Eric Gilbert v. United States

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
ERIC L. GILBERT; AUDRA GILBERT, No. 18-17004
husband and wife,
Plaintiffs-Appellants, D.C. No.
2:17-cv-03762-
v. JJT
UNITED STATES OF AMERICA; PHILIP
K. LEOPARD, as Trustee of Namaca OPINION
Management Limited,
Defendants-Appellees.
Appeal from the United States District Court
for the District of Arizona
John Joseph Tuchi, District Judge, Presiding
Argued and Submitted February 3, 2021
Phoenix, Arizona
Filed May 20, 2021
Before: William A. Fletcher, Eric D. Miller, and
Danielle J. Hunsaker, Circuit Judges.
Opinion by Judge Hunsaker
2 GILBERT V. UNITED STATES
SUMMARY *
Tax
The panel affirmed the district court’s dismissal, for lack
of jurisdiction, of appellants’ action for a declaratory
judgment on the effect of the Foreign Investment in Real
Property Tax Act and Fixed, Determinable, Annual, or
Periodical income rules on a contract to purchase real
property from a foreign entity.
The FIRPTA and FDAP require a buyer in taxable
transactions with a foreign entity to deduct, withhold, and
pay a prescribed amount to the Internal Revenue Service, to
ensure that funds to pay the required taxes are collected up
front. The Declaratory Judgment Act allows a federal court
with jurisdiction to issue a declaration resolving the parties’
competing legal rights, except with respect to federal taxes.
Appellants sought a declaratory judgment that withholding
money, to pay federal taxes, from their agreed purchase price
of real property from a foreign entity is not a breach of the
real estate contract. The panel affirmed the district court’s
determination that the Declaratory Judgment Act prohibits
courts from entering declaratory judgments related to federal
taxation obligations.
The panel addressed appellants’ remaining claims in a
contemporaneously filed memorandum disposition.
*
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
GILBERT V. UNITED STATES 3
COUNSEL
Lauren Elliott Stine (argued) and Julia Wittman, Quarles &
Brady LLP, Phoenix, Arizona, for Plaintiffs-Appellants.
Sherra Wong (argued) and Michael J. Haungs, Attorneys,
Tax Division; Richard E. Zuckerman, Principal Deputy
Assistant Attorney General; United States Department of
Justice, Washington, D.C.; for Defendant-Appellee United
States of America.
Robert Andrew Rahtz (argued) and Peter Westby, Platt &
Westby PC, Phoenix, Arizona, for Defendant-Appellee
Philip K. Leopard.
OPINION
HUNSAKER, Circuit Judge
Eric and Audra Gilbert contracted to buy real property
from Namaca Management Limited (Namaca), a purported
foreign entity. After a dispute arose concerning the
withholdings required under the Foreign Investment in Real
Property Tax Act (FIRPTA) and the Fixed, Determinable,
Annual, or Periodical income (FDAP) rules, the Gilberts
brought this action seeking a declaratory judgment that,
among other things, withholding money from their agreed
purchase price to pay the federal taxes required under
FIRPTA and the FDAP rules is not a breach of their real
estate contract with Namaca. 1 The district court dismissed
this claim for lack of jurisdiction because the Declaratory
1
The Gilberts’ remaining claims are resolved in a
contemporaneously filed memorandum disposition.
4 GILBERT V. UNITED STATES
Judgment Act prohibits courts from entering declaratory
judgments related to federal taxation obligations. We affirm.
I. BACKGROUND
In July 2014, the Gilberts and Namaca, acting through its
trustee Philip K. Leopard, entered a Contract for Deed
(Contract) for the sale of a residential property in Peoria,
Arizona (Property). The Gilberts agreed to pay $1,200,000
for the Property under the following terms: an initial down
payment of $60,000; a lump sum payment of $90,000 by
March 2015; 24 monthly payments of $4,750; adjustable
monthly payments after the first 24 months; and a final
balloon payment in August 2019. Namaca guaranteed that
the Property was not currently encumbered and agreed to not
take any action that would encumber the Property. But the
day after executing the Contract, the Gilberts discovered a
federal tax lien had been recorded against the Property for
$416,372.05 several months earlier. Thereafter, the parties
amended their contract to require Namaca to resolve the title
issues “as quickly as possible” and for all title defects to be
resolved “prior to or at the time of final conveyance of the
Property.” Nearly a year and a half later, in November 2015,
the federal government recorded a second tax lien against the
Property for $283,007.48.
