Retfalvi v. United States, 5:17-CV-468-D

• Decision Date: 15 August 2018
• Docket Number: No. 5:17-CV-468-D,5:17-CV-468-D
• Court: U.S. District Court — Eastern District of North Carolina
• Parties: Paul M. RETFALVI, Plaintiff, v. UNITED STATES of America, Defendant.

335 F.Supp.3d 791

Paul M. RETFALVI, Plaintiff,

v.UNITED STATES of America, Defendant.

No. 5:17-CV-468-D

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

Signed August 15, 2018

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

Christopher J. Williamson, United States Department of Justice, Washington, DC, for Defendant.

ORDER

JAMES C. DEVER III, Chief United States District Judge

On September 14, 2017, Paul M. Retfalvi ("plaintiff" or "Retfalvi") filed this action against the United States ("defendant" or "United States") seeking a tax refund under 26 U.S.C. § 7422 [D.E. 1]. On November 24, 2017, the United States moved to dismiss the complaint for failure to state a claim [D.E. 9], and filed a memorandum in support [D.E. 10]. On December 15, 2017, Retfalvi responded in opposition [D.E. 11]. On December 22, 2017, the United States replied [D.E. 12]. As explained below, the court grants the government's motion to dismiss.

I.

Retfalvi was born in Hungary. See Compl. [D.E. 1] ¶ 9. In December 1988, Retfalvi moved to Canada under a restricted work permit. See id. ¶ 10. In 1993, Canada granted Retfalvi citizenship. See id. Also in 1993, Retfalvi came to the United States on a J-1 visa to participate in a medical residency program. See id. ¶ 11. In 1997, Retfalvi completed his medical residency and returned to Canada to comply with his J-1 visa. See id. In 1998, Retfalvi returned to the United States on an H1-B visa. See id. ¶ 12. While Retfalvi was living in the United States on his H1-B visa, he purchased two condominiums in Vancouver, Canada because he needed a place to live if he had to leave the United States and return to Canada. See id. ¶¶ 13–14. In February 2005, the United States granted Retfalvi permanent resident status. See id. ¶ 15. In 2006, Retfalvi sold his condominiums in Vancouver because he planned to remain in the United States. See id. ¶¶ 15–16. In March 2007, Retfalvi and his wife filed separate Canadian tax returns for the 2006 tax year and each reported one-half of the sales of the two condominiums. See id. ¶ 17. Retfalvi and his wife also filed a joint United States income tax return for the 2006 tax year and reported the condominium sales. See id.

In June 2007, the Canada Revenue Agency began an audit of Retfalvi's 2006 tax return. See id. ¶ 18. In June 2010, Retfalvi became a United States citizen. See id. ¶ 21. In 2011, the Canada Revenue Agency completed its audit and concluded that Retfalvi improperly accounted for the sale of the condominiums and issued a tax deficiency. See id. ¶¶ 18–19. The Canada Revenue Agency gave Retfalvi 90 days to file an appeal with the Canadian Tax Court, but he failed to do so. See id. ¶ 20. Thus, on October 3, 2011, Retfalvi's Canadian tax liability became final. See id.

After Retfalvi failed to pay his Canadian tax liability, the Canada Revenue Agency sent the Internal Revenue Service ("IRS") a Mutual Collection Assistance Report pursuant to Article 26A of the Third Protocol of the United States-Canada Income Tax Convention (the "Treaty"). See [D.E. 10] 10. Article 26A authorizes the IRS to collect Canadian tax assessments on behalf of the Canadian government. See [D.E. 10] 7; Convention Between the United States of America and Canada with Respect to Taxes on Income and Capital, Article 26A, Sept. 26, 1980, T.I.A.S. No. 11087, 1986–2 C.B. 258 ; Mar. 17, 1995, U.S.–Canada, art. 15, S. Treaty Doc. No. 104–4 ("Article 26A"). Specifically, Article 26A provides that the United States and Canada will "undertake to lend assistance to each other in the collection of taxes referred to in paragraph 9 [of this article], together with interest, costs, additions to such taxes and civil penalties, referred to ... as a ‘revenue claim.’ " Article 26A ¶ 1. Article 26A also provides

2. An application for assistance in the collection of a revenue claim shall include a certification by the competent authority of the applicant State that, under the laws of that State, the revenue claim has been finally determined. For the purposes of this Article, 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.

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, subject to the provisions of paragraph 7, 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.

