The opinion
T.C. Memo. 2008-118
UNITED STATES TAX COURT
WILLIAM D. AND JUDITH A. JAMIESON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16421-05. Filed April 29, 2008.
William D. and Judith A. Jamieson, pro sese.
Louise R. Forbes, for respondent.
MEMORANDUM OPINION
MARVEL, Judge: Respondent determined a deficiency in
petitioners’ Federal income tax of $6,078 for 2003. The sole
issue for decision is whether petitioners are liable for
alternative minimum tax (AMT) under section 55 as a result of the
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limitation on the amount of the AMT foreign tax credit imposed by
section 59(a)(2).1
Background
The parties submitted this case fully stipulated under Rule
122. The stipulation of facts is incorporated herein by this
reference. Petitioners resided in Rothesay, New Brunswick,
Canada, when the petition in this case was filed.
Petitioners are U.S. citizens who resided in Canada during
2003. Petitioners timely filed a joint Form 1040, U.S.
Individual Income Tax Return, for 2003. Most of petitioners’
reported income was earned and was taxable in Canada. Thus,
petitioners claimed foreign tax credits of $95,132 against their
reported U.S. tax liability of $96,429, resulting in a net U.S.
tax liability of $1,297. Petitioners did not compute their AMT
liability under section 55; instead they placed an asterisk on
line 42, Alternative minimum tax, of their Form 1040 that
referenced the “US-Canada Income Tax Treaty Articles XXIV and
XXIX”.
On April 7, 2005, respondent mailed petitioners a notice of
deficiency determining that they were liable for AMT of $6,078
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) in effect for the year in issue,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
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plus accrued interest.2 The deficiency resulted solely from
respondent’s application of the AMT foreign tax credit limitation
in section 59(a)(2).
On September 2, 2005, we received and filed petitioners’
petition contesting respondent’s notice of deficiency.
Petitioners allege in their petition that respondent erred in his
application of the section 59(a)(2) limitation on AMT foreign tax
credits because the Convention With Respect to Taxes on Income
and on Capital, U.S.-Can., Sept. 26, 1980, T.I.A.S. No. 11087
(U.S.-Canada Convention or Convention),3 prohibits the double
2
Petitioners do not dispute respondent’s calculation of
their AMT liability.
3
The U.S.-Canada Convention and two amending protocols,
Protocol Amending the Convention With Respect to Taxes on Income
and on Capital, U.S.-Can., Sept. 26, 1980, S. Treaty Doc. 98-7
(1983) (First Protocol), and Second Protocol Amending the
Convention With Respect to Taxes on Income and on Capital, U.S.-
Can., Sept. 26, 1980, as Amended by the Protocol on June 14,
1983, S. Treaty Doc. 98-22 (1984) (Second Protocol), entered into
force on Aug. 16, 1984.
The U.S.-Canada Convention has since been amended several
times. See Revised Protocol Amending the Convention With Respect
to Taxes on Income and on Capital, U.S.-Can., Sept. 26, 1980, as
Amended by the Protocols on June 14, 1983, and Mar. 28, 1984, S.
Treaty Doc. 104-4 (1995) (Third Protocol) and Protocol Amending
the Convention With Respect to Taxes on Income and on Capital,
U.S.-Can., Sept. 26, 1980, as Amended by the Protocols on June
14, 1983, Mar. 28, 1984, and Mar. 17, 1995, S. Treaty Doc. 105-29
(1997) (Fourth Protocol). Another protocol, Protocol Amending
the Convention With Respect to Taxes on Income and on Capital,
U.S.-Can., Sept. 26, 1980, as Amended by the Protocols on June
14, 1983, Mar. 28, 1984, Mar. 17, 1995, and July 29, 1997 (Fifth
Protocol), was executed on Sept. 21, 2007, S. Treaty Doc. 110-15
(2008). The Fifth Protocol is not relevant to this case and will
(continued...)
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taxation of U.S. citizens residing in Canada. Petitioners do not
dispute that the section 59(a)(2) limitation applies, but they
contend that articles XXIV and XXIX of the U.S.-Canada Convention
entitle them to claim additional foreign tax credits so as to
reduce their U.S. income tax liability to zero and thereby
prevent any double taxation on the same income by the United
States and Canada.
