Domestic Law and Tax Treaties: the United States


1. Tax Treaties in the Hierarchy of Law

In the United States, the paramount source of law is the U.S. Constitution.[2] Among other things, the Constitution enumerates and delineates the powers of each of the three branches of the federal government. A branch of the federal government cannot take action (e.g., enact legislation or hear a case) that exceeds the scope of the powers allocated to it by the Constitution. Likewise, it has been held that treaties concluded by the United States may not contravene any of the prohibitions or limitations of the Constitution applicable to the exercise of authority by the United States.[3]

1.1. Entry into and Implementation of Treaties

In the United States, treaties may only be concluded by the federal government.[4] The executive branch, normally acting through the U.S. Department of State, negotiates treaties on behalf of the federal government.[5] In the case of tax treaties, however, the U.S. Department of Treasury (Treasury Department) conducts negotiations with current or potential treaty partners.[6] Once negotiations have concluded, the President submits the proposed treaty to the U.S. Senate for its advice and consent.[7] If the Senate approves the treaty by a vote of at least two-thirds of the senators present,[8] then the President brings the treaty into force by notifying the treaty partner in accordance with the terms of the treaty.[9]

With regard to implementation, treaties concluded by the United States are classified as either self-executing or non-self-executing. The difference between self-executing and non-self-executing treaties has been described as follows:

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 infra-territorial; 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.[10]

By their terms, most tax treaty provisions are self-executing. In other words, the obligations undertaken by the United States in a tax treaty are, for the most part, enforceable as soon as the treaty enters into force no further action by the federal government is necessary to implement the treaty obligations.[11]

1.2. Treaties Versus Domestic Law

The U.S. Constitution does not speak directly to the hierarchy of the various sources of federal law. Nonetheless, it does set forth the hierarchy of federal and state law.

1.2.1 Treaties Versus State Law

The Supremacy Clause of the U.S. Constitution provides that:

This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be supreme Law of the Land . . . .[12]

Accordingly, both federal statutes and treaties including tax treaties[13] are considered to be the supreme law of the land.

This means that if a state law conflicts with the provisions of a tax treaty, then the treaty provisions will prevail over the inconsistent state law.[14] In practice, however, such conflicts rarely occur because U.S. tax treaties generally restrict their coverage to federal taxes; they do not purport to directly alter the application of a tax imposed by a state or locality.[15] Nevertheless, the nondiscrimination articles in many U.S. tax treaties do apply to state and local taxes (as well as to federal taxes) and, under the Supremacy Clause, will therefore prevail over inconsistent state law.[16]

1.2.2. Treaties Versus Federal Statutes

Even though the U.S. Constitution does not speak directly to the hierarchy of sources of federal law, the federal courts have for more than a century held that treaties and federal statutes are on equal footing under the Supremacy Clause because they are both listed in that clause without any mention of one being superior to the other.[17] Based on this premise of equal status, the federal courts have consistently held that, in the event of a conflict between a treaty and a federal statute, whichever is later in time will prevail. This rule is referred to as the later-in-time or last-in-time rule. Under this rule, a federal statute will prevail over earlier, inconsistent treaty obligations, including tax treaty obligations.

It is worth noting that the soundness and advisability of the later-in-time rule have been seriously questioned on a variety of grounds:

Academic commentators have questioned the logical underpinning of the later-in-time rule.[18] In enumerating the sources of law that will prevail over inconsistent state law, the

Supremacy Clause mentions not only federal statutes and treaties, but also the Constitution itself. And, as with federal statutes and treaties, the text of the Supremacy Clause makes no mention of the Constitution’s superiority to either of these sources of law. Thus, if the logic underlying the later-in-time rule were carried to its natural end, one would be forced to conclude that federal statutes and treaties are on equal footing with the Constitution and could simply override inconsistent provisions in the Constitution when they are later in time. But such an interpretation would be contrary to the basic idea, articulated at the outset of this chapter, that the U.S. Constitution is the paramount source of law in the United States and that, as a result, the federal government is without power to enact legislation or to conclude treaties that contravene the Constitution.

In addition to questioning the logic underlying the later-in-time rule, at least one commentator has questioned the extent to which that rule conforms to the expectations of the framers of the Constitution. This commentator has argued that the later-in-time rule is actually contrary to the substantial evidence suggest[ing] that the framers understood treaties to be superior to statutes.[19]

Furthermore, despite the acceptance of the later-in-time rule as settled law for more than a century,[20] members of the executive branch, treaty partners, and commentators have all decried the practice of overriding inconsistent treaty obligations through the passage of legislation.[21] These critics consider legislative overrides to be harmful because they constitute a clear violation of international law,[22] undermine the trust of our treaty partners, and make it more difficult for the Treasury Department to negotiate concessions from treaty partners that are beneficial to U.S. citizens and residents.[23] These critics have instead urged Congress to leave to the renegotiation process the task of adapting tax treaties to legislative changes in U.S. international tax policy.[24]

2. Interaction Between Domestic Law and Tax Treaties

2.1 References to Internal Law Made by Tax Treaties

A legislative treaty override occurs when Congress enacts a law that is intended to have effects in clear contradiction to international treaty obligations.[25] In contrast, where the treaty itself authorizes Congress to alter the application of the treaty, legislation enacted within the scope of that authority will in no sense be overriding the treaty. For example, although some terms used in tax treaties are specifically defined in the text of the treaty, many other terms are left undefined. To fill these lacunae, U.S. tax treaties, consistent with the OECD Model Income Tax Convention,[26] usually provide that any term not defined in the treaty will have the meaning ascribed to it by the laws of the country whose tax is being applied.[27] Unless the context otherwise requires, it is the definition under domestic law at the time that the treaty is being applied (and not at the time the treaty was signed) that will control.[28] Therefore, a law enacted by Congress that changes the definition of a term not otherwise defined in a treaty will not normally constitute a treaty override, because the treaty generally accords Congress the power to fix the meaning of undefined terms.[29]

Tax treaties concluded by the United States also contain other, more specific provisions that allow the United States to define a term used in the treaty. For example, the initial determination of residence or domicile for treaty purposes is generally made under the respective domestic laws of each treaty partner.[30] In some instances, an individual will be treated as a resident of both the United States and the treaty partner under their respective domestic laws (i.e., the individual will be a dual resident). When a dual resident individual is classified as a resident of the treaty partner under the treaty’s tiebreaker provision,[31] the United States treats the individual as a nonresident alien for purposes of applying the treaty and for purposes of computing the individual’s U.S. federal income tax liability. However, the dual resident individual continues to be treated as a U.S. resident for all other purposes of the U.S. Internal Revenue Code (Code).[32] Regulations illustrate the application of this rule by providing that a dual resident individual continues to be treated as a U.S. resident for purposes of determining whether a foreign corporation is a controlled foreign corporation under section 957 of the Code, which may affect the U.S. tax treatment of other shareholders of that corporation.[33]

In addition, many U.S. income tax treaties allow the United States to define the scope of the term real property as applied to property located within its borders.[34] In the case of treaties with language patterned after the 1996 U.S. Model Income Tax Convention, the definition of U.S. real property under the treaty will be found in section 1.897-1(b) of the Treasury Regulations.[35] Similarly, U.S. tax treaties often grant to the United States the power to establish the outer parameters of dividends paid by its domestic corporations.[36]

With regard to double taxation relief, U.S. income tax treaties normally allow U.S. citizens and residents a credit for taxes paid to the treaty partner. This credit is generally allowed [i]n 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).[37] While certain provisions in older U.S. income tax treaties applied the domestic law limitations in force at the time that the treaty was concluded, even these provisions have been subjected to later amendments of the U.S. statutory foreign tax credit limitations under the later-in-time rule.[38]

Naturally, the discussion of treaty overrides in this chapter concerns only situations in which the United States has exceeded the scope of its authority under the treaty to alter the application of the treaty to taxpayers.

2.2 Interaction Between Treaties and Domestic Law

2.2.1 Reservation of Taxpayer’s Right to Rely on Domestic Law

Most U.S. income tax treaties contain a provision similar in effect to article 1, paragraph 2 of the 1996 U.S. Model Income Tax Convention, which provides that [t]he Convention shall not restrict in any manner any benefit now or hereafter accorded: a) by the laws of either Contracting State; or b) by any other agreement between the Contracting States.[39] As the Treasury Department has explained, this provision ensures that the Convention may not increase the tax burden on a resident of a Contracting States [sic] beyond the burden determined under domestic law. Thus, a right to tax given by the Convention cannot be exercised unless that right also exists under internal law.[40]

Accordingly, taxpayers are permitted to choose between domestic law and a tax treaty, and can avail themselves of whichever produces a more favorable result. This power to choose is not, however, completely unfettered: The Treasury Department has interpreted the relevant treaty provision to impose a duty of consistency on taxpayers.[41] The U.S. Internal Revenue Service (Service) illustrated the application of this duty of consistency in a 1984 revenue ruling.[42]

In that ruling, a taxpayer who is a resident of a U.S. treaty partner markets three distinct products (a, b, and c) in the United States through separate business activities. Product a is manufactured and marketed in the United States through a permanent establishment, while products b and c are manufactured abroad and sold in the United States through an independent contractor that does not constitute a permanent establishment in the United States. In a given taxable year, the taxpayer has a gain from the sale of product a, a gain from the sale of product b, and a loss from the sale of product c. In each case, the gain or loss would be taken into account in calculating the taxpayer’s taxable income under the Code.

