T.C. Memo. 2002-215

UNITED STATES TAX COURT

ROBERT M. AND PAMELA PRICE, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 9227-00. Filed August 23, 2002.

Steven R. Toscher and Michael Stein, for petitioners.

Leslie Van Der Wal and Melissa D. Arndt, for

respondent.

MEMORANDUM OPINION

WHALEN, Judge: Respondent determined a deficiency of

$50,200 in petitioners' Federal income tax for the taxable

year 1998. The sole issue for decision is whether

petitioners' alternative minimum tax foreign tax credit is

subject to the limitation imposed by section 59(a)(2). 
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Unless stated otherwise, all section references are to the

Internal Revenue Code as in effect during 1998. 

This issue turns on whether the application of section

59(a)(2) to petitioners is precluded by article XXIV of the

Convention With Respect to Taxes on Income and on Capital

(hereinafter U.S.-Canada treaty), Sept. 26, 1980, U.S.-

Can., T.I.A.S. No. 11087, as amended by four protocols (viz

Protocol Amending the Convention Between the United States

of America and Canada With Respect to Taxes on Income and

on Capital, Sept. 26, 1980, S. Treaty Doc. 98-7 (1983)

(hereinafter First Protocol); Protocol Amending the

Convention Between the United States of America and Canada

With Respect to Taxes on Income and on Capital, Sept. 26,

1980, as amended by the Protocol on June 14, 1983, S.

Treaty Doc. 98-22 (1984) (hereinafter Second Protocol);

Revised United States-Canada Protocol to Amend the 1980

Treaty on Income and on Capital, Sept. 26, 1980, as amended

by the Protocols, June 14, 1983, and March 28, 1984, S.

Treaty Doc. 104-4 (1995) (hereinafter Third Protocol); and

Protocol Amending the Convention Between the United States

of America and Canada With Respect to Taxes on Income and

on Capital, Sept. 26, 1980, as amended by Protocols,

June 14, 1983, March 28, 1984, and March 17, 1995, S.

Treaty Doc. 105-29 (1997) (hereinafter Fourth Protocol)).
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The parties agree that, if the Court finds that

petitioners' alternative minimum tax foreign tax credit

is subject to limitation under section 59(a)(2), then the

deficiency in petitioners' Federal income taxes for 1998 is

$50,200. They further agree that, if the Court finds that

petitioners' alternative minimum tax foreign tax credit is

not limited by section 59(a)(2), then no deficiency exists

in petitioners' income tax for 1998.

The parties submitted this case fully stipulated

pursuant to Rule 122 of the Tax Court Rules of Practice and

Procedure. The stipulation of facts and accompanying

exhibits are incorporated herein by this reference. At the

time the petition was filed, petitioners resided in Santa

Barbara, California. 

At all times material to this proceeding, Mr. Price

was a citizen of the United States of America and

Mrs. Price was a citizen of Canada. They were husband

and wife, and they resided in Canada. Throughout 1998,

Mr. Price was employed as a stockbroker by Newcrest

Capital, Inc., a Canadian corporation, and all of the

income that he received during 1998 came from Canadian

sources. Mr. Price reported his income on his separate

Canadian income tax return, and he paid income taxes to

Canada. Mrs. Price was not employed during 1998 and she
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reported zero tax liability on her separate Canadian income

tax return. 

Petitioners timely filed a joint U.S. income tax

return for 1998 (U.S. return). On their U.S. return,

petitioners reported taxable income of $2,099,121 and 

precredit U.S. tax of $602,237. Petitioners claimed a

foreign tax credit of $750,387, based upon the taxes paid

by Mr. Price to Canada, and they reported total U.S. tax

after this credit of zero. Petitioners also reported

alternative minimum tax of zero. 

Petitioners attached to their U.S. return a Form 6251,

Alternative Minimum Tax--Individuals. On their Form 6251,

petitioners reported precredit tentative alternative

minimum tax pursuant to section 55(b)(1)(A) of $501,999,

an alternative minimum tax foreign tax credit of $451,799,

and alternative minimum tax of $50,200. At the top of Form

6251 appear the handwritten words "Treaty Override see

[Form] 8833". 

Petitioners also attached to their U.S. return two 

Forms 8833, Treaty-Based Return Position Disclosure

Under Section 6114 or 7701(b). On one of the Forms 8833,

petitioners asserted that section 59 is overruled or

modified by article XXIV of the U.S.-Canada treaty. They

set forth the following explanation of their position: 
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The Taxpayer is taking the position that

paragraph 1 of Article XXIV was enacted to

eliminate double taxation of citizens of the

U.S. and that Paragraphs 1, 4, 5 and 6 of Article

XXIV override U.S. Domestic tax law. Therefore

the foreign tax credit to be allowed by the U.S.

under the Canada-U.S. Tax Convention should not

be affected by the 90% limitation in the U.S. AMT

Rules.