Discussion
I. Section 59(a)(2) Limitation on AMT Foreign Tax Credit
Generally, all U.S. citizens are subject to U.S. Federal
income tax, and all income of a U.S. citizen is subject to
taxation by the United States regardless of the citizen’s
residence or the source of the income. Sec. 1; Cook v. Tait, 265
U.S. 47, 56 (1924); sec. 1.1-1(a)(1), Income Tax Regs.
Consequently, U.S. citizens who reside or work abroad may face
double taxation when the United States and a foreign country tax
the same item of income. This hardship is generally alleviated,
however, under the Code through the foreign tax credit. See sec.
27(a).
Section 55 imposes an AMT in an amount equal to the excess,
if any, of the tentative minimum tax for the taxable year over
3
(...continued)
not be discussed in this opinion.
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the taxpayer’s regular tax for that year.4 However, the amount
of a noncorporate taxpayer’s tentative minimum tax is reduced by
the taxpayer’s AMT foreign tax credit under section 59(a). Sec.
55(b)(1)(A)(i). Section 59(a)(2) limits the amount of the AMT
foreign tax credit that can be claimed in a given year. As in
effect for 2003,5 section 59(a)(2) provides as follows:
(2) Limitation to 90 percent of tax.--
(A) In general.--The alternative minimum tax
foreign tax credit for any taxable year shall not
exceed the excess (if any) of–
(i) the pre-credit tentative minimum tax for
the taxable year, over
(ii) 10 percent of the amount which would be
the pre-credit tentative minimum tax without
regard to the alternative tax net operating loss
deduction and section 57(a)(2)(E).
Petitioners do not dispute that section 59(a)(2) limits
their foreign tax credit or that the deficiency respondent
determined correctly reflects the calculation of the limitation.
The dispute between the parties arises from the parties’
arguments regarding the interrelationship of the U.S.-Canada
Convention and section 59(a)(2). Both parties maintain that
there is no conflict between the Convention and section 59(a)(2).
4
The definitions and rules for computing a taxpayer’s
tentative minimum tax and regular tax are found in sec. 55(b) and
(c), respectively.
5
Sec. 59(a)(2) was repealed, effective for taxable years
beginning after Dec. 31, 2004, by the American Jobs Creation Act
of 2004, Pub. L. 108-357, sec. 421, 118 Stat. 1514.
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However, the conclusions that they reach are diametrically
opposite. Respondent claims that petitioners may not claim an
AMT foreign tax credit for the full amount of tax paid in Canada
because of section 59(a)(2), while petitioners claim that the
section 59(a)(2) limitation is offset by additional credits under
the U.S.-Canada Convention in an amount sufficient to reduce
their U.S. income tax liability to zero. In order to resolve
these conflicting interpretations of the allegedly harmonious
relationship between the U.S.-Canada Convention and section
59(a)(2), we must examine the applicable statutes and Convention
provisions to decide (1) whether the Code provisions and the
Convention can be harmonized as both parties contend, and (2) if
they cannot be harmonized, which provision qualifies as the “last
in time”.
II. Applicable Statutes and U.S.-Canada Convention Provisions
The U.S.-Canada Convention and two amending protocols,
Protocol Amending the Convention With Respect to Taxes on Income
and on Capital, U.S.-Can., September 26, 1980, S. Treaty Doc. 98-
7 (1983), signed on June 14, 1983 (First Protocol), and Second
Protocol Amending the Convention With Respect to Taxes on Income
and on Capital, U.S.-Can., September 26, 1980, as Amended by the
Protocol on June 14, 1983, S. Treaty Doc. 98-22 (1984), signed on
March 28, 1984 (Second Protocol), entered into force on August
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16, 1984. For purposes of this case, the relevant Convention
provision is found in article XXIV.
