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By Thomas S. Bissell, CPA
It is clear that Congress has long had the ability to enact a statute that has the effect of abrogating — and thus rendering null and void for all U.S. tax purposes — part or all of the provisions of a tax treaty that has at some time in the past been duly approved by the U.S. Senate and ratified, and which would remain fully in effect in the absence of the new statute. Although Congress was historically reluctant to do this, in recent decades it has felt less constrained to enact statutes that have this effect. Symptomatic of this trend was the enactment in 1988 of §7852(d)(1) (as part of the Technical and Miscellaneous Act of 1988 (TAMRA)), which provides, "For 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."
It does not appear that the enactment of §7852(d)(1) actually changed what might be called the "common law" in this area, because Congress had previously enacted new rules under the 1954 Code that had the effect of nullifying certain tax treaty provisions. The 1954 Code itself had provided that the provisions of all tax treaties that were in effect as of August 16, 1954, were to prevail over any conflicting statutes, but only those that were already in effect on that date. After 1954 and prior to the enactment of §7852(d)(1), Congress did indeed enact statutes that specifically abrogated any contrary provisions in pre-existing tax treaties — most notably with the enactment of the Foreign Investment in Real Property Tax Act (FIRPTA) rules in 1980. On other occasions, Congress specifically declared that it was aware of its power to nullify certain tax treaty provisions, but stated that it chose not to do so — most notably in the Foreign Investors Tax Act of 1966 (FITA). Indeed, TAMRA itself contained a separate provision stating that when Congress enacted a "minimum tax" (AMT) limitation to the individual foreign tax credit two years earlier, it had intended to override all inconsistent tax treaties. Thus, the enactment of §7852(d)(1) in 1988 was apparently meant to clarify to both taxpayers and to the courts that Congress did indeed have the power to abrogate a pre-existing tax treaty, and would continue on occasion to exercise that power. This seems clear from the very detailed discussion of the §7852(d)(1) language in the 1988 Senate Finance Committee Report on Pub. L. No. 100-647.1
Although it is clear that Congress may nullify — i.e., "override"2 — an existing tax treaty, the 1988 legislative history of §7852(d)(1) makes clear that if a newly enacted statute conflicts with an existing treaty, and if the enacting legislation itself does not specifically say which is to prevail (as was done, for example, in both the FIRPTA and the FITA legislation), then the legislative history (primarily the related committee reports) must be examined in order to determine which is to prevail. In some situations the legislative history may be extensive and detailed, as was the case when Congress expanded the "anti-expatriation" rules of §877 in 1996, or it may be extremely brief, as occurred when Congress repealed the per-country foreign tax credit limitation in 1976. Even if there is no language in the enacting legislation on how to resolve a treaty conflict, and no language in the legislative history on this subject, Congress may express its intention "retroactively" by commenting on the earlier legislation when it writes the committee reports that accompany the enactment of a subsequent law on a related subject. For example, when Congress enacted §901(f) and §907 in 1975 to restrict the foreign tax credits available to certain oil and gas companies, neither the enabling legislation nor the committee reports mentioned the issue of a treaty override, but when Congress repealed the per-country foreign tax credit limitation a year later, the committee reports stated (and then even only impliedly) that the earlier 1975 legislation had been intended to override all tax treaties. The IRS cited the 1976 committee reports in Rev. Rul. 80-223 in holding that the 1975 law had indeed overridden all tax treaties.3
Thus, the intent of §7852(d)(1) seems to be to give considerable deference to any comments, however brief, that may appear in the legislative history of a new statute that conflicts with an existing treaty, or even in the legislative history of a subsequent statute that covers a similar subject. What is not at all clear, however, is which prevails where the legislative history is totally silent on the question. Although the 1988 legislative history does not discuss this issue in detail, the 1988 Senate Finance Committee Report makes clear that silence should not be construed to mean that no override has occurred with respect to inconsistent tax treaties. In part, the Committee was concerned with the following identical language that the IRS had included eight years earlier in both Rev. Rul. 80-223 (cited above) and in Rev. Rul. 80-201: "The courts do not favor repudiation of an earlier treaty by implication and require clear indications that Congress, in enacting subsequent inconsistent legislation, meant to supersede the earlier treaty." In disagreeing with this language, the Committee stated specifically that "it would be erroneous to assert that the absence of legislative history mentioning a treaty was sufficient" to conclude whether or not a new statute had the effect of overriding an existing treaty. Thus, the Committee stated that although a treaty override would definitely occur if either the statute or the legislative history specifically so stated, a treaty override could nevertheless occur even if the statute and the legislative history were both silent on the question. The Committee Report does mention a "residual later-in-time rule," but at the same time it gives several examples of statutes (both hypothetical and actual) where a treaty override either would or would not occur in the absence of any mention of treaties in either the statute or in the legislative history. Subsequently, the Conference Committee Report on §7852(d)(1) adopted the same position in stating that if the legislative history of the statute is silent on the question, then "taxpayers and the IRS can look beyond the Code to determine the proper tax treatment of the item of income in question."
