Retfalvi v. Comm'r of Internal Revenue Serv., 5:16–CV–160–BO

• Decision Date: 19 October 2016
• Docket Number: NO. 5:16–CV–160–BO,5:16–CV–160–BO
• Citation: 216 F.Supp.3d 648
• Court: U.S. District Court — Eastern District of North Carolina
• Parties: Paul M. RETFALVI, Plaintiff, v. COMMISSIONER OF INTERNAL REVENUE SERVICE, Defendants.

216 F.Supp.3d 648

Paul M. RETFALVI, Plaintiff,

v.COMMISSIONER OF INTERNAL REVENUE SERVICE, Defendants.

NO. 5:16–CV–160–BO

United States District Court, E.D. North Carolina, Western Division.

Signed October 19, 2016

Filed October 20, 2016

Robert H. Merritt, Jr., Jeffrey D. McKinney, Bailey & Dixon, L.L.P., Raleigh, NC, for Plaintiff.

Christopher J. Williamson, U.S. Department of Justice, Washington, DC, for Defendants.

ORDER

TERRENCE W. BOYLE, UNITED STATES DISTRICT JUDGE

This matter comes before the Court on defendant's motion to dismiss, made pursuant to Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure. [DE 14]. Plaintiff opposed, and the motion is ripe for adjudication. For the reasons stated below, defendant's motion to dismiss is granted.

BACKGROUND

Complaint and Motion to Dismiss

Plaintiff, originally from Hungary, moved to Canada in 1988 and in 1993 became a Canadian citizen. Later he found a job in the United States, and remained in the United States to practice medicine on an H1–B visa. [DE 4 at ¶ 13–15]. In 2006 he sold two properties in Canada and declared the proceeds in both Canadian and U.S. tax returns. [DE 4 at ¶ 19, 21, 22]. The Canadian Revenue Agency ("CRA") performed an audit on these two transactions which continued for several years. [DE 4 at ¶ 26]. CRA completed it audit and on October 3, 2011, because plaintiff chose not file an appeal with the Canadian Tax Court, the liability was finally determined, resulting in a Canadian tax assessment. Id.

Plaintiff did not pay the amount owed to Canada, and thereafter CRA sent the Internal Revenue Service ("Service") a Mutual Collection Assistance Request pursuant to Article 26A of the Third Protocol to the US–Canada Income Tax Convention. [DE 4 at ¶ 30]. The Service sent plaintiff a "Final Notice–Notice of Intent to Levy," demanding that he pay the current amount owed to Canada, which totaled $124,286.83.

On April 12, 2016, plaintiff filed a complaint in this Court seeking declaratory and injunctive relief. Plaintiff alleges that the Service does not have authority to utilize its collection enforcement measures on behalf of CRA, because "Article 26A is unconstitutional, invalid and of no effect," and it conflicts with the Treaty's prohibition against double taxation as well as the provisions of the Internal Revenue Code and the Internal Revenue Manual. [DE 4 at ¶ 3]. Plaintiff seeks an injunction to prohibit the Service from collecting the Canadian revenue claim on behalf of CRA. [DE 4 at ¶ 29]. Plaintiff also seeks a declaratory judgment finding the Article unconstitutional and in violation of the Treaty, the Internal Revenue Code, and the Internal Revenue Manual. [DE 4 at ¶¶ 27, 28].

Defendant filed a motion to dismiss, asserting that the Anti–Injunction and Declaratory Judgment Acts preclude the federal courts from issuing the relief sought by plaintiff. Defendant also disputed each of plaintiff's substantive challenges to the U.S.'s collection assistance.

The United States—Canada Income Tax Convention

The United States and Canada entered into the Income Tax Convention ("Treaty") in 1980, seeking to reduce tax and trade barriers between the two states.¹ Subsequent Protocols amended and expanded the terms of the Treaty, including the Third Protocol to the Treaty which included Article 26A. This Article, entitled "Assistance in Collection," allows each state to request the assistance of the other in collecting revenue claims from their own citizens who are living within other country. Specifically, Article 26A obligates each sovereign to "undertake to lend assistance to each other in the collection of taxes referred to in paragraph 9, together with interest, costs, additions to such taxes and civil penalties, referred to in this Article as a ‘revenue claim’." Treaty Art. 26A ¶ 1.

Under Paragraph 3, "[a] revenue claim of the applicant State that has been finally determined may be accepted for collection by the competent authority of the requested State and ... if accepted shall be collected by the requested State as though such revenue claim were the requested State's own revenue claim finally determined in accordance with the laws applicable to the collection of the requested State's own taxes." Id. at ¶ 3. Similarly, the next paragraph states that when the United States accepts an application for a revenue claim, "the revenue claim shall be 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 ¶ 4. Article 26A also precludes "any rights of administrative or judicial review of[a] finally determined revenue claim by the requested State, based on any such rights that may be available under the laws of either Contracting State." Id. , at ¶ 5.