To minimize its taxes, the taxpayer attempts to elect application of the treaty with respect to products a and b, but attempts to elect application of domestic law with regard to product c. This would be beneficial to the taxpayer because the treaty would only require the taxpayer to include in income the gain from product a (the gain on product b would be exempt from U.S. federal income tax under the treaty because it is not attributable to a

U.S. permanent establishment), and the taxpayer would be able to offset the loss from product c against the gain from product a under the Code. The Service rejected this approach, indicating that the taxpayer would be required to choose the application of either the treaty or the Code with respect to all three products: In other words, either the taxpayer could elect the application of the treaty (and only be taxed on the gain from product a without any offset for the loss on product c) or the taxpayer could elect the application of the Code (and be taxed on the gain from both products a and b, but with an offset for the loss on product c), whichever produced a lower tax.

2.2.2. Reference Made by Domestic Law to Tax Treaties

A handful of provisions in the Code refer directly to tax treaties. For example, under certain circumstances, the Code’s earnings stripping rules disallow a corporation’s interest deduction for interest payable to a related person who is not subject to U.S. federal income tax on that payment.43 In determining whether the related person is subject to tax on the interest payment, the Code specifically considers the application of tax treaty provisions to the payment. If the treaty reduces the tax on the interest payment, then a proportionate part of the interest payment is treated as not being subject to U.S. tax at all (e.g., if a treaty reduces the statutory rate of tax from 30% to 15%, then the foreign person is treated as not being subject to tax on one-half (15/30) of the interest payment).[44]

In addition, application of the Code’s special regime for tax expatriates[45] is not confined to an individual who loses her U.S. citizenship or relinquishes her green card after having been a long-term U.S. resident. It is likewise triggered when a long-term green card holder commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country and . . . does not waive the benefits of such treaty applicable to residents of the foreign country.[46]

Furthermore, the application of some Code provisions turns on whether a foreign person is eligible for treaty benefits. Thus, dividends received by a U.S. citizen or resident from a foreign corporation may be taxed at the preferential rate of 15% if the foreign corporation is eligible for the benefits of a comprehensive U.S. income tax treaty.[47] And a foreign corporation that holds a U.S. real property interest may elect to be treated as a domestic corporation for purposes of applying the Code provisions governing the tax treatment of a foreign person’s disposition of a U.S. real property interest only if that corporation is eligible for the benefits of a treaty nondiscrimination article.[48]

3. Treaty Override

3.1 Statutory Provisions Codifying the Later-in-Time Rule

3.1.1. Rise of Treaty Overrides

During the three decades following the conclusion of the first U.S. income tax treaty,[49] the judicially-created later-in-time rule was of little consequence to taxpayers. In fact, the Internal Revenue Code of 1954 provided that [i]ncome of any kind, to the extent required by any treaty obligation of the United States, shall not be included in gross income and shall be exempt from taxation under this subtitle.[50] It was not until 1962 that Congress first expressed an intent to override tax treaties through the passage of legislation.[51]

Since that time, Congress has with increasing frequency enacted legislation that is intended to override inconsistent provisions in existing (and, in some cases, even future) tax treaties. Indeed, nearly every major piece of tax legislation since the mid-1970s has contained at least one provision that was intended to override (or that may arguably have the effect of overriding) tax treaties:

– Tax Reduction Act of 1975 section 601 (foreign tax credits)[52]

– Tax Reform Act of 1976 section 1031 (foreign tax credits)[53]

– Foreign Investment in Real Property Tax Act of 1980 section 1125(c) (concerning the tax consequences to non-U.S. persons of disposing of a direct or indirect interest in U.S. real property)[54]

– Deficit Reduction Act of 1984 section 136 (stapled stock)[55]

– Tax Reform Act of 1986 section 1241 (the branch profits tax)56 and section 1810(a)(4) (foreign tax credits)[57]

– Technical and Miscellaneous Revenue Act of 1988 section 1012(aa)(2) (providing that specified provisions of the Tax Reform Act of 1986 would retroactively override tax treaties)[58]

– Revenue Reconciliation Act of 1989 section 7210 (the earnings stripping rules),59 section 7403 (concerning information reporting with respect to foreign owned domestic corporations),[60] and section 7815(d)(14) (concerning the estate tax marital deduction for non-citizen spouses)[61]

– Omnibus Budget Reconciliation Act of 1993 section 13238 (authorizing the promulgation of regulations recharacterizing multiple-party financing transactions)[62]

– Health Insurance Portability and Accountability Act of 1996 section 511 (taxation of expatriates)[63]

– Taxpayer Relief Act of 1997 section 1054(a) (concerning the application of income tax treaties to hybrid entities)[64]

– American Jobs Creation Act of 2004 section 801(a) (anti-inversion provision)65 and section 804 (taxation of expatriates)[66]

3.1.2. Codification of Later-in-Time Rule

In keeping with its devolving attitude toward tax treaties, Congress in 1988 amended the provisions governing the interaction between tax treaties and the Code. At that time, the ostensibly deferential language of section 894 of the 1954 Code (quoted above) was replaced with the following: The provisions of this title shall be applied to any taxpayer with due regard to any treaty obligation of the United States which applies to such taxpayer.[67]

At first blush, the switch from the earlier, more emphatic language to this due regard standard may not appear to have effected a radical change in the relationship between tax treaties and the Code; however, the true import of this change cannot be fully understood without reading the new text of section 894(a) in conjunction with section 7852(d), which was also replaced in 1988. Revised section 7852(d) fleshes out the due regard standard in section 894(a) by providing that [f]or purposes of determining the relationship between a provision of a treaty and any law of the United States affecting revenue, neither the treaty nor the law shall have preferential status by reason of its being a treaty or law.[68] Through this amendment of section 7852(d), Congress codified the judicially-created later-in-time rule upon which its legislative overrides have been based.

3.2 Analyzing Legislative Overrides

3.2.1. Presumption of Harmony

The Supreme Court has held that an act of Congress ought never to be construed to violate the law of nations if any other possible construction remains.[69] This presumption of harmony stems from the assumption that Congress does not intend to repudiate an international obligation of the United States by nullifying a rule of international law or an international agreement as domestic law, or by making it impossible for the United States to carry out its obligations.[70] Accordingly, when a treaty and a statute relate to the same subject, the courts, regulatory agencies, and the Executive Branch will endeavor to construe them so as to give effect to both.[71]

When Congress amended Code sections 894(a) and 7852(d) in 1988, it made clear that it intended this initial presumption of harmony to survive the codification of the later-intime rule:

The committee does not intend this codification to alter the initial presumption of harmony between, for example, earlier treaties and later statutes. Thus, for example, the bill continues to allow an earlier ratified treaty provision to continue in effect where there is not an actual conflict between the treaty provision and a subsequent revenue statute (i.e., where it is consistent with the intent of each provision to interpret them in a way that gives effect to both).[72]

3.2.2. Resolving Conflicts

Based on the same assumption that Congress does not intend to repudiate the international obligations of the United States, [t]he courts do not favor a repudiation of an international obligation by implication and require clear indication that Congress, in enacting legislation, intended to supersede the earlier agreement or other international obligation.[73] Indeed, the Supreme Court long ago stated that [a] treaty will not be deemed to have been abrogated or modified by a later statute unless such purpose on the part of Congress has been clearly expressed.[74]

Evidence of a congressional purpose to abrogate or modify an earlier treaty may be found in statutory language that unambiguously conflicts with an earlier treaty.[75] If, however, the statutory language is ambiguous, then a court must inquire into Congress’ intent with respect to the abrogation of the international agreement prior to giving force to the statute.[76] In that case, [l]egislative silence is not sufficient to abrogate a treaty.[77] For example, in Trans World Airlines, Inc. v. Franklin Mint Corp., the Supreme Court refused to find a legislative override of the Warsaw Convention (relating to international air transportation) in ambiguous legislation where Congress had made no mention of the treaty in either the enacted statute or its legislative history.[78] The courts have reiterated this firm and obviously sound canon of construction against finding implicit repeal of a treaty in ambiguous congressional action . . . in a number of cases.[79]

Nonetheless, when the later-in-time rule was codified in 1988, the Senate indicated its belief that, whenever a conflict exists between a later federal statute and an earlier treaty, the conflict should be resolved in favor of the statute without regard to whether Congress had expressed an intent to override the treaty or had even considered the impact of the statute on the treaty:[80]

The committee does not believe that Congress can either actually or theoretically know in advance all of the implications for each treaty, or the treaty system, of changes in domestic law, and therefore Congress cannot at the time it passes each tax bill address all potential treaty conflict issues raised by that bill. This complexity, and the resulting necessary gaps in Congressional foreknowledge about treaty conflicts, make it difficult for the committee to be assured that its tax legislative policies are given effect unless it is confident that where they conflict with existing treaties, they will nevertheless prevail.[81]

