Retfalvi v. United States

• Decision Date: 16 July 2019
• Docket Number: No. 18-2158,18-2158
• Citation: 930 F.3d 600
• Parties: Paul M. RETFALVI, Plaintiff - Appellant, v. UNITED STATES of America, Defendant - Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

930 F.3d 600

Paul M. RETFALVI, Plaintiff - Appellant,

v.UNITED STATES of America, Defendant - Appellee.

No. 18-2158

United States Court of Appeals, Fourth Circuit.

Argued: May 8, 2019

Decided: July 16, 2019

ARGUED: Robert H. Merritt, Jr., BAILEY & DIXON, LLP, Raleigh, North Carolina, for Appellant. Anthony T. Sheehan, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee. ON BRIEF: Richard E. Zuckerman, Principal Deputy Assistant Attorney General, Teresa E. McLaughlin, Tax Division, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C.; Robert J. Higdon, Jr., United States Attorney, OFFICE OF THE UNITED STATES ATTORNEY, Raleigh, North Carolina, for Appellee.

Before NIEMEYER and HARRIS, Circuit Judges, and Ellen L. HOLLANDER, United States District Judge for the District of Maryland, sitting by designation.

Affirmed by published opinion. Judge Hollander wrote the opinion, in which Judges Niemeyer and Harris joined.

HOLLANDER, District Judge:

This appeal resolves a challenge to the constitutionality of a treaty authorizing the United States to collect unpaid income taxes on behalf of Canada. The issue arises in the context of a tax refund action filed by appellant Paul M. Retfalvi, M.D., the taxpayer. He filed suit against the United States, seeking a refund of approximately $125,000 in taxes collected from him by the Internal Revenue Service ("IRS"), pursuant to the treaty, for income taxes that he owed to Canada for 2006.

Dr. Retfalvi advances several grounds in support of his challenge to the constitutionality of the treaty. According to Dr. Retfalvi, the treaty constitutes a "bill for raising revenue" that did not originate in the House of Representatives, in violation of the Origination Clause, Article 1, § 7, cl. 1. In addition, he argues that the treaty violates the Taxing Clause, Article I, § 8, cl. 1, which, in his view, confers on Congress the exclusive right to enact taxing legislation. Further, Dr. Retfalvi contends that the treaty is not self-executing and is therefore unenforceable, because it has not been validated by the requisite implementing legislation. Dr. Retfalvi also challenges the IRS’s legal authority to collect a foreign assessment on behalf of Canada.

The District Court for the Eastern District of North Carolina rejected these contentions. We affirm.

I.

A.

In 1980, the United States and Canada executed the Convention Between the United States of America and Canada with Respect to Taxes on Income and on Capital, U.S.-Can., Sept. 26, 1980, 1986-2 C.B. 258 (the "Treaty"). It was ratified by the U.S. Senate in 1984. Article 26 XXVIA ("Article 26A") was added to the Treaty by Article 15 of Protocol 3 and entered into force after the Senate ratified Protocol 3 in 1995. S. Treaty Doc. No. 104-4, 1984 WL 261890.

Under Article 26A, the United States and Canada agreed to assist each other with the collection of unpaid taxes. Article 26A, ¶¶ 1, 9. To apply for collection assistance, the applicant State submits a revenue claim to the requested State. Id. ¶ 2. The applicant State must certify that the revenue claim has been "finally determined" under its laws. Id. Of relevance here, "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." Id.

The requested State decides whether to accept the revenue claim. Article 26A, ¶ 3. If it accepts the revenue claim, it must collect the claim as though it were its own finally determined tax debt. Id. Therefore, a Canadian revenue claim accepted by the United States 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. ¶ 4(a). Any monies collected by the United States are forwarded to Canada. Id. ¶ 6.

The taxpayer retains any rights of review otherwise available under the applicant State’s laws. However, under Article 26A, the taxpayer cannot seek administrative or judicial review by the requested State of the revenue claim of the applicant State. Id. ¶ 5.

The United States has construed Article 26A as a self-executing treaty. That is, Article 26A " ‘operates of itself without the aid of any legislative provision.’ " Medellin v. Texas , 552 U.S. 491, 505, 128 S.Ct. 1346, 170 L.Ed.2d 190 (2008) (quoting Foster v. Neilson , 27 U.S. (2 Pet.) 253, 314, 7 L.Ed. 415 (1829), overruled on other grounds by United States v. Percheman , 32 U.S. (7 Pet.) 51, 8 L.Ed. 604 (1833) ); see also ESAB Grp., Inc. v. Zurich Ins., PLC , 685 F.3d 376, 387 (4th Cir. 2012) (noting that a treaty can have both self-executing and non-self-executing provisions).

B.

