KAPPUS v. COMMISSIONER

T.C. Memo. 2002-36

UNITED STATES TAX COURT

TOM AND LOUISE KAPPUS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 16512-99. Filed February 8, 2002.

Frank Joseph O’Connell, Jr., for petitioners.

Jennifer L. Nuding, for respondent.

MEMORANDUM OPINION

GOLDBERG, Special Trial Judge: Respondent determined a

deficiency in petitioners’ Federal income tax in the amount of

$6,152 for the taxable year 1997. Unless otherwise indicated,

section references are to the Internal Revenue Code in effect for

the year in issue, and all Rule references are to the Tax Court

Rules of Practice and Procedure.
 - 2 -

The sole issue for decision is whether petitioners are

subject to the limitations on the alternative minimum tax foreign

tax credit under section 59(a)(2).1 Petitioners contend that the

Convention Between the United States of America and Canada 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

in effect during 1997), overrides the application of section

59(a)(2).

This case was submitted fully stipulated pursuant to Rule

122. The stipulation of facts and the attached exhibits are

incorporated herein by this reference. At the time of filing the

petition, petitioners resided in Orangeville, Ontario, Canada.

Petitioners are husband and wife.

Petitioners are, and were during 1997, U.S. citizens.

Petitioners resided and worked in Canada throughout 1997.2

Petitioner Thomas Kappus (Mr. Kappus) has resided and worked

in Canada since 1973. During 1997, Mr. Kappus was employed as

1
The parties agree that if the Court holds for
petitioners, then there is a deficiency in income tax of $2,166,
and if the Court holds for respondent, then there is a deficiency
in income tax of $6,152.
2
The parties agree, for purposes of this case, that
petitioners were residents of Canada throughout 1997 for purposes
of the Convention Between the United States of America and Canada
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
in effect during 1997).
 - 3 -

president of Taylor Freezers, Inc. Petitioner Louise Kappus

(Mrs. Kappus) has resided and worked in Canada since 1976.

Petitioners timely filed a joint 1997 Federal income tax

return (U.S. joint return). On their return, petitioners

reported taxable income of $244,211 and income tax liability of

$69,410. Petitioners reduced their U.S. income tax liability to

zero by applying the foreign tax credit of $69,410. Petitioners

did not pay any U.S. Federal income taxes for 1997.

Attached to their U.S. joint return, petitioners also filed

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

petitioners reported a precredit tentative minimum tax of $61,556

pursuant to section 55(b)(1)(A), an alternative minimum tax

foreign tax credit of $55,400, a tentative minimum tax of $6,156,

and an alternative minimum tax liability of zero. Petitioners

attached a statement to their U.S. joint return in which they

claimed exemption for alternative minimum tax on the basis of the

U.S.-Canada tax treaty.3

In the notice of deficiency, respondent determined that

petitioners’ precredit tentative minimum tax for 1997 was

$61,519. Respondent further determined that petitioners’

alternative minimum tax foreign tax credit could not exceed 90

3
The parties agree that the statement properly disclosed
petitioners’ treaty-based return position for purposes of sec.
6114.
 - 4 -

percent of the precredit tentative minimum tax pursuant to

section 59(a)(2). Accordingly, respondent determined a

deficiency in tax of $6,152.

A. The Arguments of the Parties

Petitioners contend that the U.S.-Canada treaty and section

59(a)(2) are in direct conflict because the language of article

XXIV, specifically paragraph 1, prohibits the application of

section 59(a)(2). Petitioners further contend that the Revised

United States-Canada Protocol to Amend the 1980 Treaty on Income

and on Capital, September 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, September 26, 1980,

as amended by the Protocols, June 14, 1983, March 28, 1984, and

March 17, 1995, S. Treaty Doc. 105-29 (1997) (hereinafter Fourth

Protocol), are the last expressions of sovereign will of the

United States and, thus, override the application of section

59(a)(2).

Respondent contends that section 59(a)(2) and the U.S.-

Canada treaty are in harmony with the result that petitioners

are subject to the limitation on the amount of their alternative

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

Respondent relies, in part, on this Court’s recent opinions in
 - 5 -

Pekar v. Commissioner, 113 T.C. 158, 161 (1999), and in Brooke

v. Commissioner, T.C. Memo. 2000-194, affd. per curiam 13 Fed.

Appx. 7 (D.C. Cir. 2001), which held that section 59(a)(2) and

the double taxation provision of the Convention Between the

Federal Republic of Germany and the United States of America for

the Avoidance of Double Taxation and the Prevention of Fiscal

Evasion With Respect to Taxes on Income and Capital and to

Certain Other Taxes (hereinafter U.S.-Germany treaty), August 29,

1989, U.S.-Germany, art. 23, 30 I.L.M. 1778, 1779, were in

harmony. Respondent further contends that if the Court were to

find that section 59(a)(2) and the treaty are in conflict, then

section 59(a)(2) is the last expression of the sovereign will of

the United States and must be applied to petitioners, in any

event.