Whether the courts would actually give effect to this interpretation remains an open question. For more than a century, the later-in-time rule has been viewed as an interpretation of the Supremacy Clause of the U.S. Constitution.[82] Because the later-intime rule is the putative product of constitutional interpretation, the courts may not allow Congress to substitute its own judgment for that of the [Supreme] Court in determining the circumstances under which a later tax statute will supersede an earlier tax treaty.[83]

An equally interesting question is whether the courts would even reach the question whether Congress can substitute its own judgment for that of the Supreme Court in the treaty interpretation context. In adopting the Senate’s position on the interaction of treaties and statutes, the congressional conference committee report describes the 1988 changes to sections 894(a) and 7852(d) in the following terms:

[A]s is true of current section 894(a), the agreement’s provision adds no operative rules to be applied in determining the relationship of the Code (or other tax law) and a treaty, but rather states the constitutional principle that such determinations are relevant in determining tax liabilities. Where the relationship of treaties and statutes must be determined, the agreement simply provides for giving the treaty that regard which it is due under the ordinary rules of interpreting the interactions of statutes and treaties.[84]

Clearly, the Senate’s position, which is quoted at length above, is not consistent with the ordinary rules for interpreting interactions between later statutes and earlier treaties. This discrepancy in the legislative history renders the effect of the 1988 amendments on the general rules for resolving conflicts between later federal statutes and earlier treaties ambiguous (at best).

3.2.3. The Expatriation Example

Recent amendments to the Code’s regime applicable to tax expatriates provide a nice illustration of the later-in-time rule in action. In 1996, Congress significantly toughened the tax rules applicable to individuals who expatriate for tax reasons.[85] Among other things, Congress created a presumption of expatriation with a tax avoidance purpose for expatriates with a net worth or an average tax liability in excess of a specified threshold.86 In addition, Congress for the first time extended the tax regime to cover not only former

U.S. citizens, but also former long-term permanent residents.[87] The revised rules generally applied retroactively to individuals who lost their U.S. citizenship or U.S. residency after February 5, 1995.[88] The legislative history indicated that Congress intended to override all conflicting treaties in force as of the date of enactment (i.e., August 21, 1996).[89] Uniquely, however, the legislative history further indicated that any conflicting treaty provisions that remained in force on August 21, 2006 (i.e., ten years after the date of enactment) would take precedence over the Code provisions. A notice issued by the Service indicated that the override covered both the portions of section 877 (the provision that determines whether an individual is a tax expatriate) that were amended in 1996 and the portions that were not so amended.[90]

Aside from the rather odd sunset of the treaty override, application of the later-in-time rule in this situation was relatively straightforward, especially given the clearly expressed intent of Congress to override inconsistent treaty provisions. Tax treaties concluded after 1981 generally contained provisions that would permit the United States to tax its former citizens who expatriated to avoid taxes;[91] however, under the later-in-time rule, earlier treaties without such a provision were clearly overridden by the 1996 legislation. Moreover, none of the pre-1997 treaties permitted the United States to tax its former long-term residents who expatriated by giving up their green cards or by claiming to be a resident of a treaty partner country; under the later-in-time rule, that portion of the 1996 legislation overrode all treaties then in force.[92] Thus, a former long-term resident who met the requirements of section 877 after its revision in 1996 (and before the subsequent revision in 2004, discussed below) was subject to tax on a broader basis and in a different manner than other nonresident aliens notwithstanding any treaty provision to the contrary.

Congress amended section 877 again in 2004 to eliminate the requirement that citizenship or residence must have been relinquished with a (deemed or actual) principal purpose to avoid tax. Effective June 4, 2004, section 877 applies to any expatriating citizen or long-term permanent resident regardless of the motive for her expatriation who meets a tax liability test or a net worth test or who does not certify under penalty of perjury that she has complied with her U.S. federal tax obligations during the five taxable years preceding expatriation.[93] This amendment renders section 877 inconsistent with even the 1996 U.S. Model Income Tax Convention, which, tracking pre-amendment law, reserves to the United States only the right to tax former citizens or long-term residents whose loss of citizenship or residence had as one of its principal purposes the avoidance of tax.[94] Curiously, however, Congress made no mention, either in the text of revised section 877 or in the legislative history, of whether it intended to override inconsistent treaty obligations when it made these changes.[95] Whether the courts will ultimately interpret these changes as overriding earlier, inconsistent treaty obligations remains to be seen.

3.3 Administrative Overrides

Conflicts between later federal law and earlier treaties are not confined to subsequently-enacted legislation. Conflicts may also arise between subsequently-promulgated regulations and earlier treaties.[96] At least one court has held, in an unpublished opinion97 with no analysis, that regulations issued pursuant to express Congressional authorization and . . . fully consistent with Congress’ statutory scheme will override earlier, inconsistent treaty obligations.[98]

Nevertheless, the ability of the Treasury Department and the Service to override earlier, inconsistent treaty obligations through the promulgation of regulations is open to debate. First, there is a question whether Congress can delegate the power to override treaties to an administrative agency.[99] Second, even assuming that Congress can delegate the power to override treaties to an administrative agency, there is a question whether such a delegation must be made explicitly or whether it can be made implicitly.[100] Furthermore, even assuming that Congress can and has delegated the power to override treaties in a given situation, difficulties may arise in applying the later-in-time rule, because it is quite possible that a tax treaty may be ratified between the enactment of a legislative authorization to promulgate overriding regulations and the promulgation of the final version of those regulations.[101] In such a case, for purposes of determining whether the treaty or regulations are later in time, is one to compare the date of the treaty’s ratification with (1) the date of enactment of the authorizing legislation or (2) the date of promulgation of the final regulations authorized by that legislation?

3.4 Remedies for Breach

In the past, the United States has occasionally exercised its right to terminate a treaty when a treaty partner has abetted or acquiesced in activity inconsistent with its understanding of, and policy with regard to, the scope and application of its tax treaties. For example, in 1995, the United States terminated its tax treaty with Malta (effective January 1, 1997). At the time, the United States cited its concern that recent changes in Maltese law inappropriately could facilitate use of the treaty by persons who are not residents of Malta or the United States. Under these circumstances, continuation of the treaty with Malta was not consistent with United States tax treaty policy.[102] Earlier, during the 1980s, the United States terminated a number of other treaty relationships due, at least in part, to the possibility of treaty abuse by third country residents.[103]

The United States has also acted preemptively with regard to breaches of treaty obligations. In 1996, the United States included an automatic termination provision in its income tax treaty with Thailand. Under the terms of the treaty, the operation of the treaty’s exchange of information article was temporarily suspended to allow Thailand the opportunity to enact the domestic legislation necessary to comply with its obligations under that article. To prevent termination of the treaty, Thailand was required to submit a diplomatic note to the United States indicating that it had enacted the necessary implementing legislation by June 30 of the fifth year following the treaty’s entry into force.104 Thailand’s failure to enact the legislation and to submit the diplomatic note to the United States would have resulted in the automatic termination of the entire treaty on January 1 of the sixth year following its entry into force [105] Thailand did, in fact, avoid termination of the treaty by enacting the necessary legislation and submitting the required diplomatic note to the United States in December 2001.[106]

More commonly, the United States has been the breaching party and not the victim of a breach of a tax treaty. Given the frequency of U.S. treaty overrides, it should come as no surprise that a number of recent U.S. tax treaties include a provision that allows the non-breaching party to require the breaching party to return to the negotiating table to address any imbalance in benefits created by an override. For example, article 29 of the recent United States-Japan income tax treaty provides:

If a Contracting State considers that a substantial change in the laws relevant to this Convention has been or will be made in the other Contracting State, the first-mentioned Contracting State may make a request to that other Contracting State in writing for consultations with a view to determining the possible effect of such change on the balance of benefits provided by the Convention and, if appropriate, to amending the provisions of the Convention to arrive at an appropriate balance of benefits. The requested Contracting State shall enter into consultations with the requesting Contracting State within three months from the date on which the request is received by the requested Contracting State.[107]

Obviously, should these negotiations prove fruitless, the non-breaching party retains the right to terminate the treaty either under the terms of the treaty itself or, if the override constitutes a material breach of the treaty, under customary international law as reflected in the Vienna Convention on the Law of Treaties.[108]

4. Domestic Anti-Abuse Measures and Tax Treaties

4.1 Judicial Doctrines

To prevent perceived abuses, the U.S. courts have applied domestic judicial doctrines (e.g., step transaction, substance over form, and business purpose) when interpreting tax treaties.

4.1.1 Aiken Industries

The leading example of the application of domestic judicial doctrines in the tax treaty context is Aiken Industries, Inc. v. Commissioner.[109] In that case, the U.S. Tax Court considered whether interest paid as part of a back-to-back loan arrangement between related entities was eligible for a reduced rate of tax under the former U.S.-Honduras income tax treaty.