This brings us to the heart of this case. In August 2017,
the Gilberts notified Leopard that because Namaca is a
foreign entity they were required to withhold a portion of
their agreed purchase price under FIRPTA and a portion of
their interest payments under the FDAP rules. Leopard
disputed that the withholdings were required, claiming
“Leopard and Namaca are ‘non-resident non-persons’
exempt from withholding.” But the Gilberts insisted that
Namaca was not exempt from the withholdings and advised
Leopard that they would “withhold . . . all additional sums
GILBERT V. UNITED STATES 5
payable under the [Contract] until their withholding
obligation under the FDAP rules have been fulfilled.”
Leopard continued to dispute the withholdings, arguing the
Property is not a “US real Property interest” subject to
statutory withholding, and that the Gilberts’ failure to pay
their full payment amount would be a breach of contract.
Ultimately, the Gilberts filed this lawsuit seeking a
declaratory judgment that “the withholding of payments to
Namaca pursuant to FIRPTA and FDAP did not breach the
terms of the [Contract].” Shortly thereafter, Leopard
recorded a Notice of Election to Forfeit, accelerating the full
unpaid balance on the Contract and giving notice that the
Gilberts would forfeit their interest in the Property if they
failed to pay by the required deadline. Leopard also moved
to dismiss the Gilberts’ lawsuit. The district court granted
the motion, concluding that it lacked subject matter
jurisdiction over the Gilberts’ declaratory judgment claim
under 28 U.S.C. § 2201 because their requested relief
concerned federal taxes. The Gilberts timely appealed, and
we have jurisdiction under 28 U.S.C. § 1291.
II. DISCUSSION
We review a dismissal for lack of subject matter
jurisdiction de novo, and we accept the district court’s
jurisdictional factual findings unless they are clearly
erroneous. Hughes v. United States, 953 F.2d 531, 535 (9th
Cir. 1992).
As relevant here, FIRPTA and the FDAP rules require
the transferee—or buyer—in taxable transactions with a
foreign entity to deduct, withhold, and pay a prescribed
amount to the Internal Revenue Service (IRS). 26 U.S.C.
§ 1472; 26 U.S.C. § 1445(a). Congress specifically enacted
FIRPTA to prevent foreign investors engaging in real
6 GILBERT V. UNITED STATES
property transactions in the United States from avoiding
United States taxes. Brian S. Masterson, 2 Tucker on Tax
Planning Real Estate Trans. § 22:3 (updated 2021). The pre-
tax withholding requirement ensures that funds to pay the
required taxes are collected up front. And the requirement
obligates the buyer to facilitate enforcement and collection.
26 C.F.R. 1.1445-1(b); see also John R. Wilson,
2 Transnational Business Transactions § 10:31 (updated
2020) (“The key to enforcing FDAP taxes is to make one or
more U.S. persons (or at least foreign persons over whom
the U.S. has effective jurisdiction) responsible and liable for
the collection and payment of the taxes.”); id. § 10:64
(updated 2020) (“FIRPTA contains an elaborate withholding
regime to enforce its provisions.”). Indeed, the party
required to make the withholding is liable for any
miscalculation. 26 U.S.C. § 1461; Del Com. Properties, Inc.
v. Comm'r, 251 F.3d 210, 213 (D.C. Cir. 2001).
Under the Declaratory Judgment Act, a federal court
may issue a declaration resolving the parties’ competing
legal rights “[i]n a case of actual controversy within its
jurisdiction, except with respect to Federal taxes.” 28 U.S.C.
§ 2201(a) (emphasis added). This exception stems from the
“congressional antipathy for premature interference with the
assessment or collection of any federal tax.” Bob Jones Univ.
v. Simon, 416 U.S. 725, 732 n.7 (1974). Accordingly, “[i]t is
fundamental to tax jurisprudence that declaratory judgments
and injunctions are rarely, if ever, granted.” MCA, Inc. v.
Am. Broad. Cos., Inc., 715 F.2d 475, 476 (9th Cir. 1983) (per
curiam).
The Gilberts argue that because the FIRPTA and FDAP
withholdings are made before the IRS assesses tax liability,
see 26 U.S.C. § 1445(c)(1)(A); 26 C.F.R. § 1.1445-1(b), the
taxation exception does not apply because a declaration
GILBERT V. UNITED STATES 7
concerning their withholding obligations will not restrain the
ultimate assessment of taxes. We disagree.
The Declaratory Judgment Act’s bar against resolving
matters “with respect to Federal taxes” is not conditioned on
a determination of ultimate tax liability. 28 U.S.C. § 2201(a).
Moreover, the Declaratory Judgment Act “is coextensive
with the Anti-Injunction Act despite the broader language of
the former.” Perlowin v. Sassi, 711 F.2d 910, 911 (9th Cir.
1983) (per curiam); Bob Jones Univ., 416 U.S. at 732 n.7
(“There is no dispute, however, that the federal tax exception
to the Declaratory Judgment Act is at least as broad as the
Anti-Injunction Act.”). The Anti-Injunction Act bars
jurisdiction over any claim seeking to “restrain[] the
assessment or collection of any tax.” 26 U.S.C. § 7421(a).