DISCUSSION

Defendant has moved to dismiss for lack of subject matter jurisdiction under Rule 12(b)(1) of the Federal Rules of Civil Procedure and for failure to state a claim under Rule 12(b)(6). "Subject-matter jurisdiction cannot be forfeited or waived and should be considered when fairly in doubt." Ashcroft v. Iqbal , 556 U.S. 662, 671, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (citation omitted). When subject matter jurisdiction is challenged, the plaintiff has the burden of proving jurisdiction to survive the motion. Evans v. B.F. Perkins Co. , 166 F.3d 642, 647–50 (4th Cir. 1999). When a facial challenge to subject matter jurisdiction is raised, the facts alleged by the plaintiff in the complaint are taken as true, "and the motion must be denied if the complaint alleges sufficient facts to invoke subject matter jurisdiction." Kerns v. United States , 585 F.3d 187, 192 (4th Cir. 2009). The Court can consider evidence outside the pleadings without converting the motion into one for summary judgment. See, e.g., Evans , 166 F.3d at 647.

The Court must first address whether it possesses the jurisdiction to hear plaintiff's claims. It is well-settled that the United States, as sovereign, is immune from suit unless it has consented to be sued. United States v. Sherwood , 312 U.S. 584, 61 S.Ct. 767, 85 L.Ed. 1058 (1941). The "terms of [the United States'] consent to be sued in any court define that court's jurisdiction to entertain the suit." Id. at 586, 61 S.Ct. 767 ; see also United States v. Mitchell , 463 U.S. 206, 212, 103 S.Ct. 2961, 77 L.Ed.2d 580 (1983) ("It is axiomatic that the United States may not be sued without its consent and that the existence of consent is a prerequisite for jurisdiction"). A waiver of sovereign immunity is to be strictly construed, in terms of its scope, in favor of the sovereign. Dep't of Army v. Blue Fox, Inc. , 525 U.S. 255, 261, 119 S.Ct. 687, 142 L.Ed.2d 718 ; Lane v. Pena , 518 U.S. 187, 192, 116 S.Ct. 2092, 135 L.Ed.2d 486 (1996) (citing cases). Additionally, "limitations and conditions upon which the Government consents to be sued must be strictly observed and exceptions thereto are not to be implied." Soriano v. United States , 352 U.S. 270, 276, 77 S.Ct. 269, 1 L.Ed.2d 306 (1957) (citing Sherwood , 312 U.S. at 590–91, 61 S.Ct. 767 ).

Congress has waived sovereign immunity with respect to disputes over federal taxes in a narrow range of cases. Specifically, Congress granted district courts original jurisdiction over

any civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws ....

28 U.S.C. § 1346(a).

But while the Court may entertain suits challenging a collection of a tax after such collection has occurred, the Internal Revenue Code forecloses federal courts from hearing cases which seek to restrain tax collection, even ones that challenge the constitutionality of the collection. See Alexander v. Ams. United Inc. , 416 U.S. 752, 759–60, 94 S.Ct. 2053, 40 L.Ed.2d 518 (1974). Section 7421(a) of the Code, commonly referred to as the Anti–Injunction Act ("AIA"), states in pertinent part that "no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed." 26 U.S.C. § 7421(a). The statute's language "could scarcely be more explicit," and it reflects the Act's principal purpose of protecting "the Government's need to assess and collect taxes as expeditiously as possible with a minimum of pre-enforcement judicial interference ...." Bob Jones Univ. v. Simon , 416 U.S. 725, 736, 94 S.Ct. 2038, 40 L.Ed.2d 496 (1974). The effect of the Act is apparent: "courts lack jurisdiction to issue injunctive relief in suits seeking to restrain the assessment or collection of taxes." Judicial Watch, Inc. v. Rossotti , 317 F.3d 401, 405 (4th Cir. 2003) ; Estate of Michael ex rel. Michael v. Lullo , 173 F.3d 503, 506 (4th Cir. 1999) ("The Anti–Injunction Act withdraws all courts' jurisdiction over suits filed ‘for the purpose of restraining the assessment or collection of any tax’."). The AIA is far-reaching, and has been applied "broadly to include activities that are intended to or may culminate in the assessment or collection of taxes." Judicial Watch , 317 F.3d at 405.

Similarly, the Declaratory Judgment Act ("DJA") authorizes all United States courts to issue declaratory relief in cases within their jurisdiction, "except with respect to Federal taxes other than actions brought under section 7428 of the Internal Revenue Code of 1986 [or] a proceeding under section 505 or 1146 of title 11." 28 U.S.C. § 2201(a). This tax-exclusion provision of the DJA "cannot be regarded as a jurisdictional bar, per se , because the Act does not itself confer subject matter jurisdiction, but, rather, makes available an added anodyne for disputes that come within the federal courts' jurisdiction on some other...