Initially, a Bahamian corporation had lent $2.25 million to a related U.S. corporation at 4% interest. The following year, a Honduran corporation was added to the corporate group and the back-to-back loan arrangement was established by having the Honduran corporation exchange $2.25 million worth of its own notes (bearing 4% interest) for the

Focusing on the words received by in the interest article of the treaty, the Tax Court held that the treaty required more than merely obtaining physical possession of an interest payment on a temporary basis it required nothing less than complete dominion and control over the funds.[110] The court found that the Honduran corporation lacked the requisite dominion and control over the interest paid by the U.S. debtor, because it was required to pay every dollar of that interest over to the Bahamian corporation, leaving it no profit at all on the transaction. In substance, the Honduran corporation was acting as a mere conduit for the interest payments between the U.S. debtor and the Bahamian creditor. On these facts, the Tax Court concluded that no valid economic or business purpose existed for the transaction the only purpose for involving the Honduran corporation in the loan arrangement was to gain the benefits of the treaty.

4.1.2 Northern Indiana Public Service

In 1984, the Service issued two revenue rulings in which it expansively interpreted the Tax Court’s decision in Aiken Industries;[111] however, in the mid-1990s, the courts dealt a blow to the Service’s expansive interpretation of that case. In Northern Indiana Public Service Co. v. Commissioner,[112] the Tax Court and the U.S. Court of Appeals for the Seventh Circuit considered a back-to-back loan arrangement virtually identical to that posited by the Service in the second of its two 1984 revenue rulings. The arrangement involved a U.S. corporation that had created a Netherlands Antilles finance subsidiary to borrow money in the Eurobond market and then lend the borrowed funds to the U.S. corporation. In Northern Indiana, both the Tax Court and the Seventh Circuit held that the Netherlands Antilles finance subsidiary was not a mere conduit and was entitled to the benefit of a reduced rate of tax under the U.S.-Netherlands income tax treaty (as extended at the time to the Netherlands Antilles). The courts distinguished Aiken Industries on the grounds that (1) the lenders were unrelated to the U.S. corporation and the finance subsidiary and (2) the finance subsidiary made a profit on the transaction equal to the 1% spread between the interest rates charged on the back-to-back loans (which it reinvested to generate additional income).

4.1.3 Del Commercial Properties

More recently, in Del Commercial Properties, Inc. v. Commissioner,[113] the Tax Court and the U.S. Court of Appeals for the District of Columbia Circuit applied the step transaction doctrine to disregard intermediate entities in a financing arrangement among a group of related entities. Pursuant to the arrangement, a Canadian corporation borrowed $14 million from the Royal Bank of Canada (RBC). The Canadian corporation immediately lent the loan proceeds to a Canadian subsidiary. That subsidiary contributed the $14 million to the capital of a Cayman Islands subsidiary, which in turn contributed the $14 million to the capital of a Netherlands Antilles subsidiary, which then contributed the $14 million to the capital of a Netherlands subsidiary. Finally, the Netherlands subsidiary lent the funds to a related U.S. corporation that was in the business of leasing industrial real estate and needed the funds to refinance and improve some of its U.S. properties. All of these transactions occurred within a single 24-hour period.

Applying the step transaction doctrine, both courts held that the participation of the intermediate entities should be disregarded. In reaching this decision, the courts took into account the fact that: (1) the interest rates and repayment schedules on the RBC loan and the loan from the Netherlands subsidiary to the U.S. corporation were similar; (2) the

U.S. corporation guaranteed the RBC loan, let RBC place a mortgage on its U.S. properties, and entered into other covenants designed to protect RBC; and (3) after initially making payments on the loan to the Netherlands subsidiary, the U.S. corporation began making payments directly to the Canadian corporation that was the debtor on the RBC loan (at the request of RBC). By disregarding the participation of the intermediate entities, the courts recharacterized the financing arrangement as a loan directly between the U.S. corporation and the Canadian corporation that was the debtor on the RBC loan. This resulted in the application of a 15% rate of U.S. federal income tax to the interest payments under the U.S.-Canada income tax treaty in lieu of a complete exemption from tax under the U.S.-Netherlands income tax treaty.

4.1.4 Summary

Commentators have not viewed the application of judicial doctrines to prevent abuse in these situations as a treaty override.[114] They have either viewed these cases as appropriate exercises of a contracting state’s authority to determine the meaning of terms left undefined in the treaty or as consistent with the commentary to the OECD Model Income Tax Convention, which currently indicates that:taxpayers’

[T]o the extent . . . anti-avoidance rules are part of the basic domestic rules set by domestic tax laws for determining which facts give rise to a tax liability, they are not addressed in tax treaties and are therefore not affected by them. Thus, as a general rule, there will be no conflict between such rules and the provisions of tax conventions.[115]

4.2 Legislative and Administrative Measures

Unfortunately, the same cannot be said for the variety of legislative and administrative anti-abuse measures that have been put in place in the recent past.

4.2.1 Branch Profits Tax Treaty Shopping Provisions

In 1986, Congress enacted section 884 of the Code, which imposes branch profits and branch-level interest taxes on foreign corporations.[116] These taxes were enacted in an attempt to reduce the disparity in U.S. income tax treatment of foreign corporations that conduct businesses in the United States through branches and foreign corporations that conduct such businesses through domestic subsidiaries.[117] To prevent foreign corporations from engaging in treaty shopping to lower or eliminate the branch taxes, Congress included in section 884 a statutory limitation on taxpayers ability to rely on a treaty to reduce the rate of these taxes.[118]

A foreign corporation may rely on a treaty to reduce the rate of the branch taxes only if it is otherwise eligible for the benefits of the treaty and either (1) the foreign corporation is a qualified resident of the treaty partner or (2) the limitation on benefits article of the treaty entered into force after 1986.[119] A foreign corporation is a qualified resident only if: (1) it meets a stock ownership and a base erosion test, (2) it is publicly traded (or, subject to certain limitations, is the subsidiary of a publicly-traded corporation), (3) it meets an active trade or business test, or (4) it obtains a ruling from the Service.[120] Under the later-in-time rule, this statutory limitation on obtaining treaty benefits overrides the provisions of older treaties that would lower or eliminate the branch taxes, if the treaties either lack a limitation on benefits article or have a limitation on benefits article that is less restrictive than the qualified resident rules of the Code and regulations.[121]

4.2.2. Conduit Financing Regulations

In 1993, Congress added section 7701(l) to the Code.[122] This provision authorizes the Treasury Department to prescribe regulations recharacterizing any multiple-party financing transaction as a transaction directly among any 2 or more of such parties where the [Treasury Department] determines that such recharacterization is appropriate to prevent avoidance of any tax imposed by [the Code].[123] In 1995, the Treasury Department acted on this grant of authority and promulgated Treasury Regulations section 1.881-3.[124]

For purposes of that regulation, a financing arrangement is a series of transactions by which one person (the financing entity) advances money or other property and another person (the financed entity) receives money or other property, provided that the advance and receipt are effected through one or more other persons (the intermediate entities).[125] An intermediate entity will be considered a conduit, and its participation in the financing arrangement may be disregarded by the Service, if three conditions are satisfied: (1) the participation of the intermediate entity reduces the tax imposed by section 881 of the Code; (2) the participation of the intermediate entity in the financing arrangement is pursuant to a tax avoidance plan; and (3) either the intermediate entity is related to the financing entity or the financed entity, or the intermediate entity would not have participated in the financing arrangement on substantially the same terms but for the fact that the financing entity engaged in the financing transactions with the intermediate entity.[126] If the participation of an intermediate entity is disregarded, then the transaction is recharacterized both for Code and treaty purposes as a transaction directly between the remaining parties to the financing arrangement (normally, the financing and the financed entities).[127] Despite the Treasury Department’s protestations to the contrary, these conduit financing regulations are viewed by commentators as potentially overriding income tax treaty obligations.[128]

4.2.3 Hybrid Entities

In 1997, Congress enacted section 894(c) of the Code to prevent treaty abuse through the use of hybrid entities (i.e., entities that are treated as fiscally transparent under the tax laws of one contracting state but not under the tax laws of the other contracting state).[129] Section 894(c)(1) denies treaty benefits to an item of income derived by a foreign person through an entity that is treated as fiscally transparent for purposes of the Code if: (1) the item is not treated as an item of income of the foreign person under the tax laws of the treaty partner, (2) the treaty does not address its application to items of income derived through fiscally transparent entities, and (3) the treaty partner does not impose tax on a distribution of the item of income from the entity to the foreign person. Section 894(c)(2) authorizes the Treasury Department to promulgate regulations addressing the availability of treaty benefits to arrangements involving hybrid entities that are not covered by section 894(c)(1). The Treasury Department has now promulgated regulations addressing the availability of treaty benefits to arrangements involving both hybrid and reverse hybrid entities.[130] Commentators have argued that both section 894(c)(1) and the regulations promulgated under section 894(c)(2) may potentially override income tax treaties.[131]

4.2.4 Summary

Thus, in contrast to their general approval of the use of judicial doctrines to combat treaty abuse, commentators tend to view blanket legislative and administrative anti-abuse measures which are not tailored to the specific facts of individual cases or to the varying terms of different treaties as potentially overriding treaty obligations. These contrasting views of the commentators bear out the admonition in the OECD commentary concerning the need for a cautious and particularized application of domestic anti-abuse measures in the treaty context:

It is important to note, however, that it should not be lightly assumed that a taxpayer is entering into . . . abusive transactions . . . . A guiding principle is that the benefits of a double taxation convention should not be available where a main purpose for entering into certain transactions or arrangements was to secure a more favourable tax position and obtaining that more favourable treatment in these circumstances would be contrary to the object and purpose of the relevant provisions.[132]

[1] Associate Professor of Law, University of Pittsburgh School of Law. Parts of this chapter have been adapted from the author’s revision and updating of chapter 43, Tax Treaty Overrides Treaties Versus the Code, in Rufus Rhoades & Marshall J. Langer, U.S. International Taxation and Tax Treaties (Matthew Bender, 2005). Reprinted with permission. Copyright 2005 Matthew Bender & Company, Inc., a member of the LexisNexis Group. All rights reserved.

