CONGRESSIONAL UNILATERAL TAX TREATY OVERRIDES:


699 

FLORIDA TAX REVIEW 
VOLUME 9     2009                                                         NUMBER 7 

 

 

CONGRESSIONAL UNILATERAL TAX TREATY OVERRIDES:  

THE “LATTER IN TIME DOCTRINE” IS OUT OF TIME!

 

 

 
Professor Mark J. Wolff

1 
 
 

 

I.  INTRODUCTION………………………………………………700 

II. INTERNATIONAL TAX POLICY…………...……..……….….704 

III. COMPARISON OF TREATY RATIFICATION AND DOMESTIC  

TAX LAW ENACTMENT……………………..........................705 

IV. TREATY OVERRIDES DEFINED……………………………...709 

V. THE IMPACT OF THE SUPREMACY CLAUSE………………..710 

VI. TREATY OVERRIDES AND THE INTERNAL  
REVENUE CODE ……………………………………………..731 

VII. CONCLUSION…..…………………………………………….748 

 

 

 

 

 

 

 

 

 

 

 
                                                           


 All citations herein are to the 2006 Internal Revenue Code, 26 U.S.C. §§ 

1-9833 (2006) (unless otherwise indicated). 

1. Professor Wolff currently enjoys the rank of tenured full Professor of 

Law at St. Thomas University School of Law, and over the past twenty-one 

academic years has specialized in teaching courses in various areas of 

Federal Income Taxation, Comparative International Taxation, Tax Policy, Agency 

and Partnership, Corporations, Corporate Taxation, and Contracts, as well as 

Advanced Jurisprudence Seminars related to the United Nations, International 

Monetary Fund, World Bank, World Trade Organization, Financing for 

Development and international tax cooperation. 



700                                                 Florida Tax Review                                   [Vol. 9:7  

I.  INTRODUCTION 

 

 The current form of globalization has resulted in greater global 

economic integration and liberalization, political openness, and cultural and 

social acceptance. As the world economy continues to weaken national 

economic orders, and as nations become more dependent upon international 

trade, good relations between nations may provide greater global wealth and 

political stability.
2
 Global integration requires a “cooperative multilateralist” 

approach, encouraging international alliances, partnerships and institutions.
3
  

The current global shift, however, finds the United States in a period 

of protectionism.
 
As a result of 9/11, the United States has begun a strategy 

of preemption, one triggered at creating measures aimed at preventing 

substantial casualties to the U.S., whether military or economic.
4
 The actions 

taken in furtherance of this strategy, such as the invasion of Iraq without the 

consent of the Security Council, altered the perception of the United States 

around the world.
5
 Furthermore, these actions were in direct contradiction of 

                                                           

2. Richard N. Haas, The Age of Nonpolarity: What will follow U.S. 

Dominance, Foreign Affairs, 44 May/June 2008. “Trade can be a powerful tool of 

integration. It gives states a stake in avoiding conflict because instability interrupts 

beneficial commercial arrangements that provide greater wealth and strengthen the 

foundations of domestic political order. Trade also facilitates development, thereby 

decreasing the chance of state failure and alienation among citizens.” Id. at 54. 

3. Id. “Encouraging a greater degree of global integration will help promote 

stability. Establishing a core group of governments and others committed to 

cooperative multilateralism would be a great step forward.” Id. at 56. 

4. David Hendrickson, The Curious Case of American Hegemony: Imperial 

Aspirations and National Decline, World Policy Journal, 1, 2005. The United States 

“broke from the Cold World doctrines of containment and deterrence, arguing that 

the threat posed by terrorists and rogue states justified a strategy of preventive war, 

which it called the strategy of preemption.” Id. 

5. Robert Kagan, America’s Crisis of Legitimacy, Foreign Affairs, 

Mar./Apr. 2004. The global situation is now inverted, “where once the United States 

risked its own safety to defend the vital interests of a threatened Europe, a threatened 

United States was now looking out for itself in apparent, and sometimes genuine, 

disregard for what many Europeans perceived to be their moral, political and 

security interests.” Id. “Europeans objected to the U.S.’s willingness to go to war 

without the Security Council’s approval – that is, without Europe’s approval – 

challenged both Europe’s world view and its ability to exercise even a modicum of 

influence in the new unipolar system.” Id.  See also Michael Cox, Empire by Denial: 

the Strange Case of the United States, International Affairs, Volume 81, 2005. The 

world has been led into an “age of unparalleled U.S. dominance and global terror, 

where it looks as if the United States has now arrogated to itself the international role 

of setting standards, determining threats, using force and meting out justice. Define 

it as unilateralism, call it necessary response to new threats: it still looks like 

imperialism and empire.” Id. 



2009]                        Congressional Unilateral Tax Treaty Overrides                    701 

 

 
 

Secretary of State Condoleezza Rice’s pledge to “support and uphold the 

system of international rules and treaties that allow us to take advantage of 

our freedom.”
6
  

International tax treaties are a vital instrument in developing and 

stimulating economies throughout the world.
7
 Countries enter into tax 

treaties to promote investment, growth, and commerce by avoiding double 

taxation and preventing tax evasion.
8
 Unilateral actions, such as Congress 

amending the tax code to override an international tax treaty, bear significant 

negative impacts upon the potential development of economies and the 

political relationship between the nations.
9
 Congress’ ability to override 

                                                           

6. Hendrickson, supra note 4. Note that pre-9/11 the government still 

retained protectionist views. John Bolton stated in 1999, “it is a big mistake for us to 

grant any validity to international law even when it may seem in our short-term 

interest to do so – because, over the long term, the goal of those who think that 

international law really means anything are those who want to constrict the United 

States.” Id. 

7. See generally, Pending Income Tax Agreements: Hearing before the S. 

Comm. on Foreign Relations, 109th Cong. 1 (2006). (testimony of Patricia A. 

Brown, Deputy International Tax Counsel (Treaty Affairs), United States 

Department of the Treasury). Opening Statement For Hearing on Tax Treaties: 

Bangladesh, France and Sweden 109th Cong. 1, (2006) (opening statement of 

Richard G. Lugar, Chairman, S. Comm. on Foreign Relations, (testimony of the 

Staff, J. Comm. on Taxation), The Ratification of an Income Tax Treaty and Various 

Protocols Before the Senate Committee on Foreign Relations 109th Cong. 1 2006) 

(testimony of William A. Reinsch, President, National Foreign Trade Council), 

Renato Ruggiero, The High Stakes of World Trade, Wall St. J., Apr. 28, 1999, at 

A18.  

8. William H. Newton, III, International Income Tax and Estate Planning, 

405 (West 2nd ed. 2004). “Double taxation occurs when two jurisdictions, due to 

overlapping authority, tax the same income or assets. The effect discourages 

investment and creates artificial barriers to the free flow of commerce. Both 

international cooperation and goodwill are correspondingly undermined.” Id. “Tax 

treaties also limit fiscal evasion by authorizing close administrative coordination and 

mutual exchange of information between contracting jurisdictions.” Id. at 405-6 

(citations omitted). Another form of tax evasion occurs through treaty shopping. 

“[T]reaty shopping is the practice of rerouting income through one or more artificial 

entities in different countries for the main or sole purpose of obtaining treaty benefits 

that are not directly available to the true earner of income.” Simone M. Haug, The 

United States Policy of Stringent Anti-Treaty Shopping Provisions: A Comparative 

Analysis, 29 Vand. J. Transnat’l L. 191, 205 (1996).  

9. Richard L. Doernberg, Overriding Tax Treaties: The U.S. Perspective, 9 

Emory Int’l L. Rev. 71, 71 (1997) Such actions have caused treaty partners to come 

to expect that the United States will breach its treaty obligations because the later-in-

time doctrine causes domestic tax law to supersede prior agreements without due 

regard for prior treaty obligations.   



702                                                 Florida Tax Review                                   [Vol. 9:7  

these treaties negates the “anti-imperial” design of the Constitution and 

creates negative consequences for economic development and commerce.
10

 

In spite of this, treaties are often partially or completely abrogated in a 

unilateral fashion.  

It is vital for the United States to adhere to treaties into which it 

enters and pay heed to the reliance of other nations on these treaties. The 

United States “retains more capacity than any other actor to improve the 

quality of the international system, so the question is whether it will continue 

to possess such capacity.”
11

  

The determination of this question appears to depend on how the 

nation develops its’ international relations under the new leadership of 

President Barack Obama.
12

  President Obama believes “it is illegal and 

unwise for the President to disregard international human rights treaties that 

have been ratified by the United States Senate,” yet, the question remains 

whether he feels the same about overriding international tax treaties.
13

 

President Obama stated the United States is in need of repairing relationships 

with other nations, whereby strengthening its economic alliances and 

garnering the support for the United States to compete on a global scale.
14

 

                                                           

10. Bill Emmott, 20:21 Vision: Twentieth Century Lessons for the Twenty-

First Century, 2003. 

America’s constitutional domestic law has primacy over 

international treaties…Congress can alter the terms of any 

international treaty entered into by the administration, and all 

treaties need to be implemented through domestic laws. Not only 

is it wrong to imagine that America is a single, unified actor, it is 

also the case that the constitution was expressly designed by the 

Founding Fathers to prevent such a single actor from emerging… 

In international affairs that makes America especially difficult to 

deal with, since countries are accustomed to dealing with each 

other as sovereign governments, empowered to negotiate. The 

American system does its best to prevent the White House from 

being able to negotiate freely. 

Id. 

11.  Haas, supra note 2 at 53. 
12

 The question was of great importance in the 2008 Presidential Election and 

presented to Senator, former Presidential candidate, John McCain.  Senator McCain 

was quoted saying: “if there is a treaty that the Congress has ratified, we have chosen 

to make it the law of the land, and it must be obeyed under the terms that it was 

ratified.”  Questionnaire on Executive Power, Boston Globe, Dec. 20, 2007.  Senator 

McCain further pointed out that “demanding unilateral changes and threatening to 

abrogate an agreement that has increased trade and prosperity is nothing more than 

retreating behind protectionist walls.”  Mark Murray, McCain’s Day In Canada, Jun. 

20, 2008.  http://firstread.msnbc.msn.com/archive/2008/06/20/1158780.aspx. 

13. Boston Globe, supra note 12.   

14. Barack Obama, Renewing American Leadership, Foreign Affairs, 

http://firstread.msnbc.msn.com/archive/2008/06/20/1158780.aspx


2009]                        Congressional Unilateral Tax Treaty Overrides                    703 

 

 
 

Due to President Obama’s overwhelming dedication to international policy,
15

 

it seems inevitable the question will be answered sooner than expected, 

especially considering the historic lack of urgency to address this matter.   

This article examines the questionable jurisprudence allowing the 

United States to override treaties unilaterally, freely negotiated between two 

sovereign nations, through the later-in-time doctrine. Through the 

perspective of tax conventions, this article provides an overview of the 

historical development and context of unilateral treaty overrides. The 

following analysis will demonstrate the flawed reasoning behind the 

enactment of the later-in-time doctrine; the necessity to distinguish between 

Indian and sovereign nations; the contravention of the executive branch’s 

treaty powers; the flawed interpretations of the Supremacy Clause; and the 

growing requirement to fulfill international obligations.  

The analysis provides a plausible solution by applying a heightened 

scrutiny to domestic tax statutes attempting to override prior-in-time treaties. 

The call for heightened scrutiny is to be applied before potential overrides 

are granted; it is not meant to displace Congress’ power to override 

international tax treaties by way of the tax code. In the case that an override 

                                                                                                                                         

Jul./Aug., 2007. Senator Obama stated “to renew American leadership in the world, I 

intend to rebuild the alliances, partnerships, and institutions necessary to confront 

common threats and enhance common security. Needed reform of these alliances 

and institutions will not come by bullying other countries to ratify changes we hatch 

in isolation. It will come when we convince other governments and people that they, 

too, have a stake in effective partnerships… Our essential challenge is to build a 

relationship that broadens cooperation while strengthening our ability to compete.”  

Id. 

15. Stop Tax Haven Abuse Act, S. 681, 110th Congress (2007).  President 

Obama was a leading promoter of this bill aimed at the eradication of tax havens, 

which has substantial impact on the international economy.  Not only does the 

definition of tax havens vary, so does the estimated impact of tax havens on the 

world’s economy.  Certain analysts suggest that more than 50% of the world’s 

money goes through tax havens.  Nick Kochan, Cleaning Up by Cleaning Up, 

Euromoney, April 1991, at 73-77; Marcel Cassard, The Role of Offshore Centers in 

International Financial Intermediation (Int’l Monetary Fund Working Paper 

WP/94/107, 1994).  It is estimated that around 20% of total private wealth and 

around 22% of banks’ external assets are invested offshore.  Id.  See also, Diamond, 

Walter H. and Dorothy B. Diamond, Tax Havens of the World, 1, Newark, NJ: 

Matthew Bender Books (2002). Additionally, Walter and Dorthy Diamond estimate 

the current total assets located in tax havens at $5.1 trillion. Id.  Regardless of the 

scholar or the estimated impact, it is indisputable that tax havens have become an 

emerging consequence of today’s ever globalizing economy.  President Obama’s 

next steps at restoring the United States’ international relations, while trying to 

regulate them, is going to be of great importance to the United States’ economy and 

overall well-being.   



704                                                 Florida Tax Review                                   [Vol. 9:7  

is allowed, the void left from the unfulfilled obligations should spur the 

United States to make restitution to the parties injured. 

 

II. INTERNATIONAL TAX POLICY 

 

Because our ever-globalizing economies are becoming dependent on 

international trade, each country’s tax policy is important. Each country’s tax 

specialists and tax advisors need to be totally aware of the other countries’ 

tax policies to negotiate international tax treaties presenting a hospitable 

environment for foreign investors and also to protect their revenue base.
16

 

The tax policy is supposed to equalize taxes in cross-border transactions in 

which many small and medium size companies, as well as large companies, 

are now engaged.
17

  

The relationship between tax treaties and domestic tax legislation is 

complex in many countries. The basic principle is the treaty should prevail in 

the event of a conflict between the provisions of domestic law and a treaty.
18

 

One of the most important issues for many countries in international treaties 

is the risk to taxpayers of international double taxation.
19

 International tax 

extends beyond the income tax. It may include estate taxes, gift taxes, 

inheritance taxes, general wealth taxes, sales taxes, customs duties, and a 

variety of special levies.
20

  

The goals of international tax treaties should be to get the country’s 

fair share of revenue from cross-border transactions, promote fairness, 

enhance the competitiveness of the domestic economy, and to neutralize 

capital-exports and capital imports.
21

 The list of U.S. tax treaties with 

                                                           

16. Brian J. Arnold & Michael J. McIntyre, International Tax Primer, 1 

(Kluwer Law Internat’l, 2d ed. 2002). 

17. Id. at 7. Almost all modern income tax treaties are based on the OECD 

Model treaty and the UN Model Treaty. Id. The OECD Model Treaty has been 

revised over 8 times, as late as 2002. Id. at 107. The UN Model Treaty was first 

published in 1980, revised in 2001, and is usually used by developing countries. Id. 

at 109.   

18. Id. at 104. 

19. Id. at 2. There are three types of double taxation that arise from conflicts 

over tax jurisdiction: source-source conflicts, residence-residence conflicts and 

residence-source conflicts, which is the most common because most countries tax on 

the basis of both the residence status of the taxpayer and the source of income. Id. at 

27. 

20. Id. at 4. 

21. Id. at 5. Three methods are commonly used for providing relief from 

double taxation: the deduction method, which is generally taxable at a higher 

effective rate, and the exemption and the credit methods, which usually give 

equivalent results. Id. at 31. On tax policy grounds, the credit method is supposed to 

be the best method for eliminating international double taxation. Id. at 37. But the 

debate about which method is better is often vigorous and emotional. Id. at 44.  



2009]                        Congressional Unilateral Tax Treaty Overrides                    705 

 

 
 

developing countries is growing rapidly. Although tax incentives have some 

supporters in the political arena, they are impossible to justify on the basis of 

tax policy principles. The costs of tax incentives are typically large, the 

benefits are uncertain, and very rarely do the benefits justify the likely 

costs.
22

 

 The challenge for future governments is to achieve a proper balance 

of cooperation and competition among taxing regimes.  Governments have 

been reluctant to act on a multilateral basis because they do not want to lose 

sovereignty over their tax policy. Globalization is a real threat to sovereignty. 

