The Commissioner of the IRS, Congress, the President and the US courts are to thank for the “Last in Time Rule”, which essentially enables the United States to dishonour every tax treaty that it has ever made. Senior Circuit Judge WILLIAMS wrote this summary of the case (William David JAMIESON and Judith A. Jamieson, Appellants v. COMMISSIONER of INTERNAL REVENUE Service, Appellee):
William David and Judith A. Jamieson are United States citizens who lived in Canada in 2003, earned Canadian income and paid Canadian taxes on that income. On their U.S. income tax return for that year, they claimed foreign tax credits of $95,132 against their reported U.S. tax liability of $96,429, resulting in a net U.S. liability of $1297. They did not compute any alternative minimum tax (“AMT”) liability under 26 U.S.C. § 55, noting on their return their position that a tax treaty between the United States and Canada precluded any such liability. The Commissioner of Internal Revenue rejected this position and, applying 26 U.S.C. § 59(a)(2)’s limit on foreign tax credits for AMT purposes, calculated that the Jamiesons owed $6078 in alternative minimum tax.
The case, as far as I can read, does not dispute the Jamisons’ interpretation of the tax treaty, the main purpose of which is to avoid double taxation, or so we hear time and again. Yet the Commissioner, in forcing the issue of the Alternate Minimum Tax, essentially creates two principles of tax law out of which he operates: (1) The Last in Time Rule: since the AMT became law later than the tax treaty with Canada, the AMT supersedes the treaty; (2) thus, revenue generating supersedes any other principle of law, such as keeping one’s contracts with other nations. The United States DC Circuit court, affirmed the “Last in Time Rule” (before ROGERS and KAVANAUGH, Circuit Judges, and WILLIAMS, Senior Circuit Judge).
Thus, Brian Dooley aptly titles his blog post on the subject, “Last in Time” Rule Voids Most of US Tax Treaties, saying, “The ‘Last in Time Rule’ makes many treaties worthless” (hat tip Just Me). Judge William says as much (emphasis mine):
Moreover, to the extent that there might be any ambiguity about whether Congress intended § 59(a)(2) to apply to taxpayers in countries with which the United States has “double taxation” treaties, Congress resolved that ambiguity with the Technical and Miscellaneous Revenue Act of 1988 (“TAMRA”), Pub.L. No. 100-647, 102 Stat. 3342. There it provided that certain amendments made by the Tax Reform Act of 1986, including those made by its title VII (of which § 59(a)(2) was a part), “shall apply notwithstanding any treaty obligation of the United States in effect on the date of the enactment of the [1986 Tax] Reform Act.” Id. § 1012(aa)(2) (codified at 26 U.S.C. § 861 note) (emphasis added).
I have maintained that the actions of the United States government in recent years, reaching across borders to exact tribute from subjects who live within the jurisdiction of other sovereign countries, are hostile acts; this extra-territorial tax crack-down is potentially a casus belli. In earlier epochs, nations went to war in order to exact tribute. We are witnessing the United States presiding over the destruction of the world order which it was instrumental in creating after the end of World War II. It is only a matter of time before the nations realize that the United States has attacked them on several fronts in this financial war. Perhaps journalists will be the last to know, as most of them still seem to have a man crush on President Obama.
The violation of a tax convention, however, is a serious matter. The IRS Commissioner could have accepted the arguments of the the Jamiesons but did not. Ultimately, most of the responsibility for this dishonorable behaviour also belongs to the President, the Congress and the Courts.
What is a treaty? Chief Justice Marshall said in 1829 (see onecle; emphasis mine):
A treaty is, in its nature, a contract between two nations, not a legislative act. It does not generally effect, of itself, the object to be accomplished; especially, so far as its operation is intraterritorial; but is carried into execution by the sovereign power of the respective parties to the instrument.” “In the United States, a different principle is established. Our constitution declares a treaty to be the law of the land. It is, consequently, to be regarded in courts of justice as equivalent to an act of the legislature, whenever it operates of itself, without the aid of any legislative provision. But when the terms of the stipulation import a contract—when either of the parties engages to perform a particular act, the treaty addresses itself to the political, not the judicial department; and the legislature must execute the contract, before it can become a rule for the Court.
