Uncle Sam as Danish Tax Collector

By: Diane Ring

Who says that real global tax cooperation is dead? During a very interesting conference on international tax held in Boston a couple of weeks ago, a recent U.S. tax case was discussed and caught my attention: Torben Dileng v. Commissioner (D.Ct. N. Ga., Jan. 15, 2016). In that case, a U.S. District Court ruled that the IRS could collect $2.5M of Danish taxes owed by a Danish citizen who was resident in the U.S.

IRS as Danish tax collector– what was this all about?

As a general matter there is a longstanding rule in common law and civil jurisdictions–the “revenue rule”–that countries will not assist other jurisdictions in their collection of tax.  But the Danish-U.S. treaty (and a few others) calls for administrative assistance in the collection of taxes under specified circumstances. In relevant part, Article 27 of the Danish-U.S. treaty provides:

1. The Contracting States undertake to lend assistance to each other in the collection of taxes referred to in Article 2 (Taxes Covered), together with interest, costs, additions to such taxes, and civil penalties, referred to in this Article as a “revenue claim.”
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.

Pursuant to this provision of the Denmark-U.S. tax treaty, Denmark had asked the U.S. to help collect tax owed to it by Torben Dileng, a Danish taxpayer living in the United States. Denmark certified to the U.S. that the revenue claim was in fact “finally determined” as required by the treaty. The U.S. agreed to assist in collection, but the taxpayer sought to bar the U.S. collection efforts in U.S. court. The taxpayer had argued in part that the U.S. could not assist Denmark until his challenge to the taxes in Danish court had been concluded. In January this year, the District Court ruled that the IRS could go forward with its collection efforts.

In reaching its decision in favor of immediate tax collection assistance, the court reviewed a number of arguments (most of which were not tax related, including claims regarding sovereign immunity, the Declaratory Judgment Act, and the Anti-Injunction Act). But for the tax focused among us, the court did address the meaning of the treaty requirement that the requesting country certify that the claim has been “finally determined.” The court concluded that under the terms of the treaty, the U.S. was required to accept Denmark’s certification, and the U.S. could not revisit the underlying substantive Danish tax claim. Additionally, the court observed that the taxpayer offered no evidence that Denmark could not pursue immediate collection enforcement domestically, had there been sufficient assets in the country.

Given that there are very few (perhaps just three cases) addressing comparable collection assistance under a treaty (and they involved the 1948 Netherlands treaty with the U.S.), the Dileng case offers a fresh perspective on judicial interpretation of these treaty provisions. The IRS and DOJ were clearly pleased by the court’s response. Acting Assistant Attorney General Caroline Ciraolo noted in her remarks at the ABA Mid-Year Meeting (Jan. 29, 2016), just two weeks after the Dileng opinion came down, that “[w]e also stand ready to assist our treaty partners in their own tax enforcement efforts.” Emphasizing this pattern of cooperation, she drew parallels to “similar orders obtained from seven federal courts in 2013 authorizing the IRS to serve John Doe summonses on certain U.S. banks and financial institutions seeking information about persons who used specific credit or debit cards in Norway.” The message is that Dileng is not an outlier so long as the treaty provides for collection assistance. And given that these treaty provisions are reciprocal—we should expect that the Danish tax authority (which has the great acronym “SKAT”) will stand ready to collect U.S. tax bills owed by U.S. taxpayers in Denmark.