In the global economy, a unilateral approach to tax policy is obsolete, 

counterproductive, and ineffective. Some forms of cooperation are now 

necessary for governments to achieve their traditional tax policy objectives, 

and some forms of competition are helpful in promoting the best taxing 

practices.
23

 

 

III. COMPARISON OF TREATY RATIFICATION AND  

DOMESTIC TAX LAW ENACTMENT 

 

 Overriding a tax treaty is heavily influenced by the processes 

through which the treaties are ratified and domestic tax laws are enacted. The 

levels of influence of the two differ, due to the United States Constitution’s 

prescribed roles for the three branches of the government.
24

 The Executive 

                                                                                                                                         

Treaty relief is very important because it usually is more generous and it usually 

constrains a country’s ability to amend its domestic law to withdraw the double 

taxation relief afforded to nonresidents. Id. at 47. 

22. Id. at 52. 

23. Id. at 143-144. 

24. The Constitution confers the power to enact domestic tax laws on the 

House of Representatives, part of the legislative branch of the United States 

government. U.S. Const. art. I, § 7, cl.1. (“All Bills for raising Revenue shall 

originate in the House of Representatives; but the Senate may propose or concur 

with Amendments as on other Bills.”). The Constitution places the power to enter 

into treaties on the President and executive branch, subject to two-thirds ratification 

by the Senate. U.S. Const. art. II, § 2, cl. 2. (“He shall have Power, by and with the 

Advice and Consent of the Senate, to make Treaties, provided two thirds of the 

Senators present concur . . .”). When the House of Representatives enacts a domestic 

law that directly conflicts with a treaty provision, under current U.S. jurisprudence 

the domestic law overrides the treaty provision and therefore, the House of 

Representatives is impinging upon the executive’s treaty powers. This procedure has 

been exasperated since the amendment to the language of the 1954 Code. The 

language as amended allows Congress to give due regard to any treat obligation and 

still tax an item that is exempt from taxation under the treaty. Also, in 1988, the 

House of Representatives amended § 7852(d)(1) providing that “[f]or purposes of 

determining the relationship between a provision of a treaty and any law of the 



706                                                 Florida Tax Review                                   [Vol. 9:7  

branch vests the power to create treaties whereby the process begins with 

negotiations between representatives of the President and the delegation of 

the other nation.
25

 After an agreement is reached, representatives from both 

sides sign the proposed treaty and the President forwards it to the Senate for 

its advice and consent. The Senate Foreign Relations Committee debates the 

merits of the proposed treaty and votes to accept or reject. During this 

debate, the Foreign Relations Committee seeks advice from the tax-writing 

committees in the House of Representatives and the Senate, despite them 

having no official jurisdiction.
26 

After consent is given by the Senate, the 

treaty is sent back to the Executive branch which decides whether to ratify.
27

 

The Executive branch maintains the ability to deny the treaty’s ratification if 

conditions relevant to the proposal have changed.
28

 

                                                                                                                                         

United States affecting revenue, neither the treaty nor the law shall have preferential 

status by reason of its being a treaty or law.” This latter provision reflects the U.S. 

rule that the “later in time” of either the treaty or the applicable statute controls. 

Under the U.S. Constitution, U.S. treaties and federal statutes have equal status as 

the supreme law of the land. U.S. Const. art. VI, cl. 2. Consequently, when a conflict 

exists between the treaty and the statute, the later in time prevails. See Restatement 

(Third) of the Foreign Relations Law of the United States § 115 (1986). For well 

over 100 years the United States has allowed this lack of uniformity and certainty to 

hinder the United States’ international relations. However, this impinging upon the 

executive’s treaty powers, whether intended or not, is inevitable due to the current 

domestic and international treaty enactment processes. See also IRC § 894(a) which 

provides “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.” 

(emphasis added).      

25. U.S. Const. art. II, § 2, cl. 2:  

He shall have power, by and with the advice and consent 

of the Senate, to make treaties, provided two thirds of the Senators 

present concur; and he shall nominate, and by and with the advice 

and consent of the Senate, shall appoint ambassadors, other public 

ministers and consuls, judges of the Supreme Court, and all other 

officers of the United States, whose appointments are not herein 

otherwise provided for, and which shall be established by law: but 

the Congress may by law vest the appointment of such inferior 

officers, as they think proper, in the President alone, in the courts 

of law, or in the heads of departments. 

26. Overriding Tax Treaties, supra note 9, at 77. The tax-writing committee 

in the House of Representatives is the only component of the House of 

Representatives which has input into the treaty making process. Such miniscule 

input helps explain the lack of comity among domestic and international tax 

legislation. 

27. U.S. Const. art. I § 7. 

28. Transcript of Senate Foreign Relations Hearing on Tax Treaties, 93 

TNT 225-23, Nov. 2, 1993: In 1981, the Senate gave its advice and consent to a 

treaty and protocol with Israel. The treaty was signed in 1975 and the protocol in 



2009]                        Congressional Unilateral Tax Treaty Overrides                    707 

 

 
 

 The process for creating domestic tax laws and their influence upon 

tax treaties differs from the process of ratifying a treaty. While all revenue 

bills are initiated in the House of Representatives, the Senate may exert its 

influence by amending tax legislation and voting to approve legislation 

originating in the House.
29

 The Executive branch creates tax bills which 

originate usually in the Department of Treasury or directly from the 

President. These bills, whether originating in Congress or the Executive 

branch, must be screened by the House and Senate before being vetoed or 

signed into law by the President. If the President vetoes the bill, it may still 

be passed into law if two-thirds of Congress overrides the veto.
30

 

 The most significant difference between the enactment of domestic 

tax laws and the treaty ratification process is the absence of an official role 

for the House of Representatives. One reason for the House’s exclusion is the 

Senate is expected to have an expertise in foreign politics,
31

 while the 

                                                                                                                                         

1980. Israel objected, however, to the final terms of the treaty and failed to ratify it. 

In 1986, Israel changed its views and asked whether the United States would be 

prepared to exchange instruments of ratification. In the meantime, the United States 

had adopted an anti-treaty shopping policy that was not reflected in the treaty. 

Consequently, the Treasury refused to exchange instruments of ratification until a 

new protocol was negotiated...     

29. U.S. Const. art. 1, § 7, cl. 1. (“All Bills for raising Revenue shall 

originate in the House of Representatives; but the Senate may propose or concur 

with Amendments as on other Bills.”); Overriding Tax Treaties, supra note 9, at 74-

76 (providing a thorough examination of the enactment process for a domestic tax 

statute which differs greatly from the international treaty enactment process). 

30. U.S. Const. art. 1, § 7, cl. 2.   

Every Bill which shall have passed the House of 

Representatives and the Senate, shall, before it become a Law, be 

presented to the President of the United States; If he approves he 

shall sign it, but if not he shall return it, with his Objections to that 

House in which it shall have originated, who shall . . .  proceed to 

reconsider it. If after such Reconsideration two thirds of . . . 

[Congress] . . . shall agree to pass the Bill, . . . it shall become a 

Law.  

31. The Federalist No. 64, at 432 (John Jay) (Jacob E. Cooke ed., 1961). 

The framers of the Constitution thought:  

[t]he power of making treaties is an important one, especially as it 

relates to war, peace and commerce; and it should not be delegated 

but in such a mode, and with such precautions, as will afford the 

highest security, that it will be exercised by men the best qualified 

for the purpose, and in the manner most conducive to the public 

good. Alexander Hamilton did not think that these qualities existed 

in the House of Representatives.  The fluctuating, and taking its 

future increase into the account, the multitudinous composition     



708                                                 Florida Tax Review                                   [Vol. 9:7  

founding forefathers intended for the House of Representatives to be the 

voice of the people and have power over domestic revenue laws.
32

 As the 

voice of the people, the House of Representatives has the primary role in 

enacting domestic tax laws and are answerable to their voters in their 

respective states.
33

 The Senate, on the other hand, which is not subject to re-

                                                                                                                                         

of . . . [the House of Representatives] . . . forbid us to expect in it 

those qualities which are essential to the proper execution of . . . 

[treaty powers]. Accurate and comprehensive knowledge of 

foreign politics; a steady and systematic adherence to the same 

views; a nice and uniform sensibility to national character, 

decision, secrecy and dispatch; are incompatible with the genius of 

a body so variable and so numerous.  

The Federalist No. 75, at 506-07 (Alexander Hamilton) (Jacob E. Cooke ed., 1961).  

However, it was believed that these qualities are found in Senators, as  

the age restrictions imposed on their offices should produce 

candidates of “whom the people have had time to form a 

judgment, and with respect to whom they will not be liable to be 

deceived by those brilliant appearances of genius and patriotism, 

which like transient meteors sometimes mislead as well as dazzle.  

Thus, ‘the president and   senators . . . will always be of the 

number of those who best understand our national interests . . . and 

whose reputation for integrity inspires and merits confidence.  

With such men the power of making treaties may be safely 

lodged.’ 

The Federalist No. 64, at 433 (John Jay) (Jacob E. Cooke ed., 1961).   

32. U.S. Const. art. 1, § 2, cl. 1 (“The House of Representatives shall be 

composed of Members chosen every second Year by the People of the several States 

. . . .”). In light of the fact that a Representative is subject to re-election every two 

years by popular vote, if he or she is not relaying the “people’s voice,” he or she will 

likely not remain in office for a subsequent term. The House has been called “a 

popular assembly whose members are ‘constantly coming and going in quick 

succession’ and, therefore, do not continue in office for ‘sufficient time to become 

perfectly acquainted with our national concerns, and to form and introduce a system 

for the management of them.’” The Federalist No. 64, at 432 (John Jay) (Jacob E. 

Cooke ed., 1961). However, such an assessment of the capabilities of the members 

of the House of Representatives, made in 1961, should not be set in stone, just as the 

Internal Revenue Code should not be set in stone. Rather, the Internal Revenue Code 

should adapt to the growing concerns of the United States to ensure our nation will 

prosper in our globalizing economy.       

33. Another reason the House of Representatives is considered the voice of 

the people is the number of Representatives a state has is dependent upon the 

population within each state and each voting district. U.S. Const. art. 1, § 2, cl. 3. In 

comparison, originally, “[t]he Senate of the United States shall be composed of two 

Senators from each State, chosen by the Legislature thereof, for six years . . . .”  U.S. 

Const. art. 1, § 3, cl. 1. However, since the enactment of the seventeenth amendment, 

“[t]he Senate of the United States shall be . . . elected by the people thereof, for six 

years . . . .”  U.S. Const. amend. 17. 



2009]                        Congressional Unilateral Tax Treaty Overrides                    709 

 

 
 

election every two years, is not as directly answerable to the public as is the 

House. This allows the Senate to act with independent judgment as to what is 

best for the nation as a whole rather than for his or her particular state.  

 

IV. TREATY OVERRIDES DEFINED 

 

A treaty override is the implementation of a domestic law that 

directly conflicts with a treaty provision.
34

 For example, the United States 

and country B enter into a treaty granting country B a most-favored-nation 

status for products exported to the United States.
35

 The United States 

subsequently enacts a domestic law taxing imported cotton at $40 per ton 

from every country except country C. Country C is taxed at $25 per ton of 

cotton it exports to the United States.
36

 Under current U.S. jurisprudence, the 

domestic law enacted after the treaty would supersede the treaty obligation, 

and obligate country B to pay a tax of $40 per ton of cotton it exports to the 

United States while country C pay $25 per ton; country B is no longer the 

most-favored-nation. This contradiction arises out of country B no longer 

having a most-favored-nation status with all exports to the United States, as 

specifically noted in the treaty. However, despite finding a direct conflict 

between the treaty and the domestic law, a court would likely find the 

resulting conflict was intended by Congress and its ensuing consequences are 

to be accepted. 
37

 

To delve further into the intricacies of tax treaty overrides, we must 

analyze the structure of the United States Constitution, separation of powers 

and the theories of monism and dualism. 

 

                                                           

34. Id. at 74. Under the current § 7852(d), the Code gives deference to the 

domestic law regardless of whether the treaty was prior in time. Such practice results 

in the United States breaching its treaty obligations and placing it in violation of 

international law. This result may not be anticipated by Congress prior to the change 

in domestic law.   

35. See Taylor v. Morton, 23 F. Cas. 784 (Curtis, Circuit Justice, C.C.D. 

Mass. 1855); see also infra, pp. 3-6 (examining the processes by which domestic law 

is enacted and the treaty ratification process). Reuven S. Avi-Yonah, International 

Tax as International Law, 57 TAXLR 483 (2004) (Examining the processes by 

which international law differs from international tax law).   

36. See Morton, 23 F. Cas. at 785. 

37. See Id. at 788; see also Cook v. United States, 288 U.S. 102, 120 (1933) 

(holding 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 clearly been 

expressed.”); Trans World Airlines v. Franklin Mint Corp., 466 U.S. 243, 252 

(1984). It has been conceded by Congress that such conflict cannot always be 

anticipated. Id.     



710                                                 Florida Tax Review                                   [Vol. 9:7  

V. THE IMPACT OF THE SUPREMACY CLAUSE 

 

 The Supremacy Clause in the United States Constitution has been 

interpreted, and further emphasized in Marbury v. Madison, to place 

domestic federal statutes on equal status with treaties.
38 

The Supremacy 

Clause states: 

 

[t]his 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 the supreme Law of the Land; and the Judges 

in every State shall be bound thereby, any Thing in the 

Constitution or Laws of any State to the Contrary 

notwithstanding.
39

 

 

 An ambiguity is found in the complications arising from the 

Constitution’s allocation of power and enforcement. The ambiguity is 

whether a treaty and a domestic law of the United States carry the same level 

of authority. Pursuant to Constitution, the President has the power to create 

treaties
40

 subject to the Senate’s consent, and Congress has the power to lay 

                                                           

38. In Marbury v. Madison 5 U.S. at 180, the Supreme Court determined, in 

light of the language of the Supremacy Clause, that the Constitution was the supreme 

law of the land. Specifically, Justice Marshall stated that  

[i]t 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. 

Id. (Marshall, J.)  

Notably absent from this opinion is any mention of 

“treaty.”  Yet, Marbury v. Madison has subsequently been relied 

on in holding that while that the Constitution is supreme to 

statutes, statutes and treaties must be of equal status. However, this 

overlooks the fact that unlike statutes, treaties are formed as the 

result of negotiations between two sovereign nations, each ceding 

some of its sovereignty in return for a benefit, and the fact that the 

international obligation remains after the domestic override.   

See Jordan J. Paust, International Law as Law of the United States 277 n.547 (1996). 

39. U.S. Const. art. VI, § 2, cl. 2. 

40. U.S. Const. art. II, § 2, cl. 2 (giving the Executive Branch treaty powers, 

subject to Senate consent). 



2009]                        Congressional Unilateral Tax Treaty Overrides                    711 

 

 
 

and collect taxes.
41

 Yet, when a conflict arises between domestic tax 

legislation and an international treaty, how should the conflict be resolved? 

This question has been in debate since 1855; however, with the advent of 

globalization and the call for stronger economic foreign policy, should the 

United States continue to follow the later-in-time rule? Current law dictates 

that, when there is a conflict between a domestic law and a treaty provision, 

whichever was enacted later-in-time triumphs. Has policy and law become 

solely an issue of preemptive planning and strategic timing? 

 To investigate the later-in-time doctrine further, it is important to 

consider how the Supreme Court originally interpreted the character of an 

international treaty. In The Amiable Isabella case,
42

 a 1795 treaty between 

the United States and Spain led the Court to question the construction of 

treaties. The 1795 treaty contained a provision allowing either nation to “sail 

from any port to those of a country which may be at war with either or both 

nations, and may go to neutral places, or to other enemy ports; and that every 

article on board, except contraband, to whomsoever belonging, shall be 

free.”
43

 If a ship did not have a passport, it could be captured and claimed as 

a war prize.
44

   

The Isabella had a passport, but the captors claimed the document 

was not issued by a competent authority because the Spanish king was 

required to authorize such passports; therefore, it was invalid and cause for 

the Isabella’s seizure.
45

 The treaty required passports to be issued by the 

                                                           

41. U.S. Const. art. I, § 8, cl. 1 (giving Congress the power to lay and 

collect taxes). Specifically, the Constitution gives the House of Representatives the 

power to create domestic tax laws. U.S. Const. art. 1, § 7, cl. 1 (“All Bills for raising 

Revenue shall originate in the House of Representatives; but the Senate may propose 

or concur with Amendments as on other Bills.”).     

