Dallas Lawyer Loses Civil Rights Claims Against IRS Agents Who Wrongly Assessed $40 Million Tax Penalty
“Mr. Canada felt that the violations were such and the actions of the Internal Revenue Service agents were such that he needed to at least make the argument and bring it to the court’s attention,” Lewis said.
Published; Feb 20, 2020
Although in the past a Dallas attorney was successful in batting down a $40 million tax penalty in a bankruptcy, he now has lost civil-rights claims against the Internal Revenue Service agents who assessed the penalty.
The U.S. Court of Appeals for the Fifth Circuit on Thursday affirmed a district court decision to dismiss William “Ralph” Canada Jr.’s case against the IRS and three agents in their individual capacities.
Hayward & Associates of counsel John P. Lewis Jr. of Dallas, who represented Canada, said he wasn’t surprised by the ruling because U.S. Supreme Court case law recently has made it exceedingly hard to sue government agents for civil rights violations.
“It was a very, very difficult case to be argued, but Mr. Canada felt that the violations were such, and the actions of the Internal Revenue Service agents were such that he needed to at least make the argument and bring it to the court’s attention,” Lewis said.
Canada now works as a partner in Loewinsohn Flegle Deary Simon. In the 1990s and early 2000s, he worked at the Heritage Organization, a personal finance and estate planning company for high-net-worth people, according to the ruling by U.S. District Judge Andrew S. Hanen of the Southern District of Texas, who was sitting by designation on a Fifth Circuit panel that also included Judges Catharina Haynes and Andrew Oldham.
While he served as COO of Heritage, an outside firm in 1998 told Canada about a new strategy to reduce capital gains taxes for clients. The strategy would begin with the sale of securities, but through a series of transactions, would generate artificial losses. That’s what reduced the client’s capital gains tax.
In 2002, Canada had a compensation dispute, and left his job. He won an arbitration proceeding against Heritage, and Heritage filed for bankruptcy protection.
It was during Heritage’s bankruptcy that the IRS investigated Canada about tax penalties for allegedly failing to report tax-shelter transactions, as required by law. The IRS said the penalties were more than $49 million, but after reviewing Canada’s finances, proposed that he pay $5 million.
Canada then filed for Chapter 11 bankruptcy protection, and the IRS filed a claim for $40 million. After a trial, the bankruptcy court tossed the penalties claim, ruling the transactions at issues didn’t count as tax shelters, and even if they were, Canada had reasonable cause for not registering them. In May 2017, a district court affirmed the bankruptcy court’s decision. The bankruptcy court wrapped up Canada’s bankruptcy in May 2017 and he received a discharge.
But Canada wasn’t done fighting the IRS.
He sued them, asserting Bivens claims against the three IRS agents, individually, for violating his due process rights for allegedly “knowingly and intentionally subject[ing] him to a baseless penalty pegged at an amount so high that he could not seek judicial review,” the opinion said. A taxpayer must pay a tax penalty, and then can sue in district court to seek a refund. Canada alleged the agents maliciously set his penalty at $40 million so that he couldn’t pay it first, and sue for a refund.
The case turns on a 1971 U.S. Supreme Court case, Bivens v. Six Unknown Named Agents, which recognized an implied damages against federal officers for constitutional violations of unreasonable search and seizure. Bivens was narrowed more recently in 2017′s Ziglar v. Abbasi, which discouraged implied damages claims.
The Zigler ruling laid out a test for courts to determine if the case before them involves a new context from Bivens, and ask if special factors counsel hesitation against extending a Bivens claim.
Here, Canada’s claims didn’t survive the test.
The Fifth Circuit found the case clearly presented a new context for a Bivens remedy, and there were no special factors to extend the remedy.
“Congress chose to omit a damages remedy as to tax penalties assessed and to limit judicial review to post-payment and bankruptcy review,” the opinion said. “This court cannot recognize an implied Bivens claim without violating the separation-of-powers principles that are at the core of the special factors analysis.”