No Relief for Overtaxed Foreign Verizon Retirees

CHICAGO (CN) - In a "perverse implication" of the U.S. tax code, a federal judge ruled that tax-exempt foreign Verizon employees cannot sue to recoup tens of thousands of dollars Uncle Sam withheld from their pension payouts.

"As Benjamin Franklin once famously wrote, nothing in this world can be said to be certain, except death and taxes," U.S. District Judge Harry Leinenweber wrote. "This case deals with the latter and what recourse someone has when a retirement plan gives unto Caesar more than his fair share. The answer, unfortunately for plaintiffs, is precious little."

Ramon Mejia and Mario Boeri are foreign-based former Verizon Communications employees who worked for the company for at least 30 years. Both are participants in Verizon's pension plan.

Neither Mejia nor Boeri ever worked or resided in the United States, so their retirement plan benefits are not subject to U.S. taxes.

Nonetheless, when Boeri exercised his stock options in Verizon's plan in 1998 and 1999, the administrator of the plan withheld $94,202 from his earnings and sent him an Internal Revenue Service "Notice of Information Discrepancy."

A few months later, Verizon admitted it had made a mistake by confusing the Verizon global ID number with a U.S. Social Security number. But Boeri never received a refund of $94,202.

Mejia faced similar deductions when he retired in 2004. After receiving numerous letters from Mejia averring his tax-exempt status, Verizon responded in 2009 and admitted that it had mistakenly treated his benefits as if they had been earned inside the U.S. He received a partial refund from the IRS for withheld taxes since 2005.

"Boeri faced a Kafkaesque nightmare similar to Mejia's," Leinenweber wrote. When Boeri retired, his pension plan withheld more than $50,000 in taxes. He appealed the issue at the time, but was incorrectly told that he was not eligible for tax exemption. Verizon refused to revisit the matter in 2009 after Boeri learned of Mejia's successful appeal.

The men filed a 2011 class action, but Leinenweber dismissed it Wednsday because the tax code prohibits lawsuits against private parties who over-collect taxes on behalf of the federal government.

"The court believes that § 7422 is rather absolute in its prohibition on seeking tax refunds from private tax collectors, and there is no form of repleading that could evade § 7422," he wrote, citing the section of federal law on civil actions for refund.

"The court is aware of the perverse implications of this all-powerful statute," Leinenweber wrote. "A vengeful employer upset with his employee might very well withhold 100 percent of the employee's paycheck as federal taxes and do so without any financial repercussions for the employer. ... In short, it appears that Congress wanted employers (and other tax-collection agents) to be more afraid of the IRS than lawsuits from employees, and it gave them broad protection in the form of § 7422 to effect seamless tax collection."

The employees can amend their claims for injunctive or declaratory relief, however, because "Verizon essentially admitted in writing the withholdings were incorrect and then blithely continued them," the decision states.

"For example, removal of the fiduciaries would implicitly serve as an admonition to the replacement fiduciaries that the former regime had incorrectly collected taxes and that they should not repeat the same mistake," Leinenweber wrote.

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