42. In re The Amiable Isabella, 19 U.S. 1, 4 (1821). A Spanish ship, sailing 

from Havana, Cuba, under the protection of the British Navy, leaving such 

protection off the coast of Florida, allegedly setting course for London, was 

“captured by the privateer ship Roger, and carried into Wilmington, North Carolina, 

for adjudication.” The captured ship, the Amiable Isabella, claimed that it had free 

passage because the Administrator General of the Royal Revenues for the port of 

Havana, Cuba granted such authority, in the form of a passport. The passport gave 

the Isabella permission to sail from Cuba to Hamburg, Germany, for the purposes of 

trading and it gave permission for the return trip. 

43. Id. at 14. The treaty further provided that ships “shall be furnished with 

a passport expressing her national character, and with certificates to show, that the 

cargo is not contraband.” The passport was to have conclusive effect. 

44. 19 U.S. at 21 (“[W]ithout which requisites they [the cargo and ship]  

may be sent to one of the ports of the other contracting party, and adjudged by the 

competent tribunal . . . [as] legal prizes . . . .”).   

45. 19 U.S., at 18. 



712                                                 Florida Tax Review                                   [Vol. 9:7  

magistrate of the place from which the vessel sails.
46

 Therefore, Cuba could 

not issue the passport because the Isabella was a Spanish vessel.
47

 However, 

the Court examined the treaty provision and found it did not proscribe any 

specific form for the passport.
48

 Specifically, the Supreme Court held “the 

obligations of the treaty could not be changed or varied but by the same 

formalities with which they were introduced; or at least by some act of as 

high an import, and of as unequivocal an authority.”
49

 

 

In The Amiable Isabella case, Justice Story stated: 

 

[This] Court does not possess any treaty-making power. That 

power belongs by the constitution to another department of 

the Government; and to alter, amend, or add to any treaty, by 

inserting any clause, whether small or great, important or 

trivial, would be on our part an usurpation of power, and 

not an exercise of judicial functions.  It would be to make, 

and not to construe a treaty.
 50

 (emphasis added) 

   

Justice Story further held: 

 

[t]he parties who formed this treaty, and they alone, have a 

right to annex the form of the passport. It is a high act of 

sovereignty, as high as the formation of any other stipulation 

of the treaty. It is a matter of negotiation between the 

Governments. The treaty does not leave it to the discretion 

of either party to annex the form of the passport; it requires 

it to be the joint act of both; and that act is to be expressed 

by both parties in the only manner known between 

independent nations – by a solemn compact through agents 

specially delegated, and by a formal ratification.
51

 

 

                                                           

46. Id. at 18 

47. Id.  

48. Id. at 23.   

49. This was decided thirty-four years before the Taylor v. Morton, 23 F. 

Cas. 784, 786-87 (Curtis, Circuit Justice, C.C.D. Mass. 1855). Justice Story wrote 

the opinion in which the following Justices concurred: Chief Justice Marshall, 

Justice Livingston, Justice Washington, Justice Todd, and Justice Duvall; Justice 

Johnson provided the sole dissenting opinion. The Amiable Isabella, 19 U.S. at 25.

 Justice Johnson dissented because he thought the passport provision applied 

and that any form substantially complying with the provision should be acceptable.  

Id. at 111-12 (Johnson, J., dissenting).   

50. The Amiable Isabella, 19 U.S. at 22. 

51. Id. at 22. 



2009]                        Congressional Unilateral Tax Treaty Overrides                    713 

 

 
 

The Amiable Isabella distinguishes the character of treaties and their 

authority to domestic law. The Court states a treaty requires, not just the 

cooperation of the United States, but the cooperation of another country, and 

it is not the place of any branch of government to circumvent their obligation 

under a treaty without first approaching the other country.   

 The true progenitor of the later-in-time doctrine was Supreme Court 

Justice Benjamin Curtis, sitting alone on circuit court as trial judge in the 

case of Taylor v. Morton.
52

 In 1832, the United States entered into a treaty 

with Russia, in which the United States granted Russia most-favored-nation 

treatment with respect to imports.
53

 The Tariff Act of 1842 lowered the tax 

on Bombay hemp to $25 per ton, while keeping the same tax on Russian 

hemp at $40 per ton.
54

 Russia brought action against the Boston port 

                                                           

52. 23 F. Cas. 784, 786-87 (Curtis, Circuit Justice, C.C.D. Mass. 1855).   

See also David Sachs, Is the 19th Century Doctrine of Treaty Override Good Law 

for Modern Day Tax Treaties?, 47 Tax Law. 867, 869 (1994).   

 In Dred Scott v. Sandford, 60 U.S. 393 (1857), Curtis, in a dissenting 

opinion, had an opportunity to further profess the later-in-time doctrine. Curtis 

showed his resentment at the idea the legislature could be constrained by a treaty.  

Dred Scott, 60 U.S. at 629 (Curtis, J., dissenting). He thought the powers of the 

government must be unimpaired. Id. Curtis completely rejected the idea that the 

United States ceded any sovereignty when it entered into the treaty:  

[t]he responsibility of the Government to a foreign nation, for the 

exercise of those powers, is quite another matter. That 

responsibility is to be met, and justified to the foreign nation, 

according to the requirements of the rules of public law; but never 

upon the assumption that the United States had parted with or 

restricted any power of acting according to its own free will, 

governed solely by its own appreciation of its duty. 

Id. (Curtis, J., dissenting). Curtis further stated:  

“[t]his 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 the 

supreme law of the land.” This has made treaties part of our 

municipal law; but it has not assigned to them any particular 

degree of authority, nor declared that laws so enacted shall be 

irrepealable. No supremacy is assigned to treaties over acts of 

Congress. That they are not perpetual, and must be in some way 

repealable, all will agree. 

Id. (Curtis, J., dissenting). 

53. Taylor, 23 F. Cas. at 784. 

54. The domestic statute imposed a tax of forty dollars per ton on all hemp 

except hemp imported from Manila and Suera, and on other hemps from India, on 

which a tax of twenty-five dollars was levied. Id. at 784-85. 



714                                                 Florida Tax Review                                   [Vol. 9:7  

collector of customs seeking repayments for the difference between the two 

rates.
55

   

Judge Curtis acknowledged the Supremacy Clause, but reasoned it 

was not dispositive of the issue. He believed when a treaty and domestic law 

conflicted, “the solution of the question was [to be] found, by considering the 

nature and objects of each species of law, the authority from which each 

emanated, and the consequences of allowing or denying the paramount effect 

of the constitution.”
56

 

 Judge Curtis recognized “[t]he foreign sovereign between whom and 

the United States a treaty has been made, has a right to expect and require its 

stipulations to be kept with scrupulous good faith . . . .;”
57

 yet, relying on 

Article I, Section 8 of the Constitution, he found the statute overrode the 

treaty.
58

 He expressly rejected the idea that the House of Representatives’ 

power to lay taxes had to be exercised in conformity with treaties, as this 

would deeply affect the independence and sovereignty of the United States.
59

 

Judge Curtis found the tax statute was within the House’s powers and 

because a treaty was equivalent to a law, there was nothing that could 

prevent the House from repealing the treaty since it could repeal laws.
60

   

 In addition, Judge Curtis stated domestic statutes should receive 

deference as opposed to treaties, because the creation of domestic laws 

involves three bodies of government (the House of Representatives, the 

Senate, and the President), while treaty ratification involves only two (the 

President and the Senate).
61

 Judge Curtis’s opinion wholly ignores and 

disregards The Amiable Isabella case. 

 Finally, Judge Curtis held certain questions such as whether a treaty 

had been violated, whether the nations under the treaty were still required to 

fulfill their obligations, and whether a treaty override was justified, were not 

                                                           

55. Id. at 784. 

56. Id. at 785. 

57. Id. 

58. Id. 

59. Id. at 786. This reasoning overlooks the fact that by entering a treaty, 

each country cedes sovereignty in return for a benefit. See Paust, supra note 38, at 

277 n.547. 

60. Taylor, 23 F. Cas. at 784-6. Judge Curtis explicitly rejected the idea that 

the President and the Senate exclusively held the power to modify or repeal treaty 

provisions. Id. He reasoned that because when Congress makes a declaration of war, 

it has the effect of repealing all “treaties with the hostile nation, inconsistent with a 

state of war[,]” there is nothing that requires the same government body that enacts 

the treaty to be the same body that that repeals it. Id. at 786. Congress could override 

a treaty, because if it could not, no one could, and “the power to do so, is 

prerogative, of which no nation can be deprived, without deeply affecting its 

independence.” Id.   

61. Taylor, 23 F. Cas. at 786. 



2009]                        Congressional Unilateral Tax Treaty Overrides                    715 

 

 
 

questions for judicial review,
62

 were questions for the executive and 

legislative departments of the government.
63

 

 The Supreme Court addressed statutory overrides of treaties, in the 

context of “domestic dependent nations,” in The Cherokee Tobacco case.
64

  

                                                           

62. Thus Judge Curtis found that a court could not determine whether a 

treaty had been violated because it was a political question. See generally Baker v. 

Carr, 369 U.S. 186 (1962), in which a court decided that a right was justiciable 

before the Supreme Court as arising basically out of their jurisdiction directly under 

the Constitution. 

63. Taylor, 23, F.Cas. at 786-87. Curtis thought the remedy was to be found 

in diplomacy and legislation, not through the administration of existing laws: 

Is it a judicial question, whether a treaty with a foreign sovereign 

has been violated by him; whether the consideration of a particular 

stipulation in a treaty, has been voluntarily withdrawn by one 

party, so that it is no longer obligatory on the other; whether the 

views and acts of a foreign sovereign, manifested through his 

representative have given just occasion to the political departments 

of our government to withhold the execution of a promise 

contained in a treaty, or to act in direct contravention of such 

promise? I apprehend not. These powers have not been confided 

by the people to the judiciary, which has no suitable means to 

exercise them; but to the executive and the legislative departments 

of our government. They belong to diplomacy and legislation, and 

not to the administration of existing laws.   

Id. at 787. 

64. The Cherokee Tobacco, 78 U.S. 616 (1870). This was a split decision, 

the opinion was delivered by Justice Swayne, in which Justice Strong, Justice 

Clifford, and Justice Miller concurred; Chief Justice Chase, Justice Nelson, and 

Justice Field did not hear the argument; and Justice Bradley and Justice Davis 

concurred in dissent.    

In Cherokee Nation v. Georgia, 30 U.S. 1, 17 (1831). Justice Marshall 

referred to Indian nations as domestic dependent nations and described the 

relationship between Indian Nations and the United States as one similar to a ward 

and guardian. 30 U.S. 1, 17 (1831) (Marshall, J.). 

Though the Indians are acknowledged to have an unquestionable, 

and, heretofore, unquestioned right to the lands they occupy, until 

that right shall be extinguished by a voluntary cession to our 

government; yet it may well be doubted whether those tribes 

which reside within the acknowledged boundaries of the United 

States can, with strict accuracy, be denominated foreign nations. 

They may, more correctly, perhaps, be denominated domestic 

dependent nations. They occupy a territory to which we assert a 

title independent of their will, which must take effect in point of 

possession when their right of possession ceases.  Meanwhile they 



716                                                 Florida Tax Review                                   [Vol. 9:7  

The Cherokee nation argued an Internal Revenue Act, enacted in 1868,
65

 

which taxed liquor and tobacco products, did not apply to the nation due to a 

treaty it had with the United States.
66

 Under the treaty, the Cherokee nation 

did not have to pay federal taxes on goods produced within the nation.
67

 The 

                                                                                                                                         

are in a state of pupilage. Their relation to the United States 

resembles that of a ward to his guardian.  

Id.  

Marshall also relied on the Commerce Clause in holding that Congress had 

the power to regulate trade with Indian Nations. Id. at 43 (Marshall, J.). Article I, § 8 

of the Constitution gives Congress the power “[t]o regulate Commerce with foreign 

Nations, and among the several States, and with the Indian Tribes.” U.S. Const. art. 

I, § 8, cl. 3.  

In Johnson v. M’Intosh, 21 U.S. 543, 586, 592 (1823) (Marshall, J.) decided 

eight years earlier, Marshall found Indian Nations were subject to the sovereignty of 

the United States and noted that Indian nations did not have absolute title to their 

lands, the United States having the power to extinguish it. The Indian nations were 

first conquered by Great Britain, Spain, and France, but through the Civil War, a 

treaty with Spain, and the Louisiana Purchase, the United States acquired absolute 

title to the lands occupied by the conquered Indian Nations and therefore the Indian 

Nations were subject to the sovereignty of the United States, the conqueror. Id. at 

583-88 (Marshall, J.).  

Nine years later, Marshall had another opportunity to describe the 

relationship between the United States and Indian nations, and the lack of 

sovereignty on the part of the Indian Nations. Worcester v. Georgia, 31 U.S. 515, 

580 (1832) (Marshall, J.). 

At no time has the sovereignty of the country been 

recognized as existing in the Indians, but they have been always 

admitted to possess many of the attributes of sovereignty.  All the 

rights which belong to self government have been recognized as 

vested in them. Their right of occupancy has never been 

questioned, but the fee in the soil has been considered in the 

government. This may be called the right to the ultimate domain, 

but the Indians have a present right of possession. 

31 U.S. at 580 (1832) (Marshall, J.). Marshall stated the Indian nations were 

dependent upon the United States for their protection and for the supply of their 

essential wants. Id. at 555 (Marshall, J.). Marshall again noted Congress had power 

over Indian nations pursuant to the commerce clause in the Constitution. Id. at 559 

(Marshall, J.).   

65. Internal Revenue Act of 1868 § 107. 

66. The Internal Revenue Act taxed “distilled spirits, fermented liquors, 

tobacco, snuff, and cigars . . . produced anywhere within the exterior boundaries of 

the United States, whether the same shall be within a collection district or not.” The 

Cherokee Tobacco, 78 U.S. at 618. 

67. Under the treaty, “[e]very Cherokee Indian and freed person residing in 

the Cherokee nation shall have the right to sell any products of his farm . . . or any 

merchandise or manufactured products . . . without . . . paying any tax thereon . . . .”  

Id. 



2009]                        Congressional Unilateral Tax Treaty Overrides                    717 

 

 
 

government argued the code provision applied to the Cherokee, as it did in 

all other territories, and the relevant provisions of the treaty were annulled.
68

 

 Justice Swayne, much like Judge Curtis,
69

 believed the Constitution 

did not address the issue of when treaties and acts of Congress conflict.
70

 

Justice Swayne ultimately held the internal revenue statute to supersede the 

treaty with the Cherokee nation, despite being enacted later-in-time.
71

 He 

believed the consequences of the treaty override were merely political 

questions outside “the sphere of judicial cognizance.”
72

 The Supreme Court’s 

decision which enacted the first-in-time rule was reflective of the reasoning 

of that time.
73

 Indirectly, the Court found it inconceivable, in its 

deliberations, that a treaty could in some way impair or supersede the 

authority or independence of the United States.
74

    

                                                           

68. Id. 

69. See Taylor v. Morton, 23 F. Cas. at 785. 

70. Worcester v. Georgia, 31 U.S. at 621. 

71. The Cherokee Tobacco, 78 U.S. at 621. Drawing from the language in 

Taylor v. Morton, the Court stated that “[in] the case under consideration the act of 

Congress must prevail as if the treaty were not an element to be considered.” Id. 