Respondent concedes that this Form 8833 disclosed

petitioners' position, that a treaty of the United States

overrules or modifies an internal revenue law, as required

by section 6114.

Respondent mailed a notice of deficiency to

petitioners with respect to their U.S. return. In that

notice, respondent determined that petitioners' alternative

minimum tax for 1998 is $50,200. Respondent determined

that petitioners' precredit alternative minimum tax was

$501,999, and that their alternative minimum tax foreign

tax credit was limited to $451,799, or 90 percent, of that

precredit amount. In effect, respondent determined that

petitioners' alternative minimum tax foreign tax credit

for 1998 is subject to limitation under section 59(a)(2),

contrary to the position set forth by petitioners on their

Form 8833. 

This case requires us to examine section 59(a)(2) and

the provisions of the U.S.-Canada treaty dealing with the

elimination of double taxation. We must determine whether
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the statute and the treaty can be harmoniously applied

or whether the provisions of the treaty override the

provisions of the statute, as petitioners contend.

In interpreting a treaty and a statute that pertain

to the same subject matter, the general rule is that the

provisions of both should be construed to be in harmony. 

Whitney v. Robertson, 124 U.S. 190, 194 (1888); see also

The Cherokee Tobacco, 78 U.S. 616 (1870); Samann v.

Commissioner, 313 F.2d 461, 463 (4th Cir. 1963), affg. 36

T.C. 1011 (1961); Am. Trust Co. v. Smyth, 247 F.2d 149,

152-153 (9th Cir. 1957). However, if the provisions of one

conflict with those of the other, then the one adopted last

in time generally prevails. See Chae Chan Ping v. United

States, 130 U.S. 581, 600 (1889); Whitney v. Robertson,

supra at 194; Pekar v. Commissioner, 113 T.C. 158 (1999);

Lindsey v. Commissioner, 98 T.C. 672 (1992), affd. without

published opinion 15 F.3d 1160 (D.C. Cir. 1994). As the

Supreme Court explained in Whitney v. Robertson, supra

at 194:

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
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the two are inconsistent, the one last in date

will control the other, provided always the

stipulation of the treaty on the subject is selfexecuting. * * *

The U.S.-Canada treaty, as amended by the First and

Second Protocols, entered into force on August 16, 1984. 

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, or to a company

electing to be treated as a domestic corporation,

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 provides the following rule

applicable to U.S. citizens who are residents in Canada:

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
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(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). 

In 1986, Congress revamped the alternative minimum tax

imposed on noncorporate taxpayers. See Tax Reform Act of

1986 (TRA), Pub. L. 99-514, sec. 701(a), 100 Stat. 2085,

2320. As amended at that time, former section 55(a)

imposed an alternative minimum tax on noncorporate

taxpayers equal to the excess of the "tentative minimum

tax" over the "regular tax". The term "regular tax" was

defined to mean "the regular tax liability for the taxable

year (as defined in sec. 26(b)) reduced by the foreign tax

credit allowable under section 27(a)". Sec. 55(c)(1). 

Former section 55(b) defined "tentative minimum tax" as an

amount equal to 21 percent of so much of the "alternative

minimum taxable income" for the taxable year as exceeded

the "exemption amount", reduced by the "alternative minimum

tax foreign tax credit" for the year. Former section

59(a)(1) defined "alternative minimum tax foreign tax

credit" as the foreign tax credit allowed by section 27,

with certain adjustments that we need not detail here, and

former section 59(a)(2)(A), the predecessor of the
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provision at issue in this case, limited the credit to 90

percent of the precredit tentative minimum tax liability. 

Therefore, no more than 90 percent of the alternative

minimum tax could be offset under former section 59(a)(1).

With changes that are not material to this case, the

alternative minimum tax provisions, as amended by TRA, 

apply to the taxable year in issue. The current version

of section 59(a)(2)(A), the provision at issue, 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 alterative tax net

operating loss deduction and section

57(a)(2)(E). 

In 1988, during its consideration of the Technical and

Miscellaneous Revenue Act of 1988 (TAMRA), Pub. L. 100-647,

102 Stat. 3342, Congress reviewed the relationship of the

Internal Revenue Code and treaties. As originally enacted

in 1954, former section 7852(d) had provided that no

provision of the Internal Revenue Code was to apply in any

case where its application would be contrary to any treaty
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obligation of the United States in effect on the date of

enactment of the 1954 Code. See S. Rept. 100-445, at 316-

328 (1988). More recently, Congress had specifically

provided from time to time that it intended certain

amendments of the Internal Revenue Code to prevail over

treaties in case of a conflict. Id.