This bar applies even where the IRS has yet to make a final
determination of the plaintiff’s tax liability. See Bob Jones
Univ., 416 U.S. at 738–39 (applying the Anti-Injunction Act
to taxpayer’s claim that its § 501(c)(3) status was improperly
revoked); Int’l Lotto Fund v. Va. State Lottery Dep’t, 20 F.3d
589, 592 (4th Cir. 1994) (“Courts have found the Anti-
Injunction Act to apply in numerous cases where the IRS had
yet to make a final determination of the plaintiff’s tax
liability.”). There is no basis to reach a different conclusion
under the Declaratory Judgment Act.
Courts clearly lack jurisdiction over claims seeking an
injunction or declaration “against the collection of the tax by
withholding.” United States v. Am. Friends Serv. Comm.,
419 U.S. 7, 10 (1974) (per curiam) (emphasis added); see
Fredrickson v. Starbucks Corp., 840 F.3d 1119, 1122 (9th
Cir. 2016) (refusing to issue declaratory and injunctive relief
under the Tax Injunction Act because the “withholding of
tax payments from wages constitutes a method of tax
‘collection’”) (citation omitted). As the Fourth Circuit noted,
8 GILBERT V. UNITED STATES
there is no “justification for treating withholding from a
foreign corporation as anything other than the collection of
a tax.” Int’l Lotto Fund, 20 F.3d at 592. But the Gilberts’
requested declaration—that withholding funds as required
by FIRPTA and the FDAP rules from the Contract price is
not a breach of the Contract—is different. They are not
seeking to stop the government from collecting taxes related
to the parties’ real estate transaction. Quite the opposite.
They seek to comply with their asserted FIRPTA and FDAP
obligations but in a way that avoids any adverse contractual
consequences with Namaca.
Nonetheless, by filing this action and asking the court to
declare their tax withholding obligation rather than
withholding the required funds and paying them to the IRS
and then, if necessary, filing suit against Namaca, the
Gilberts are interfering with or restraining the collection of
taxes. That they sought to interplead the funds they contend
must be withheld pending a declaratory judgment
determining whether the IRS or Namaca is entitled to such
funds further supports this conclusion. The IRS does not
need to await court authorization before it can collect taxes
it asserts are owed. Cf. 28 U.S.C. 1346(a)(1). Indeed, judicial
review of tax-collection disputes is limited to post-payment
refund proceedings. See Flora v. United States, 362 U.S.
145, 162–63 (1960); Kent v. N. California Reg’l Office of
Am. Friends Serv. Comm., 497 F.2d 1325, 1328 (9th Cir.
1974). A pre-payment judicial ruling concerning the parties’
FIRPTA and FDAP rights and obligations would be binding
on the parties involved in the litigation, thereby undermining
standard tax procedures. See Flora, 362 U.S. at 164–65;
Kent, 497 F.3d at 1328 (noting that “allowing interpleader
could disrupt the orderly procedures created by Congress for
handling tax litigation”). The Supreme Court has recognized
that the government’s vital interest in securing tax revenues
GILBERT V. UNITED STATES 9
justifies a “pay-first, litigate-later” system of judicial review.
See Flora, 362 U.S. at 164 & n.29. The Gilberts’ attempt to
litigate the existence, or extent, of their withholding
obligation before paying withheld funds to the government
departs from this longstanding principle. There can be no
dispute that the ultimate issue in this case is the parties’ tax
obligations flowing from their real estate transaction. And
even though the Gilberts are not seeking to avoid tax
liability, Congress has made clear that the court lacks
jurisdiction over their request for declaratory relief.
28 U.S.C. § 2201(a).
III. CONCLUSION
It is understandable why the Gilberts are seeking
clarification of their withholding obligations vis-à-vis their
contractual obligations owed to Namaca. As has been
observed, the FIRPTA and FDAP withholding requirements
can create tension between a foreign entity that wants full
payment under the contract, and the transferee, “who does
not want to be left ‘holding the bag.’” John R. Wilson,
2 Transnational Business Transactions § 10:31 (updated
2020). But this tension is not resolved by filing litigation that
interferes with the tax-collection process. It is resolved by
parties addressing this issue when they negotiate the terms
of their transaction. Unfortunately, the Gilberts failed to do
this, and they are suffering the consequences of the
uncertainty that comes from such failure.
The district court’s dismissal of the Gilbert’s request for
a declaratory judgment that withholding money from their
agreed purchase price to pay the taxes allegedly owed under
FIRPTA and the FDAP rules is not a breach of their real
estate contract is
AFFIRMED.