Justice Bradley, in his dissenting opinion, stated that he did not think it was 

“the intention of Congress to extent [sic] the internal revenue law to the Indian 

territory [because] . . . [t]hat is an exempt jurisdiction.” Id. at 622 (Bradley, J., 

dissenting). Bradley reasoned that because Congress did not expressly state that the 

Cherokee Nation, a jurisdiction exempt from U.S. taxation pursuant to numerous 

treaties, was to be subject to the domestic legislation, it should not have to pay the 

tax. Id. at 622-23 (Bradley, J., dissenting).   

72. The Court held that any injuries resulting from the domestic statute 

overriding the treaty, “the power of redress is with Congress, not with the judiciary, 

and that body, upon being applied to, it is presumed, will promptly give the proper 

relief.” Id. at 621. 

73. This is reflective of Justice Marshall’s view expressed in Johnson v. 

M’Intosh, 21 U.S. 543, 586, 592 (1823), where Justice Marshal found that the Native 

Americans, although in the United States first, ceded their sovereignty to the United 

States who came later-in-time. 

This case involved a “domestic dependent nation” and, at this time, the U.S. 

already had a history of poorly treating Indian Nations and disregarding treaty 

obligations. Cherokee Tobacco, supra note 63. The Indian Removal Act of 1830 

gave President Andrew Jackson the power to enter into treaty agreements with 

Indians, seeking relocation of Native Americans. The “Trail of Tears,” a product of 

this relocation plan in which Indian Nations were relocated to Indian Territories at 

gunpoint, resulted in the deaths of over four thousand Native Americans mostly due 

to disease, malnutrition, and violence. Essentially, this resulted in the forced 

relocation of Indian nations onto reservations.   

74. See The Cherokee Tobacco, 78 U.S. at 621. The U.S. was still 

expanding westward, developing such states like California and Arizona which were 

admitted as states in 1850 and 1912. 



718                                                 Florida Tax Review                                   [Vol. 9:7  

 In 1884, the Supreme Court had the occasion to revisit the issue of 

treaty overrides in two separate cases, decided in the context of Congress’ 

immigration powers.
75

 In The Head Money Cases, a consolidation of several 

                                                           

75. Chew Heong v. United States, 112 U.S. 536 (1884); The Head Money, 

112 U.S. 580 (1884). These cases were decided on the same day, Chew Heong first 

and The Head Money Cases second, with the Court reaching different results on very 

similar facts involving Congress’ power over immigration.  While The Head Money 

Cases had a unanimous decision, Chew Heong was not. 112 U.S. at 580, 600; Chew 

Heong, 112 U.S. at 538, 560. 

In Chew Heong, the majority held that there was no treaty override because 

Congress did not intend for the domestic law, which required Chinese laborers 

returning to the United States to possess a certificate to be readmitted into the 

country, to apply to those already covered by the earlier treaty, which allowed 

Chinese laborers to freely leave and return to the United States. Chew Heong, 112 

U.S. at 542, 560.  The majority consisted of the following justices: Chief Justice 

Waite, Justice Harlan, Justice Miller, Justice Woods, Justice Matthews, Justice Gray, 

and Justice Blatchford; Justice Field and Justice Bradley provided separate 

dissenting opinions.  Chew Heong, 112 U.S. at 538, 560; see United States Supreme 

Court, http://www.supremecourtus.gov/about/members.pdf (last visited Jun. 23, 

2008). 

Justice Field, in his dissenting opinion, thought that Congress had intended 

for the domestic law to apply to Chinese laborers despite the treaty. Chew Heong, 

112 U.S. at 561. Citing Taylor v. Morton, Field reaffirmed some of the concerns 

about sovereignty and independence and stated that a treaty, like any other 

legislation, may be modified or revoked by a subsequent act of Congress. Id. at 562-

63 (Field, J., dissenting) (“If the treaty relates to a subject within the powers of 

Congress and operates by its own force, it can only be regarded by the courts as 

equivalent to a legislative act. Congress may, as with an ordinary statute, modify its 

provisions, or supersede them altogether.”). Field stated that treaty overrides were 

not a matter for judicial review,  

[i]f the nation with which the treaty is made objects to the 

legislation it may complain to the executive head of our 

government, and take such measures as it may deem advisable for 

its interests. But whether it has just cause of complaint, or whether, 

in view of its action, adverse legislation on our part be or be not 

justified, is not a matter for judicial cognizance or consideration. 

112 U.S. at 562 (Field, J., dissenting). In support for the domestic law overriding the 

treaty provision, just as Justice Curtis reasoned in Taylor v. Morton, Field reasoned 

that the Supremacy Clause placed treaties and federal law on equal footing and did 

not give paramount authority to either over the other, therefore the last expression of 

the sovereign will must control. Id. (Field, J., dissenting); Taylor v. Morton, 23 F. 

Cas. 784, 785 (Curtis, Circuit Justice, C.C.D. Mass. 1855).    

Field also based his reasoning that the domestic law override the treaty on 

Congress’ powers over immigration; he stated that “[t]he immigration of foreigners 

to this country, and the conditions upon which they shall be permitted to come or 

remain, are proper subjects both of legislation and of treaty stipulation. The power of 



2009]                        Congressional Unilateral Tax Treaty Overrides                    719 

 

 
 

lower court opinions, debated a fifty-cent tariff imposed on all non-U.S. 

passengers arriving aboard ships in the United States.
76

 The fifty-cent tax, 

part of a congressional act known as the Act to Regulate Immigration, 

conflicted with a pre-existing treaty with Russia. Relying on The Cherokee 

Tobacco and Taylor v. Morton, the Court held if a provision of an act is in 

conflict with any treaty with a foreign nation, the act must prevail in the 

courts. The Court, reasoning that the Constitution gave treaties no “superior 

sanctity,” likened it to a statute, and therefore determined that nothing made 

a treaty “irrepealable” or “unchangeable.”
77

 

 Several years later, in Whitney v. Robinson,
78

 the Supreme Court for 

the first time clearly enunciated the later-in-time rule.
79

 Relying primarily on 

                                                                                                                                         

Congress, however, over the subject can neither be taken away nor impaired by any 

treaty.” Chew Heong, 112 U.S. at 563 (Field, J., dissenting). 

76. The Head Money Cases, 112 U.S. at 586. 

The suit is brought to recover from Robertson the sum of money 

received by him, as collector of the port of New York, from 

plaintiffs, on account of their landing in that port passengers from 

foreign ports, not citizens of the United States at a rate of 50 cents 

for each such passengers, under the act of Congress of Aug. 3, 

1882, entitled ‘An act to regulate immigration.’ 

Id. 

77. Id. at 598-99. 

 

A treaty, then, is a law of the land as an act of Congress is, 

whenever its provisions prescribe a rule by which the rights of the 

private citizen or subject may be determined. And when such 

rights are of a nature to be enforced in a court of justice, that court 

resorts to the treaty for a rule of decision for the case before it as it 

would to a statute. But even in this aspect of the case there is 

nothing in this law which makes it irrepealable or unchangeable. 

The Constitution gives it no superiority over an act of Congress in 

this respect, which may be repealed or modified by an act of a later 

date. Nor is there anything in its essential character, or in the 

branches of the government by which the treaty is made, which 

gives it this superior sanctity. 

Id.  

78. Whitney v. Robinson, 124 U.S. 190 (1888) 

79. Id. The Whitney Court, which rendered a unanimous decision, had 

almost an identical composition as the Chew Heong and The Head Money Court, 

consisted of Chief Justice Waite, Justice Miller, Justice Field, Justice Bradley, 

Justice Harlan, Justice Matthews, Justice Gray, Justice Blatchford, and Justice 

Lamar. See id.; Chew Heong, 112 U.S. at 536; The Head Money Cases, 112 U.S. at 

580; see also United States Supreme Court, supra note 61.   

In this case, the importers of sugar from the island of Santo Domingo 

protested the collection of taxes on those items. They argued that since the United 



720                                                 Florida Tax Review                                   [Vol. 9:7  

Taylor v. Morton, but also citing The Head Money Cases, Justice Field held 

whenever a conflict exists between a treaty provision and a domestic tax law, 

the later enacted provision would control:
80

 

 

By the Constitution a treaty is placed on the same footing, 

and made of like obligation, with an act of legislation. Both 

are declared by that instrument to be the supreme law of the 

land, and no superior efficacy is given to either over the 

other. When the two 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; but if the two are inconsistent, the one last in date will 

control the other, provided always the stipulation of the 

treaty on the subject is self-executing.
81

 

 

 Following Whitney was The Chinese Exclusion Case.
82

 It dealt with a 

conflict between a treaty with the United States and China, permitting 

                                                                                                                                         

States had a treaty with the Kingdom of Hawaii that exacted on taxes on the same 

items, and because the United States’ treaty with the Dominican Republic had a 

clause precluding any “higher or other duty” it should not have to pay those taxes 

either.  Id.   

The Supreme Court rejected this argument because Congress had 

subsequently passed a law requiring taxation on the importation of certain items 

covered by the U.S.-Santo Domingo treaty, notwithstanding the treaty’s provisions.  

The Court found that treaties and statutes were of equal status and when there is an 

un-resolvable conflict, the last one passed will control. Id. at 194. 

80. Whitney, 124 U.S. at 194 

81. Id. at 195. As the analysis of this article is confined to treaty 

overrides in the context of tax conventions, it is important to note that tax 

treaties are self-executing – no domestic legislation is required to 

incorporate them into domestic law. Overriding Tax Treaties, supra note 7, 

at 78 (citing Columbia Marine Services, Inc. v. Reffet Ltd., 861 F.2d 18 (2d 

Cir. 1988); United States v. Schooner Peggy, 5 U.S. 103 (1801)). 

82. Chae Chan Ping v. United States, 130 U.S. 581 (1889) [hereinafter 

Ping]. Plaintiff was a Chinese laborer living in United States until 1887, when he 

returned to China. Upon returning to the U.S., he presented his certificate allowing 

him to enter the country when he was taken into custody by the collector of customs.  

During Ping’s trip to China, Congress had enacted legislation, which became 

effective in 1888, that denied Chinese laborers passage into the United States, this 

legislation became effective several days before Ping returned to the U.S. Id. at 431; 

Ping, 130 U.S. at 593-94. The new legislation was claimed to be for the common 

good and protection of the nation. The discovery of gold in California in 1848 

caused an influx of Chinese immigrants into the United States and as a result, there 

was a fear that California “would be overrun by them unless prompt action was 

taken to restrict their immigration.” Ping, 130 U.S. at 595. An 1880, U.S.-China 



2009]                        Congressional Unilateral Tax Treaty Overrides                    721 

 

 
 

Chinese immigrants to freely return to the United States, and a subsequently 

enacted statute which placed restrictions on the return of Chinese 

immigrants.
83

 Justice Field delivered the unanimous opinion which held, 

“Congress has the power to control immigration because such power, 

although not enumerated in the Constitution, is inherent in the sovereignty 

and nationhood of the United States.”
84

 Secondly, relying on Taylor v. 

                                                                                                                                         

treaty allowed Chinese to freely return to the United States with a certificate issued 

by the collector of customs. Id. at 589.  

The Supreme Court had an identical composition as the Whitney Court, 

which consisted of Chief Justice Waite, Justice Miller, Justice Field, Justice Bradley, 

Justice Harlan, Justice Matthews, Justice Gray, Justice Blatchford, and Justice 

Lamar. See id. at 581; Whitney, 124 U.S. 90. 

83. This treaty was not a self-executing treaty, but in 1882, an act of 

Congress made the treaty effective. Ping, 130 U.S. at 597. To resolve the conflict 

between the treaty and subsequently enacted statute, the Court applied the rule 

enunciated in Whitney, that a treaty which is not self-executing can be overridden by 

another Congressional act. Id. at 600. After applying this rule, the Court went even 

further and held that “in either case [the treaty being self-executing or not] the last 

expression of the sovereign will must control. Id. at 600.  

Distinguishing this case from Chew Heong, was Congress’ express intent 

for the override. See id. at 598-99; Chew Heong v. United States, 112 U.S. 536, 542 

(1884); see supra note 61. In The Chinese Exclusion Case, Congress had specifically 

amended the domestic law at issue in Chew Heong to make it “unlawful for any 

Chinese laborer who shall at any time heretofore have been, or who may now or 

hereafter be, a resident within the United States, and who shall have departed, or 

shall depart therefrom, and shall not have returned before the passage of this act, to 

return to, or remain in, the United States” and “every certificate heretofore issued in 

pursuance thereof is hereby declared void and of no effect, and the Chinese laborer 

claiming admission by virtue thereof shall not be permitted to enter the United 

States.” Ping, 130 U.S. at 599. 

84. Ping, 130 U.S. at 603-04. Justice Field found that control over 

immigration is a right that belongs to every sovereign state and that this right is 

inherent in state independence and sovereignty. Ping, 130 U.S. at 605-06 (Field, J.).   

In The Head Money Cases, which dealt with the imposition of a tax of fifty-

cents per immigrant, found that Congress had the power to impose this under its 

authority to regulate commerce with foreign nations. 112 U.S. 580, 591 (1884).  

However, in 1884, immigration was more of a matter of personal choice and not 

foreign commerce; also, the notion that foreign commerce includes the importation 

of persons conjures thoughts of the slave trade and was demeaning to immigrants to 

be thought of in this way. Ping, 130 U.S. at 603-04.   

But, in The Chinese Exclusion Case, even though power over immigration 

is not expressly granted to the federal government in the Constitution, the Court 

found support for Congress’ power to control immigration in the sovereignty and 

independence inherently belonging to the United States.  See id. at 857. 

In United States v. Curtiss-Wright Export Corp., Justice 



722                                                 Florida Tax Review                                   [Vol. 9:7  

Morton, Justice Field stated “the Constitution does not prohibit Congress 

from enacting laws inconsistent with the international obligations of the 

United States and that the courts will give effect to an act of Congress 

inconsistent with provisions in an earlier treaty.”
85

 The Court held treaties 

and statutes to be of equal status under the Supremacy Clause and found that 

when in conflict, whichever was enacted later-in-time would triumph.
86

 The 

Court noted that despite the resemblance of treaties as contracts between 

nations, the Court found them to be just like statutes, able to be repealed or 

modified by a subsequent Congressional act.
87

 

Despite the recognition by the Court that an override may leave 

international obligations unfulfilled, relying on Taylor and notions of 

inherent sovereignty, the Court found that “[t]he validity of this legislative 

release from the stipulations of the treaties was of course not a matter for 

judicial cognizance.”
88

 

Historically, courts have addressed conflicts between treaty 

provisions and statutes, and have ruled that not every provision of a treaty 

must be dominated by a domestic law. The starting point with cases 

proclaiming this reasoning began with Murray v. The Schooner Charming 

Betsy.
89

 In this case, the Supreme Court declared “an act of Congress ought 

never to be construed to violate the law of nations if any other possible 

construction remains . . .”
90

  This rule of construction has also been applied 

                                                                                                                                         

Sutherland expounded the doctrine that the powers of external 

sovereignty did not derive from the Constitution. These powers, he 

said, were lodged in the United States, rather than in the individual 

states, before the Constitution was adopted and remained there – 

and therefore in the federal government – under the Constitution. 

Id. at 858 (citing United States v. Curtiss-Wright Export Corp., 299 U.S. 304, 316-18 

(1936)). It should be noted that this interpretation would seem to be precluded by the 

10th Amendment, which states that “[t]he powers not delegated to the United States 

by the Constitution, nor prohibited by it to the States, are reserved to the States 

respectively, or to the people.” U.S. Const. amend. X. 

85. Ping, 130 U.S. at 602).   

86. Id.   

87. Id.   

88. Id. (“The question whether our government is justified in disregarding 

its engagements with another nation is not one for the determination of the courts.”). 

89. 6 U.S. 64, 81 (1808). This was a unanimous decision delivered by Chief 

Justice Marshall; also sitting on the Court at this time were Justice Cushing, Justice 

Chase, Justice Washington, Justice Johnson, Justice Livingston, and Justice Todd.  

Id. at 64.   

90. The Charming Betsy, 6 U.S. at 118. Here, a domestic statute prohibited 

trade with France and authorized the seizure of any vessel bound for French ports. 