Article XXIV of the U.S.-Canada Convention generally
provides that double taxation by the United States and Canada
shall be avoided. Paragraph 1 of article XXIV provides the
general rule as follows:
1. In the case of the United States, subject to
the provisions of paragraphs 4, 5, and 6, double
taxation shall be avoided as follows: In accordance
with the provisions and subject to the limitations of
the law of the United States (as it may be amended from
time to time without changing the general principle
hereof), the United States shall allow to a citizen or
resident of the United States * * * as a credit against
the United States tax on income the appropriate amount
of income tax paid or accrued to Canada * * *
Paragraph 4 of article XXIV applies to U.S. citizens who are
residents of Canada and provides:
4. Where a United States citizen is a resident of
Canada, the following rules shall apply:
(a) Canada shall allow a deduction from the
Canadian tax in respect of income tax paid or accrued
to the United States in respect of profits, income or
gains which arise (within the meaning of paragraph 3)
in the United States, except that such deduction need
not exceed the amount of the tax that would be paid to
the United States if the resident were not a United
States citizen; and
(b) For the purposes of computing the United
States tax, the United States shall allow as a credit
against United States tax the income tax paid or
accrued to Canada after the deduction referred to in
subparagraph (a). The credit so allowed shall not
reduce that portion of the United States tax that is
deductible from Canadian tax in accordance with
subparagraph (a).
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In 1986, while the U.S.-Canada Convention was in force,
Congress amended the AMT imposed on noncorporate taxpayers by
section 55 and added section 59 to the Code. Tax Reform Act of
1986 (1986 Act), Pub. L. 99-514, sec. 701(a), 100 Stat. 2320.
Section 55(b)(1)(A)(i), as amended and in effect for 2003,
provides that the amount of a noncorporate taxpayer’s tentative
minimum tax shall be reduced by the taxpayer’s AMT foreign tax
credit under section 59(a). Section 59(a)(2) limits the amount
of the AMT foreign tax credit that can be claimed in a given
year.
The legislative history of section 59(a)(2) explains the
introduction of the AMT foreign tax credit limitation:
While allowance of the foreign tax credit for minimum
tax purposes generally is appropriate, the committee
believes that taxpayers should not be permitted to use
the credit to avoid all minimum tax liability. U.S.
taxpayers generally derive benefits from the protection
and applicability of U.S. law, and in some cases from
services (such as defense) provided by the U.S.
Government, even if all of such taxpayers’ income is
earned abroad. Thus, it is fair to require at least a
nominal tax contribution from all U.S. taxpayers with
substantial economic incomes. [S. Rept. 99-313, at 520
(1986), 1986-3 C.B. (Vol. 3) 1, 520; emphasis added.]
Although the U.S.-Canada Convention was in force at the time,
Congress nevertheless enacted the limitation in section 59(a)(2)
to require all U.S. taxpayers with substantial economic incomes
to contribute to the cost of the services they receive from the
Federal Government.
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In 1988 Congress examined the relationship between Code
provisions and treaties during its consideration of the Technical
and Miscellaneous Revenue Act of 1988 (TAMRA), Pub. L. 100-647,
102 Stat. 3342, and incorporated into TAMRA an amendment to
section 7852(d). TAMRA sec. 1012(aa)(1), 102 Stat. 3531. As
amended and in effect for 2003, section 7852(d) provides that
neither a provision of a treaty nor a law of the United States
affecting revenue shall have preferential status by reason of its
status as a law or a treaty. In enacting the amendment to
section 7852, Congress intended to make clear that conflicts
between a revenue law and a treaty must be resolved by applying
the principle that the provision adopted later in time controls
(the last-in-time rule). S. Rept. 100-445, at 321-322 (1988);
see also Chae Chan Ping v. United States, 130 U.S. 581, 600
(1889). Congress went even further in making its intentions
known regarding the obligation of U.S. citizens residing abroad
to pay at least some AMT. In addition to amending section
7852(d), Congress enacted the following provision as TAMRA
section 1012(aa)(2), 102 Stat. 3531:
(2) Certain amendments to apply notwithstanding
treaties.--The following amendments made by the Reform
Act [the 1986 Act] shall apply notwithstanding any
treaty obligation of the United States in effect on the
date of the enactment of the Reform Act:
(A) The amendments made by section 1201 of the
Reform Act.
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(B) The amendments made by title VII of the Reform
Act to the extent such amendments relate to the
alternative minimum tax foreign tax credit.
TAMRA section 1012(aa)(2) clarified that section 59(a)(2) applies
notwithstanding treaty obligations in effect on the date of
enactment of the 1986 Act. S. Rept. 100-445, supra at 319.