In TAMRA, Congress amended section 7852(d) to provide

that neither a provision of a treaty nor a law of the

United States affecting revenue shall have preferential

status by reason of its being a treaty or a law. TAMRA

sec. 1012(aa)(1), 102 Stat. 3531. Congress intended this

change to place treaties and revenue statutes on the same

footing, so that conflicts in their provisions would be

resolved under the rule that the provision adopted later

in time controls. S. Rept. 100-445, supra at 321-322. 

Congress also intended this change to codify the approach

of the courts under which the same canons of construction

applied to the interaction of two statutes enacted at

different times would be applied to the interaction of

revenue statutes and treaties enacted and entered into at

different times. Id. at 321. 

In addition to amending section 7852(d), Congress

enacted the following provision as section 1012(aa)(2)

of TAMRA: 
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(2) Certain amendments to apply

notwithstanding treaties.-–The following

amendments made by the Reform Act [viz, TRA]

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.

(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.

Thus, Congress specifically codified the later-in-time rule

with respect to section 59(a)(2). See S. Rept. 100-445,

supra at 319. 

The Third Protocol, signed on March 17, 1995, which

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. These amendments did not alter the general rule

of article XXIV found in paragraph 1, as stated above. 

Id.; U.S.-Canada treaty, art. XXIV, par. 1. Significantly,

article 1 of the Third Protocol amended paragraph 2 of

article II of the U.S.-Canada treaty, setting forth the

taxes covered by the U.S.-Canada treaty. That paragraph

was amended to read as follows:
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2. Notwithstanding paragraph 1, the taxes

existing on March 17, 1995 to which the

Convention shall apply are: 

 * * * * * * * 

(b) In the case of the United States, the

Federal income taxes imposed by the Internal

Revenue Code of 1986. * * *

Thus, the Third Protocol makes specific reference to the

Internal Revenue Code of 1986, the Code as renamed by TRA. 

TRA sec. 2(a), 100 Stat. 2095.

The Fourth Protocol was signed on July 29, 1997, and

entered into force on December 16, 1997. The Fourth

Protocol made no modifications to article XXIV of the U.S.-

Canada treaty. There is no mention in the Third or the

Fourth Protocol of the enactment of section 59 by TRA, or

the enactment of section 1012(aa)(2) of TAMRA.

Petitioners contend that a conflict exists between

section 59(a)(2) and article XXIV of the U.S.-Canada

treaty, and that article XXIV of the U.S.-Canada treaty,

which is the later expression of the sovereign will of the

United States by reason of the entry into force of the

Third and Fourth Protocols, precludes the application of

section 59(a)(2) to them. Petitioners contend that, as a

result, their alternative minimum tax foreign tax credit

cannot be reduced by the limitation set forth in section

59(a)(2).
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In support of their position that the application of

section 59(a)(2) conflicts with the provisions of article

XXIV, petitioners make three arguments. First, petitioners

point out that paragraph 1 of article XXIV provides that

the treaty is "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)". 

Petitioners argue that section 59(a)(2) is not only adverse

to the principle of the elimination of double taxation but

"repudiates" that principle in that it "subjects a certain

portion of a U.S. taxpayer's income to double taxation". 

Thus, they argue that section 59(a)(2) is not an amendment

of U.S. law that is compatible with article XXIV of the

treaty dealing with the elimination of double taxation. 

Second, they argue that section 59(a)(2) cannot be

harmonized with paragraphs 4, 5, and 6 of article XXIV, and

that the entire paragraph 1 is "subject to the provisions

of paragraphs 4, 5, and 6". According to petitioners, 

paragraphs 4, 5, and 6 of article XXIV provide, in

substance, that the United States and Canada have agreed to

a method for allocating a U.S. citizen's tax liabilities

between the two countries in the case of a U.S. citizen who

resides in Canada. In making that allocation, petitioners

argue, the United States has agreed that a U.S. citizen
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residing in Canada need not pay U.S. income tax greater

than the amount that would have been paid by a taxpayer who

is not a U.S. citizen. Petitioners argue that this means

that since they had no U.S.-source income in 1998, they

would not have been subject to alternative minimum tax if

they were not U.S. citizens. Therefore, petitioners argue,

the section 59(a)(2) limitation is not applicable to them

by reason of the provisions of article XXIV.

Finally, petitioners argue that this Court "has

previously determined that a conflict exists between

section 59(a)(2) and the U.S.-Canada treaty" in Jamieson

v. Commissioner, T.C. Memo. 1995-550, affd. without

published opinion 132 F.3d 1481 (D.C. Cir. 1997).