The Court noted that “the building of vessels in the United States for sale to neutrals, 

in the islands, is, during war, a profitable business, which Congress cannot be 

intended to have prohibited, unless that intent be manifested by express words or a 



2009]                        Congressional Unilateral Tax Treaty Overrides                    723 

 

 
 

to treaties. Therefore, a court should attempt to construe a domestic statute 

against a treaty provision to prevent conflict.   

For example, in Chew Heong v. United States, involving a Chinese 

laborer working in the United States, the Supreme Court held that Congress 

did not intend for the domestic law to apply to those covered by a pre-

existing treaty.
91

 In 1880, the United States and China signed a treaty 

allowing Chinese laborers already in the United States “to go and come of 

their own free will.”
92

 In 1881, Chew left for the Hawaiian Kingdom and, 

upon attempting to return to the United States in 1884, was denied admission 

because he did not possess a certificate required of all Chinese laborers 

entering the country.
93

 Congress passed the certificate requirement as part of 

the Chinese Restriction Act of 1882.
94

 The Supreme Court held that when 

Congress enacted the certificate provision, it did not intend for it to apply to 

Chinese laborers already covered by the earlier treaty provisions.
95

 The 

inference drawn from this holding is Congress may override an existing 

treaty, only if there is a clear expression of Congressional intent such result 

was intended.
96

 

In Cook v. United States, the Supreme Court addressed a potential 

override of a treaty with the United Kingdom.
97

 In 1930, pursuant to the 

Tariff Act of 1930, a U.S. Coast Guard stopped the British vessel Mazel Tov, 

eleven and one-half miles from the United States coast.
98

 The Tariff Act 

                                                                                                                                         

very plain and necessary implication.” Captain Murray, of the United States Navy, 

captured a vessel, The Charming Schooner Betsy, and sold in 1800 pursuant to the 

statute. The former owner challenged the sale because he was a United States citizen 

and the current owner, born in Connecticut, swore an oath to Denmark in 1797. 

Chief Justice Marshall declared the proper construction of the statute was that a 

citizen must own the vessel, “not at the time of the passage of the law, but at the time 

when the act of forfeiture shall be committed.” Since the current owner was not a 

United States citizen at the time of forfeiture, the domestic law did not apply and the 

forfeiture was illegal. Under this construction, the statute did not violate the 

naturalization and citizenship laws of the Danish crown. 

91. 112 U.S. 536 (1884).   

92. Id. at 542.   

93. Id. at 539. 

94. Id. at 538. 

95. Id. at 560.   

96. Id.; Sachs, supra note 51, at 870. 

97. 288 U.S. 102 (1933). Justice Brandeis delivered the unanimous opinion 

of the Court, which also consisted of Chief Justice Hughes, Justice McReynolds, 

Justice Sutherland, Justice Stone, Justice Roberts, Justice Cardozo, Justice Van 

Devanter, and Justice Butler. See Id. at 102. 

98. Cook, 288 U.S. at 107. The Collector of Customs seized the ship and 

searched Cook’s cargo, discovering intoxicating liquor, and charged Cook a penalty 

for failing to disclose the illegal cargo. Id. Cook claimed that his cargo, which was 



724                                                 Florida Tax Review                                   [Vol. 9:7  

allowed the Coast Guard to stop and inspect any ship coming within twelve 

miles of the U.S. coast. Cook argued the stop was unjustified because the 

treaty between the United States and Great Britain only permitted the 

stopping and inspecting of any ship within three nautical miles of shore.
99

   

The Tariff Act of 1922 contained language which the subsequent 

treaty with Britain sought to address and found relevant in this case.
100

 

However, when Congress amended the Tariff Act in 1930, they left that 

specific portion unchanged.
101

 While not addressing Cook v. U.S., Justice 

                                                                                                                                         

being transported from a French colony, was destined for the Bahamas, a British 

colony, and that his ship was intercepted outside the legal limit of the Tariff Act. Id.    

99. From 1918 until 1933, under the 18th Amendment, the manufacture, 

sale, and transportation of alcohol were prohibited in United States. U.S. Const. 

amend. XVIII, repealed by U.S. Const. amend. XXI; see Wikipedia, 

http://en.wikipedia.org/wiki/Prohibition#Prohibition_in_the_United_States (last 

visited Jun. 23, 2008). This is reflected in the U.S.-Britain treaty, which 

provided that the high contracting parties should declare “their 

firm intention to uphold the principle that three marine miles 

measured from low water mark constitute the proper limits of 

territorial waters” . . . . Moreover, the arrangement . . . was to be 

limited specifically to intoxicating liquors; and no reciprocal rights 

were to be conferred.   

Cook, 288 U.S. at 117-18 (citations omitted). It was specifically noted that  

[t]he need of the United States was to be met by providing that His 

Britannic Majesty ‘will raise no objection to the boarding,” etc., 

outside the territorial waters at no “greater distance from the coast 

of the United States than can be traversed in one hour by the vessel 

suspected of” smuggling. The need of Great Britain was to be met 

by our allowing “British vessels voyaging to or from the ports or 

passing through the waters of the United States to have on board 

alcoholic liquors listed as sea stores or as cargo destined for a 

foreign port, provided that such liquor is kept under seal while 

within the jurisdiction of the United States.” 

Id.  

100. Id. 

101.  

Shortly after the Treaty took effect, the Treasury Department 

issued amended instructions for the Coast Guard which pointed 

out, after reciting the provisions . . . [the Tariff Act], that “in cases 

of special treaties, the provisions of those treaties shall be 

complied with;” and called attention particularly to the recent 

treaties dealing with the smuggling of intoxicating liquors. The 

Commandant of the Coast Guard, moreover, was informed in 

1927, as the Solicitor General states, that all seizures of British 

vessels captured in the rum-smuggling trade should be within the 

terms of the Treaty and that seizing officers should be instructed to 

produce evidence, not that the vessel was found within the four-



2009]                        Congressional Unilateral Tax Treaty Overrides                    725 

 

 
 

Brandeis cited Chew Heong and held the amendments to the Tariff Act of 

1930 did not have a clear expression of congressional intent to abrogate and 

modify the treaty between the United States and Great Britain.
102

 

Specifically, Justice Brandeis stated, “[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.”
103

 

Distinguishing Cook, the Supreme Court in Trans World Airlines v. 

Franklin Mint Corp.
104

 held a domestic statute did not override a treaty 

provision because there was no clear expression of Congressional intent for 

such effect.
105

 The Court was asked to determine the extent of Trans World 

Airlines’ (“TWA”) liability for losing cargo belonging to Franklin Mint.
106

  

The district court followed the Warsaw Convention, an international air 

carriage treaty into which the United States entered in 1934, which limited 

TWA’s liability to a sum of 250 francs per kilogram; the French franc 

consisted of “65 1/2 milligrams of gold at the standard of fineness of nine 

hundred thousandths.”
107

 Franklin Mint argued that the repeal of the Par 

                                                                                                                                         

league limit, but that she was apprehended within one hour’s 

sailing distance from the coast.   

Id. at 119. 

102. Id. at 119-20. 

103. Id. at 120. 

104. 466 U.S. 243, 251 (1984). 

105. Trans World Airlines, Inc. v. Franklin Mint Corp., 466 U.S. 243, 251 

(1984).   

106. Franklin Mint, 466 U.S. at 245-46. The cargo consisted of four 

packages of numismatic materials that, in total, weighed 714 pounds and was 

shipped on TWA from Philadelphia to London. Id. Franklin Mint did not declare the 

value of the cargo, but declared damages of $250,000 for the subsequently lost 

packages. Id. at 246. The district court ruled that under article 22 of the Warsaw 

Convention, TWA’s liability was limited to $6,475.98. Id. 

107. Id. Justice O’Connor noted that “[t]he [Warsaw] Convention was 

drafted at international conferences in Paris in 1925, and in Warsaw in 1929. The 

United States became a signatory in 1934. More than 120 nations now adhere to it.  

The Convention creates internationally uniform rules governing the air carriage of 

passengers, baggage, and cargo.” Id. at 246-47. Article 18 of the Convention holds 

carriers liable for the loss of cargo. See Convention for the Unification of Certain 

Rules Relating to International Carriage by Air, ch. III, Art. 18, Oct. 12, 1929, 

available at http://www.jus.uio.no/lm/air.carriage.warsaw.convention.1929/18 (last 

visited on Jun. 24, 2008). (“The carrier is liable for damage sustained in the event of 

the destruction or loss of, or of damage to, any registered luggage or any goods . . . 

.”). Article 22 sets the amount of liability equal “to a sum of 250 francs per kilogram, 

unless the consignor has made . . . a special declaration of the value at delivery[,] . . . 

[then] the carrier will be liable to pay a sum not exceeding the declared sum, unless 

he proves that that sum is greater than the actual value to the consignor at delivery.”  



726                                                 Florida Tax Review                                   [Vol. 9:7  

Value Modification Act, which had the effect of abandoning the gold 

standard, rendered the liability limitation in Article 22 of the Warsaw 

Convention unenforceable in the United States.
108

 The court of appeals 

agreed, as it held the “enforcement of the [Warsaw] Convention requires a 

factor for converting the liability limit into dollars and . . . there is no United 

States legislation specifying a factor to be used by the United States 

courts.”
109

 

The Supreme Court disagreed with this reasoning.
110

 The Court did 

not cite to The Charming Betsy or Chew Heong; instead, the Court relied on 

Cook v. United States and held “[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.”
111

 Therefore, the abandonment of the 

gold standard and the enactment of legislation repealing the Par Value 

Modification Act did not terminate the United States’ obligation to follow 

                                                                                                                                         

Convention for the Unification of Certain Rules Relating to International Carriage by 

Air, ch. III, art , Oct. 12, 1929. 22, available at http://www.jus.uio.no/lm/air.carriage. 

warsaw.convention.1929/22 (last visited Jun. 24, 2008). Article 22 also states that 

the French franc consists “of 65 milligrams gold of millesimal fineness 900” and 

provides that the “sums may be converted into any national currency in round 

figures.” Id.  

In 1945, the United States became a member of the International Monetary 

Fund (“IMF”) and agreed to “maintain a ‘par value’ for the dollar and to buy and sell 

gold at the official price in exchange for balances of dollars officially held by other 

IMF nations.” Franklin Mint, 466 U.S. at 248. In 1945, a price of $35 per ounce of 

gold was established, which, under Article 22 of the Warsaw Convention, equaled a 

cargo limit of $7.50 per pound. Id. at 248-49. This changed in 1978 with the 

abandonment of the gold standard and the repeal of the Par Value Modification Act.  

Id. at 249.   

In 1968, the central banks of most Western nations “instituted a ‘two-tier’ 

gold standard in 1968[,] the gold-based international monetary system began to 

collapse” and gold transactions took place at a free market price. Id. In 1971, the 

United States passed the Par Value Modification Act, which set a standard value for 

gold; eventually the exchange rate was set at $42.22 per ounce. Id. (citing 

Aeronautics and Space, 14 C.F.R. § 221.176 (1975)). “In 1976, Congress passed 

legislation to . . . [repeal] the Par Value Modification Act effective Apr. 1, 1978.”  

Franklin Mint, 466 U.S. at 249. 

108. Id. at 251. 

109. Id. at 251, 254 n.25.   

110. 466 U.S. at 251, 254 n.25. Trans World Airlines, Inc. v. Franklin Mint 

Corp. was not a unanimous decision, Justice O’Connor wrote the majority opinion, 

in which Chief Justice Burger, Justice Powell, Justice Brennan, Justice White, 

Justice Marshall, Justice Blackmun, and Justice Rehnquist joined. Id. at 244. Justice 

Stevens was the sole dissenter. Id. 

111. Id. at 252 (quoting Cook v. United States, 288 U.S. 102, 120 (1933)).   



2009]                        Congressional Unilateral Tax Treaty Overrides                    727 

 

 
 

the Warsaw Pact.
112

 Thus, the Court construed the domestic law and treaty so 

as not to be in conflict. 

 

In our view Congress has not abandoned any “unit of 

conversion specified by the Convention” – the Convention 

specifies liability limits in terms of gold francs and provides 

no unit of conversion whatsoever. To the contrary, the 

Convention invites signatories to make the conversion into 

national currencies for themselves. In the United States the 

CAB has been delegated the power to make the conversion, 

and has exercised the power most recently in Order 74-1-16. 

We are not called upon to “[substitute] a new term,” but 

merely to determine whether the CAB’s Order is 

inconsistent with the Convention. That determination does 

not engage the “political question” doctrine.
113

 

 

 Justice Stevens, in his dissenting opinion, found Article 22 of the 

Warsaw Convention and the legislation to be in direct conflict with each 

other.
114

 According to Stevens, Article 22 required “that the liability limits be 

determined by reference to the value of ‘gold at the standard of fineness of 

nine hundred thousandths’ and then converted into our ‘national currency in 

round figures.’”
115

 Justice Stevens believed the majority held the liability 

limitation to be unenforceable and the limitation set by the Civil Aeronautics 

Board (“CAB”) as enforceable thus effectively rewriting the treaty.
116

 Under 

Stevens’ reasoning, Article 22 set the standard for the value of gold in terms 

                                                           

112. Id. at 253.   

113. Id. at 254. Under the order by the Civil Aeronautics Board 

(“CAB”), TWA’s liability was limited to $9.07 per pound. Id. CAB Order 

4-1-16, issued in 1974, set the minimum acceptable figure for liability 

limits applicable to ‘international carriage at $9.07 per pound of cargo. Id. 

at 251. Because Article 22 was not found to be in conflict with the 

legislation repealing the Par Value Modification Act, the Supreme Court 

held that TWA’s liability was limited to $9.07 per pound.   

114. Id. at 261-62 (Stevens, J, dissenting).   

115. Id. at 261 (Stevens, J., dissenting) (citing Convention for the 

Unification of Certain Rules Relating to International  Carriage by Air, ch. III, art. 

22,   Oct.   12,   1929,   available   at    http://www.jus.uio.no/lm/air.carriage.warsaw. 

convention.1929/22) (last visited Jun. 24, 2008).   

116. Id. (Stevens, J., dissenting). Stevens thought that the majority had 

rewritten the treaty and had acted outside the scope of the Judicial Branch’s 

constitutional powers, as the treaty making power belongs to the Executive Branch.  

Id. at 263 (Stevens, J., dissenting) (citing The Amiable Isabella, 19 U.S. 1, 71-73 

(1821)). 



728                                                 Florida Tax Review                                   [Vol. 9:7  

of a stated fineness, and then allowed for this sum to be converted into 

national currencies in round figures.
117

 Stevens believed the economic 

climate changed dramatically since the Warsaw Convention,
118

 and in light 

of the abandonment of the gold standard and the repeal of the Par Value 

Modification Act, “[t]he rate at which a domestic currency exchanges for 

gold was and is the only ‘conversion’ permitted or anticipated by the 

[Warsaw] Convention. That figure is the liability limitation of the Warsaw 

Convention[,]” not the amount set by CAB.
119

 

While The Charming Betsy, Cook, Chew Heong, and Trans World 

Airlines require a clear expression of congressional intent in for a domestic 

law to override a treaty, the United States v. Palestine Liberation 

Organization
120

 illustrates that even when congressional intent is clear, 

courts may still construe a treaty and a statute so as not to conflict.
121

 The 

issue was whether the Palestine Liberation Organization (hereinafter the 

“PLO”) could maintain its office, as a permanent observer, at the United 

Nations’ headquarters in New York.
122

 The PLO was asked to be an observer 

                                                           

117. Id. at 265-66 (Stevens, J., dissenting).   

118. Id. at 274-75 (Stevens, J., dissenting). When the Warsaw Convention 

was entered into, aviation was very dangerous; it was considered an unbelievable 

feat when Charles Lindbergh flew the Spirit of St. Louis from New York to Paris.  

Id. (Stevens, J., dissenting). Article 22 was intended to calm fears of losing one’s 

cargo or life in the event of a disaster and to stimulate travel and shipment by 

airlines. Id. at 264-65. Three years after the United States entered the Warsaw 

Convention, the crash of the Hindenburg occurred in 1937, furthering fears of 

traveling or shipping on airlines. Id. at 265. Stevens noted “[a]ir travel is among the 

safest forms of transportation and the fledging venture of a half century ago is a 

major, established international industry today. Id. at 273. 