Following the enactment of TAMRA, the U.S.-Canada Convention
was amended. The revised Protocol Amending the Convention With
Respect to Taxes on Income and Capital, U.S.-Can., September 26,
1980, as Amended by the Protocols on June 14, 1983, and March 28,
1984, S. Treaty Doc. 104-4 (1995) (Third Protocol), which was
signed on March 17, 1995, and entered into force on November 9,
1995, made changes to Article XXIV affecting credits for Social
Security tax, corporate tax exemptions, and the tax treatment of
dividends, interest, and royalties, Third Protocol, art. 12, but
did not alter the general rule found in article XXIV, paragraph
1, id. The Protocol Amending the Convention With Respect to
Taxes on Income and on Capital, U.S.-Can., September 26, 1980, as
Amended by the Protocols on June 14, 1983, March 28, 1984, and
March 17, 1995, S. Treaty Doc. 105-29 (1997) (Fourth Protocol),
which was signed on July 29, 1997, and entered into force on
December 16, 1997, made no modifications to articles XXIV and
XXIX of the U.S.-Canada Convention.
Neither the Third nor the Fourth Protocol references section
59 or TAMRA section 1012(aa)(2).
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III. Analysis
It is well established that, where a statute and a treaty
pertain to the same subject matter, they must be read so as to
give effect to both if at all possible. Whitney v. Robertson,
124 U.S. 190, 194 (1888). In Whitney, the Supreme Court
explained this general rule as follows:
By the Constitution a treaty is placed on the same
footing, and made of like obligation, with an act of
legislation. Both are declared by that instrument to
be the supreme law of the land, and no superior
efficacy is given to either over the other. When the
two relate to the same subject, the courts will always
endeavor to construe them so as to give effect to both,
if that can be done without violating the language of
either; but if the two are inconsistent, the one last
in date will control the other, provided always the
stipulation of the treaty on the subject is self-
executing. * * * [Id.]
If there is no conflict between a statute and a treaty, “the Code
and the treaty should be read harmoniously, to give effect to
each.” Pekar v. Commissioner, 113 T.C. 158, 161 (1999). If,
however, the statute and the treaty conflict, the last-in-time
rule requires that “the last expression of the sovereign will
* * * [controls].” Chae Chan Ping v. United States, supra at
600; Whitney v. Robertson, supra at 194.
Both petitioners and respondent argue that the double
taxation provisions of the U.S.-Canada Convention and section
59(a)(2) are not in conflict and can be read in harmony, thus
making the last-in-time rule inapplicable. Under petitioners’
interpretation, section 59(a)(2) and the U.S.-Canada Convention
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operate at different times, and consequently, section 59(a)(2)
does not limit petitioners’ ability to claim foreign tax credits
under the Convention. Thus, according to petitioners, taxpayers
first apply the foreign tax credits allowed under the Code
(sections 27 and 55(b)), taking into account the corresponding
limitations (e.g., section 59(a)(2)), to compute their tax
liability, and if double taxation remains, the Convention
provides tax credits to correct double taxation of the same
income by the United States and Canada. In essence, petitioners
conclude that the U.S.-Canada Convention prohibits any form of
double taxation on their 2003 income. Under respondent’s
interpretation, the U.S.-Canada Convention does not prohibit all
double taxation; rather the treaty expresses the intention of
Canada and the United States to avoid double taxation. Section
59(a)(2) reflects Congress’s intention that all U.S. taxpayers
with substantial incomes contribute to the cost of the services
provided by the Federal Government, and the U.S.-Canada
Convention does not prohibit this minimum contribution.
Alternatively, both parties argue that, even if we determine
there is a conflict, the last-in-time rule validates their
respective positions.
We have addressed whether article XXIV of the U.S.-Canada
Convention conflicts with the limitation on the AMT foreign tax
credit imposed by section 59(a)(2) in several cases. In Jamieson
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v. Commissioner, T.C. Memo. 1995-550, affd. without published
opinion 132 F.3d 1481 (1997), petitioners alleged that article
XXIV and section 59(a)(2) conflict. We assumed but did not
expressly decide that there was a conflict between the comparable
double taxation provisions of the U.S.-Canada Convention6 and
section 59(a)(2), and we applied the last-in-time rule to
conclude that section 59(a)(2) was the last expression of the
sovereign will. We rejected petitioners’ alternative argument
that the Third Protocol overrides section 59(a)(2) under the
last-in-time rule because the Third Protocol had not been
ratified by the United States and Canada and was not effective on
the relevant date.