In support of their position that the treaty is the

last expression of the sovereign will of the United States,

petitioners rely on the fact that "the ratification of the

Third and Fourth Protocols in 1995 and 1997, [took place]

some nine and eleven years following the enactment of

section 59(a)(2)." Petitioners argue that treaty protocols

are the last expression of sovereign will of the

contracting parties even if the relevant treaty provision

is not amended. Moreover, petitioners point out that the

amendments made by articles 1, 3, and 12 of the Third

Protocol did affect the provisions at issue in this case,
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paragraphs 1 and 4 of article XXIV of the U.S.-Canada

treaty. 

Recently, in Kappus v. Commissioner, T.C. Memo. 2002-

36, we decided the very issue presented in the instant

case. The taxpayers in that case made virtually the same

argument as petitioners. We pointed out that in order for

the taxpayers to prevail, we would have to find both that

section 59(a)(2) and article XXIV of the treaty are in

conflict and that the U.S.-Canada treaty is later in time. 

We pointed out:

If the treaty and section 59(a)(2) are not in

conflict, then effect must be given to the

provisions of both without regard to which of the

two is later in time. Pekar v. Commissioner, 

* * * [113 T.C. 158, 161 (1999)]. In that event,

we must find that petitioners are subject to

section 59(a)(2). On the other hand, if there is

a conflict between the two, and if section

59(a)(2), as opposed to the treaty, is found to

be later in time, then section 59(a)(2) controls

as the last expression of the sovereign will. 

Jamieson v. Commissioner, T.C. Memo. 1995-550,

affd. without published opinion 132 F.3d 1481

(D.C. Cir. 1997). 

In Kappus, we disagreed with the taxpayers' position

that there is a conflict between section 59(a)(2) and

article XXIV of the U.S.-Canada treaty, and we agreed with

the Commissioner that section 59(a)(2) and the provisions

of article XXIV of the U.S.-Canada treaty can be applied
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harmoniously. We addressed the taxpayers' argument as

follows: 

Petitioners' argument misses the mark. 

Petitioners urge us to find a conflict between

section 59(a)(2) and Article XXIV of the treaty

based upon the Third and Fourth Protocols, but

they fail to address the effect of the enactment

of section 1012(aa)(2) of TAMRA. As discussed

above in section 1012(aa)(2) of TAMRA, Congress

provided that section 701 of the Tax Reform Act

of 1986, including section 59(a)(2), would apply

"notwithstanding any treaty obligation of the

United States in effect on the date of the

enactment of the Reform Act". The Third and

Fourth Protocols on which petitioners rely,

became effective after Congress enacted section

59(a)(2) of the Code and section 1012(aa)(2) of

TAMRA. Neither of the later protocols mentions

the limitation of the alternative minimum tax

foreign tax credit imposed by section 59(a)(2) or

section 1012(aa)(2) of TAMRA. Thus, neither the

Third or Fourth Protocol contains a clearly

expressed intent to supercede section 59(a)(2).

To the contrary, the language of the Third

Protocol comtemplates that the U.S.-Canada treaty

accepted the changes to U.S. revenue laws that

were made by the Tax Reform Act of 1986,

including the enactment of section 59(a)(2). 

As noted above, article 1 of the Third Protocol

expressly provides that the taxes existing on

March 17, 1995, to which the treaty applies, in

the case of the United States, are "the Federal

income taxes imposed by the Internal Revenue Code

of 1986." [TRA sec. 2(a) redesignated the

Internal Revenue Code of 1954 the "Internal

Revenue Code of 1986".] It was also the statute

that substantially revised the alternative

minimum tax on noncorporate taxpayers and enacted

the predecessor of section 59(a)(2). Tax Reform

Act of 1986, sec. 701, 100 Stat. 2320. Section

1012(aa)(2) of TAMRA which codified the last in

time rule with respect to the revision of the

alternative minimum tax rules was enacted as a

technical amendment to the Tax Reform Act of 1986

and was made effective as if it had been included
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therein. TAMRA sec. 1012 (aa)(4), 102 Stat. 3532. 

Thus, the Third Protocol specifically takes into

account, as the taxes to which the convention

shall apply, the alternative minimum tax as

amended by the Tax Reform Act of 1986, including

the limitation on the alternative minimum tax

foreign tax credit imposed by section 59(a)(2). 

Accordingly, we find that there is harmony

between provisions of the U.S.-Canada treaty and

section 59. Pekar v. Commissioner, supra at 163;

Brooke v. Commissioner, T.C. Memo. 2000-194

[affd. 13 Fed. Appx. 7 (D.C. Cir. 2001)].

For the reasons set forth in our opinion in Kappus

v. Commissioner, supra, we reject petitioners' position

that there is conflict between the provisions of the U.S.-

Canada treaty and section 59, and we find that petitioners

are subject to section 59(a)(2).

On the basis of the foregoing,

Decision will be entered

for respondent.