U.S. Court Orders Enforcement of Tax Lien for Canadian Tax Liability

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Thursday, May 1, 2003
Bruce Zagaris
On February 24, 2003, the U.S. District Court for the Southern District of New York issued an opinion holding that the IRS did not abuse its discretion in denying a Canadian taxpayer’s request to set aside a notice of federal tax lien issued at Canada’s request for collection of Canadian tax liability. On February 17, 2000, the Internal Revenue Service, on the basis of its Notice of Federal Tax Lien (NFTL) against Martin Tesher, filed it in the office of the Register of the City of New York. The notice seeks $59,314 and states that “(t)his amount is due, owing, and unpaid to the government of Canada, and is being collected on behalf of Canada under the provisions of Article 26A of the United States-Canada Income Tax Convention, and applicable laws of the United States of America.” Additionally, the form erroneously states, in a column headed “Kind of Tax,” that the unpaid balance was owed to the U.S. in respect of U.S. income taxes notwithstanding the clear reference in the notice relating to collection of Canadian taxes. Plaintiff sought and obtained an administrative hearing before the Internal Revenue Service, challenging the propriety of the lien. He argued that the lien notice contravened Paragraph 7 of Article 26A of the U.S.-Canadian tax treaty, which provides that Canadian revenues claims accepted by the U.S. for collection will not have any priority accorded to revenue claims of the U.S. itself. The IRS rejected plaintiff Tesher’s request to set aside the notice of lien. The IRS held that nothing in the sought to accord the lien any priority under U.S. law While the IRS acknowledged that the reference to “1040" in the “Kind of Tax” column was erroneous, the IRS concluded that the mistake was not fatal. As a result, plaintiff Tesher then brought a lawsuit in U.S. District Court, seeking to annual the notice of lien on the same grounds asserted at the administrative hearing.