The United States has bilateral tax treaties with many countries. Of all the tax treaties the United States has only five have a provision that allows each country to the treaty to collect outstanding liabilities of the other party to the treaty as I discussed in an earlier post. One of the five countries that has a collection treaty with the United States is Denmark. The other four are Canada, France, the Netherlands and Sweden. This post discusses the recent case of Torben Dileng v. Commissioner in which the Danish taxpayer brought suit in the District Court for the Northern District of Georgia seeking an order to stop the IRS from collecting the taxes he owes to the Danish government. These cases appear only rarely in the United States or in the courts of our treaty partners. The case deserves attention because it demonstrates how the IRS can and will go about collecting the taxes owed to a treaty partner and it provides a basis for raising again why the United States only has the collection provision in five of its bilateral treaties and does not make an effort to routinely include this provision into tax treaties.
One argument against inserting collection language in treaties is that the United States has done more to collect for its treaty partners than those partners have done to collect for the United States. Even if this is true, it misses the mark that the United States should lead in insuring global collection of taxes just as it took the lead in FATCA. If the United States ends up spending more resources to collect taxes for Denmark than it causes the Danish tax authorities to expend in collecting taxes for the United States, that also does not mean that the net expenditure did not benefit the United States. If we eliminate places for persons seeking to hide from paying their taxes, all countries will benefit and perhaps domestic collection will increase. If by failing to enter into treaties covering the collection side of tax compliance, we make it easy for high income, sophisticated taxpayers to move money and hide from tax collection, we degrade overall compliance.
Mr. Dileng did business in Denmark before moving to Atlanta and incurred a liability for approximately $2.5 million. While the liability exists, he continues to contest it in Denmark and that fact becomes important in thinking about what the IRS can and should do to assist Denmark with respect to this tax. Denmark made the appropriate formal request to the United States to initiate collection under the treaty and the IRS informed Mr. Dileng that to fulfill its treaty obligation it intended to levy on his assets. He did not get the opportunity to have a Collection Due Process hearing to discuss whether other less intrusive ways might exist to collect the tax but Mr. Dileng did not think collection of the tax by levy in the United States worked best for him while he was still fighting about the liability in Denmark. He asked that the IRS hold off collection until the litigation in Denmark over the liability ran its course. He stated that collection of the liability by levy “would be financially ruinous” and “destroy his ability to care for his family…”
He brought suit to enjoin the IRS from collecting and the IRS filed a motion to dismiss for lack of jurisdiction. The IRS argued that Congress had not waived sovereign immunity to allow a plaintiff such as Mr. Dileng to bring suit to enjoin it. Here the treaty required that the Danish revenue claim “be treated like U.S. federal income taxes for purposes of domestic U.S. law.” Mr. Dileng argued that certain judicially created exceptions to the Declaratory Judgment Act (DJA) and the Anti-Injunction Act (AIA) applied to allow him to raise defenses. The District Court then stopped and analyzed the application of the DJA and AIA to the circumstances of this case. First it looked at the treaty where it found that the IRS had to treat the revenue claim certified by a treaty partner as if it were an assessment of taxes in the United States. Although Mr. Dileng acknowledged that very limited exceptions exist allowing a taxpayer to avoid the application of the anti-injunction act, he felt that one of the exceptions applied to him. The district court disagreed. It first looked at the exception created by the Supreme Court in Enochs v. Williams Packing & Nav. Co. It found that this exception did not apply because Mr. Dileng could not show that the claim totally lacked merit. “Plaintiff does not and cannot show that the ‘claim of liability [is] without foundation.’ … Plaintiff here does not challenge the underlying validity of the Taxes in the United States, and does not assert in his Complaint, or in his Response, that there are no circumstances under which he can be found liable for the Taxes in Denmark.”
Mr. Dileng next argues that the taxes lack the finality required by the treaty. Article 27 at paragraph 2 of the treaty provides that “a revenue claim is finally determined when the applicant 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 applicant State have lapsed or been exhausted.” Because Mr. Dileng has ongoing litigation in Denmark concerning the taxes, he argues that the finality provision of the treaty does not exist in his circumstances. The Court found that his claim of lack of finality for purposes of the treaty is not supported by Danish law. In the Danish case he seeks to have Denmark forebear from collecting the tax. He did not show that bringing the action in Denmark necessarily means that the taxes may not currently be collected by the Danish tax authorities and, in fact, his plea for forbearance of collection suggests just the opposite. Denmark certified the taxes are “finally determined” which does not necessarily mean that Mr. Dileng has no avenues for continuing to contest the taxes. In a similar situation in the United States an assessment of a tax liability could exist and provide the IRS with full rights of collection while the taxpayer retains the right to bring a refund suit at some point in the future and contest the amount of the liability. The treaty does not require that the taxpayer have no remaining avenue to contest the tax but rather that the country have the full right to collect.
Next, Mr. Dileng contests the collection of the debt in the United States based on due process. He argued that the Danish court where he continues to fight has the equivalent status of the United States Tax Court and that collection should not begin because of the injunction in 6213 against collection during a Tax Court case. Unfortunately, no authority exists for this argument and it appears that the Danish case is not a preassessment proceeding. So, he also lost this argument which was the last of his arguments under Williams Packing but he also argued for an injunction under the exception to the AIA created by the Supreme Court in South Carolina v. Regan based on his lack of remedy elsewhere.
The Supreme Court in Regan found a limited exception to the AIA where the state had no other means of challenging the application of the statute. Here, the taxpayer has a forum in Denmark in which to challenge the statute and he seeks in the United States to challenge the collection of the tax rather than the underlying tax. The narrow Regan exemption does not apply to these circumstances. Thus, he loses on both of his attempts to find an exception to the AIA. The opinion does not provide insight into what assets Mr. Dileng has in the United States from which the IRS can collect or what action the IRS intends to take to collect. The case merely shows that he does not have the power on these facts to stop the IRS from collecting under the treaty based on the AIA or the DJA. Since so few cases exist shedding any light on the collection by the IRS under the treaty provisions, the case is interesting from that aspect alone.
The obvious answer to the question in the title is that the United States is collecting taxes for Denmark because we have a treaty obligation to do so just as Denmark has a corresponding obligation to collect for us. The broader question is whether this treaty agreement represents a model the United States should seek to replicate on a broader scale or is simply one of five historically anomalous treaty provisions.