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.
*The individual blocking the tax treaty in the US Senate is Senator Rand Paul. While his “hold” on the treaty could be overridden it would take the US Senate a week of debate time to do so and simply put they don’t have a week to lose in an election year when they are already behind schedule in getting a lot “must pass” legislation through.
@Just Me: The original US request for 450 bank accounts of suspected US tax evaders at Credit Suisse was filed in September 2011. This was denied based on the existing tax treaty that only allows for official government assistance when tax fraud is suspected. The new request is for 100 accounts, which, I suspect, will be processed since it probably meets the law’s requirements.
In some ways, delaying ratification of the new tax treaty does not buy US tax evaders anything but time and hope. Once the tax treaty is ratified, the IRS/ DOJ will still be able to look back as far as September 2009 for evidence of simple tax evasion. Based on what I have read, it is expected that they will request official Swiss government assistance to look for identified US Persons who have not filed W-9 forms, under a so-called and apparently appended “Gruppenanfrage” clause. These account holders will be suspected of tax evasion (passive omission of income) and their account information will be turned over to the IRS/ DOJ for analysis. Of course, some of these account holders may have died or renounced by then but I would expect that most will be detected.
*The other issue with tax treaty requests is information under them cannot be used for FBAR enforcement purposes under Title 31 which as I understand creates significant issues.
*Given the nature of the tea party the IRS and DOJ might be waiting a long time. At some point they are going to run into a statute of limitations issue although that will not really start to bite until 2015.
Thanks for the additional explanation. I sometimes get lost in the treaty and Constitutional battles in Switzerland…. So appreciate the help.
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