The taxpayer, Paul M. Retfalvi, is a medical doctor who was born in Hungary. He moved to Canada in 1988 under a restricted work permit, and he became a Canadian citizen in 1993. That same year, Dr. Retfalvi came to the United States on a J-1 visa to participate in a medical residency program. After Dr. Retfalvi completed his residency in 1997, he returned to Canada.

The following year, Dr. Retfalvi returned to the United States under an H1-B visa. To ensure that he would have a place to live if his H1-B visa was not renewed, Dr. Retfalvi purchased a small condominium in Vancouver, Canada and signed a pre-construction contract to purchase a larger one. Through extensions of his H1-B visa, Dr. Retfalvi continued to reside in the United States. In 2005, he was granted permanent resident status from the United States. As Dr. Retfalvi was no longer planning to reside in Canada, he sold both condominiums in 2006.

In 2007, Dr. Retfalvi and his wife filed separate Canadian income tax returns for 2006. Each return included one-half of the proceeds of the sale of the condominiums. Dr. Retfalvi and his wife also reported the sales on their joint federal income tax return, filed with the IRS.

The Canada Revenue Agency ("CRA"), which administers Canada’s tax laws, audited Dr. Retfalvi’s tax return in 2007. In 2008, the CRA sent Dr. Retfalvi a summary of the audit adjustments, finding that he had improperly reported the sale of the condominiums. The next year, the CRA sent him a Notice of Assessment.

In response, Dr. Retfalvi filed an untimely objection in February 2010. Thereafter, in March 2010, he filed a timely administrative appeal. Then, on June 23, 2010, Dr. Retfalvi became a United States citizen.

The CRA sent Dr. Retfalvi a Notice of Confirmation on July 4, 2011, denying his appeal and providing him 90 days to file an appeal with the Canadian Tax Court. However, Dr. Retfalvi did not challenge the proposed deficiency by the deadline of October 3, 2011. As a result, the Canadian tax liability became final on that date.

On October 27, 2015, the CRA referred the assessment to the United States for collection, pursuant to Article 26A. In turn, on November 16, 2015, the Internal Revenue Service ("IRS") issued a "Final Notice – Notice of Intent to Levy and of Your Right to a Hearing," instructing Dr. Retfalvi to pay $124,286.83 in U.S. currency to satisfy the Canadian revenue claim. In the Notice, the IRS advised that it intended to use its collection procedures if Dr. Retfalvi did not pay the assessment within the allotted period. Further, the Notice indicated that the taxpayer had 30 days to seek a hearing before the IRS Office of Appeals regarding the proposed levy. However, the Notice stated that the IRS had no authority to adjust the underlying Canadian tax liability.

Dr. Retfalvi objected to the Notice on January 13, 2016, and requested a hearing. On February 23, 2016, he sought a hearing before the IRS Office of Appeals under the Collection Due Process Program, pursuant to Section 6330 of the Internal Revenue Code ("I.R.C." or the "Tax Code"). In response, Dr. Retfalvi was informed that he was not entitled to a hearing under that program, but he was entitled to a limited hearing under the Collection Appeals Program. Dr. Retfalvi then filed for that hearing.

On March 24, 2016, the IRS denied Dr. Retfalvi’s "Collection Appeal Request," because the "Appeals Office does not have the authority to adjust a foreign tax liability." And, as noted, Dr. Retfalvi never challenged the existence or the amount of the Canadian tax claim.

Thereafter, in the Eastern District of North Carolina, Dr. Retfalvi filed suit for a declaratory judgment and injunctive relief to enjoin the collection of the tax. See Retfalvi v. Comm’r , 216 F. Supp. 3d 648 (E.D.N.C. 2016). But, the court dismissed the suit for lack of jurisdiction, pursuant to the Anti-Injunction Act, 26 U.S.C. § 7421(a), and the tax exception to the Declaratory Judgment Act, 28 U.S.C. § 2201(a). Id. Dr. Retfalvi did not appeal. Rather, he paid the tax assessment and then filed a refund claim with the IRS, which was denied.

Dr. Retfalvi’s refund suit followed on September 14, 2017. It contains nine counts, of which five are relevant on appeal.¹ In Count I, Dr. Retfalvi claims that Article 26A violates the Constitution’s Origination Clause, as a revenue raising measure that did not originate in the House of Representatives. In Count II, he maintains that Article 26A does not have the force of law because it is not a self-executing treaty provision. Counts III and V pertain to the Taxing Clause. In Count VI, Dr. Retfalvi asserts that the IRS is not authorized to collect taxes because Article 26A has no legal force.

The government moved to dismiss the suit under Fed. R. Civ. P. 12(b)(6). In a well-reasoned decision issued on August 15, 2018, the district court rejected all of the taxpayer’s claims and concluded that the IRS had the authority to collect the assessment on behalf of Canada, pursuant to Article 26A. Therefore, the court dismissed the complaint. This appeal followed.

Dr. Retfalvi maintains that the district court erred in granting the government’s Rule 12(b)(6) motion. Because this is an appeal...