The Onecle article continues by citing Justice Miller, who wrote 50 years later (emphasis mine):
A treaty is primarily a compact between independent nations. It depends for the enforcement of its provisions on the interest and the honor of the governments which are parties of it.... But a treaty may also contain provisions which confer certain rights upon the citizens or subjects of one of the nations residing in the territorial limits of the other, which partake of the nature of municipal law, and which are capable of enforcement as between private parties in the courts of the country.
A country which does not keep its side of treaties but casually nullifies them through legislation is essentially a nation without honour.
This will come as no surprise to anyone familiar with how the US comports itself in other treaties it has signed. NAFTA comes immediately to mind. The US agreed to settle trade disputes through a binding dispute settlement mechanism. Only problem was, Canada kept winning the cases. That was OK for some of the smaller issues — but when Canada kept winning all the dispute settlement panel rulings in the softwood lumber dispute (which involved more than $5 billion in illegal duties on Canadian lumber), the US either ignored the rulings entirely, or passed regulations to apply retroactively in order to make an unfavourable ruling null and void.
Unfortunately, the Harper government caved in on this one and worked a deal with the Americans — snatching defeat from the jaws of victory, and leaving $1 billion in illegal duties in the hands of the Americans.
What worries me about all that is that this is the same government that we (fingers crossed) think is on our side in this FATCA issue. I’m sorry but they will collapse faster than a cheap tent if the Americans offer up some little trinket to get them onside. Right now Canada wants in to the talks on a big Asia-Pacific trade deal, and it won’t get to the table without US support (all the other countries are PO’d at us for maintaining our ridiculous supply management system for dairy products).
The US doesn’t like supply management either — but if they can get Canada on board on FATCA they’ll put their principles aside on supply management (which Harper needs to maintain to keep Quebec happy) and let us in the door.
I hope I’m wrong, but THAT’s what has me worried.*
I think that history proves that the U.S. has a long and proud history of dishonoring any treaty when it feels like it. When it comes to the U.S. treaties are dedicated to one purpose which is that of the U.S. being able to stop any other nation from interfering with U.S. interests.
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@ arrow, and @recalcitrantexpat, thats what worries me as well, the unknowns influencing any concessions. I don’t believe that Canada will come out the winner in any bargaining with the US. We’ll be told that we’ve got a good deal (whatever it is), but that will just be selling whatever the agreement is after the fact to appease the public. And, as they have already demonstrated, extraterritoriality, and changing terms without notice (or even retroactively) is to be expected. Take the RRSPs for example – there’s no good reason why those shouldn’t be automatically recognized after all these years, without annual election forms. There is no competition with the US banks, they are registered and tightly controlled by the Canadian government, reported to the CRA, etc. with no evidence of abuse. Plus, that continues to imply that Canada is not capable of effectively overseeing it’s own registered plans and sovereign taxation. And the other registered plans that are not recognized, or penalized with onerous and timeconsuming reporting (ex. TFSAs) – there is absolutely no evidence that they are being used for nefarious purposes. And we are denied the benefits offered to all others in Canada who have not been born or designated US tax and reporting chattel. As are all the others living in non-US countries, who may not even have it ‘as good’ as we do with at least some treaty protections – as the comments from Brazil show .
There is every indication that the US will continue to behave in the current punitive and unethical mode, which will continue to negatively affect more than one million US ‘persons’ in Canada, Mexico, plus millions more globally. And if it took years to get Canadian RRSPs even somewhat recognized as legit, how many decades will it take to get the RDSPs treated even halfway fairly? If they continue to deny us the same banking and savings options as our peers, to protect us in our old age, (whereupon any costs will fall to the countries we live in) without any return, and without any services whatsoever, they place unreasoning obsession and domestic politics over the wellbeing of those millions ‘abroad’, and their descendents.