B. Applicable Statutes and U.S.-Canada Treaty Provisions

The U.S.-Canada treaty, signed on September 26, 1980, and

amending protocols, signed on June 14, 1983 (First Protocol)4

and March 28, 1984 (Second Protocol)5, respectively, were entered

4
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).
5
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
(continued...)
 - 6 -

into force on August 16, 1984. Article XXIV of the U.S.-Canada

treaty generally prohibits double taxation by the United States

and Canada, where one country has a right to tax income as the

country of source and the other country may tax on the basis of

residence. The U.S. foreign tax credit allowed by the treaty

applies to certain taxes imposed by Canada with respect to income

from Canadian sources. Paragraph 1 of Article XXIV provides the

general rule as follows:6

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 * * * [U.S.-
Canada treaty, art. XXIV, par. 1.]

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

5
(...continued)
Protocol).
6
This portion of art. XXIV, par. 1, as cited herein, was
not amended by the First or Second Protocol. Under the First
Protocol, we note that the only change to paragraph 1 was the
deletion of the last sentence defining “appropriate amount”. The
Second Protocol made no amendments to art. XXIV.
 - 7 -

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).

In 1986, Congress revamped the alternative minimum tax

imposed on noncorporate taxpayers. Tax Reform Act of 1986, Pub.

L. 99-514, sec. 701(a), 100 Stat. 2320 (herein referred to as Tax

Reform Act of 1986). 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”.7 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

7
The term “regular tax” means “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).
 - 8 -

adjustments that we need not detail here, and former section

59(a)(2)(A), the predecessor of the 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 the Tax Reform

Act of 1986, apply to the taxable year in issue. The current

version of section 59(a)(2)(A), the provision at issue, states 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 and section 7852(d). 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
 - 9 -

where its application would be contrary to any treaty 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), hereinafter

referred to as 1988 Senate Report). 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. 1988 Senate Report, 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 differenct

times. Id. at 321.

In addition to amending section 7852(d), Congress enacted

the following provision as section 1012(aa)(2) of TAMRA:
 - 10 -

(2) Certain Amendments To Apply Notwithstanding
Treaties.-–The following amendments made by the Reform
Act [viz Tax Reform Act of 1986] shall apply notwith-
standing 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). Id. at 319.

The Third Protocol, 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. 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, the Third Protocol amended paragraph 2 of Article

II of the treaty, setting forth the taxes covered by the treaty.

That paragraph was amended to read as follows:

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.
 - 11 -

Thus, the Third Protocol makes specific reference to the Internal

Revenue Code of 1986.

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 the Tax Reform Act of 1986 or the

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

C. Legal Discussion and Analysis

In the case where a treaty and a statute pertain to the

same subject matter, the general rule is to afford a reading so

as to give effect to both, if at all possible. In Whitney v.

Robertson, 124 U.S. 190, 194 (1888), 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. * * *

Therefore, we must decide whether the treaty and the statute can

be read to give effect to both. If there is no conflict between

the two, “the Code and the treaty should be read harmoniously, to
 - 12 -

give effect to each.” Pekar v. Commissioner, 113 T.C. at 161.

However, if there is a conflict between a Code provision and a

tax treaty, the “last-in-time” rule will override the earlier

provision. Id.; Whitney v. Robertson, supra at 194.

Petitioners' position, that they are not subject to section

59(a)(2), is based upon two elements. The first is their

assertion that the U.S.-Canada treaty and section 59(a)(2) are in

conflict and the second is their assertion that the U.S.-Canada

treaty is later in time than section 59(a)(2) by reason of the

Third and Fourth Protocols, with the result that the provisions

of the treaty override section 59(a)(2). Both of these elements

must be established in order for petitioners to prevail in this

case. 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, supra. 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).

As to the first element of their position, petitioners

assert that the limitation on the foreign tax credit imposed by
 - 13 -

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

of the U.S.-Canada treaty, entitled "Elimination of Double

Taxation". Petitioners reject respondent's contention that

section 59(a)(2) can be harmonized with the treaty because the

treaty expressly makes the double taxation provisions 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)". U.S.-Canada treaty, Article XXIV, paragraph 1.

According to petitioners, the operation of paragraphs 4, 5, and

6, of article XXIV, especially paragraph 4 which specifically

deals with United States citizens who reside in Canada, is not

subject to change by the amendment of U.S. law. Furthermore,

petitioners argue, even if the quoted language of paragraph 1 of

article XXIV applies to paragraphs 4, 5, and 6 of article XXIV,

section 59(a)(2) is not an amendment of U.S. law that fits within

the parenthetical because it causes double tax and, thus, would

not be in keeping with the general principle of the elimination

of double taxation.

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
 - 14 -

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 supersede section 59(a)(2).

To the contrary, the language of the Third Protocol

contemplates 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." 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
 - 15 -

1986 and was made effective as if it had been included 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.

In light of the above, it is unnecessary to address the

second element of petitioners' position, that the U.S.-Canada

treaty was the last expression of sovereign will. Since we find

no conflict between the U.S.-Canada treaty and section 59(a)(2),

petitioners are subject to section 59(a)(2), regardless which is

later in time.

We have considered all the other arguments made by

petitioners, and, to the extent we have not addressed them, find

them to be without merit.

To reflect the foregoing,

Decision will be entered

for respondent.