119. Id. at 275.   

120. 695 F.Supp. 1456 (S.D.N.Y. 1988). 

121. The Schooner Charming Betsy, 6 U.S. 64, 81 (1808); Cook, 288 U.S. 

at 120 (1933); Chew Heong, 112 U.S. 536, 560 (1884); Trans World Airlines, Inc., 

466 U.S. 243, 251 (1984); Palestine Liberation Organization, 695 F. Supp. at 1465-

68.   

122. Palestine Liberation Organization, 695 F. Supp. at 1458. The court 

referred to the Headquarters Agreement, in which the United States extended an 

invitation to the United Nations to establish a seat within the U.S. Id. (citing H.R. 

Con. Res. 75, 79th Cong., (1st Sess. 1945)). The United Nations has invited non-

member Nations, consisting of intergovernmental organizations and other 

organizations to maintain “Permanent Observer Missions” in New York. Id. The 

PLO is one of the “other organizations” asked to become an observer at the U.N. Id. 

(citing Headquarters Agreement, § 11, 61 Stat. 756 (1947)); see United Nations, 

available at http://www.un.org/Overview/missions.htm#iga (last visited Jun. 24, 

2008).   



2009]                        Congressional Unilateral Tax Treaty Overrides                    729 

 

 
 

to the United Nations in 1974 and maintain a Permanent Observer Mission in 

the U.N.’s New York headquarters.
123

   

In 1986, Congress asked the U.S. State Department to close the PLO 

mission office in New York.
124

 The request was unsuccessful and gave rise 

to the Anti-Terrorism Act of 1987 (hereinafter the “ATA”).
125

 Under the 

ATA, the PLO was “stated to be ‘a terrorist organization and a threat to the 

interests of the United States, its allies, and international law, and it should 

not benefit from operating in the United States.’”
126

 The ATA prohibited “the 

establishment or maintenance of ‘an office, headquarters, premises, or other 

facilities or establishments within the jurisdiction of the United States at the 

behest or direction of, or with funds provided by’ the PLO, if the purpose is 

to further the PLO’s interests.”
127

   

The ATA was clearly and expressly aimed at removing the PLO 

from the U.N. headquarters in New York.
128

 The Court held the statute did 

not override the treaty, and cited The Charming Betsy, Cook, Chew Heong, 

The Head Money Cases, and Trans World Airlines, when it stated a court is 

under a duty to interpret statutes in a manner consistent with existing treaty 

obligations, and a domestic statute enacted later-in-time should not override 

a treaty provision unless Congress clearly and unequivocally expressed their 

intent to override the treaty.
129

  

                                                           

123. Palestine Liberation Organization, 695 F. Supp. at 1459. The 

“observer” status conferred the right upon the representatives of the PLO to 

admission to the United States and access to the United Nations. Id. at 1459, 1465 

(citing 61 Stat. 756) (“Section 11 of the Headquarters Agreement reads . . . [t]he 

federal, state or local authorities of the United States shall not impose any 

impediments to transit to or from the headquarters district of: (1) representatives of 

Members . . ., (5) other persons invited to the headquarters district by the United 

Nations . . . on official business.”). Further, “[s]ection 12 requires that the provisions 

of § 11 be applicable ‘irrespective of the relations existing between the Governments 

of the persons referred to in that Section and the Government of the United States.’” 

Id. (citing 61 Stat. 756). The right to access into the United States, granted under the 

Headquarters Agreement, was unsuccessfully challenged in the Eastern District of 

New York and the PLO’s right to access was upheld. Id.   

124. Id. (citing Anti-PLO Terrorism Act of 1987, H.R. 2211, 100th Cong., 

(1st Sess. 1987)). 

125. Id. at 1459-60.   

126. Id. at 1460 (citing 22 U.S.C. § 5201(b)).   

127. Id. (citing 22 U.S.C. § 5202(3)). The ATA also prohibited the 

spending of PLO funds and proscribed the PLO from receiving, in New York, 

anything of value except material information from the PLO. Id. (citing 22 U.S.C. §§ 

5202(1)-(2)).   

128. Palestine Liberation Organization, 695 F. Supp. at 1465. 

129. Id. at 1465. The PLO argued that application of the ATA would violate 

the Headquarters Agreement. The district court agreed and held that the ATA was 



730                                                 Florida Tax Review                                   [Vol. 9:7  

 In reaching their decision, the district court analyzed the language of 

both the Headquarters Agreement and the ATA. It referred to the United 

States’ past practice regarding the Headquarters Agreement and the 

interpretation each party gave to such agreement.
130

 The district court 

reasoned Congress did not clearly express its intention to abrogate the 

Headquarters Agreement because neither the Mission nor the Headquarters 

Agreement was mentioned in the ATA. It stated, “[s]uch an inclusion would 

have left no doubt as to Congress’ intent on the matter which had been raised 

repeatedly with respect to this act, and its absence here reflects equivocation 

and avoidance, leaving the court without clear interpretive guidance in the 

language of the act.”
131

 

 Palestine Liberation Organization is a glaring illustration of the 

efforts a court will exert to harmonize a treaty with the subsequent enactment 

of a statute, without applying the later-in-time rule to override the treaty.
132

 

 Up to this point, this article has examined statutory overrides of 

treaty provisions in the context of “domestic dependent nations,” commerce 

with Indian nations, immigration, and trade with foreign nations.
133

 

                                                                                                                                         

“inapplicable to the PLO Mission to the United Nations.” Id. at 1466-68.  

130. Id. at 1466-68, 1471. The district court noted that in the forty years 

since the United States had accepted the Headquarters Agreement, it had taken 

numerous “actions consistent with its recognition of a duty to refrain from impeding 

the functions of observer missions to the United Nations.” Id. at 1466. Further, after 

the PLO was asked to establish a permanent observer mission, the Department of 

State took the position that it was required to grant access to the United Nations by 

the PLO. Id. (citations omitted). The district court reasoned that the ATA’s language 

that it should apply “notwithstanding any provision of law to the contrary[,]” did not 

apply “notwithstanding any treaty.” Id. at 1468. The district court also thought it was 

important that the Department of State, part of the Executive Branch, took the 

position that the Headquarters Agreement should remain effective when petitioned 

by Congress to remove the PLO from the U.N. headquarters in New York. Id. at 

1466. 

131. Id. at 1468. 

132. See generally Curtis A. Bradley, The Charming Betsy Canon and 

Separation of Powers: Rethinking the Interpretive Role of International Law, 86 

Geo. L.J. 479 (1998) (providing a thorough examination The Charming Betsy 

doctrine).   

133. Taylor v. Morton, 23 F. Cas. 784 (Curtis, Circuit Justice, C.C.D. Mass. 

1855) (involving the domestic override of a treaty in the context of Congress’ power 

to regulate commerce with foreign nations); The Cherokee Tobacco, 78 U.S. 616 

(1870) (involving the statutory override of a treaty with a “domestic dependent 

nation” and pursuant to Congress’ power to regulate commerce with Indian Nations); 

Chew Heong v. United States, 112 U.S. 536 (1884) (involving Congress’ power over 

immigration); Edye v. Robertson, 112 U.S. 580 (1884) (involving Congress’ power 

over immigration); Whitney v. Robinson, 124 U.S. 190 (1888) (involving Congress’ 

power to regulate commerce with foreign nations); Chae Chan Ping v. United States, 



2009]                        Congressional Unilateral Tax Treaty Overrides                    731 

 

 
 

However, the issue of domestic law overriding treaty provisions also arises 

in the context of the Internal Revenue Code and tax conventions. 

 

VI. TREATY OVERRIDES AND THE INTERNAL REVENUE CODE
134

 

 

Initially, the Code declared treaty obligations prevailed over 

domestic tax laws; “[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.”
135

 However, in the 

1962 Revenue Act, Congress changed how treaty obligations would be 

treated for domestic tax purposes when it provided that “[s]ection 7852(d) of 

the Internal Revenue Code of 1954 (relating to treaty obligations) shall not 

apply in respect to any amendment made by this Act.”
136

 At this time, the 

United States had an estate tax treaty with Greece which included a real 

estate exemption provision that was in conflict with the 1962 Revenue 

Act.
137

 The conflict never became an issue because the effective date of the 

domestic tax law was deferred for two years, allowing for the renegotiation 

of the treaty.
138

 

 The Code further gave treaties preference over domestic law through 

the Foreign Investors Tax Act of 1966; “[n]o amendment made by this title 

shall apply in any case where its application would be contrary to any treaty 

obligation of the United States.”
139

 However, favorable treatment was short 

                                                                                                                                         

130 U.S. 581 (1889) (involving Congress’ power over immigration). 

134. Hereinafter referred to as the “Code.” 

135. IRC §§ 894(a), 7852(d) (1954) (“No provision of this title shall apply 

in any case where its application would be contrary to any treaty obligation of the 

United States in effect on the date of enactment of this title.”).   

The Code’s former treatment of treaty obligations should be contrasted with 

how the Internal Revenue Service currently views such obligations; now the Code 

applies “to any taxpayer with due regard to any treaty obligation . . . which applies to 

such taxpayer.” IRC § 894(a). The 1954 language was changed in 1988, and allows 

Congress to give due regard to any treaty obligation and still tax an item that is 

exempt from taxation under the treaty. Also in 1988, the House of Representatives 

amended § 7852(d) and officially adopted the later-in-time doctrine therein.  

Overriding Tax Treaties, supra note 7, at 80-81; § 7852(d) (1988) (“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.”). 

136. The Revenue Act of 1962, Pub. L. No. 87-834 § 31, 76 Stat. 960, 1069 

(1962). 

137. H.R. Rep. No. 2508, 87th Cong., 2d Sess. 48 (1962), reprinted in 1962 

U.S.C.C.A.N. 3732, 3771; Sachs, supra note 51, at 870-71.   

138. Id.   

139. Foreign Investors Tax Act of 1966, Pub. L. No. 89-809 § 110, 80 Stat. 



732                                                 Florida Tax Review                                   [Vol. 9:7  

lived.  

 The Tax Reduction Act of 1975 reduced the amount of credit to 

income arising from foreign oil and gas.
140

 This Act failed to state whether it 

was to apply notwithstanding any conflicting treaty obligations. The House 

and the Senate failed to provide for such application in the legislative history, 

but the Service ruled that these changes would override any conflicting treaty 

provisions.
141

 Furthermore, the Tax Reform Act of 1976 gave preference to 

domestic tax laws over treaty obligations.
142

    

                                                                                                                                         

1539, 1575 (1966).  

140. Tax Reduction Act of 1975, Pub. L. No. 94-12 § 601, 89 Stat. 26, 54-

58 (1975). Section 907(a) provided for a reduction in the amount of credit allowed 

under § 901, which gives a credit to foreign oil and gas income. Id at § 601(d)(1)–

(2). During this time period, the unemployment rate was rising and the economy was 

declining. Id. at § 501. The purpose of this amendment was, inter alia, to counteract 

the aforementioned negative factors by stimulating the economy, while creating jobs. 

Id.  

141. Sachs, supra note 51, at 871; Rev. Rul. 80-223, 1980 C.B. 217 (1980) 

(“§§ 901(f) and 907 of the Code by the 1975 Act supersede inconsistent provisions 

of all income tax treaties, those in effect on the date of the enactment of the 1954 

Code as well as those in effect after this date.”). 

142. Tax Reform Act of 1976, Pub. L. No. 94-455 § 1031, 90 Stat. 1520, 

1620-24 (1976); Sachs, supra note 51, at 871. The Service took the position that § 

1031 of the Tax Reform Act of 1976, which amended Code § 904(a) to provide that 

the limitation on the foreign tax credit shall be computed using only the overall 

method, overrides the foreign tax credit per-country limitation provided in United 

States income tax treaties. Rev. Rul. 80-201, 1980-2 C.B. 221 (1980); Sachs, supra 

note 51, at 872. 

[T]he method for determining the limitation on foreign tax credits 

has taken a variety of forms over the years, having been computed 

based on a taxpayer’s overall foreign source income when first 

enacted in 1921, limited to the lesser of an overall or per-country 

amount in the 1930’s, 1940’s, and early 1950’s, and computed 

country by country in the latter half of the 1950’s. Beginning in 

1960, taxpayers were given the option of an overall or per country 

limitation until 1976 when the per country limitation was repealed 

and the law returned to its 1921 shape. There it rested until 1986 

when today’s system, which categorizes various types of income 

into so-called baskets for purposes of calculating the foreign tax 

limitation, came into effect. Whenever the limitation has changed, 

Congress has expressed concern with protecting the U.S. tax on 

U.S. source income from erosion. 

Michael J. Graetz, Taxing International Income: Inadequate Principles, Outdated 

Concepts, and Unsatisfactory Policies, 26 Brook. J. Int’l L. 1357, 1359-60 (2001) 

(citations omitted). 



2009]                        Congressional Unilateral Tax Treaty Overrides                    733 

 

 
 

Throughout the last several decades, Congress promulgated a 

number of treaty overrides.
143

 

 

A. Congressional Treaty Overrides
144

 

 

 The following is an exhaustive list of treaty overrides enacted during 

the past 45 years: 

 

A) Revenue Act of 1962 – Section 27.  Treaties. Senate amendment No. 

203: The bill as passed by the House provided section 7852(d) of the 

code, relating to treaty obligations, was not to apply in respect of any 

amendment made by the Revenue Act of 1962. Senate amendment No. 

203 provides no provision of this Act will apply in any case where its 

application would be contrary to any treaty obligation of the United 

States;
145

 

 

B) Foreign Investors Tax Act of 1966 – Section 110. Treaty Obligations.  

The section provides no amendment made by this title shall apply in 

any case where its application would be contrary to any treaty 

obligation of the United States. However, granting a benefit provided 

by an amendment made by this bill is not to be considered to be 

contrary to a treaty obligation. Thus, even though a nonresident alien 

or foreign corporation has a permanent establishment in the United 

States, income which is not effectively connected with this business is 

to be taxed at the applicable treaty rate rather than at the regular 

individual or corporate rate;
146

 

 

C) Tax Reduction Act of 1975 – Section 601. Limitations On Foreign Tax 

Credit For Taxes Paid In Connection With Foreign Oil And Gas 

Income. The Act was to amend the Internal Revenue Code of 1954 to 

provide for a refund of 1974 individual income taxes, to increase the 

low income allowance and the percentage standard deduction, to 

provide a credit for personal exemptions and a credit for certain earned 

                                                           

143. Overriding Tax Treaties, supra note 7, at 83. Prior to the 1980s, 

statutory overrides of tax treaties were rare. Harry G. Gourevitch, Tax Treaties: The 

Legislative Override Problem, 93 Tax Notes Int’l 172-15 (1993).   

144. See Anthony C. Infanti, Curtailing Tax Treaty Overrides: A Call To 

Action, 62 U. Pitt. L. Rev. 677, 682-683 (2001). This article contributed general 

information and citations for this list. 

145. See Revenue Act of 1962, supra note 137. 

146. See Foreign Investors Tax Act of 1966, supra note 135. 



734                                                 Florida Tax Review                                   [Vol. 9:7  

income, to increase the investment credit and the surtax exemption, to 

reduce percentage depletion for oil and gas, and for other purposes;
147

 

 

D) Tax Reform Act of 1976 – Section 1031. Requirement That Foreign 

Tax Credit Be Determined On Overall Basis. The Senate Finance 

Committee provided it was the Committee’s understanding that the 

per-country limitation was not required under the provisions of any 

recent income tax treaty between a foreign country and the United 

States. It was the committee’s intent for consistent application of all 

existing treaties with this amendment by using the overall limitation in 

computing the allowable foreign tax credit. The committee further 

intends that, as was the case with other recent legislation modifying 

the foreign tax credit. The amendments made by the committee’s bill 

are to be used in computing the credit allowed under all treaties;
148

 

 

E) Foreign Investment in Real Property Tax Act of 1980 – Section 1445 

Concerning disposition of United States Real Property Interest. – 

Gains, profits, and income from the disposition of a United States real 

property interest (as defined in section 897 (c)). Section 1125 (c). 