[2] See Marbury v. Madison, 5 U.S. (1 Cranch) 137, 180 (1803) (It is also not entirely unworthy of observation, that in declaring what shall be the supreme law of the land, the constitution itself is first mentioned; and not the laws of the United States generally, but those only which shall be made in pursuance of the constitution, have that rank. Thus, the particular phraseology of the constitution of the United States confirms and strengthens the principle, supposed to be essential to all written constitutions, that a law repugnant to the constitution is void; and that courts, as well as other departments, are bound by that instrument.).

[3] American Law Institute, Restatement (Third) of Foreign Relations Law of the United States (St. Paul, MN: American Law Institute Publishers, 1987), at ß 302(2).

[4] U.S. Constitution, at art. I, ß 10, cl. 1.

[5] Id., at art. II, ß 2, cl. 2.

[6] Richard E. Andersen & Peter H. Blessing, Analysis of United States Income Tax Treaties (Electronic resource: RIA, 2005), at ∂ 1.04[1][a][i].

[7] U.S. Constitution, at art. II, ß 2, cl. 2.

[8] Id.

[9] E.g., U.S. Model Income Tax Convention of September 20, 1996, at art. 28, in Rhoades & Langer, op. cit., at 6:MOD-1, ß 1.28; U.S. Model Estate & Gift Tax Treaty of November 20, 1980, at art. 14, in Rhoades & Langer, op. cit., at 6:MOD-5, ß 1.14.

[10] Foster v. Neilson, 27 U.S. (2 Pet.) 253, 314 (1829).

[11] See Lidas, Inc. v. United States, 83 A.F.T.R.2d (RIA) 1112, 1115 (C.D. Cal. 1999), affirmed, 238 F.2d 1076 (9th Cir.), certiorari denied, 533 U.S. 903 (2001).

[12] U.S. Constitution, at art. VI, cl. 2.

[13] Samann v. Commissioner, 313 F.2d 461, 463 (4th Cir. 1963); American Trust Co. v. Smyth, 247 F.2d 149, 153 (9th Cir. 1957), overruled on other grounds by Maximov v. United States, 373 U.S. 49 (1963).

[14] See, e.g., Reuters Ltd. v. Tax Appeals Tribunal, 623 N.E.2d 1145 (N.Y. 1993), certiorari denied, 512 U.S. 1235 (1994).

[15] E.g., U.S. Model Income Tax Convention of September 20, 1996, at art. 2(1)(a), in Rhoades & Langer, op. cit., at 6:MOD-1, ß 1.02; U.S. Model Estate & Gift Tax Treaty of November 20, 1980, at art. 2(1)(a), in Rhoades & Langer, op. cit., at 6:MOD-5, ß 1.02.

[16] E.g., U.S. Model Income Tax Convention of September 20, 1996, at art. 24(6), in Rhoades & Langer, op. cit., at 6:MOD-1, ß 1.24; U.S. Model Estate & Gift Tax Treaty of November 20, 1980, at art. 10(4), in Rhoades & Langer, op. cit., at 6:MOD-5, ß 1.10.

[17] The Chinese Exclusion Case, 130 U.S. 581, 585ñ86 (1889); Whitney v. Robertson, 124 U.S. 190, 193ñ94 (1888); The Head Money Cases, 112 U.S. 580, 599 (1884).

[18] Anthony C. Infanti, Curtailing Tax Treaty Overrides: A Call to Action, 62 University of Pittsburgh Law Review 4 (2001), at 684 n.40 (quoting Whitney v. Robertson, 124 U.S. 190, 194 (1888)) [hereinafter Anthony C. Infanti, Curtailing Tax Treaty Overrides]; see Richard L. Doernberg, Overriding Tax Treaties: The U.S. Perspective, 9 Emory International Law Review 1 (1995), at 79ñ80 [hereinafter Richard L. Doernberg, Overriding Tax Treaties]; Louis Henkin, Treaties in a Constitutional Democracy, 10 Michigan Journal of International Law 2 (1989), at 425ñ26; Jules Lobel, The Limits of Constitutional Power: Conflicts Between Foreign Policy and International Law, 71 Virginia Law Review 7 (1985), at 1104ñ14; David Sachs, Is the 19th Century Doctrine of Treaty Override Good Law for Modern Day Tax Treaties?, 47 Tax Lawyer 4 (1994), at 877ñ83.

[19] Jules Lobel, op. cit., at 1108.

[20] David Sachs, op. cit., at 870.

[21] Anthony C. Infanti, Curtailing Tax Treaty Overrides, op. cit., at 689ñ90.

[22] See Vienna Convention on the Law of Treaties, May 23, 1969, arts. 26, 39, in International Legal Materials (Washington, D.C.: American Society of International Law, 1969), at 8:690, 694 (Article 26 provides that: Every treaty in force is binding upon the parties to it and must be performed by them in good faith. Article 39 provides that: A treaty may be amended by agreement between the parties.); American Law Institute, op. cit., at ß 115(1)(b) (That a rule of international law or a provision of an international agreement is superseded as domestic law does not relieve the United States of its international obligation or of the consequences of a violation of that obligation.). The United States has signed, but not ratified, the Vienna Convention. Nevertheless, those provisions of the convention that constitute the codification of customary international law (as opposed to the progressive development of international law) are binding on the United States. See The Paquete Habana, 175 U.S. 677, 700 (1900). Articles 26 and 39 of the Vienna Convention do no more than codify customary international law. Article 26 reproduces, in lapidary language, the basic principle pacta sunt servanda, designated by the [International Law] Commission as ëthe fundamental principle of the law of treaties.í Ian Sinclair, The Vienna Convention on the Law of Treaties 2nd ed. (Dover, N.H.: Manchester University Press, 1984), at 83 (quoting Report of the International Law Commission on the Work of Its Eighteenth Session, 2 Yearbook of the International Law Commission (United Nations Document No. A/6309/Rev. 1, 1966), at 211). Article 39 codifies the general rule of customary international law that a treaty may not be revised without the consent of all the parties. Id., at 106. Thus, articles 26 and 39 of the Vienna Convention are binding on the United States. Nonetheless, I have not come across a U.S. tax case in which the court mentioned these articles of the Vienna Convention when discussing a legislative override of a tax treaty. In any event, it has generally been conceded that there is no effective remedy (either legal or diplomatic) under international law for a breach of a [U.S.] tax treaty obligation. Anthony C. Infanti, Curtailing Tax Treaty Overrides, op. cit., at 690; see Richard L. Doernberg, Overriding Tax Treaties, op. cit., at 115ñ21; Philip F. Postlewaite & David S. Makarski, The A.L.I. Tax Treaty Study A Critique and a Modest Proposal, 52 Tax Lawyer 4 (1999), at 740, 749ñ50.

[23] Anthony C. Infanti, Curtailing Tax Treaty Overrides, op. cit., at 687ñ88.

[24] Id., at 677ñ78.

[25] OECD Committee on Fiscal Affairs, Tax Treaty Overrides, in 2 Tax Notes International 1 (1990), at

[25].

[26] OECD Committee on Fiscal Affairs, Model Tax Convention on Income and on Capital (Paris: OECD,
2005 (Condensed Version)), at 25 [hereinafter OECD, Model Tax Convention].

[27] E.g., U.S. Model Income Tax Convention of September 20, 1996, at art. 3(2), in Rhoades & Langer, op. cit., at 6:MOD-1, ß 1.03; U.S. Model Estate & Gift Tax Treaty of November 20, 1980, at art. 3(2), in Rhoades & Langer, op. cit., at 6:MOD-5, ß 1.03.

[28] U.S. Model Income Tax Convention of September 20, 1996, Technical Explanation, at art. 3, in Rhoades & Langer, op. cit., at 6:MOD-2, ß 1.03; Revenue Ruling 80-243, Cumulative Bulletin (Washington, D.C.: U.S. Department of Treasury, 1980), at 2:413.

[29] But see Anthony C. Infanti, The Proposed Domestic Reverse Hybrid Entity Regulations: Can the Treasury Department Override Treaties?, 30 Tax Management International Journal 7 (2001), at 309ñ10 (exploring a situation where the United States may have exceeded its definitional authority under a treaty) [hereinafter Anthony C. Infanti, The Proposed Domestic Reverse Hybrid Entity Regulations].