In Kappus v. Commissioner, T.C. Memo. 2002-36, affd. 337
F.3d 1053 (D.C. Cir. 2003), and Price v. Commissioner, T.C. Memo.
2002-215, we addressed the question of whether the U.S.-Canada
Convention, as amended by the Third and Fourth Protocols, and
section 59(a)(2) conflict. In both cases the taxpayers argued
that section 59(a)(2) and the U.S.-Canada Convention conflicted
and that the Third and Fourth Protocols had the effect of
reestablishing the Convention as the last expression of the
sovereign will under the last-in-time rule. In both cases we
6
The Court cited Lindsey v. Commissioner, 98 T.C. 672
(1992), affd. without published opinion 15 F.3d 1160 (D.C. Cir.
1994), in support of its assumption. In Lindsey, we examined the
provisions regarding double taxation in the U.S.-Switzerland
Convention, and we held that they conflicted with sec. 59(a)(2).
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concluded that there was no conflict, and we held that relevant
U.S.-Canada Convention provisions and section 59(a)(2) could be
harmonized. Accordingly, we did not reach the taxpayers’
arguments under the last-in-time rule.7
The taxpayer in Kappus appealed this Court’s decision to the
Court of Appeals for the D.C. Circuit. In Kappus v.
Commissioner, 337 F.3d 1053 (D.C. Cir. 2003), the Court of
Appeals affirmed this Court’s decision for the Commissioner but
did so on different grounds. The Court of Appeals noted that the
question of whether a conflict existed between the U.S.-Canada
Convention and section 59(a)(2) was extremely close, but it
concluded that it did not need to resolve the question because
section 59(a)(2) was the last relevant provision under the last-
in-time rule. See S. African Airways v. Dole, 817 F.2d 119, 125-
126 (D.C. Cir. 1987); Jamieson v. Commissioner, supra. The Court
of Appeals stated that when a statute conflicts with a treaty,
“‘The duty of the courts is to construe and give effect to the
latest expression of the sovereign will.’” Kappus v.
Commissioner, 337 F.3d at 1057 (quoting Whitney v. Robertson, 124
7
Although petitioners attempt to avoid the result reached
in Kappus v. Commissioner, T.C. Memo. 2002-36, affd. 337 F.3d
1053 (D.C. Cir. 2003), and Price v. Commissioner, T.C. Memo.
2002-215, by arguing that the U.S.-Canada Convention does not
conflict with sec. 59(a)(2), the substance of petitioners’
argument is that, under the U.S.-Canada Convention, as amended by
the Third and Fourth Protocols, no double taxation is permitted.
In Kappus and Price, this Court rejected that argument.
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U.S. at 195). In deciding whether the U.S.-Canada Convention, as
amended by the Third and Fourth Protocols, or section 59(a)(2)
takes precedence as the latest expression of the sovereign will,
the Court of Appeals acknowledged that, although section 59(a)(2)
did not specifically deal with the relationship between its
requirement and tax treaty provisions, Congress made its will
known when it enacted section 7852(d)(1) and TAMRA section
1012(aa)(2). The Court of Appeals concluded that “TAMRA thus
made it crystal clear that Congress intended the 90% cap on the
AMT foreign tax credit to supercede any preexisting treaty
obligation with which it conflicted.” Kappus v. Commissioner,
337 F.3d at 1058. It then examined and rejected the taxpayer’s
argument that the Third and Fourth Protocols reestablished the
U.S.-Canada Convention as the last expression of the sovereign
will, holding that it could not read the protocols as implicitly
reviving original treaty provisions that had been superseded by
section 59(a)(2). Id. The Court of Appeals, quoting Johnson v.
