The United States has entered into bilateral tax treaties with a significant number of countries. The general goal of these arrangements is to increase trade by eliminating double taxation. As a consequence, they have rules to determine the residence of taxpayers and provisions limiting the ability of the treaty partners to impose taxes in certain cases.
A few of these treaties include provisions for collection assistance; earlier this year, a district court addressed a challenge to a request for collection assistance received from the Kingdom of Denmark. See Dileng v. Comm’r, 157 F. Supp. 2d 1336 (N.D. Ga. 2016). Recently, a district judge in North Carolina addressed the collection assistance provisions of the U.S.-Canada treaty. Retfalvi v. Comm’r, No. 5:16-CV-180-BO, 2016 U.S. Dist. LEXIS 145375 (E.D.N.C. Oct. 20, 2016).
In Retfalvi, the taxpayer had emigrated to Canada from Hungary, becoming a Canadian citizen in 1993. Id. at *1. Later, he found a job as a doctor in the United States; while residing in the U.S., he sold two Canadian properties. Id. After an audit, the Canadian Revenue Agency assessed Dr. Retfalvi with additional tax, and he failed to appeal the audit determination, leading to a final assessment. Id. at *1-*2. When the taxpayer failed to pay, Canada sent the IRS a Mutual Collection Assistance Request under the relevant tax treaty, and the IRS issued a notice of intent to levy, demanding $124,286.83 on behalf of the Canadian government. Id. at *2.
Dr. Retfalvi responded by filing an action in district court, seeking declaratory and injunctive relief. Specifically, the taxpayer sought a declaration that the relevant treaty provision was unconstitutional, in violation of the Internal Revenue Code, and inconsistent with the treaty itself; the taxpayer also sought an injunction prohibiting the IRS from collecting on behalf of the Canadian government. Id. at *2-*3. In response, the government argued that the plaintiff’s complaint was barred by the Anti-Injunction Act and by the terms of the Declaratory Judgment Act. Id. at *3.
Under the treaty, Canada is authorized to request assistance from the U.S. to collect taxes owed by Canadian citizens under any final assessment. Any such request is then to be treated as a final U.S. tax assessment and collected in the same way that the IRS collects U.S. taxes. Id. at *3-*4. In addressing the government’s motion to dismiss, the district court began it analysis by noting that the federal government had limited its consent to be sued primarily to refund actions and that the Anti-Injunction Act (section 7421(a) of the Internal Revenue Code) generally barred efforts to restrain the assessment and collection of taxes. Id. at *6-*7. For good measure, the court also referenced the fact that the Declaratory Judgment Act expressly limited the authority of federal courts to issue declaratory judgments in tax matters. Id. at *7-*8.
Against that background, the court focused on the key question: Whether an effort to stop the collection of a Canadian tax assessment was a suit to restrain the collection of a “tax” subject to the restrictions of the Anti-Injunction Act and the Declaratory Judgment Act. Here, the court noted that the Canadian tax claim was expressly defined to be a tax in the treaty. Id. at *11. And while the taxpayer had argued that the Canadian tax was not a “tax” for purposes of the Anti-Injunction Act and the Declaratory Judgment Act because the treaty referred to foreign tax claims as assessments, id. at *9, the court concluded that the reference to the foreign tax as an “assessment” was simply intended to authorize the IRS to utilize its various administrative collection powers. Id. at *11-*12.
In a similar vein, the district court rejected the taxpayer’s argument that the Anti-Injunction Act should not bar his claim because he had no other remedy for a constitutional violation, noting that Dr. Retfalvi could bring a refund claim after paying the relevant tax. Id. at *12-*13. Finally, the court rejected the taxpayer’s effort to find a basis for subject matter jurisdiction in treaty language requiring the treaty partners to provide “comparable assistance” to one another, reasoning that the treaty language had nothing to do with access to courts. Id. at *13-*14.
While Dileng and Retfalvi, appear straightforward, there are significant potential issues that may arise in the future. If a Canadian or Danish tax assessment is treated as a U.S. tax assessment for collection purposes, then the taxpayers would seem to have the right to a collection due process hearing, subject to Tax Court review. Similarly, foreign citizens would also appear to be able to utilize offer in compromise procedures to reduce the amount of their debt.
The only apparent limit is a provision in the Canadian treaty (presumably replicated in others) indicating that “[n]othing in this article shall be construed as creating or providing any rights of administrative or judicial review of the applicant State’s finally determined revenue claim by the requested State, based on any such rights that may be available under the laws of either Contracting State.” U.S.-Canada Treaty, Art. XXVI-A, § 5. This simply appears to bar a consideration of the merits of a foreign tax claim.