The United States Tax Court has applied the “later in time” rule in holding that an Internal Revenue Code (“Code”) provision overrides a provision of the U.S.-Canada treaty designed to prevent the double taxation of U.S. citizens residing in Canada. This case illustrates that treaty provisions cannot be applied in a vacuum, but must be analyzed in conjunction with the statutory provisions with which they may conflict.
The issue before the Tax Court was whether a provision in the Code that limits the amount of foreign tax credits that can be used to reduce a taxpayer’s alternative minimum tax (“AMT”) liability controlled or whether a provision in the U.S. – Canada treaty controlled. The court explained that where a statute and a treaty pertain to the same subject matter, they must be construed to give effect to both if at all possible. If this is not possible, the “later in time” rule prevails. Under that rule, statutes and treaties have equal legal status, and the latter in time to be enacted will prevail.
Constrained to follow a precedent in the judicial circuit in which the taxpayers’ case would be appealable, the court found that the statute was “later in time” notwithstanding certain amendments to the treaty that postdated the enactment of the statute. Accordingly, the court upheld the Internal Revenue Service’s position that the taxpayers were limited in the amount of foreign tax credits that could be taken into account for AMT purposes.