Kappus v. C.I.R.

• Decision Date: 08 August 2003
• Docket Number: No. 02-1145.,02-1145.
• Citation: 337 F.3d 1053
• Parties: Tom KAPPUS and Louise Kappus, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 1053

337 F.3d 1053

Tom KAPPUS and Louise Kappus, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

No. 02-1145.

United States Court of Appeals, District of Columbia Circuit.

Argued March 21, 2003.

Decided August 8, 2003.

Appeal from the United States Tax Court (No. IRS-16512-99).

Lawrence P. Postol argued the cause and filed the briefs for appellants.

Frank P. Cihlar, Attorney, U.S. Department of Justice, argued the cause for appellee. With him on the brief was Robert J. Branman, Attorney. John A. Nolet, Attorney, entered an appearance.

Before: GINSBURG, Chief Judge, and EDWARDS and GARLAND, Circuit Judges.

Opinion for the court filed by Circuit Judge GARLAND.

GARLAND, Circuit Judge:

Tom and Louise Kappus, United States citizens living in Canada, appeal from a decision of the United States Tax Court denying their challenge to a notice of deficiency in their federal income tax issued by the Commissioner of Internal Revenue. The Kappuses claimed a credit against their U.S. tax for all of the taxes they paid to Canada on their Canadian-source income, leaving them with no U.S. tax liability. The Commissioner argues that section 59(a)(2) of the Internal Revenue Code, 26 U.S.C. § 59(a)(2), limits the allowable foreign tax credit to 90% of a taxpayer's alternative minimum tax liability. The Kappuses counter that this section violates the terms of a tax treaty between the United States and Canada. We conclude that, even if the appellants are correct that the treaty and statute are in conflict, the statute must prevail under the "last-in-time" rule. We therefore affirm the judgment of the Tax Court.

I

The parties have stipulated to the relevant facts. Tom and Louise Kappus are United States citizens who resided and worked in Canada during 1997. On their 1997 joint federal income tax return, they reported taxable income of $244,211 and a "regular" income tax liability of $69,410. They then reduced that liability to zero by applying a foreign tax credit of $69,410 based on their payment of Canadian income taxes. See 26 U.S.C. §§ 27(a), 901. In addition to the regular tax, the Kappuses were subject to the alternative minimum tax (AMT) imposed by 26 U.S.C. § 55(a).¹ They reported a pre-credit tentative minimum tax of $61,556. However, they claimed an AMT foreign tax credit of $61,556, see id. §§ 55(b)(1), 59(a)(1), reducing their alternative minimum tax to zero as well. The Kappuses attached a statement to their joint return in which they claimed that they were not subject to 26 U.S.C. § 59(a)(2), which provides that the AMT foreign tax credit may not exceed 90% of a taxpayer's pre-credit tentative minimum tax. They claimed that exemption on the basis of a tax treaty between the United States and Canada. See Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital, Sept. 26, 1980, U.S.-Can., T.I.A.S. No. 11,087 [hereinafter "U.S.-Canada Tax Treaty" or "Treaty"].

On May 28, 1999, the Commissioner sent the Kappuses a notice of deficiency in their 1997 tax, stating that they should have paid $6,152. That amount was equal to 10% of their pre-credit tentative minimum tax as recalculated by the Commissioner,² who applied § 59(a)(2)'s 90% cap on the AMT foreign tax credit. The Kappuses filed a petition with the Tax Court contesting the Commissioner's determination. They argued that § 59(a)(2) was in direct conflict with the U.S.-Canada Tax Treaty, and that in such a circumstance the most recent provision must govern under the last-in-time rule. Although the Treaty went into effect in 1984, two years before the enactment of § 59(a)(2), the Kappuses contended that protocols (amendments) to the Treaty ratified in 1995 and 1997 implicitly repealed § 59(a)(2) and represented the most recent relevant enactments. In response, the government argued that the Treaty and § 59(a)(2) were not in conflict, and that even if they were, § 59(a)(2) would prevail as the last in time because nothing in the subsequent protocols conflicted with the statute. The parties stipulated that, if the legal questions were decided in the Commissioner's favor, the Kappuses' 1997 tax deficiency would amount to $6,152.