Based on the legislative history of §7852(d)(1) itself, therefore, it seems clear that if a conflict exists between a treaty and a later-enacted statute, and if the statute and its legislative history are both silent on the override issue, there may be a slight presumption in favor of an override under a "later-in-time rule," but nevertheless all other possibly relevant provisions of other treaties, statutes, court decisions, statements by individuals in the legislative and executive branches, and indeed statements by outside commentators, should be considered. Such an approach clearly seems appropriate, especially because statutes that conflict with pre-existing treaties are often enacted by Congress without time for the responsible committees to consider the potential conflicts.4
Since the enactment of §7852(d)(1) in 1988, it does not appear that the IRS or the courts have ruled on the "silence" question. The question is nevertheless important. Since 2004, the author is aware of at least three instances in which Congress has enacted statutes that conflict with pre-existing treaty provisions, and where both the statute and the legislative history are silent. In 2004, Congress enacted a new excise tax under §4985 that may be imposed on nonresident alien "insiders" of an expatriating U.S. corporation.5 In 2008, Congress enacted a new transfer tax that may be imposed under §2801 on U.S. citizens and residents who receives gifts or bequests from a so-called "covered expatriate" (within the meaning of §877A). And in 2010, Congress enacted the new 3.8% "net investment income tax" (NIIT), which can apply to U.S. citizens and resident aliens with respect to foreign-source income but without the allowance of a statutory foreign tax credit for foreign income tax on the same income.6 All three of these provisions conflict with numerous pre-existing tax treaties, yet both the statute and the legislative history are silent on this issue. Doubtless there have been other instances since the enactment of §7852(d)(1) in 1988 in which a newly enacted statute conflicted with pre-existing treaties, and where Congress gave no hint on how to resolve the conflict.
Because of the importance of this issue, a subsequent commentary will explore how the Code/treaty conflict might be resolved in the three instances just cited. In the meantime, the author welcomes any additional citations that readers might provide on other instances in which this issue has arisen since 1988.
This commentary also appears in the July 2016 issue of the Tax Management International Journal. For more information, in the Tax Management Portfolios, see Nauheim and Scott, 938 T.M., U.S. Income Tax Treaties — Income Not Attributable to a Permanent Establishment, and in Tax Practice Series, see ¶7160, U.S. Income Tax Treaties.
1 The Senate Finance Committee Report expressed the Committee's concern "that there are some who assert that treaties receive preferential treatment in their interaction with statutes … ," and it cites an example where the IRS had apparently taken this position (although subsequently withdrawn) under the 1986 Act.
2 Up to this point (other than in the title to this commentary), the author has avoided using the term "override," because his most recent commentary used the word "override" to refer to a situation in which a provision in a tax treaty that is fully in effect "overrides" a contrary provision in the Code — in that case, §4985. However, because most commentators who discuss the subject of this commentary use the term "override" — i.e., enactment of a federal statue that "overrides" an existing treaty — the rest of this commentary will use the term "override," instead of "abrogate" or "nullify."
3 The ruling stressed, however, that the committee reports under the subsequent 1976 legislation were authoritative legislative history for the earlier 1975 legislation, because both statutes had been enacted by the same Congress (the 94th Congress). The ruling stated that "… comments made by a subsequent Congress on the meaning of an earlier Congress are not considered part of the legislative history of the earlier act … They are entitled to consideration as a secondarily authoritative expression of expert opinion." (Emphasis added.) This comment is obviously correct, because the political make-up of the subsequent Congress may be very different from that of the previous Congress that enacted the statute in question. It should be noted that the retroactive override of treaties that occurred as part of the 1988 TAMRA legislation with respect to the prior enactment in 1986 of the AMT foreign tax credit limitation was done as part of the TAMRA legislation itself, and not solely by way of a comment in a committee report. See Pub. L. No. 100-647, §1012(aa)(2)(B).
4 It should be stressed that if the subsequently enacted statute provides a more favorable result — for example, by decreasing the rate of a statutory withholding tax on a particular kind of income — the statutory change could clearly be claimed (even in the absence of any mention of treaties in the statute or its legislative history) by application of the rule that a treaty cannot increase a taxpayer's U.S. tax as calculated under U.S. domestic law, but may only reduce that tax.
5 See Bissell, The Potential §4985 Excise Tax on "Insiders" of an Expatriating U.S. Corporation, 45 Tax Mgmt. Int'l J. 161 (March 11, 2016); Bissell, Application of the §4985 Anti-Inversion Excise Tax to Nonresident Alien "Insiders", 45 Tax Mgmt. Int'l J. 222 (April 8, 2016); and Bissell, Do U.S. Income Tax Treaties Override the §4985 Anti-Inversion Tax on NRA Insiders? 45 Tax Mgmt. Int'l J. 348 (June 10, 2016).
6 See Bissell, Foreign Tax Credit Issues Under the New §1411 "Additional Medicare Tax" [another name for the NIIT], 42 Tax Mgmt. Int'l J. 232 (April 12, 2013), and Blanchard, The Application of §1411 to Income from CFCs and PFICs, 45 Tax Mgmt. Int'l J. 127, 133 (March 8, 2013).
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