Federal District Court Allows the IRS to Collect Danish Income Tax
January 2016A recent decision of the Federal District Court for the Northern District of Georgia offers an example of how the Internal Revenue Service may collect income tax from a citizen of another country residing in the United States pursuant to the terms of an income tax treaty. In Dileng v. Commissioner of Internal Revenue Service a Federal District Court refused to block the IRS from collecting Danish income tax as requested by the Skatteminsteriet (the “SKAT”) Denmark’s Ministry of Taxation. The SKAT requested the IRS to collect the tax pursuant to the terms of Article 27 (Administrative Assistance), of the 1999 Denmark-USA Income Tax Convention (the “Danish Treaty”).
U.S. income tax treaties typically include an article providing that one Contracting State may assist the other Contracting State in collecting income taxes due the latter. Article 27 of the Danish Treaty provides that the Contracting States “undertake to lend assistance to each other in the collection of taxes referred to in Article 2 (Taxes covered), together with interest, costs, additions to such taxes, and civil penalties [the ‘revenue claim’].” However, assistance is only provided when the competent authority of the requesting Contracting State has certified that the revenue claim has been “finally determined” under its laws. A revenue claim is considered finally determined when the requesting Contracting State “has the right under its internal law to collect the revenue claim and all administrative and judicial rights of the taxpayer to restrain collection in the [requesting] State have lapsed or been exhausted.” Once this is certified, the other Contracting State agrees to collect the revenue claim as though it were its own “in accordance with the laws applicable to the collection of [that] Contracting State's own taxes.” Article 27 also states that it does not create or provide “any rights of administrative or judicial review of the applicant Contracting State's finally determined revenue claim by the [Other] Contracting State, based on any such rights that may be available under the laws of either Contracting State.” Thus, a taxpayer may not seek to raise defenses to the enforcement of the revenue claim in the courts of the Other Contracting State.
Pursuant to the terms of Article 27 of the Danish Treaty, the SKAT requested the IRS to assist it in collecting tax from Torben Dileng, a Danish citizen living in the United States (“Dileng”). The SKAT provided a certification that the Danish tax had been “finally determined” under Danish law. The IRS then filed a notice of levy informing Dileng that the IRS would levy on his assets to collect the Danish tax due. Dileng responded with a Collection Appeal Request stating that he was challenging the tax liability under Danish law. Dileng had filed in Denmark a request for “henstand” -- a request with the Danish parliament to postpone collection of a tax that is otherwise due.
The IRS denied Dileng’s request on the grounds that it was required by the Danish Treaty to collect the tax once it had received a certification from the SKAT. Dileng then filed an action in federal District Court seeking a declaratory judgment that the IRS could not collect the tax until the Danish courts fully and finally adjudicated his tax liability. Dileng also sought to enjoin the IRS from collecting the tax until his case in Denmark is concluded.
The IRS argued that Dileng’s Danish tax liability had been finally determined and that the IRS was required to collect the tax due under the Danish Treaty. The IRS also argued that the district court lacked jurisdiction over Dileng’s claim because the United States generally is immune from suit unless it consents to be sued (sovereign immunity) and the Declaratory Judgment Act, 28 USC § 2201 (the “DJA”) and the Anti-Injunction Act, 26 USC §7421 (the AIA”) bar the court from granting Dileng relief. Dileng argued in response that certain judicial exceptions to the DJA and the AIA applied to allow the district court to hear the case.
The Court’s Analysis
The court first addresses the government’s sovereign immunity argument: that the United States may be sued only if a statute so provides. 28 USC § 1346(a) permits “a civil action against United States for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected . . . .” Under the Danish Treaty, the Danish tax due is required to be treated as a U.S. income tax. The court reasoned that as the Danish tax has not been erroneously or illegally assessed or collected, section 1346(a) does not create jurisdiction over Dileng’s claim.
The court next turns to Dileng’s argument that certain judicially created exceptions to the DJA or the AIJ apply to permit the court to hear his claim. The court begins by noting that there is “a long-standing Congressional policy excluding various types of federal tax disputes from judicial review.” Thus, federal tax matters may not be the subject of a declaratory judgment under the DJA. Also, under the AIA, “no suit for the purpose of restraining assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is a person against whom such tax was assessed.” A taxpayer generally must pay any tax due and then bring a suit for refund. The principal exception to this general rule is that a taxpayer may bring an action in the Tax Court contesting a tax liability based on a notice of deficiency, which is issued before a tax is assessed and therefore is subject to collection.
The court considers two narrow judicial exceptions to the statutes created by Enochs v. Williams Packing & Nav. Co. and S. Carolina v. Regan. Under Williams Packing, the AIA does not apply if (i) it is clear that under no circumstances could the government ultimately prevail and (ii) equity jurisdiction otherwise exists.
Dileng focused on the first part of the test arguing that the revenue claim was not finally determined under Danish law. The district court notes that Dileng did not challenge the underlying validity of the tax and did not show that under no circumstances could he be found not liable for the taxes in Denmark. The court also notes that to require a U.S. court to determine the status of Denmark’s tax claim against Dileng would violate Article 27 of the Danish Treaty which provides that Article 27 may not be construed as “creating or providing any rights of administrative or judicial review of the applicant State’s finally determined revenue claim . . .”
Although the District Court stated that it would be a violation of Article 27 to evaluate the status of Denmark’s tax claim, the court does address Dileng’s argument based on “henstand.” It finds that it the claim of henstand does not affect Dileng’s obligation to pay the Danish tax due.
Dileng also makes a Due Process argument: the Danish tax may not be collected until Dileng exhausts his administrative remedies. Dileng argues that the Danish court considering his case is the equivalent of the United States Tax Court. He therefore should have the same rights as a U.S. taxpayer to challenge a tax assessment in the Tax Court. The court finds that Dileng “does not provide any authority for his argument that his challenge in the Danish courts is an equivalent procedural posture to that of a challenge by a United States taxpayer to a notice of deficiency in the Tax Court.”
The court next turns to Regan exception to the AIA. This exception is limited to cases where Congress has not provided a plaintiff with an alternative legal means to challenge the validity of a tax. In Regan, South Carolina challenged an amendment to the section of the Internal Revenue Code exempting interest on bonds issued by the states from U.S. federal income tax. The amendment would have limited the exemption to bonds that were issued in registered form. Thus, interest paid on bearer bonds issued by a state would no longer be tax-exempt. The Supreme Court allowed the suit because a state would have no other way of challenging the validity of the statute. A state is not taxable on the interest on the bonds that it issues.
Dileng argued that the Regan exception applied because a challenge of his liability and Danish court was not an “alternative avenue” to challenging his tax liability. The court rejects this argument, inter alia, because to allow a challenge would be a violation of the Danish Treaty, which precludes an action the U.S. courts for relief of Danish tax that is been finally determined.
This case illustrates the mechanical nature of the collection process that is initiated once a Contracting State requests the Other Contracting State to assist it in the collection of a tax liability that has been “finally determined.” A taxpayer with assets in the United States should take action to see that his tax liability has not been finally determined under foreign law if he wishes to avoid a collection action in the United States. One the tax is finally determined, the taxpayer has no defenses under U.S. law to collection of tax by the IRS.
KEYWORD: Income Tax Treaties
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