The US eats its own ‘children’ (i.e. citizens ‘abroad’).
As I wrote in another recent comment – we have a “ring side” to the crumbling of the American Empire. It’s over. There is no honour, no integrity, no rationality.
As I said before, I believe that in this blog we are creating a document of great historical importance.
Keep up the articles and the comments.
Thanks for picking this up and running with a full post on it. I wanted to get some Brocker visibility, as that was the first I had ever seen or heard that. I also, offline, sent it over to Phil Hodgen, because if he has time, he might be able to comment or add insight. It definitely deserves some attention, and I appreciate you bringing it to the forefront!
@Just Me: I am personally amazed that you found it in the first place. Kudos. I am surprised that this 2009 court decision has received so little attention.
I add my thanks and admiration Petros; for considering this case and making sense of it for the rest of us, by expanding it into this post. I admit that I had no prior interest in the vagaries of taxation – out of the bliss of ignorance, cut brutally short by the thuggishness of US extra-territorial and citizenship taxation. However, the posts of you and others (listed under IBS participants, and ‘external sources’) on this and other linked blogs have made it accessible in a way that I would never have dreamed possible.
Thanks Just Me for digging it up.
I am grateful.
It is amazing what you find when cruising around the internet, looking for stuff hidden away. Thanks for helping us try to make sense of it all. While I feed voraciously off the things I find on blogs and in various stories, I do need some time for adequate digestion!
@renounceuscitizenship- the crumbling of the American empire would be the perfect historical bookend to mark the closing of the rivalry of the two nations which have dominated our age to the detriment of all the other nations of the world.
The fact that both empires would have come to their end because of over spending on their respective militaries and concomitant wars of aggression would serve as poetic justice.
Dear IRS, why hast thou forsaken me?
I guess this means that I have to start running that Alternative Minimum Tax thing also.
If anyone has been attempting to do their own taxes, note that it is absolutely impossible to negotiate the loops and after-the-fact-asterisks that are built into the foreign income exclusion and qualified dividends worksheets which are attached to line 44 of the 1040. Each error takes the IRS 5 months to send a response.
Everyday I think that there couldn’t possibly be more that the US government is doing to make my life worse, but everyday I am sadly proven wrong 🙁
I wouldn’t describe us as “subjects” of the US – More like cattle…
Honour often gets thrown out the window in the pursuit of cash.
Talking about new tax rules, the senate just voted a bill that boost the IRS funding.
The article mentions “Funds will also support an array of compliance activities to address offshore tax evasion, reduce the under-reporting tax gap, combat tax-related identity theft, strengthen return preparer compliance, and restore revenue lost as a result of past reductions to examinations and collection programs“.
Not surprising. They’ll need more manpower to go after all the Liechtenstein whales they just uncovered.
So far that is just the Senate Panel, which the Dems control, but it is telling that the only thing they have taken on board from the TAS and the other reports to Congress, is that the IRS needs more money, not that they need less Complex tax laws or changes in Offshore FATCA and OVDI. Say no more. And I always love these types of comments…
So just want kinds of “services” are you and I demanding that requires extra funding? Better ways to help them into your pocket? 🙂
I don’t need any of these services, thank you very much. Just doing away with the entire tax complexity code, and replacing it with any one of the many Fair tax or Flat tax iniatitives out there would work better than these…
I queried an Isaac Brock favored reference, Phil Hodgen, on this issue as I thought maybe he could provide some valued insight for us novices. Below is his response (with permission) to me.
To which I add. FATCA is unilateral. Take from that what you will.
The Last-In-Time rule basically means that all treaties with the U.S. are invalid because one of the necessary components to the existence of a valid and therefore enforceable contract is that there be, “a meeting of the minds.” It is self evident that when America enters into a tax treaty that there is no “meeting of the minds.”
This means that America’s intent in writing such a treaty is disingenuous, from the beginning. This policy puts into question the validity of all treaties that America writes with regards to any issue. It would seem that by even its own understanding of contract law that America has no contracts that it believes it must honour.