[30] E.g., U.S. Model Income Tax Convention of September 20, 1996, at art. 4(1), in Rhoades & Langer, op. cit., at 6:MOD-1, ß 1.04; U.S. Model Estate & Gift Tax Treaty of November 20, 1980, at art. 4(1), in Rhoades & Langer, op. cit., at 6:MOD-5, ß 1.04; see U.S. Code Annotated (St. Paul, MN: West Group, 2005), at 26:ß 7701(b).

[31] E.g., U.S. Model Income Tax Convention of September 20, 1996, at art. 4(2), in Rhoades & Langer, op. cit., at 6:MOD-1, ß 1.04; U.S. Model Estate & Gift Tax Treaty of November 20, 1980, at art. 4(2), in Rhoades & Langer, op. cit., at 6:MOD-5, ß 1.04.

[32] Code of Federal Regulations (Washington, D.C.: U.S. Government Printing Office, 2005), at 26:ß 301.7701(b)-7(a)(1)ñ(3).

[33] Id., at 26:ß 301.7701(b)-7(a)(3), -7(e), ex. 1.

[34] E.g., U.S. Model Income Tax Convention of September 20, 1996, at art. 6(2), in Rhoades & Langer, op. cit., at 6:MOD-1, ß 1.06; see Andersen & Blessing, op. cit., at ∂ 5.02[1][b][ii].

[35] U.S. Model Income Tax Convention of September 20, 1996, Technical Explanation, at art. 6(2), in Rhoades & Langer, op. cit., at 6:MOD-2, ß 1.06.

[36] E.g., U.S. Model Income Tax Convention of September 20, 1996, at art. 10(5), in Rhoades & Langer, op. cit., at 6:MOD-1, ß 1.10; U.S. Model Income Tax Convention of September 20, 1996, Technical Explanation, at art. 10(5), in Rhoades & Langer, op. cit., at 6:MOD-2, ß 1.10; see Andersen & Blessing, op. cit., at ∂ 9.02[2][b].

[37] U.S. Model Income Tax Convention of September 20, 1996, at art. 23(1), in Rhoades & Langer, op. cit., at 6:MOD-1, ß 1.23.

[38] E.g., Pekar v. Commissioner, 113 T.C. 158 (1999); Lindsey v. Commissioner, 98 T.C. 672 (1992); Revenue Ruling 80-201, Cumulative Bulletin (Washington, D.C.: U.S. Department of Treasury, 1980), at 2:221; Revenue Ruling 80-223, Cumulative Bulletin (Washington, D.C.: U.S. Department of Treasury, 1980), at 2:217; see also Andersen & Blessing, op. cit., at ∂ 19.02[2][b].

[39] U.S. Model Income Tax Convention of September 20, 1996, at art. 1(2), in Rhoades & Langer, op. cit., at 6:MOD-1, ß 1.01; see Andersen & Blessing, op. cit., at ∂ 2.05[2][b][i].

[40] U.S. Model Income Tax Convention of September 20, 1996, Technical Explanation, at art. 1, in Rhoades & Langer, op. cit., at 6:MOD-2, ß 1.01.

[41] Id.

[42] Revenue Ruling 84-17, Cumulative Bulletin (Washington, D.C.: U.S. Department of Treasury, 1984), at

[43] U.S. Code Annotated, op. cit., at 26:ß 163(j).

[44] Id., at 26:ß 163(j)(5)(B).

[45] Id., at 26:ßß 877, 2107, 2501(a).

[46] Id., at 26:ß 877(e)(1)(B).

[47] Id., at 26:ß 1(h)(11)(C)(i)(II).

[48] Id., at 26:ß 897(i)

[49] Convention Concerning Double Taxation, Apr. 27, 1932, U.S.-France, in U.S. Statutes at Large (Washington, D.C.: U.S. Government Printing Office, 1936), at 49:3145.

[50] U.S. Code Congressional and Administrative News: Internal Revenue Code of 1954 (St. Paul, MN: West Publishing Co., 1954), at 329.

[51] Revenue Act of 1962, Public Law No. 87-834, ß 31, in U.S. Statutes at Large (Washington, D.C.: U.S. Government Printing Office, 1963), at 76:1069 (generally providing that the Act would override all existing tax treaties). In fact, the Treasury Department determined that there were no conflicts between provisions of the bill and provisions of tax treaties, with one minor exception relating to the . . . Greek Estate Tax Treaty, which the Treasury Department indicated it would attempt to renegotiate before July 1, 1964. House of Representatives Conference Report No. 87-2508, at 48 (1962), in U.S. Code Congressional and Administrative News: 87th Cong. 2d Sess.: 1962 (St. Paul, MN: West Publishing Co., 1963), at 2:3770.

[52] Public Law No. 94-12, in U.S. Statutes at Large (Washington, D.C.: U.S. Government Printing Office, 1977), at 89:54; see Revenue Ruling 80-223, Cumulative Bulletin (Washington, D.C.: U.S. Department of Treasury, 1980), at 2:217.

[53] Public Law No. 94-455, in U.S. Statutes at Large (Washington, D.C.: U.S. Government Printing Office, 1978), at 90:1620; see Revenue Ruling 80-201, Cumulative Bulletin (Washington, D.C.: U.S. Department of Treasury, 1980), at 2:221.

[54] Public Law No. 96-499, in U.S. Statutes at Large (Washington, D.C.: U.S. Government Printing Office, 1981), at 94:2690ñ91.

[55] Public Law No. 98-369, in U.S. Statutes at Large (Washington, D.C.: U.S. Government Printing Office, 1986), at 98:669.

[56] Public Law No. 99-514, in U.S. Statutes at Large (Washington, D.C.: U.S. Government Printing Office, 1989), at 100:2576; see Richard L. Doernberg, Legislative Override of Income Tax Treaties: The Branch Profits Tax and Congressional Arrogation of Authority, 42 Tax Lawyer 2 (1989), at 173 (indicating that the branch profits tax violates the nondiscrimination provisions in many income tax treaties by limiting their application in situations where the United States believes that treaty shopping may be occurring) [hereinafter Richard L. Doernberg, Branch Profits Tax].

[57] Public Law No. 99-514, in U.S. Statutes at Large (Washington, D.C.: U.S. Government Printing Office, 1989), at 100:2822ñ23.

[58] Public Law No. 100-647, in U.S. Statutes at Large (Washington, D.C.: U.S. Government Printing Office, 1990), at 102:3531.

[59] Public Law No. 101-239, in U.S. Statutes at Large (Washington, D.C.: U.S. Government Printing Office, 1991), at 103:2339; see Richard L. Doernberg, Overriding Tax Treaties, op. cit., at 92ñ105 (arguing that the earnings stripping rules violate nondiscrimination provisions in many income tax treaties).

[60] Public Law No. 101-239, in U.S. Statutes at Large (Washington, D.C.: U.S. Government Printing Office, 1991), at 103:2359ñ61; see House of Representatives Report No. 101-247, at 1301ñ02 (1989), in U.S. Code Congressional and Administrative News: 101st Cong. 1st Sess.: 1989 (St. Paul, MN: West Publishing Co., 1990), at 4:2771ñ72 (arguing that the information reporting requirements do not violate the nondiscrimination provisions found in many income tax treaties, but stating that, if the reporting requirements are found to violate the nondiscrimination provisions of a treaty, the reporting requirements will override inconsistent treaty provisions). But see Sanford H. Goldberg & Peter A. Glicklich, Treaty-Based Nondiscrimination: Now You See It Now You Don’t, 1 Florida Tax Review 2 (1992), at 78 (indicating that the reporting provisions may, in fact, violate the nondiscrimination provisions in many income tax treaties).

[61] Public Law No. 101-239, in U.S. Statutes at Large (Washington, D.C.: U.S. Government Printing Office, 1991), at 103:2418; see House of Representatives Conference Report No. 101-386, at 668ñ70 (1989), in U.S. Code Congressional and Administrative News: 101st Cong. 1st Sess.: 1989 (St. Paul, MN: West Publishing Co., 1990), at 4:3271ñ73.

[62] Public Law No. 103-66, in U.S. Statutes at Large (Washington, D.C.: U.S. Government Printing Office, 1994), at 107:508; see, e.g., Timothy S. Guenther, Tax Treaties and Overrides: The Multiple-Party Financing Dilemma, 16 Virginia Tax Review 4 (1997), at 668ñ70 (arguing that regulations relating to the recharacterization of multiple-party financing arrangements, promulgated under the authority of this section, override treaty obligations); Linda E. Carlisle & Geoffrey B. Lanning, Tax Treatment of Substitute Payments Under Securities Lending and Sale Repurchase Transactions, 15 Journal of Taxation of Investments 3 (1998), at 246 (arguing that regulations relating to the source and character of substitute dividend and interest payments, promulgated under the authority of this section, override treaty obligations). 10

[63] Public Law No. 104-191, in U.S. Statutes at Large (Washington, D.C.: U.S. Government Printing Office, 1997), at 110:2093; see House of Representatives Conference Report No. 104-736, at 329, 338 (1996), in U.S. Code Congressional and Administrative News: 104th Cong. 2d Sess.: 1996 (St. Paul, MN: West Publishing Co., 1997), at 5:2142, 2151 (evincing an explicit intent to override tax treaties); Notice 97-19, Cumulative Bulletin (Washington, D.C.: U.S. Department of Treasury, 1997), at 1:402 (same).