On February 13, 2002, the Tax Court issued a final decision in favor of the Commissioner, holding the Kappuses liable for income tax in the amount of $6,152. The Kappuses now appeal to this court. We review the Tax Court's judgment de novo because it rests solely on a determination of law. See Flynn v. Comm'r of Internal Revenue, 269 F.3d 1064, 1068 (D.C.Cir. 2001).³

II

All American citizens are subject to U.S. taxes, regardless of where they live or earn their income. See 26 C.F.R. § 1.11(b); see also Cook v. Tait, 265 U.S. 47, 56, 44 S.Ct. 444, 68 L.Ed. 895 (1924). Citizens living and working abroad must therefore report their foreign-source income to the Internal Revenue Service. Taxes on such income, however, may often be offset under U.S. law by credits for taxes paid to foreign governments, and are also subject to limitations imposed by bilateral tax conventions, such as the U.S.-Canada Tax Treaty.

Article XXIV of that treaty, entitled "Elimination of Double Taxation," reads in relevant part:

1. In the case of the United States, subject to the provisions of paragraphs 4, 5, and 6, double taxation shall be avoided as follows: In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a citizen or resident of the United States... as a credit against the United States tax on income the appropriate amount of income tax paid or accrued to Canada....

. . .

4. Where a United States citizen is a resident of Canada, the following rules shall apply:

(a) Canada shall allow a deduction from the Canadian tax in respect of income tax paid or accrued to the United States in respect of profits, income or gains which arise ... in the United States, except that such deduction need not exceed the amount of the tax that would be paid to the United States if the resident were not a United States citizen; and

(b) for the purposes of computing the United States tax, the United States shall allow as a credit against United States tax the income tax paid or accrued to Canada after the deduction referred to in subparagraph (a). The credit so allowed shall not reduce that portion of the United States tax that is deductible from Canadian tax in accordance with subparagraph (a).

U.S.-Canada Tax Treaty art. XXIV (italics and underlining added). The Kappuses contend that under paragraph 4(b), the United States is required to grant a credit for the entire amount of the Canadian tax that they paid on the income they earned in Canada while residing there.

The Commissioner counters that paragraph 1 of Article XXIV subjects the required credit to "the limitations of the law of the United States," and that the law applicable to the appellants' situation, 26 U.S.C. § 59(a)(2), caps their AMT foreign tax credit at 90% of their pre-credit tentative minimum tax liability. Section 59(a)(2) states, in relevant part:

(2) Limitation to 90 percent of tax. —

(A) In general. — The alternative minimum tax foreign tax credit for any taxable year shall not exceed the excess (if any) of —

(i) the pre-credit tentative minimum tax for the taxable year, over

(ii) 10 percent of the amount which would be the pre-credit tentative minimum tax....

26 U.S.C. § 59(a)(2). The Kappuses agree that, but for the Treaty, this provision would have obligated them to pay an alternative minimum tax equal to 10% of their pre-credit tentative minimum tax liability, and they acknowledged as much in the statement they attached to their 1997 return.

Where a treaty and a statute "relate to the same subject, the courts will always endeavor to construe them so as to give effect to both, if that can be done without violating the language of either." Whitney v. Robertson, 124 U.S. 190, 194, 8 S.Ct. 456, 31 L.Ed. 386 (1888); see Xerox Corp. v. United States, 41 F.3d 647, 658 (Fed. Cir.1994). The Kappuses contend that harmonization is not possible here because the Treaty flatly bars the application of § 59(a)(2). As a consequence, they argue that the Treaty — as the provision that is the last in time — must govern. See infra Part III. The Commissioner contends that the two can be read in harmony, but that even if they cannot, it is the statute that is the last in time.

The parties' dispute over the meaning of the Treaty centers on Article XXIV. According to the Commissioner's interpretation, the general obligation imposed by paragraph 1 of that article, that the United States allow its citizens a credit for income taxes paid to Canada, is "subject to the limitations of the law of the United States" — the phrase that we have underlined in the excerpt from the Treaty set out above. And because § 59(a)(2) is just such a limitation, the Commissioner continues, the Treaty permits its application. The Kappuses respond that the underlined proviso is itself "subject to the provisions of paragraphs 4, 5, and 6" — the phrase that we have italicized above — because that limitation precedes the underlined proviso and therefore modifies it. And paragraph 4(b), they continue, requires that U.S. citizens who reside in Canada be fully credited for their Canadian taxes. In reply, the Commissioner disagrees that the order of the phrases is controlling, but argues that even if it is, paragraph 4 does not bar the application of § 59(a)(2). In his view, that paragraph does not impose a substantive obligation on the United States to grant a tax credit, but rather "merely provides rules for determining the order in which deductions or credits for taxes paid to the other jurisdiction are to be applied when the same income is subject to tax by both." Appellee's Br. at 17-18.

The question of whether...