The interpretation and application of its treaties seems to rest solely with the U.S. who at any time can unilaterally render part or all of any treaty of none effect.
All the more reason to urge our representatives in Canada (and other countries) to be extra-wary of any future ones.
I posted in another thread information I received in a letter from TD Bank Group, but I will post a part relevant to this thread here:
“There is also the possibility that the Canadian and US governments could negotiate a bilateral agreement that would define the requirements that would apply to Canadian banks specifically.”
I don’t know what that statement means, but the US usually does what it wants anyway with total regard to treaties, laws of other nations, etc.
TFSA legislation was passed three years ago in Canada. The TFSA, is a tax free account, which is a the equivalent of a Roth IRA–contributions to the account are taxed, earnings in the account are tax exempt. By this logic, “Last in time”, the new TFSA must be tax free because it was passed by the sovereign legislature of Canada. Its non-inclusion in the tax treaty is irrelevant. What is important is that the Canadian law is “last in time”.
@Petros, Do you really think that “Last in Time” really applies to Canada as far as America is concerned? I know the ‘What’s good for the goose’ argument, but the U.S. Supreme court could care less.
*@justme– the point though is a valid one. If the last in time rule is applied by all countries that have a tax treaty with the U.S. then it would in principle be a rule of mutual negation for all treaties. The U.S. never thinks through the logic of its own legislation.
The U.S. Supreme court should care more.
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Yesterday’s Swiss Tages-Anzeiger newspaper carried an article called “Standoff Situation in Tax Dispute” and shows how difficult it can be to deal with the US. First, however, some background. The US has targeted 11 Swiss banks for accepting tainted UBS funds owned by US Persons. The Swiss government is trying to negotiate a settlement with the DOJ and IRS for all 300 Swiss banks that would free them of any criminal liability for past acts involving tax evasion by their American customers. Five of the 11 Swiss banks under investigation, Credit Suisse, HSBC, Julius Baer, ZKB and Basler KB, are negotiating deals directly with the US. These five banks sent correspondence with their US Person customers to the US government several months ago that included the bank employee names* but with the customer name redacted, to comply with the bank customer privacy law. Also, as of September 2009, the US and Switzerland negotiated a new Tax Treaty that recognizes suspected tax evasion by Americans as a basis for formally requesting Swiss government support but the new treaty has not been ratified by the US Senate. Under the old tax treaty, the US could request Swiss government help if tax fraud was suspected but not for tax evasion. (Under Swiss law tax evasion is a passive activity, e.g., omission, and is treated similar to a misdemeanor. Tax fraud is an active activity, e.g., falsifying documents, and is a criminal offense under Swiss law). Here is an excerpt from the article:
“”The Swiss government council should again find a way for the transfer of customer names as quickly as possible” is the demand of the banks. The Swiss government refuses as shown by statements from Swiss State Secretary Ambuehl. Especially, he is relying on the ratification of the new Tax Treaty between Switzerland and the USA. This ratification is hanging in the air because a senator has blocked it in the US Senate. Involved individuals tell the Tages-Anzeiger that this is not an insurmountable obstacle: “The will is lacking on the part of the US government to push this through.”
The intention behind this: If the USA ratifies the Double Tax Treaty, they are confirming that no customers can be pursued for tax evasion prior to September 2009. This cut-off period goes against the grain for the American government who suspect that a large amount of undeclared US customer money was secretly drawn off before this cut-off date. As a result, the USA and Switzerland are in a stand-off situation. No one wants to move.”
* – News sources report that four former bank employees have filed civil lawsuits claiming violation of employer privacy laws for transferring correspondence with their names to the US. The former head of HSBC’s legal department has also filed criminal charges. These banks are doing everything possible to pull themselves out of the wringer including sacrificing employees and former employees and, in the process, are likely violating Swiss employment law.
Is this related in any way to what I was reading on Jack’s Blog tonight…
IRS Submits Reformulated Treaty Request for Credit Suisse U.S. Clients