[64] Public Law No. 105-34, in U.S. Statutes at Large (Washington, D.C.: U.S. Government Printing Office, 1998), at 111:943; see Robert Critchfield, Nathan Honson, & Myron Mendelowitz, Pass-Through Entities, Double Tax Conventions, and Treaty Overrides, 82 Tax Notes 6 (1999), at 887ñ89 (arguing that the portion of this section codified at Code section 894(c)(1) overrides at least one income tax treaty); Peter H. Blessing, Final ß 894(c)(2) Regulations, 29 Tax Management International Journal 9 (2000), at 499 (indicating that the portion of this section codified at Code section 894(c)(2) was intended to override income tax treaties).

[65] Public Law No. 108-357, in U.S. Code Congressional and Administrative News: 108th Cong. 2d Sess.: 2004 (St. Paul, MN: West Publishing Co., 2005), at 118 Stat. 1565 (containing an explicit override of both past and future treaty obligations).

[66] Id., at 118 Stat. 1569ñ73; see Kimberly S. Blanchard & Natalie C. Maksin, The Jobs Act’s Individual Expatriation Provisions, 105 Tax Notes 9 (2004), at 1119 (raising the question whether the changes to Code section 877 will be interpreted to override inconsistent treaty provisions); Marco Blanco & John Kaufmann, The Noose Tightens: The New Expatriation Provisions, 106 Tax Notes 1 (2005), at 91 (indicating that any conflict between revised Code section 877 and tax treaties should be resolved in favor of the Code).

[67] U.S. Code Annotated, op. cit., at 26:ß 894(a)(1) (emphasis added).

[68] Id., at 26:ß 7852(d).

[69] Murray v. The Schooner Charming Betsy, 6 U.S. (2 Cranch) 64, 118 (1804).

[70] American Law Institute, op. cit., at ß 115 comment a.

[71] Id.; see, e.g., Pekar v. Commissioner, 113 T.C. 158 (1999); Snap-on Tools, Inc. v. United States, 26 Cl. Ct. 1045 (1992); Revenue Ruling 79-199, Cumulative Bulletin (Washington, D.C.: U.S. Department of Treasury, 1979), at 1:246.

[72] Senate Report No. 100-445, at 321ñ22 (1988), in U.S. Code Congressional and Administrative News:
100th Cong. 2d Sess.: 1988 (St. Paul, MN: West Publishing Co., 1989), at 6:4833.

[73] American Law Institute, op. cit., at ß 115 comment a.

[74] Cook v. United States, 288 U.S. 102, 120 (1933).

[75] Roeder v. Islamic Republic of Iran, 195 F. Supp. 2d 140, 170 (D.D.C. 2002), affirmed, 333 F.3d 228 (D.C. Cir. 2003), certiorari denied, 124 S. Ct. 2836 (2004) ([W]hen the unambiguous statutory text conflicts with an earlier treaty or international executive agreement, precedent of equally long-standing requires the later statutory provision to prevail. Furthermore, if the text of the later statute is unambiguous, that statute is legally binding regardless of Congress’ intent to abrogate the earlier treaty or agreement. (citations omitted)); see also American Law Institute, op. cit., at ß 115(1)(a) (stating that a later statute will supersede an earlier treaty if the act and the earlier rule or provision cannot be fairly reconciled).

[76] Roeder v. Islamic Republic of Iran, 195 F. Supp. 2d at 169.

[77] Trans World Airlines, Inc. v. Franklin Mint Corp., 466 U.S. 243, 252, rehearing denied, 467 U.S. 1231 (1984); see also Minnesota v. Mille Lacs Band of Chippewa Indians, 526 U.S. 172, 202ñ03 (1999) (Congress may abrogate Indian treaty rights, but it must clearly express its intent to do so. There must be clear evidence that Congress actually considered the conflict between its intended action on the one hand and Indian treaty rights on the other, and chose to resolve that conflict by abrogating the treaty.í (quoting United States v. Dion, 476 U.S. 734, 740 (1986)) (citations omitted)); Roeder v. Islamic Republic of Iran, 195 F. Supp. 2d at 175 (The Supreme Court has unequivocally held that legislative silence is not sufficient to abrogate a treaty or a bi-lateral executive international agreement. When a later statute conflicts with an earlier agreement, and Congress has neither mentioned the agreement in the text of the statute nor in the legislative history of the statute, the Supreme Court has conclusively held that it can not find the requisite Congressional intent to abrogate. (quoting Trans World Airlines, Inc. v. Franklin Mint Corp., 466 U.S. at 252) (citations omitted)).

[78] Trans World Airlines, Inc. v. Franklin Mint Corp., 466 U.S. at 252.

[79] Anthony C. Infanti, Curtailing Tax Treaty Overrides, op. cit., at 685 (quoting Trans World Airlines, Inc. v. Franklin Mint Corp., 466 U.S. at 252); see also McCulloch v. Sociedad Nacional de Marineros de Honduras, 372 U.S. 10, 21ñ22 (1963); Blanco v. United States, 775 F.2d 53, 61 (2d Cir. 1985); Torres v. Immigration & Naturalization Service, 602 F.2d 190, 195 (7th Cir. 1979); United States v. White, 508 F.2d 453, 456 (8th Cir. 1974); Ungo v. Beachie, 311 F.2d 905, 907 (9th Cir.), certiorari denied, 373 U.S. 911 (1963).

[80] Anthony C. Infanti, Curtailing Tax Treaty Overrides, op. cit., at 685.

[81] Senate Report No. 100-445, at 326 (1988), in U.S. Code Congressional and Administrative News: 100th Cong. 2d Sess.: 1988 (St. Paul, MN: West Publishing Co., 1989), at 6:4837.

[82] Jules Lobel, op. cit., at 1104ñ10; see also American Law Institute, op. cit., at ß 115 reporter’s note 1 (The principle that United States treaties and federal statutes are of equal authority, so that in case of inconsistency the later in time should prevail, was derived early from the Supremacy Clause, Article VI of the Constitution.).

[83] Anthony C. Infanti, Prying Open the Closet Door: The Defense of Marriage Act and Tax Treaties, 105 Tax Notes 5 (2004), at 571 n.55; see Martha A. Field, Sources of Law: The Scope of Federal Common Law, 99 Harvard Law Review 5 (1986), at 896 n.60 (Congress always has power to alter a federal common law rule that is not constitutionally based. Moreover, even common law inferred from constitutional provisions is not always beyond Congress’s power to change. But Congress sometimes lacks power to alter common law derived from the Constitution, because sometimes such law is constitutionally required.).

[84] House of Representatives Conference Report No. 100-1104, at 12 (1988), in U.S. Code Congressional and Administrative News: 100th Cong. 2d Sess.: 1988 (St. Paul, MN: West Publishing Co., 1989), at 6:5072.

[85] Code sections 877, 2107, and 2501, as amended, and 6039F (later re-designated 6039G), as added, by the Health Insurance Portability and Accountability Act of 1996, Public Law No. 104-191, ßß 511ñ12, in U.S. Statutes at Large (Washington, D.C.: U.S. Government Printing Office, 1997), at 110:2093ñ2102.

[86] U.S. Code Congressional and Administrative News: Internal Revenue Code: 1997 (St. Paul, MN: West Publishing Co., 1997), at 1:1196.

[87] U.S. Code Annotated, op. cit., at 26:ß 877(e).

[88] Health Insurance Portability and Accountability Act of 1996, Public Law No. 104-191, ßß 511(g), 512(c), in U.S. Statutes at Large (Washington, D.C.: U.S. Government Printing Office, 1997), at 110:2100, 2102.

[89] House of Representatives Conference Report No. 104-736, at 329 (1996), in U.S. Code Congressional and Administrative News: 104th Cong. 2d Sess.: 1996 (St. Paul, MN: West Publishing Co., 1997), at 5:2142.

[90] Notice 97-19, Cumulative Bulletin (Washington, D.C.: U.S. Department of Treasury, 1997), at 1:48.

[91] Andersen & Blessing, op. cit., at ∂ 2.05[1][a][ii].

[92] Rhoades & Langer, op. cit., at 3:ß 42.07.

[93] U.S. Code Annotated, op. cit., at 26:ß 877(a)(2).

[94] U.S. Model Income Tax Convention of September 20, 1996, at art. 1(4), in Rhoades & Langer, op. cit., at 6:MOD-1, ß 1.01.

[95] House of Representatives Conference Report No. 108-755, at 568ñ80, in U.S. Code Congressional and Administrative News: 108th Cong. 2d Sess.: 2004 (St. Paul, MN: West Publishing Co., 2005), at 4:1636ñ 46.