Special Rule for Treaties. Except as provided in paragraph (2), after 

December 31, 1984 nothing in section 894(a) or 7852(d) of the 

Internal Revenue Code of 1954 or in any other provision of law shall 

be treated as requiring, by reason of any treaty obligation of the United 

States, an exemption from (or reduction of) any tax imposed by 

section 871 or 882 of such Code on a gain described in section 897 of 

such Code;
149

 

 

F) Tax Reform Act of 1984 – Section 127 Repeal of 30% tax on portfolio 

interest paid to foreign persons. Payments of passive income (interest, 

dividends, royalties, etc.) to foreign persons generally are subject to a 

30% U.S. withholding tax if the payments are not effectively 

connected with a U.S. trade or business conducted by the foreign 

person. Exemptions from the tax are provided in  certain situations.  

Some U.S. tax treaties reduce the tax. Some treaties eliminate the tax. 

The conference agreement generally repeals the 30% withholding tax 

on interest paid on portfolio indebtedness by U.S. borrowers to 

nonresident alien individuals and  foreign corporations;
150

 

 

                                                           

147. See Tax Reduction Act of 1975, supra note 139. 

148. See Tax Reform Act of 1976, supra note 141. 

149. See Foreign Investment in Real Property Tax Act of 1980, infra note 

157. 

150. See Tax Reform Act of 1984, infra note 161. 



2009]                        Congressional Unilateral Tax Treaty Overrides                    735 

 

 
 

G) Tax Reform Act of 1986 – Section 1241 Branch-level interest tax. This 

section states any interest paid by a branch’s U.S. trade or business is 

U.S. source and subject to U.S. withholding tax of 30%, unless the tax 

is reduced or eliminated by a specific Code or treaty provision. For 

purposes of determining whether the tax on the excess interest is to be 

reduced or eliminated by treaty, the applicable treaty generally is any 

income tax treaty between the United States and the country of the 

corporation’s home office. However, any treaty benefits available in 

this case are subject to the agreement’s prohibition against treaty 

shopping. The conference agreement generally follows the Senate 

amendment in providing that existing U.S. income tax treaties may 

modify, reduce, or eliminate the branch profits tax, the second-level 

withholding tax on dividends, or the branch-level tax on interest 

except in cases of treaty shopping;
151

 

 

H) Technical and Miscellaneous Revenue Act of 1988 – Section 1012 

(aa). Coordination with Treaties. (2) Certain Amendments To Apply 

Notwithstanding Treaties. This section provides in part the following 

amendments made by the Reform Act “apply notwithstanding any 

treaty obligation of the United States in effect on the date of the 

enactment of the Reform Act.  (A) The amendments made by section 

1201 of the Reform Act, and  (B) The amendments made by title VII 

of the Reform Act to the extent such amendments relate to the 

alternative minimum tax foreign tax credit;”
152

  

 

I) Omnibus Budget Reconciliation Act of 1989 – Section 7210. The 

 Earnings Stripping Rules. Section 7403. Information With Respect To 

 Certain Foreign-Owned Corporations. (a) 25% Foreign-Owned 

 Corporations Required to Report. Section 7815(d)(14). The Estate Tax 

 Marital Deduction For Non-Citizen Spouses;
153

 

 

J) Omnibus Budget Reconciliation Act of 1993 – Section 13238.  

Authorizing the promulgation of regulations re-characterizing 

multiple-party financing transactions;
154

 

 

                                                           

151. See Tax Reform Act of 1986, infra note 167. 

152. Technical and Miscellaneous Revenue Act of 1988, Pub L No 100-647 

§ 1012, 102 Stat. 3342, 3531 (1988). See TAMRA infra note 171. 

153. See Omnibus Budget Reconciliation Act of 1989, infra note 194.  

154. See Omnibus Budget Reconciliation Act of 1993, infra note 195. 



736                                                 Florida Tax Review                                   [Vol. 9:7  

K) Health Insurance Portability and Accountability Act of 1996 – Section 

511. Taxation of expatriates;
155

 

 

L) Taxpayer Relief Act of 1997 – Section 1054(a). Denial of Treaty 

Benefits For Certain Payments Through Hybrid Entities. A foreign 

person shall not be entitled under any income tax treaty of the United 

States with a foreign country to any reduced rate of any withholding 

tax imposed by this title on an item of income derived through an 

entity which is treated as a partnership for purposes of this title if – 

(A), (B), & (C) of the title are raised;
156

 

 

M) American Jobs Creation Act of 2004 – Section 801(a). Anti-Inversion 

Provision. Section 804. Taxation of Expatriates.
157

 

 

 The Foreign Investments in Real Property Tax Act of 1980 

(hereinafter “FIRPTA”) authorized the United States to tax non-residents on 

the sale of U.S. real property, and on the gain from the sale of shares in 

certain U.S. real property holding corporations.
158

 Notably, most treaties 

entered into with the United States specifically exempted foreigners from 

gain on domestic stock.
159

  However, FIRPTA expressly provided, 

 

                                                           

155. See Health Insurance Portability and Accountability Act, infra note 

199. 

156. See Taxpayer Relief Act of 1997, infra note 202. 

157. American Jobs Creation Act of 2004, Pub L No 108-357 § 804, 118 

Stat. 1418, 1565, 1569-73 (2004). See also supra note 172. 

158. Foreign Investment in Real Property Tax Act of 1980, Pub. L. No. 96-

499, § 1121, 96 Stat. 2682 § 1121, 94 Stat. 2599 (1980). Section 1122 of FIRPTA 

amended the 1954 Code to include a new section, § 897. Id.  Section 897 taxes non-

resident aliens or foreign corporations on the gains upon the dispositions of direct or 

indirect interests in United States real property. Id. A report from the Senate Finance 

Committee is instructed on the Act’s purpose, noting that the Finance Committee   

believes that it is essential to establish equity of tax treatment in 

U.S. real property between foreign and domestic investors. The 

committee does not intend by the provisions of this bill to impose 

a penalty on foreign investors or to discourage foreign investors 

from investing in the United States. However, the committee 

believes that the United States should not continue to provide an 

inducement through the tax laws for foreign investment in U.S. 

real property which affords the foreign investor a number of 

mechanisms to minimize or eliminate his tax on income from the 

property while at the same time effectively exempting him from 

U.S. tax on the gain realized on disposition of the property. 

S. Rep. No. 96-499, at 8-9 (1979). 

159. Doernberg, super note 7, at 83. 



2009]                        Congressional Unilateral Tax Treaty Overrides                    737 

 

 
 

nothing in section 894(a) or 7852(d) of the Internal Revenue 

Code of 1954 or in any other provision of law shall be 

treated as requiring, by reason of any treaty obligation of the 

United States, an exemption from (or any reduction of) any 

tax imposed by section 871 or 882 of such Code on a gain 

described in section 897 of such Code.
160

 

 

 FIRPTA had a clear expression of congressional intent to override 

any prior inconsistent treaty provisions. However, a five year delayed 

effective date allowed the Treasury Department to renegotiate treaties 

containing conflicting tax-exemption provisions.
161

 

 Section 269B was enacted with the passage of the Tax Reform Act 

of 1984.
162

 Under section 269B, the stock of a foreign corporation was 

“stapled” to the stock of a domestic corporation because a shareholder could 

not buy or sell the stock of one corporation without buying or selling the 

stock of the other.
163

  Section 269B superseded tax treaty provisions which 

conferred tax-exempt status, under domestic law, on corporations from the 

partner nation of the treaty.
164

 Moreover, section 904(g), added by section 

121(a) of the Act, re-characterizes “the source of certain United States-

owned foreign corporations.”
165

 Section 7701(b), also enacted as part of the 

Act, orders an alien individual to be taxed as a U.S. resident, under certain 

                                                           

160. Foreign Investment in Real Property Tax Act of 1980, Pub. L. No. 96-

499, § 1125(c), 94 Stat. 2690 (1980). Recall that § 894(a) and § 7852(d) of the 1954 

Code mandated that treaty obligations shall prevail over domestic tax laws. IRC §§ 

894(a); 7852(d) (1954); supra note 124. 

161. Gourevitch, supra note 142, at 2; Overriding Tax Treaties, supra note 

7, at 83.  

162. Tax Reform Act of 1984, Pub. L. No. 98-369, 98 Stat. 494 (1984); 

Gourevitch, supra note 142, at  n.2. 

163. Pub. L. 98-369 § 136, 98 Stat. 669–72 (1984).  

164. Gourevitch, supra note 142, at 2; § 269B(d); Deficit Reduction Act of 

1984, Pub. L. No. 98-369, 98 Stat. 1175 (1984). If the foreign corporation has a 

permanent establishment in the United States, it would then be subject to U.S. 

taxation. 

165. Sachs, supra note 51, at 872. Section 904(g), “provided that interest, 

dividends and certain other payments by a U.S. owned foreign corporation are to be 

treated in the hands of the recipient as U.S. source rather than foreign source income 

to the extent the payments are attributable to income of the U.S. owned foreign 

corporations from U.S. sources.” Gourevitch, supra note 142. Following enactment, 

it was not clear whether § 904(g) was to prevail over inconsistent treat provisions; 

however, this was resolved “in the Tax Reform Act of 1986 and related Senate 

Finance Committee report which retroactively expressed a congressional intent that 

[the] initially inadvertent statutory changes [of §§ 904(g) and 7701(b)] were to 

override inconsistent tax treaties.” Id.  



738                                                 Florida Tax Review                                   [Vol. 9:7  

circumstances, thus conflicting with definitions of what constitutes a U.S. 

resident under the terms of a treaty.
166

 Congress still determined these 

conflicting treaty provisions should triumph over the domestic law 

definition.
167

 

 Additionally, the Tax Reform Act of 1986 contained further 

provisions affecting international commerce.
168

 The Act added Code section 

865, which taxes a nonresident maintaining an office or other fixed place of 

business in the United States, on “any sale of personal property (including 

inventory property) attributable to such office or other fixed place of 

business . . .”
169

 If the nonresident does not maintain an office or other fixed 

place of business in the U.S., the taxpayer is not subject to U.S. taxation 

because the source of his or her income is the country of residence.
170

 

 Section 904(d) increased “the number of separate categories of 

foreign source income for purposes of the foreign tax credit limitation.”
171

  

This expansion conflicts directly with tax treaties; however, there is no 

congressional expression as to whether domestic law or the conflicting treaty 

provisions are to prevail in the event of a conflict.
172

 In 2004, as part of the 

American Jobs Creation Act, Congress amended section 904(d),
173

 limiting 

                                                           

166. Gourevitch, supra note 142.   

167. See Staff of Joint Committee on Taxation, 98th Cong., General 

Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, at 468 

(Comm. Print 1985) (“[A]n alien who is a resident of the United States under the 

new statutory definition but who is a resident of a treaty partner of the United States 

(and not a resident of the United States) under a U.S. income tax treaty is eligible for 

the benefits that the treaty extends to residents of the treaty partner.”)   

168. IRC § 1, 11, 38, 46-48 (1986).  “The 1986 Act lowered individual and 

corporate income tax rates, and reduced total expected tax payments from 

individuals while increasing those from corporations. Familiar features of the 

Internal Revenue Code like the investment tax credit and full deductibility of 

contributions into individual retirement accounts (IRAs) disappeared. Many new 

provisions appeared, such as the passive loss limitation rule aimed at curbing tax 

shelters.”  Richard L. Doernberg & Fred S. McChesney, Doing Good or Doing 

Well? Congress and the Tax Reform Act of 1986, 62 N.Y.U. L. Rev. 891, 891 

(1987). (citations omitted)  

169. IRC § 865(e)(2)(A). 

170. Id.   

171. Gourevitch, supra note 142.  

172. Id.  Congress enacted the Technical and Miscellaneous Revenue Act of 

1988, Pub. L. No. 100-647, 102 Stat. 3342 (1988(, (hereinafter TAMRA) to 

retroactively express its intent that the changes made to § 904(d) in the Tax Reform 

Act of 1986 were to override inconsistent treaties. Gourevitch, supra note 142 (citing 

H.R. Rep. No. 100-1104 at 204-206 (1988) (Conf. Rep.) The Tax Reform Act of 

1986 “also limited the alternative minimum foreign tax credit to 90% of the tentative 

U.S. alternative minimum tax.” Gourevitch, supra note 142.  

173. P.L. 108-357, §404(a), 118 Stat. 1418, 1494 (2004) (Hereinafter 



2009]                        Congressional Unilateral Tax Treaty Overrides                    739 

 

 
 

foreign source categories to either the passive income category or the general 

income category. Despite the re-characterization of the categories, the 

definition of “passive category income” as contained in section 904(d)(2),
174

 

may still conflict with international treaty provisions. 

 Internal Revenue Code sections 884(a) and (f), known as the branch 

profits tax, were also enacted as part of the Tax Reform Act of 1986.
175

 The 

                                                                                                                                         

American Jobs Creation Act]. 

174.  Passive income “means any income received or accrued by any person 

which is of a kind which would be a foreign personal holding company income (as 

defined in § 954(c)).  IRC § 904(d)(2)(B)(i). 

175. Pub. L. No. 99-514, § 1241(a), 100 Stat. 2285, 2576 (1986). Before the 

branch profits tax,  

a foreign corporation owned by foreign investors and doing 

business in the United States was taxed at the corporate level under 

the regular graduated corporate rates on income effectively 

connected with a U.S. trade or business. If the foreign investors 

operated in the United States through a domestic corporation, the 

outcome was the same. Differences in treatment arose when the 

corporation distributed its corporate earnings to foreign investor-

owners. 

Doernberg, supra note 7, at 84. (citations omitted). At this time, dividends paid by 

foreign corporations to foreign investors were rarely subject to U.S. taxation because 

many treaties exempted such dividends paid by foreign corporations to non-U.S. 

residents. Id. at 84-85. In contrast, dividends paid by domestic corporations to non-

U.S. residents were subject to a 30% tax. See §§ 871(a)(1) (withholding tax on 

nonresident alien individuals) 881(a) (withholding tax on non resident alien 

corporations). The resulting effect was that domestic corporations were subject to 

two levels of taxation while foreign corporations were subject to only one level of 

taxation.   

IRC § 884(a), the branch profits tax on earnings, imposes “on any foreign 

corporation a tax equal to 30% of the dividend equivalent amount for the taxable 

year.”). Section 884(f)(1), the branch profits tax on interest provides:  

In the case of the foreign corporation engaged in a trade or 

business in the United States (or having gross income treated as 

effectively connected with the conduct of a trade or business in the 

United States), for purposes of the subtitle – (A) any interest paid  

by such trade or business in the United States shall be treated as if 

it were paid by a domestic corporation, and (B) to the extent that 

allocable interest exceeds the interest described in subparagraph 

(A), such foreign corporation shall be liable for tax under § 881(a) 

in the same manner as if such excess were interest paid to such 

foreign corporation by a wholly owned domestive corporation on 

the last day of such foreign corporation’s taxable year. the amount 

of interest allowable as a deduction under § 882 in computing the 

effectively connected taxable income of such foreign corporation 



740                                                 Florida Tax Review                                   [Vol. 9:7  

branch profits tax has specific provisions dealing with treaty obligations. 

Section 884(e) limits the effect of an income tax treaty provision, “[n]o treaty 

between the United States and a foreign country shall exempt any foreign 

corporation from the tax imposed by subsection (a) (or reduce the amount 

thereof) unless . . . such treaty is an income tax treaty, and . . . such foreign 

corporation is a qualified resident of such foreign country.”
176

 A similar 
                                                                                                                                         

exceeds the interest described in subparagraph (A), such foreign 

corporation shall be liable for tax under § 881(a) in the same 

manner as if such excess were interest paid to such foreign 

corporation by a wholly owned domestic corporation on the last 

day of such foreign corporation’s taxable year. 

See Doernberg, supra note 7, at 85 (providing a comprehensive analysis of the 

branch profits tax on interest). The purpose of the branch profits tax is to subject 

foreign corporations to two levels of taxation, just as domestic corporations are taxed 

at two levels – the corporate level (with a maximum rate of 35%) and the 

shareholder level (with a maximum rate of 35%). See id. Under the branch profits 

scheme, the foreign corporation’s income is taxed at the corporate rate when it is 

earned and then the foreign corporation is taxed again, the branch profits tax, when 

the income is repatriated by the foreign corporation. Id.  The effect is to treat foreign 

corporations equally as domestic corporations. Id. However, the branch profits tax is 

levied solely upon the corporation and not the shareholder. 

