French Citizen Asks Court to Quash IRS Summons Issued Under Treaty

Laetitia Smet and Jean-Philippe Smet (deceased),
Petitioner,
v.
United States
Respondent.

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF ARIZONA
SANDRA DAY O'CONNOR U.S. COURTHOUSE IN PHOENIX

MEMORANDUM OF LAW IN SUPPORT OF THE PETITION TO QUASH SUMMONS

COMES NOW, Petitioner Laetitia Smet on her own behalf and on behalf of Jean-Philippe Smet (deceased), and hereby petitions this court to quash the third party summons issued to MBNA FIA Card Services, by the Internal Revenue Service, in the matter of the French tax liability of Laetitia Smet on her own behalf and on behalf of Jean-Philippe Smet (deceased).

FACTS

Jean-Philippe Smet and his wife Laetitia Smet are French citizens who have been lawful residents of the United States and of the State of California since 2013. Jean-Philippe Smet died in December 2017. During his lifetime, Jean-Philippe Smet was a celebrity, i.e. the highest grossing French rock n' roll performer of all times know under his stage name Johnny Halliday.

From 2013 to the present, Jean-Philippe Smet and Laetitita Smet have filed every year a Form 1040 U.S. Individual Income Tax Return as United States residents. On those returns, the Smets reported their worldwide income.

In 2018, after Jean-Philippe Smet's death, the French Tax Authorities started an audit of the Smets for fiscal years 2013 to 2018 on various grounds, including that the Smets were, for some of those years, French residents and not United States residents for tax purposes, and consequently their worldwide income should be taxed in France. Currently, Laetitia Smet vigorously contests the French Tax Authority's position concerning the Smets residency through their French counsel and has even submitted an official request for the assistance of the United States Competent Authority under the provisions of the Convention between the Government of the United States of America and the Government of the French Republic for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital of 1994, for tax year 2014¹. Laetitia Smet will also file a request for the assistance of the United States Competent Authority for tax year 2015 during the course of October, 2020. Similar filings for tax years 2016, 2017 and 2018 are in preparation while the audit by the French Tax Authorities is ongoing.

During the course of the month of September, 2020, MBNA FIA Card Services, with which the Smets maintain credit cards, received a summons from the Internal Revenue Service to furnish copies of credit card documents for the period January 1^st 2017 through December 31, 2017 in accordance with Article 27 of United States-French Tax Convention.

ARGUMENT

For the enforcement of a summons, the United States government must establish a prima facie case under the four factor test set forth in United States v. Powell. Id. 379 U.S. 48 (1964). The Powell test states that the government must show: “that the investigation will be conducted pursuant to a legitimate purpose, that the inquiry may be relevant to the purpose, that the information sought is not already within the Commissioner's possession, and that the administrative steps required by the Code have been followed.” Id. 379 U.S. at 57-8. See also Mazurek v. United States, 271 F.3d 226 (5th Cir. 2001) (stating that the Powell test also applies to a summons issued pursuant to a request by a treaty partner). When a taxpayer attempts to quash a summons, he/she must refute one of the Powell factors or show the summons constitutes an abuse of process. Mazurek, 271 F.3d at 230-31.

Abuse of Process

An abuse of process occurs when a summons is issued for an improper purpose, such as for the purpose of harassment. Powell, 379 U.S. at 58. The French Tax Authority committed an abuse of process by requesting the United States account information from the Internal Revenue Service because it has no evidence showing that the Smets are or were residents of France and should be paying French income tax as France does not tax on the basis of citizenship but solely on the basis of residence.

The Smets have lived in the United States since 2013 as permanent residents. They own a home in Pacific Palisades and have been residing there with their two daughters. The Smet managed together a California S corporation, Bornrocker, Inc., which was the Smets' main source of income. Because all the relevant factors clearly indicate the Smets have been continuously residents of the United States, the French Tax Authority is abusing its treaty power and attempting to obtain financial information it is not privy to.

The Powell Factors

The French Tax Authority and Internal Revenue Service are in violation of the first Powell factor, which provides that the “investigation will be conducted pursuant to a legitimate purpose.” Powell, 379 U.S. at 57. Not only were the Smets not residents of France during the time in question, but also executing the summons requested by the French Tax Authority would effectively expand its power to obtain information not otherwise accessible to the French government.

The Convention between the Government of the United States of America and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital of 1994 (“the Convention”) provides for the exchange of information concerning taxes under the Convention between the contracting states. Article 27 of the Convention, effective as of January 1^st, 1996, authorizes the competent authorities of the contracting states to exchange such information as is pertinent for carrying out the provision of this Convention and of the domestic laws of the Contracting States concerning taxes covered by this convention insofar as taxation thereunder is not contrary to this Convention. Paragraph 2 of Article 27 states that in no case shall the provisions of paragraph 1 be construed so as to impose on a Contracting State the obligation: (a) to carry out administrative measures at variance with the laws or the administrative practice of that or of the other Contracting State, (b) to supply particulars that are not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State.

Under the French Tax Code, “Code Général des Impôts”, the French Tax Authorities are authorized to collect all information necessary to determine the taxable income of the taxpayer. If the taxpayer is considered a French resident for tax purposes and therefore is taxable in France on his worldwide income, the French Tax Authorities are authorized to collect all information relative to the worldwide income. If the person is not a resident of France for tax purposes, the French Tax Authorities are only authorized to collect information related to the incomes taxable in France under the Convention. France does not tax its non-resident citizens.

Further, the Commentary to the Model Tax Treaty, which most tax treaties are based on, provides that a “Contracting State cannot take advantage of the information system of the other Contracting State if it is wider than its own.” Mazurek 271 F.3d at 232 (citing Organization for Economic Co-Operation and Development, Model Treaty, Art. 26, 1977 Revised Commentary).

Allowing the execution of this summons would violate the Convention because the Smets were not residents of France during the times concerned in the requested documents (2017). Further, allowing the French Tax Authority access to their United States account information would violate Article 27, Paragraph 2(b) of the Convention because it would give the French Tax Authority a right to access confidential information on the Smets' worldwide income which is not otherwise attainable under the French Tax Code. The French Tax Authority attempts to expand its power through the Convention and this infringes upon the spirit and purpose of the Convention.

Based on the above, the Internal Revenue Service should not supply the credit card accounts information requested to the French Tax Authority because it effectively increases the power and reach of the French Tax Authority and the Convention. Further, while Laetitia Smet is contesting the position of the French Tax Authorities that she should be considered as a French tax resident, the United States has no obligation to supply the credit card account information in accordance to Article 27, paragraph 2(b).

CONCLUSION

This Court should quash the third-party summons issued to MBNA FIA Card Services, because its enforcement would result in an abuse of the summons process by the French Tax Authority and would effectively increase the power of the French Tax Authority and the Convention.

Respectfully submitted this 6th day of October, 2020.

Dominique M. H. Lemoine
Lemoine & Lefebvre, LLP
1117 Perimeter Center West, Suite E-308
Atlanta, Georgia 30338
Tel. (678) 471-0507; (770) 351-0099
Fax: (770) 351-0097
Email: dlemoine@ll-uslaw.com
Georgia Bar Number: 446455