The Revenue Rule: Is It Relevant Any More? Should It Be? (2/16/16)

Keith Fogg has this excellent blog today:  Why is the IRS Collecting Taxes for Denmark? (ProceduralyTaxing 2/16/16), here.  As Keith notes in the blog entry, the general rule -- certainly in the U.S. -- is that one country (the U.S. in this case) does not involve itself in the collection of other countries' taxes.  This is a specific application of the so-called so-called "Revenue Rule."  I explain that rule in my Federal Tax Procedure book as follows (footnotes omitted):

Historically, the “Revenue Rule,” has been a barrier to one country seeking to collect taxes in another country.  According to the most recent Supreme Court foray into the rule, the Revenue Rule “at its core * * * prohibited the collection of tax obligations of foreign nations.”  Although described as a common law rule (suggesting some affiliation with Anglo-American jurisprudence), the Revenue Rule in one form or another is the general rule among countries. 

This means that taxpayers desiring to avoid U.S. tax can put their assets in a foreign jurisdiction and thereby avoid the U.S. being able to collect U.S. tax from those assets.  Similarly, persons subject to foreign country tax (including U.S. persons whose operations are subject to tax in a foreign country) can put or keep their money in the U.S. and avoid the foreign country enforcing those tax liabilities in the U.S.

But, cracks in the rule have developed over the years.  Here is my discussion of those cracks (footnotes omitted):

C. Cracks in the Revenue Rule.

1. Treaties.

As noted above, U.S. tax treaties now have exchange of information requirements which obligate one treaty party, upon a proper request from the other, to use their internal processes to obtain information and share it with the other party.  

Some U.S. treaties go beyond merely the exchange of information and provide for use of each other's legal systems for tax collections.  E.g., the Third Protocol (1995) of the U.S.-Canada Treaty of 1980 provides for reciprocal enforcement of some tax debts of the treaty parties.  The majority decision in Attorney General of Canada indicated that there are only 5 U.S. treaties providing for general assistance in collecting some tax debts of the other treaty partner.  The standard treaty provision requires such assistance in collecting only amounts necessary to protect on the Limitations of Benefits clause. 

Of course, the reason Tax Haven jurisdictions have no such treaty provisions (they wouldn’t be Tax Haven jurisdictions if they did) is to avoid such treaty information sharing provisions and tax debt collection provisions.  Tax Havens typically do not have such treaties with the U.S.  But Tax Havens are under heavy attack to change their ways.  Thus, in response to economic incentives, some of these traditional Tax Haven countries have entered into Tax Information Exchange Agreement (also referred to as a “TIEA”).  How effectively they work is another issue.  But the point here is that a taxpayer may get caught in this ever-expanding net as the developed countries continue their assault on Tax Havens and offer them sufficient incentives to move closer to the global mainstream.  At some point, this could mean not only tax information sharing agreements, but also reciprocal tax debt collection as in the U.S.-Canada Treaty. 

2. Pasquantino and Extensions.

In Pasquantino v. United States, 544 U.S. 349 (2005), the Supreme Court held that the U.S. wire fraud statute (and mail fraud statute) could apply to use of U.S. media to effect evasion of a foreign country’s taxes.  In doing so, the Supreme Court resolved a conflict among the circuits as to whether the common law revenue rule and similar prudential considerations (including presumption against extraterritoriality and the rule of lenity) required the wire fraud statute to be interpreted so exclude foreign tax violations as an object of the offense.  The conduct being penalized (use of the U.S. media) occurs within the U.S. and the U.S. has a sufficient interest in regulating that conduct that it can penalize it.  There was nothing in the statute or its interpretation that would suggest that Congress intended or would have intended it not to apply when the object of the conduct was a foreign fraud as opposed to a U.S. fraud. 

In deciding Pasquantino, the majority noted: 

We express no view on the related question whether a foreign government, based on wire or mail fraud predicate offenses, may bring a civil action under the Racketeer Influenced and Corrupt Organizations Act for a scheme to defraud it of taxes. See Attorney General of Canada v. R. J. Reynolds Tobacco Holdings, Inc., 268 F.3d 103, 106 (CA2 2001) (holding that the Government of Canada cannot bring a civil RICO suit to recover for a scheme to defraud it of taxes); Republic of Honduras v. Philip Morris Cos., 341 F.3d 1253, 1255 (CA11 2003) (same with respect to other foreign governments).

