Rev. Rul. 79-199

ISSUE

Can an individual entitled to the foreign tax credit under a United States income tax treaty claim such credit notwithstanding the limitation of section 911(a) of the Internal Revenue Code of 1954?

FACTS

In taxable year 1978, the taxpayer, a United States citizen, earned income in country X and paid income tax on such amount to country X. Pursuant to section 209(c) of the Foreign Earned Income Act of 1978 (the "FEI Act"), Pub. L. 95-615, 1978-2 C.B. 415, 422, the taxpayer elected to exclude the income earned in country X under section 911(a) of the Code before it was amended by the FEI Act and claimed the income tax paid to country X as a credit against the taxpayer's United States income tax. The United States has an income tax treaty with country X allowing the income tax imposed by country X to be credited against the United States income tax.

LAW AND ANALYSIS

The applicable sections of the Code are 901, relating to the foreign tax credit, and 911, relating to the exemption of foreign income from United States taxation.

Section 901(b) of the Code authorizes qualifying United States taxpayers to claim a foreign tax credit for the amount of any income tax paid or accrued during the taxable year to any foreign country or to any possession of the United States.

Prior to its amendment by section 1011 of the Tax Reform Act of 1976 (the "1976 Act"), Pub. L. 94-455, 1976-3 C.B. (Vol. 1) 1, 86, section 911 of the Code provided for the exclusion of $20,000, or in certain cases $25,000, of foreign source earned income from United States taxation. However, foreign taxes paid on such excludable income were creditable against any United States tax the taxpayer was liable for on income above the $20,000 or $25,000 excludable limits.

Section 1011 of the 1976 Act amended section 911 of the Code to reduce the $20,000 or the $25,000 excludible limits to $15,000 and to provide that a taxpayer claiming an exclusion under section 911 would not be allowed a foreign tax credit for taxes allocable to income excluded under section 911.

The FEI Act made major revisions in the tax treatment of income earned abroad by United States citizens and residents. Section 209(c) of the FEI Act provides that a taxpayer may elect not to have the amendments made by the FEI Act apply with respect to any taxable year beginning after December 31, 1977, and before January 1, 1979.

A number of income tax treaties between the United States and foreign countries provide for the allowance of a foreign tax credit. Some of such treaties incorporate the foreign tax credit provisions of the Code as of the effective date or ratification date of the treaty involved. Other treaties, however, incorporate the foreign tax credit provisions of the Code "as it may be amended from time to time."

Article VI, Clause 2 of the United States Constitution provides that both laws of the United States and treaties shall be the supreme law of the land.

Because treaties and acts of Congress are given equal weight by the Constitution as domestic law, Congress has the authority to overrule the effect of a treaty by subsequent legislation. When an act of Congress and a treaty relate to the same subject, the courts will endeavor to construe them so as to give effect to both, if that can be done without violating the language of either. The courts do not favor the repudiation of an earlier treaty by implication and require clear indications that Congress, in enacting subsequent inconsistent legislation, meant to supersede the earlier treaty. Head Money Cases, 112 U.S. 580, 597-99 (1884); United States v. Payne, 264 U.S. 446, 448 (1924); and Menominee Tribe of Indians v. United States, 391 U.S. 404 (1967).

Section 1011 of the 1976 Act also added section 911(e)(1) of the Code which provides that an individual entitled to the benefits of section 911 may elect not to have the provisions of section 911 apply. By including this election, Congress gave the individual the opportunity to choose the exclusion under section 911 or a foreign tax credit. While an individual is no longer entitled to both benefits, the right to claim a foreign tax credit under the treaty provisions or the Code for foreign taxes paid and attributable to the section 911 income has not been denied.

Consequently, the foreign tax credit provisions of the treaties and the amendments to section 911 of the Code can and should be construed to avoid the repudiation of treaty commitments without frustrating the intent of Congress to eliminate the double benefits available under section 911 as it existed prior to the 1976 Act. Although the modifications of section 911 under the 1976 Act reduce the tax benefits of the United States citizens working abroad, the modifications do not affect the rights of these individuals to take advantage of the foreign tax credit provisions of United States income tax treaties with respect to income that is not eligible for the section 911 exclusion or as to which the benefits of section 911 are not elected. Therefore, section 911, as amended by the 1976 Act, is not contrary to any treaty obligation. The availability of the double benefit of a foreign tax credit with respect to income exempt from taxation under section 911 was not specifically intended under any tax treaty.

HOLDING

An individual entitled to a foreign tax credit under a United States income tax treaty with a foreign country cannot claim the credit if the credit is allocable to income the individual has chosen to exclude from gross income under section 911 of the Code.