The United States has entered into a variety of bilateral tax treaties. As a general matter, they are designed to promote trade and avoid double taxation. But they also serve other purposes, such as providing for mutual assistance in tax administration matters. As the Fourth Circuit recently held, that means that the IRS can be deployed to collect taxes owed to another country. Retfalvi v. United States, No. 18-2158, 2019 U.S. App. LEXIS 21004 (4th Cir. July 16, 2019).
In 1995, the tax treaty between the United States and Canada was amended to add new article 26A, which provided that the United States and Canada would assist each other with unpaid taxes. Retfalvi, 2019 U.S. App. LEXIS 21004 at *3 (citing Article 26A ¶¶ 1, 9). The treaty provides that a state can request assistance only if it can certify that its tax claim has been “finally determined.” Id. The state that receives the request is free to decide whether to accept the claim, but once it does, the claim is treated like any domestic tax claim. Specifically, if the United States accepts a Canadian tax claim, that claim is “treated by the United States as an assessment under United States laws against the taxpayer as of the time the application is received.” Id. at *3-*4 (quoting Article 26A, ¶ 4(a)). Significantly, a U.S.-based taxpayer has no ability to seek administrative review of the revenue claim of Canada. Id. at *4 (citing Article 26A, ¶ 5).
Paul Retfalvi is a doctor who moved to Canada in 1988 and became a Canadian citizen in 1993. Id. From 1993 to 1997, Dr. Retfalvi lived in the United States while completing a medical residency program; he then returned to Canada. Id. Dr. Retfalvi came back to the United States under an H1-B visa in 1998; to assure he would have someplace to live if his visa was not renewed, Dr. Retfalvi purchased a condominium in Vancouver, and he also entered into a contract to purchase a larger one. Id. at *4-*5. When Dr. Retfalvi was awarded permanent residency in the United States, he elected to sell the two condominiums, completing the sales in 2006. Id. at *5.
Dr. Retfalvi and his wife then filed separate Canadian returns in 2007, along with a joint U.S. return. The Canadian Revenue Agency concluded that the returns filed by Retfalvi and his wife were not correct, and it sent
Dr. Retfalvi an assessment notice in 2008. Id. Dr. Retfalvi missed some administrative deadlines along the way, including the deadline for an appeal with the Canadian Tax Court. At that point, in October 2011, the Canadian assessment was final. Id. at *5-*6.
Dr. Retfalvi apparently was not receptive to paying the Canadian tax claim; accordingly, in October of 2015, the Canadian government referred the tax assessment for collection to the United States. Id. at *6. The IRS responded with alacrity, issuing a notice of its intent to levy on November 16, 2015. While the notice referenced the doctor’s collection due process rights, it also indicated that it could not adjust the underlying tax liability. Id. Dr. Retfalvi objected to the notice on January 13, 2016, and he also requested a hearing. The IRS told him that he could not have a collection due process hearing but could pursue a collection appeal program hearing. Id. at *6-*7. The collection appeal hearing went nowhere: The doctor was told that the IRS could not adjust a foreign tax claim. Id. at *7.
Dr. Retfalvi filed an action for declaratory and injunctive relief in the United States District Court for the Eastern District of North Carolina, but that was dismissed. Then he filed a refund action in 2017, which was also dismissed, triggering the Fourth Circuit appeal. Id. at *7-*8.
On appeal, Dr. Retfalvi pursued three issues:
- First, he argued that Article 26A violated the Origination Clause, art. 1, § 7, cl. 1, which requires that all bills designed to raise revenue originate in the House;
- Second, he argued that Article 26A violated the Taxing Clause, art. 1, § 8, cl. 1, which grants Congress the power to lay and collect taxes; and
- Third, he argued that Article 26A was not a self-executing treaty, meaning that it required implementing legislation.
While the issues presented were intriguing, the doctor’s appeal was not successful.
The Court of Appeals started with the Origination Clause, which provides that “[a]ll Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with amendments as on other Bills.” U.S. Const. art. I, § 7, cl. 1. At first glance, this may look like a viable issue, but the Origination Clause has been construed narrowly to reach only bills that actually impose taxes “in the strict sense of the word.” Twin City Bank v. Nebeker, 167 U.S. 196, 202 (1897) (citations omitted). Dr. Retfalvi sought a broader reading of the clause, based upon some loose language from a Ninth Circuit opinion, Armstrong v. United States, 759 F.2d 1378, 1381 (9th Cir. 1985), but the Court of Appeals was not impressed. It characterized Dr. Retfalvi’s reading of Armstrong as “mistaken” and saw “no basis” to read Armstrong the way the doctor did. Retfalvi, 2019 U.S. App. LEXIS 21004 at *12-*13.
Instead, the Fourth Circuit observed that a narrow reading of the clause was consistent with the history of the provision: “The Founders did not intend for the Origination Clause to apply to tax administration, enforcement, and any other issue related to taxes. Rather, they intended the Clause to ensure democratic accountability in the imposition of taxes.” Id. at *14. The court supported this conclusion with a review of the history of the clause, which was designed to place taxing power in the more democratically-responsive House in the first instance. Id. The government argued that the Origination Clause applied to laws that governed the creation of tax obligations, not their collection, a distinction that the Court of Appeals endorsed. Id. at *16.
The Fourth Circuit then turned to the Taxing Clause, which provides that “[t]he Congress shall have Power to lay and collect Taxes, Duties, Imposts and Excises.” U.S. Const. art. I, § 8, cl. 1. Doctor Retfalvi’s argument here was that the Taxing Clause was violated because both the House and the Senate did not vote to approve Article 26A, the Senate merely ratified it under the treaty provisions of the constitution. Retfalvi, 2019 U.S. App. LEXIS 21004 at *16.
This argument was quickly rejected by the Court of Appeals for a very simple reason: The grant of power in the Taxing Clause is not an exclusive grant of power. The D.C. Circuit had previously looked at a similar issue in Edwards v. Carter, 580 F.2d 1055 (D.C. Cir. 1978), holding that the grant of authority to Congress to dispose of government property in the Property Clause (U.S. Const. art. IV, § 3, cl. 2) did not make a treaty disposing of the Panama Canal Zone invalid. 580 F.2d at 1058-59. The Fourth Circuit found Edwards persuasive and followed it. Retfalvi, 2019 U.S. App. LEXIS 21004 at *17.
The Fourth Circuit then turned to the doctor’s argument that Article 26A was not self-executing. The court observed that a treaty was not self-executing “if (i) its text manifests an intention that implementing language is necessary; (ii) the Senate in giving consent, or Congress by resolution, requires implementing legislation; or (iii) implementing legislation is constitutionally required. Id. at *19 (citing Restatement (Third) of Foreign Relations Law § 111 (1987)). Given the fact that Article 26A relied upon the existing structure of the Internal Revenue Code for collection, there was no need for implementing legislation to make it operate. Id. By its terms, Article 26A did not call for implementing legislation, and there was no indication that the Senate had conditioned approval on implementing legislation. That left only the question of a constitutional requirement, and the court’s holdings under the Origination Clause and the Taxing Clause indicated that implementing legislation was unnecessary.
It is an interesting case, and the taxpayer’s counsel showed creativity and tenacity in pursuing it, but the disposition in the Court of Appeals appears to be sound.