A recent opinion by the U.S. District Court in the Northern District of Georgia in Dileng v. Commissioner, 1:15-CV-1777-WSD (ND GA) (January 15, 2016), suggests a new era in international tax enforcement. The opinion discusses the Internal Revenue Service’s (“IRS”) effort to collect Danish taxes pursuant to the Convention for the Avoidance of Double Taxation between the United States and Denmark (the “Treaty”).
While most tax treaties contain provisions for resolving issues of double taxation and for sharing of information by the respective treaty partners, only a few tax treaties contain provisions that provide for the collection of taxes by the treaty partners. These tax collection provisions are more likely to be found in newer tax treaties—such as the U.S.-Danish treaty, which was ratified in 1999. But even where there are tax collection provisions in the treaties, it’s been relatively unheard of for one treaty partner to seek to collect the taxes of the other treaty partner. Dileng may suggest more tax collection cooperation with our treaty partners in the future.
Historically, the United States has been unwilling to collect taxes owed to a foreign sovereign. This is based in part on the common law rule referred to the “revenue rule.” The revenue rule “generally barred courts from enforcing the tax laws of a foreign soverign.” Pasquantino v. United States, 544 U.S. 349 (2005). It arose from “a line of cases prohibiting the enforcement of tax liabilities of one sovereign in the courts of another sovereign, such as a suit to enforce a tax judgment.” Id. The revenue rule is an exception to the general rule that “judgments from a foreign country are recognized by the courts of this country when the general principles of comity are satisfied.” Her Majesty the Queen v. Gilbertson, 597 F.2nd 1161, 1163 (9th Cir. 1979). It appears that the long-standing revenue rule can be over ridden by a treaty provision which has the force of law.
The taxpayer in Dileng is a Danish national who has lived with his family for a number of years in the United States. He alleged that the Danish Ministry of Taxation (SKAT) had recently informed him that it had assessed a significant tax liability against him and that he was challenging that assessment in the Danish courts, in accordance with Danish law. He further alleged that SKAT had requested the assistance of the IRS to collect the assessment, in contravention of the US-Denmark tax treaty, which provides in pertinent part that a party to the treaty could apply for assistance in collection of a tax that “has been finally determined.” Under the treaty, a tax was “finally determined” after “all administrative and judicial rights of the taxpayer to restrain collection in the applicant State have lapsed or been exhausted.” The taxpayer alleged that IRS’s seeking to collect the Danish tax violated the treaty, was contrary to the revenue rule and was an unconstitutional deprivation of property. He sought declaratory and injunctive relief. The IRS moved to dismiss on the grounds that the suit was barred by the Anti-Injunction Act and the Declaratory Judgment Act for Taxes.
The Court’s opinion deals with the taxpayer’s claim that his suit fell within an exception to the Anti-Injunction Act and the Declaratory Judgment Act for Taxes. The Court found the taxpayer’s arguments unpersuasive and granted the IRS’s motion to dismiss. The case presents very interesting jurisdictional issues, but the real take away from the opinion and a reminder to practitioners is that the world is changing. If there is a Treaty between the U.S. and another country and that Treaty provides for the collection of taxes similar to that under the Danish Treaty, we may be see IRS collection efforts on behalf of a foreign jurisdiction. Equally important, these foreign jurisdictions will be asked for and will be taking collection action on behalf of the IRS.
The Opinion raises an interesting issue as to why the taxpayer was not accorded collection due process (“CDP”) rights. The complaint alleges that the IRS was seeking to collect the Danish tax through administrative levy and that the taxpayer had filed a Collection Appeal Request, which was verbally denied. The complaint does not allege that the IRS issued a CDP notice. According to the Opinion, under the terms of the Treaty, the IRS was required to treat the Danish tax as an IRS assessment and to collect them as if they were a tax owed to the U.S. It would seem that the taxpayer should be accorded the same rights if the IRS was using the administrative assessment procedure. Nowhere in the Opinion or the pleadings is there any mention of whether the taxpayer was afforded CDP rights.
For years it was the conventional wisdom that assets beyond our borders were beyond the reach of IRS collection efforts—with very limited exceptions—such as the use of the writ ne exeat republica. The Dileng opinion shows that the world has become a much smaller place. Stay tuned.