Browne, 205 U.S. 309, 321 (1907), in which the Supreme Court
applied a canon of construction that repeals by implication are
not favored in the interpretation of a treaty, concluded that
“‘[a] later treaty will not be regarded as repealing an earlier
statute by implication unless the two are absolutely incompatible
and the statute cannot be enforced without antagonizing the
treaty.’” Id. at 1059. The Court of Appeals, applying this
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standard to the alleged conflict, held that the Third and Fourth
Protocols are not absolutely incompatible with section 59(a)(2)
“because their text neither bars its application nor modifies any
treaty provision that bars it” and that section 59(a)(2) prevails
over the U.S.-Canada Convention, as amended by the Third and
Fourth Protocols. Id.
This case is appealable, barring a stipulation to the
contrary, to the Court of Appeals for the D.C. Circuit. See sec.
7482(b)(1). Under the rule in Golsen v. Commissioner, 54 T.C.
742, 757 (1970), affd. 445 F.2d 985 (10th Cir. 1971), we must
follow a Court of Appeals decision that is squarely in point
where appeal from our decision lies to that Court of Appeals. We
do not believe that the relevant facts and law as summarized in
the opinion of the Court of Appeals for the D.C. Circuit in
Kappus v. Commissioner, 337 F.3d 1053 (D.C. Cir. 2003), can
fairly be distinguished from the facts and law involved in this
case. Both cases involve the U.S.-Canada Convention, as amended
by the Third and Fourth Protocols. The issue presented in each
case is also the same--whether the taxpayers were liable for AMT
as a result of the application of the AMT foreign tax credit
limitation contained in section 59(a)(2). Consequently, like the
Court of Appeals in Kappus, we shall assume that a conflict
exists between the U.S.-Canada Convention and section 59(a)(2).
Applying the last-in-time rule, we hold that section 59(a)(2) is
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the last expression of the sovereign will and that it takes
precedence over the U.S.-Canada Convention to the extent there is
a conflict between them. TAMRA section 1012(aa)(2) makes it very
clear that Congress intended the limitation of section 59(a)(2)
to supersede existing treaty provisions prohibiting double
taxation. The U.S.-Canada Convention was one of those treaties.
Neither the Third nor the Fourth Protocol contains any provision
clearly indicating that Congress’s intention to ensure that
taxpayers with sufficient means should contribute a minimum
amount of tax to the United States had been superseded. See S.
Rept. 100-445, supra at 319.
We address one additional argument. Article XXIX contains a
saving clause that incorporates article XXIV as follows:
2. Except as provided in paragraph 3, nothing in
the Convention shall be construed as preventing a
Contracting State from taxing its residents (as
determined under Article IV (Residence)) and, in the
case of the United States, its citizens * * *, as if
there were no convention between the United States and
Canada with respect to taxes on income and on capital.
3. The provisions of paragraph 2 shall not affect
the obligations undertaken by a Contracting State:
(a) under * * * [Article] XXIV (Elimination of
Double Taxation) * * *
Petitioners point to article XXIX for the argument that, although
the United States is free to change its tax laws under paragraph
2, it is prevented by paragraph 3 from adopting new tax laws that
void or invalidate the double taxation provisions of article
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XXIV. In petitioners’ view, the exception to the saving clause
contained in paragraph 3 of article XXIX makes the final
elimination of any actual double taxation the “exclusive domain
and preemptive jurisdiction of the * * * provisions of article
XXIV”.
We reject petitioners’ argument pertaining to the
significance of the exception to the saving clause contained in
article XXIX of the U.S.-Canada Convention. Paragraph 3 of
article XXIX does nothing more than require the United States to
tax its citizens within the parameters of article XXIV.
Consequently, article XXIX merely reserves the issue of double
taxation to article XXIV which, as discussed above, must give way
to the provision of section 59(a)(2) as the most recent
expression of the sovereign will regarding the taxation of U.S.
citizens living in Canada.
IV. Conclusion
For the reasons set forth in this opinion and in Kappus v.
Commissioner, 337 F.3d 1053 (D.C. Cir. 2003), we hold that
section 59(a)(2) takes precedence under the last-in-time rule and
that petitioners are liable for $6,078 in AMT resulting from the
application of the section 59(a)(2) limitation, as respondent
determined.
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We have considered all the parties’ other arguments and, to
the extent not discussed above, conclude those arguments are
irrelevant, moot, or without merit.
To reflect the foregoing,
Decision will be entered
for respondent.