Now, back to Keith's excellent blog adventure with which I started this blog entry.
Keith was inspired by the case of Torben Dileng v. Commissioner (ND GA 1/15/16), in which the Court approved IRS collection of Denmark's tax pursuant to the treaty.  I won't address the specifics of that attempt, since Keith does a good job.  But I do want to cut and paste the introduction which is quite good and indicates the direction of the U.S. and other countries in this regard.

The United States has bilateral tax treaties with many countries. Of all the tax treaties the United States has only five have a provision that allows each country to the treaty to collect outstanding liabilities of the other party to the treaty as I discussed in an earlier post.  One of the five countries that has a collection treaty with the United States is Denmark.  The other four are Canada, France, the Netherlands and Sweden.  This post discusses the recent case of Torben Dileng v. Commissioner in which the Danish taxpayer brought suit in the District Court for the Northern District of Georgia seeking an order to stop the IRS from collecting the taxes he owes to the Danish government. 

 These cases appear only rarely in the United States or in the courts of our treaty partners.  The case deserves attention because it demonstrates how the IRS can and will go about collecting the taxes owed to a treaty partner and it provides a basis for raising again why the United States only has the collection provision in five of its bilateral treaties and does not make an effort to routinely include this provision into tax treaties.

One argument against inserting collection language in treaties is that the United States has done more to collect for its treaty partners than those partners have done to collect for the United States. Even if this is true, it misses the mark that the United States should lead in insuring global collection of taxes just as it took the lead in FATCA.  If the United States ends up spending more resources to collect taxes for Denmark than it causes the Danish tax authorities to expend in collecting taxes for the United States, that also does not mean that the net expenditure did not benefit the United States.  If we eliminate places for persons seeking to hide from paying their taxes, all countries will benefit and perhaps domestic collection will increase.  If by failing to enter into treaties covering the collection side of tax compliance, we make it easy for high income, sophisticated taxpayers to move money and hide from tax collection, we degrade overall compliance.

Finally, I note that the Acting Assistant Attorney General for Tax, Caroline Ciraolo, said the following at the ABA Tax Section Midyear Meeting after discussing the U.S. offshore account efforts:

We also stand ready to assist our treaty partners in their own tax enforcement efforts, as evidenced in Dileng v. Commissioner. Mr. Dileng has unpaid tax liabilities in excess of $2.5 million in Denmark, which he has challenged in Danish courts. Like many tax treaties, the U.S.-Denmark Tax Treaty contains a provision allowing a treaty partner to request that the counterpart assist in pursuing collection of domestic taxes in the counterpart jurisdiction. Pursuant to a collection assistance provision in the U.S.-Denmark Tax Treaty, the Danish taxing authority submitted a collection assistance request and a revenue claim to the IRS, requesting that the IRS assist in collecting Mr. Dileng's Danish liabilities. Mr. Dileng filed suit, seeking to enjoin collection efforts by the IRS. 

The U.S. District Court for the Northern District of Georgia dismissed the suit, finding that an accepted revenue claim must be treated like a U.S. tax assessment for collection purposes within the United States, even though Mr. Dileng is prohibited from challenging those liabilities in U.S. courts. The court found that the Anti-Injunction Act and the tax exception to the Declaratory Judgment Act barred him from bringing his claim to stop the IRS from collecting and that the United States had not waived sovereign immunity for his suit. The court further found that collection under the circumstances did not implicate Mr. Dileng's due process rights because he is indeed challenging his tax liabilities in Danish courts. 

The Dileng case, like 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, demonstrate that the IRS and the department take the United States' treaty responsibilities seriously. We will continue to use the collection assistance provisions in our tax treaties to ensure U.S. taxpayers abide by their tax obligations in the United States, and we will continue to do our best to uphold our reciprocal obligations to our treaty partners.