[96] E.g., National Westminster Bank, PLC v. United States, 44 Fed. Cl. 120 (1999) (holding that Treasury Regulations section 1.882-5 conflicts with the United States-United Kingdom income tax treaty); see also Carlisle & Lanning, op. cit. (regulations relating to the source and character of substitute dividend and interest payments); Richard L. Doernberg, Treaty Override by Administrative Regulation: The Multiparty Financing Regulations, 2 Florida Tax Review 9 (1995), at 521 (multiple-party financing regulations) [hereinafter Richard L. Doernberg, Multiparty Financing Regulations]; Richard L. Doernberg, Overriding Tax Treaties, op. cit., at 110ñ15 (same); Goldberg & Glicklich, op. cit., at 74ñ77 (regulations promulgated under Code sections 874(a) and 882(c)(2)); Timothy S. Guenther, op. cit., at 668ñ70 (multiple-party financing regulations); Anthony C. Infanti, The Proposed Domestic Reverse Hybrid Entity Regulations, op. cit. (proposed regulations under Code section 894).

[97] Under the rules of the U.S. Court of Appeals for the Ninth Circuit, unpublished opinions are not binding precedent and may not be cited to or by a court in the Ninth Circuit except in very limited circumstances. U.S. Code Annotated, op. cit., at 28:9th Cir. Rule 36-3. The Judicial Conference of the United States has proposed an amendment to the Federal Rules of Appellate Procedure that would permit the parties to litigation to cite unpublished opinions (without addressing the weight that a court must accord to such an opinion); however, as proposed, this amendment applies only to judicial decisions issued on or after January 1, 2007. See http://www.uscourts.gov/rules/index.html.

[98] American Air Liquide, Inc. v. Commissioner, 90 A.F.T.R.2d (RIA) 6148 (9th Cir. 2002) (unpublished opinion).

[99] Anthony C. Infanti, The Proposed Domestic Reverse Hybrid Entity Regulations, op. cit., at 311ñ12.

[100] Id., at 312ñ13; Richard L. Doernberg, Multiparty Financing Regulations, op. cit., at 541ñ42.

[101] See Richard L. Doernberg, Multiparty Financing Regulations, op. cit., at 544ñ50 for further discussion of this problem.

[102] U.S. Terminates Tax Treaty with Malta, 69 Tax Notes 9 (1995), at 1083.

[103] See, e.g., Announcement 79-135, Internal Revenue Bulletin 37 (Washington, D.C.: U.S. Department of Treasury, 1979), at 26; Treasury Department Announces Termination of Extensions of Income Tax Conventions Between the United States and the United Kingdom and the United States and Belgium to 18 Countries and Territories, 20 Tax Notes 2 (1983), at 175; Marshall J. Langer, The Outrageous History of Caribbean Tax Treaties with OECD Member States, 26 Tax Notes International 10 (2002), at 1205; Frith Crandall, The Termination of the United States-Netherlands Antilles Tax Treaty: What Were the Costs of Ending Treaty Shopping?, 9 Northwestern Journal of International Law & Business 2 (1988), at 355.

[104] Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, U.S.-Thailand, art. 31, para. 2, Nov. 26, 1996, Senate Treaty Document No. 105-2 (1996).

[105] Id.

[106] Kevin A. Bell, United States, Thailand Exchange Diplomatic Notes, 93 Tax Notes 13 (2001), at 1676.

[107] Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, U.S.-Japan, art. 29, Nov. 6, 2003, Senate Treaty Document No. 108-14 (2003); see also, e.g., Convention for the Avoidance of Double Taxation with Respect to Taxes on Income and the Prevention of Fraud or Fiscal Evasion, U.S.-Italy, Protocol, art. 7, para. 1, Aug. 25, 1999, Senate Treaty Document No. 106-11 (1999) (as of this writing, this treaty has not yet entered into force; for a discussion of the status of this treaty and a suggestion that it may need to be renegotiated before it is ratified, see Lee A. Sheppard & Alessandro Adelchi Rossi, Where Is the Italian Treaty?, 108 Tax Notes 10 (2005), at 986); Convention for the Avoidance of Double Taxation with Respect to Taxes on Income, U.S.Switzerland, art. 28, para. 5, Oct. 2, 1996, Senate Treaty Document No. 105-8 (1997); Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital, U.S.-Canada, Protocol, art. 17, para. 7, Mar. 17, 1995, Senate Treaty Document No. 104-4 (1995); Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, U.S.-Israel, Protocol, art. V, para. 4, Jan. 26, 1993, Senate Treaty Document No. 103-16 (1993); Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, U.S.-Mexico, Protocol, para. 20, Sept. 18, 1992, Senate Treaty Document No. 103-7 (1993) [hereinafter U.S.-Mexico Protocol]; Convention for the Avoidance of Double U.S. corporation’s $2.25 million note held by the Bahamian corporation. The Honduran corporation then claimed an exemption from U.S. federal income tax under the U.S.Honduras treaty with respect to the interest payments received from the U.S. corporation. Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, U.S.-Netherlands, art. 29, para. 6, Dec. 18, 1992, Senate Treaty Document o. 103-6 (1993).

[108] See U.S. Department of Treasury, Technical Explanation of the Convention Between the United States of America and the Government of Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital Gains, in Tax Treaties (Chicago, IL: CCH Incorporated, 2004), at 3:113,382 (indicating that customary international law allows termination of a treaty at any time in the event of a material breach); U.S. Department of Treasury, Technical Explanation of the Convention Between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income, in Tax Treaties, op. cit., at 4:185,283 (same); U.S. Department of Treasury, Technical Explanation of the Convention Between the Government of the United States of America and the Government of the Italian Republic, in Tax Treaties, op. cit., at 2:109,639ñ40 (same); U.S.-Mexico Protocol, op. cit., at para. 20 (providing both more liberal termination rules in the case of failed negotiations and reaffirming each contracting state’s right to take action under general principles of international law); Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital, U.S.-Canada, art. XXXI, para. 3, Sept. 26, 1980, Senate Executive Document T (1980) (providing more liberal termination rules in the case of failed negotiations).

[109] 56 T.C. 925 (1971).

[110] Id., at 933.

[111] Revenue Ruling 84-152, Cumulative Bulletin (Washington, D.C.: U.S. Department of Treasury, 1984), at 2:381; Revenue Ruling 84-153, Cumulative Bulletin (Washington, D.C.: U.S. Department of Treasury, 1984), at 2:383. These rulings were declared obsolete following the promulgation of the conduit financing regulations discussed in the text below. Revenue Ruling 95-56, Cumulative Bulletin (Washington, D.C.: U.S. Department of Treasury, 1995), at 2:322.

[112] 105 T.C. 341 (1995), affirmed, 115 F.3d 506 (7th Cir. 1997).

[113] 78 T.C.M. (CCH) 1183 (1999), affirmed, 251 F.3d 210 (D.C. Cir. 2001), certiorari denied, 534 U.S. 1104 (2002).

[114] See Andersen & Blessing, op. cit., at ∂ 22.02[2][a]; Richard L. Doernberg, Multiparty Financing Regulations, op. cit., at 524ñ27; Ernest R. Larkins, U.S. Income Tax Treaties in Research and Planning: A Primer, 18 Virginia Tax Review 1 (1998), at 200ñ01.

[115] OECD, Model Tax Convention, op. cit., at 53; see also id., at 63ñ64.

[116] See note 56 and accompanying text.

[117] Joel D. Kuntz & Robert J. Peroni, U.S. International Taxation (Boston, MA: Warren, Gorham, & Lamont, 2005), at 2:∂ C1.05[1]; see also Richard L. Doernberg, Branch Profits Tax, op. cit., at 176.

[118] U.S. Code Annotated, op. cit., at 26:ß 884(e), (f)(3).

[119] Code of Federal Regulations, op. cit., at 26:ß 1.884-1(g)(1); ß 1.884-4(b)(8), -4(c)(3).

[120] Id., at 26:ß 1.884-5.

[121] Andersen & Blessing, op. cit., at ∂ 1.03[1][a][iii]; Richard L. Doernberg, Branch Profits Tax, op. cit., at 185ñ87.

[122] See note 62 and accompanying text.

[123] U.S. Code Annotated, op. cit., at 26:ß 7701(l).

[124] Treasury Decision 8611, Cumulative Bulletin (Washington, D.C.: U.S. Department of Treasury, 1995), at 2:286.

[125] Code of Federal Regulations, op. cit., at 26:ß 1.881-3(a)(2)(i).

[126] Id., at 26:ß 1.881-3(a)(3)(i), -3(a)(4).

[127] Id., at 26:ß 1.881-3(a)(3)(ii)(A), (C).

[128] See note 62 and accompanying text; see also Andersen & Blessing, op. cit., at ∂ 10.02[2][g]; Richard L. Doernberg, Overriding Tax Treaties, op. cit., at 110ñ15.

[129] See note 64 and accompanying text.

[130] Code of Federal Regulations, op. cit., at 26:ß 1.894-1(d). In this context, hybrid entities are entities that are fiscally transparent for purposes of the Code but not for purposes of the treaty partner’s tax laws, while reverse hybrid entities are entities that are not fiscally transparent for purposes of the Code but that are for purposes of the treaty partner’s tax laws. Id.

[131] See note 64 and accompanying text; see also Anthony C. Infanti, The Proposed Domestic Reverse Hybrid Entity Regulations, op. cit., at 309ñ10.

[132] OECD, Model Tax Convention, op. cit., at 54 (emphasis added).

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Professor of Law, University of Pittsburgh, Pittsburgh, USA