4. Where an application for collection of a revenue claim in respect of a taxpayer is accepted

(a) By the United States, 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; and

(b) By Canada, the revenue claim shall be treated by Canada as an amount payable under the Income Tax Act, the collection of which is not subject to any restriction.

5. Nothing in this Article shall be construed as creating or providing any rights of administrative or judicial review of the applicant State's finally determined revenue claim by the requested State, based on any such rights that may be available under the laws of either Contracting State. If, at any time pending execution of a request for assistance under this Article, the applicant State loses the right under its internal law to collect the revenue claim, the competent authority of the applicant State shall promptly withdraw the request for assistance in collection.

Article 26A ¶¶ 2–5.

In accordance with Article 26A, on November 16, 2015, the IRS sent Retfalvi a "Final Notice-Notice of Intent to Levy" requiring Retfalvi to pay his Canadian revenue claim of $124,286.23. See Compl. ¶ 22. On January 13, 2016, Retfalvi objected to the notice of intent to levy, requested a hearing, and subsequently filed a statement in opposition. See id. ¶ 24. The IRS informed Retfalvi, among other things, that the IRS had no authority to adjust the liability and that the IRS would not consider any arguments concerning the validity or correctness of the revenue claim. See id. ¶ 25. On February 23, 2016, Retfalvi filed a Form 12153 with the IRS and requested a hearing through the Collection Due Process ("CDP") program under section 6630 of the Internal Revenue Code. See id. ¶ 26. The IRS rejected Retfalvi's CDP hearing request and informed him that only a Collection Appeal Procedure ("CAP") was available to him. See id. ¶ 27. On March 24, 2016, the IRS denied Retfalvi's CAP hearing request because "challenges to the existence or amount of a liability are excluded issues under the Collection Appeals Program. The Appeals Office does not have the authority to adjust a foreign tax liability." Id. ¶ 29 (quotation omitted).

On April 12, 2016, Retfalvi filed a complaint seeking a declaratory judgment and injunctive relief. See Retfalvi v. Comm'r of IRS, 216 F.Supp.3d 648 (E.D.N.C. 2016). Retfalvi asserted, among other things, that Article 26A is unconstitutional and invalid. See id. at 651. The United States moved to dismiss Retfalvi's complaint for lack of subject-matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1) and for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). See id. The court granted the United States's motion and dismissed the complaint for lack of subject-matter jurisdiction because section 7421(a) of the Internal Revenue Code precludes federal courts from hearing cases which seek to restrain tax collection. See id. at 652 ; 26 U.S.C. § 7421. In order to challenge a tax assessment, the taxpayer must first pay the amount due, and then file a refund complaint under section 7422 of the Internal Revenue Code. See 26 U.S.C. § 7422 ; Retfalvi, 216 F.Supp.3d at 654.

On December 22, 2016, Retfalvi paid the assessment. See Compl. ¶ 36. On February 24, 2017, Retfalvi filed a refund claim with the IRS. See id. ¶ 37. On June 15, 2017, the IRS rejected Retfalvi's refund claim. See id. ¶ 38. On September 14, 2017, Retfalvi filed this complaint. Retfalvi challenges the constitutionality of Article 26A. Retfalvi contends that (1) Article 26A violates the Origination Clause because it is a bill to raise revenue that did not originate in the House of Representatives; (2) Article 26A is invalid because it is not self-executing; (3) Article 26A violates the Taxing Clause because Congress has the exclusive authority to lay and collect taxes; (4) Article 26A violates the Taxing Clause because Congress cannot use its taxing power to levy or collect taxes of a foreign country; (5) Article 26A violates the Taxing Clause because it purports to amend the Internal Revenue Code; (6) the IRS is not authorized to assess and collect taxes imposed by Canadian laws; (7) Article 26A denies taxpayers due process; (8) Article 26A denies taxpayers equal protection of the law that is available to taxpayers who have had taxes assessed under the Internal Revenue Code; and (9) Article 26A creates an impermissible sub-classification of United States taxpayers. See id. ¶¶ 44–131.

II.

A motion to dismiss under Rule 12(b)(6) tests the complaint's legal and factual sufficiency. See Ashcroft v. Iqbal, 556 U.S. 662, 677–80, 684, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ; Bell Atl. Corp. v. Twombly, 550 U.S. 544, 554–63, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ; Giarratano v. Johnson, 521 F.3d 298, 302 (4th Cir. 2008). To withstand a Rule 12(b)(6) motion, a pleading "must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (quotation omitted); see Twombly, 550 U.S. at 570...