IRS Can't Use Mistaken But Good Faith Belief That Debt Hadn't Been Discharged

June 14, 2018

Summarized by DAVID BAKER, Law Office of David G. Baker

Case Type:

Consumer

Case Status:

Affirmed

Citation:

17-1601 (1st Circuit, Jun 07,2018) Published

Tag(s):

1st Circuit, Discharge/Dischargeability, Bankruptcy Taxation, 362, 524, 727

Ruling:

Under 26 USC § 7433(e), the IRS's good faith belief that it has a right to collect the purportedly discharged debts is not relevant to determining whether it "willfully violate[d]" the discharge order.

Procedural context:

Appellee Murphy claimed that the IRS had violated the discharge injunction when it attempted to collect tax debts without first obtaining a determination from the bankruptcy court that the taxes were not discharged. IRS contended that Murphy filed a fraudulent return(s) or willfully attempted to evade or defeat the tax.

Facts:

On October 13, 2005, Murphy filed a Chapter 7 petition in the United States Bankruptcy Court for the District of Maine. On Schedule E of his bankruptcy petition, Murphy listed his income tax obligations to the IRS for the years of 1993-1998, 2000, 2001, and 2003, as well as a 2003 tax obligation to the Maine Revenue Services. After several collection attempts, including levies, Murphy filed an adversary proceeding for a declaration that the taxes had been discharged. There were indications that the IRS attorney was suffering from what appeared to be Alzheimer's disease and didn't represent the IRS properly. Nevertheless, the bankruptcy court found for Murphy and was affirmed by the District Court. Over dissent, the First Circuit affirmed, finding inter alia that sovereign immunity did not protect the IRS since it was waived in the statute, 26 USC § 7433(e). Murphy apparently was awarded $175.000 in damages.

Judge(s):

Stahl and Souter in the majority, and Lynch dissenting.

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