There are special rules for when a domestic corporation makes a 

distribution to a non-U.S. resident and foreign corporation. Dividends received by 

non-resident shareholders are subject to a 30% tax. Sections 871(a)(1) (imposing “a 

tax of 30% of the amount received from sources within the United States by a 

nonresident alien individual”); § 881(a) (imposing “a tax of 30% of the amount 

received from sources within the United States by a foreign corporation”). Section 

1441(a) lays out the general withholding rule: 

all persons, in whatever capacity acting (including lessees or 

mortgagors of real or personal property, fiduciaries, employers, 

and all officers and employees of the United States) having the 

control, receipt, custody, disposal, or payment of any of the items 

of income specified in subsection (b) (to the extent that any of 

such items constitutes gross income from sources within the 

United States), of any nonresident alien individual or of any 

foreign partnership shall . . . deduct and withhold from such items 

a tax equal to 30% thereof, except that in the case of any item of 

income specified in the second sentence of subsection (b), the tax 

shall be equal to 14% of such item. 

Section 1441(b) covers items such as interest, “dividends, rent, salaries, wages, 

premiums, annuities, compensations, remunerations, emoluments, or other fixed or 

determinable annual or periodical gains, profits, and income . . .” Section 1442(a) 

states that “[i]n the case of foreign corporations subject to taxation under this 

subtitle, there shall be deducted and withheld at the source in the same manner and 

on the same items of income as is provided in § 1441 a tax equal to 30% thereof.”    

176. For § 884(e)(1) purposes, “qualified resident”   

means, with respect to any foreign country, any foreign 



2009]                        Congressional Unilateral Tax Treaty Overrides                    741 

 

 
 

requirement in section 884(f)(3) states “no benefit under any treaty between 

the United States and the foreign country of which such corporation is a 

resident shall apply unless . . . such treaty is an income tax treaty, and . . . 

such foreign corporation is a qualified resident of such foreign country.” 

However, there is an exception to these two provisions, making them 

inapplicable where a foreign corporation is engaged in treaty shopping.
177

 

 Despite seeming to pay respect to treaty obligations in regards to tax 

treaties and qualified residents, the branch profits tax, in fact, overrides other 

provisions.
178

 One such provision is the non-discrimination requirement, 

requiring foreign entities to receive the same tax treatment as domestic 

entities engaged in the same activities.
179

 Domestic corporations do not pay a 

branch profits tax rather, they are taxed at the corporate level when they earn 

income, and shareholders are taxed in their individual brackets when they 

receive distributions.
180

 In contrast, foreign corporations are taxed at the 

corporate level when they earn income and are taxed again, with the branch 

profits tax, on distributions to foreign shareholders.
181

 Therefore, non-

discrimination provisions are violated because foreign corporations receive 

                                                                                                                                         

corporation which is a resident of such foreign country unless (1)  

50% or more (by value) of the stock of such foreign corporation is 

owned . . .  by individuals who are not residents of such foreign 

country and who are not United States citizens or resident aliens, 

or (ii) 50% or more of its income is used (directly or indirectly) to 

meet liabilities to persons who are not residents of such foreign 

country or citizens or residents of the United States. 

IRC § 884(e)(4)(A). It is important to note that the term “qualified resident” is 

defined under U.S. domestic law and not under the negotiated terms of the treaty. 

177. Section 884(e)(4)(D). Gourevitch, supra note 142. The definition of 

“qualified resident” in § 884(e) “prevents non-treaty country foreign investors from 

treaty shopping by capitalizing a treaty corporation with a large amount of debt 

while residents of the treaty country hold shares of the corporation having little or no 

value.” Section 884(e)(4)(A) (1986); Overriding Tax Treaties, supra note 7, at 90. To 

fall under the terms of that definition, a foreign treaty corporation must use 50% or 

less of “its income . . . to meet liabilities to persons who are not residents of the 

treaty country or the United States.” Section 884(e)(4)(A)(ii) (1986).   

178. See Doernberg, supra note 7, at 88-90. 

179. Id., at 88 (explaining and applying the non-discrimination provision). 

180. See IRC § 11 (relating to Subchapter C corporate tax rates); 301 

(relating to taxation of Subchapter C corporate shareholders upon corporate 

distributions). 

181. Section 884(a) imposes a 30% tax on the “dividend equivalent 

amount.” Section 884(b) defines “dividend equivalent” amount as the foreign 

corporation’s effectively connected earnings and profits, with some U.S. net equity 

adjustments. Therefore, if a foreign owned corporation pulls profits out of its U.S. 

business they will incur the branch profits tax.  



742                                                 Florida Tax Review                                   [Vol. 9:7  

unfavorable tax treatment in comparison to domestic corporations.  

Congress, however, does not believe that foreign corporations are taxed 

unfavorably because foreign corporations and their shareholders are taxed 

“no worse than U.S. corporations and their shareholders . . . .”
182

 

 The Technical and Miscellaneous Revenue Act of 1988 (“TAMRA”) 

continued the Code’s trend of placing domestic law in a superior position to 

treaty obligations.
183

 First, TAMRA was expressly provided to apply, 

notwithstanding any treaty obligation of the United States.
184

 TAMRA also 

codified the later-in-time doctrine by amending section 7852(d) to read, 

“[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 a 

law.”
185

 An equally significant change commanded by TAMRA, was the 

amendment of section 894(a) to read “[t]he 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.”
186

 Prior to 1988 and TAMRA, 

section 894(a) gave preference to treaty obligations over domestic tax 

laws.
187

 TAMRA also added section 6114, which required a taxpayer to 

disclose on his tax return his reliance on a treaty provision superseding a 

domestic tax statute.
188

 

                                                           

182. Id. (citing Staff of J. Comm. on Tax’n, 99th Cong., General 

Explanation of the Tax Reform Act of 1986, at 1038 (Comm. Print 1987); Tim N. 

Vettel, Branch-Level Tax and Treaty Overrides, 35 Tax Notes 632, 633 (1987)).  

“[S]ince U.S. corporations are taxed on their earnings, and U.S. shareholders of such 

corporations are taxed on dividend distributions, it is not discriminatory to subject 

foreign corporations and their shareholders to two taxes – one on a corporation’s 

earnings and the other on the repatriation of those earnings.” Overriding Tax 

Treaties, supra note 7, at 89 (providing an analysis of the non-discrimination 

provisions found in many treaties and their relationship with the branch profits tax). 

183. TAMRA, supra note 171. 

184. Pub. L. No. 100-647, § 1012, 102 Stat. 3531 (1988). 

185. IRC § 7852(d) (1988). The Senate noted that the amendment to § 

7852(d) was intended to codify the judicial doctrine of the later-in-time rule and was 

not meant “to alter the initial presumption of harmony between . . . earlier treaties 

and later statutes.” Overriding Tax Treaties, supra note 7, at 80. S. Rep. No. 445 at 

376-77 (1988), as reprinted in U.S.C.C.A.N. 4515, 4829-33. Prior to TAMRA, § 

7852(d) gave preference to treaty obligations over domestic tax statutes, “[n]o 

provision of this title shall apply in any case where its application would be contrary 

to any treaty obligation of the United States in effect on the date of enactment of this 

title.” Section 7852(d) (1954).   

186. IRC § 894(a) (1988) (emphasis added).  

187. IRC § 894(a) (1954). Before TAMRA, § 894(a) read, “[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.” 

188. TAMRA, supra note 171 at § 1012(aa)(3). Section 6114 requires: 



2009]                        Congressional Unilateral Tax Treaty Overrides                    743 

 

 
 

 In 1989, treaty obligations further lost ground to domestic tax 

statutes within the Code. The Omnibus Budge Reconciliation Act of 1989 

continued the trend, as seen by FIRPTA, the Tax Reform Acts of 1984 and 

1986, and TAMRA, by amending section 6038A to require foreign-owned 

domestic corporations to file reports with the Secretary of the Treasury.
189

 

 The Revenue Reconciliation Act of 1989 enacted section 163(j), the 

earnings stripping provision.
190

 This section denies a corporation an interest 

deduction for interest payments made to a related tax-exempt entity. The 

deduction is denied only if the corporation has an “excess interest 

expense”
191

 at the end of the year.
192

 The earnings stripping provision 

                                                                                                                                         

[e]ach taxpayer who, with respect to any tax imposed by this title, 

takes the position that a treaty of the United States overrules (or 

otherwise modifies) an internal revenue law of the United States 

shall disclose (in such manner as the Secretary may prescribe) 

such position . . . on the return of tax for such tax (or any statement 

attached to such return), or . . . if no return of tax is required to be 

filed, in such form as the Secretary may prescribe.  

IRC § 6114(a) (1988).   

189. Omnibus Budget Reconciliation Act of 1989, Pub. L. No. 101-239, § 

7403, 103 Stat. 2106, 2358-61 (1989). According to the Senate report, § 6038A 

“should not violate any treaty, but if it did, the statutory provision should prevail.”  

Sachs, supra note 51, at 874. 

190. IRC § 163(j) (1989).   

191. Excess interest expense is defined as the excess of the corporation’s 

net interest expense less the sum of 50% of the adjusted taxable income of the 

corporation plus any excess limitation carry forward (as defined by IRC § 

163(j)(2)(B)(ii). 

192. Section 163(j) (1989); see Overriding Tax Treaties, supra note 7, at 92-

95 (providing a comprehensive examination of § 163(j)). Before the earnings 

stripping provision, a corporation could limit its tax liability by borrowing from a 

related foreign lender; thus generating interest deductions on a transaction which, 

economically, is otherwise a wash. Overriding Tax Treaties, supra note 7, at 92.   

Congress was concerned that taxable U.S. corporations were 

limiting their tax liabilities by taking interest deductions for 

payments to lenders who were exempt from U.S. taxation. The 

provision [§ 163(j)] is aimed primarily at interest payments from 

U.S. subsidiaries to foreign parent corporations when such parent 

corporations are not subject to U.S. taxation on the interest 

received, because the interest is not income effectively connected 

with a U.S. trade or business. Code § 163(j) also applies to interest 

payments from corporations related to U.S. tax-exempt 

corporations, such as charitable foundations.  

Id. (citing IRC § 882 (1998)). Under most treaties, in regards to receiving interest 

payments, exclusive taxing jurisdiction is given to the country in which the lender 

resides.    



744                                                 Florida Tax Review                                   [Vol. 9:7  

seemingly violates non-discrimination provisions in treaties by allowing 

certain interest payments to related U.S. lenders, while denying the same 

payments to foreign lenders.
193

 Congress naturally takes the position that the 

earnings stripping provision does not violate non-discrimination provisions 

found in treaties.
194

 

                                                                                                                                         

Section 163(j) operates, under certain circumstances, to deny an interest 

deduction for interest payments made to a related tax-exempt party. IRC § 163(j) 

(1989). It is known as the earnings stripping provision “because it prevents 

shareholders from using deductible interest payments to ‘strip’ a corporation of its 

earnings.” Julie A. Roin, Adding Insult to Injury: The “Enhancement” of § 163(j) 

and the Tax Treatment of Foreign Investors in the United States, 49 Tax L. Rev. 269, 

270 (1994). A related tax-exempt party includes: 

[a]n individual and a corporation more than 50% in value of the 

outstanding stock of which is owned, directly or indirectly, by or 

for such individual; . . . [t]wo corporations which are members of 

the same controlled group; . . . [a] person and an organization to 

which § 501 (relating to certain educational and charitable 

organizations which are exempt from tax) applies and which is 

controlled directly or indirectly by such person or (if such person 

is an individual) by members of the family of such individual; . . . 

[a] corporation and a partnership if the same persons own . . . more 

than 50% in value of the outstanding stock of the corporation, and 

. . . more than 50% of the capital interest, or the profits interest, in 

the partnership . . . . 

IRC § 267(b) (1989). 

193. IRC § 163(j)(3); Richard L. Doernberg  & Kees van Raad, The 

Legality of the Earnings Stripping Provision under U.S. Income Tax Treaties, 35 

Tax Notes 793 (1987). Within a non-discrimination clause, there are typically two 

provisions, “[t]he first provides that a treaty partner shall not impose more 

burdensome taxes on a company controlled by residents of the other treaty country 

than are imposed on other domestic companies” and “[t]he other provides that 

interest and other payments by a domestic corporation to a corporation resident in 

the other treaty country shall be deductible under the same conditions as if they had 

been made to another domestic corporation.” Gourevitch, supra note 142, at 4 

(citations omitted). The earnings stripping provision violates the deductibility clause, 

the second provision; foreign corporations are denied a deduction for certain interest 

payments made to related parties while domestic corporations are allowed the 

deduction for the same payment made to a domestic lender. Id., Overriding Tax 

Treaties, supra note 7, at 93.   

194. H.R. Conf. Rep. to the Omnibus Budget Reconciliation Act of 1989, 

cited in [1995 Binder] 953 Stand. Fed. Tax. Rep. (CCH) ¶ 9102 at 23,528; 

Gourevitch, supra note 142 (citing 136 Cong. Rec. S. 15629 (1990)).  According to 

Congress, the earnings stripping provision does not discriminate because it treats 

“similarly situated persons similarly.” Overriding Tax Treaties, supra note 7, at 101 

(citing H.R. Conf. Rep. to the Omnibus Budget Reconciliation Act of 1989, cited in 

[1995 Binder] 953 Stand. Fed. Tax. Rep. (CCH) ¶ 9102 at 23,528). However, the 

deductibility portion of non-discrimination provisions require “interest and other 



2009]                        Congressional Unilateral Tax Treaty Overrides                    745 

 

 
 

 Once again, in line with the Code’s discriminatory treatment of 

treaty obligations, the Omnibus Budget Reconciliation Act of 1993 (“OBRA 

1993”) provided for the statutory override of such obligations with its 

amendment to section 7701(l).
195

 Following OBRA 1993, section 7701(l) 

provides that “[t]he Secretary may prescribe regulations re-characterizing 

any multiple-party financing transaction as a transaction directly among any 

2 or more of such parties where the Secretary determines that such re-

characterization is appropriate to prevent avoidance of any tax imposed by 

this title.”
196

 This allows the Service to deny treaty benefits to the nominal 

recipient of a payment who “is not the ‘beneficial owner.”
197

 OBRA 1993 

also amended section 163(j)(3)(B) to deny an interest deduction, under 

section 163, for interest payments made by a domestic corporate borrower to 

an unrelated lender if the loan repayment was guaranteed by a foreign party 

related to the borrower.
198

 

                                                                                                                                         

payments by a [foreign-owned] domestic corporation to a corporation resident in the 

other treaty country shall be deductible under the same conditions as if they had been 

made to another domestic corporation.” Gourevitch, supra note 142, at 4 (citations 

omitted). Therefore, the non-discrimination provision is not satisfied in light of 

Congress’ reasoning that there is no discrimination because the § 163(j) treats 

similarly situated persons similarly.  H.R. Conf. Rep. to the Omnibus Budget 

Reconciliation Act of 1989, cited in [1995 Binder] 953 Stand. Fed. Tax. Rep. (CCH) 

¶ 9102 at 23,528).   

If, in analyzing for discriminatory treatment one compares the same lender, 

only changing its country of residence, the earnings stripping provision violates a 

non-discrimination provision. Id. at 97. If one compares a tax-exempt entity in the 

United States to a tax-exempt entity in a foreign country, as Congress seemingly 

does, there is no discrimination. Id. at 97, 101 (citing H.R. Conf. Rep. to the 

Omnibus Budget Reconciliation Act of 1989, cited in [1995 Binder] 953 Stand. Fed. 

Tax. Rep. (CCH) ¶ 9102 at 23,528); Gourevitch, supra note 142, at 4 (citing 136 

Cong. Rec. S. 15629 (1990)).   

195. Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103-66, 107 

Stat. 508 (1993).  

Before OBRA 1993, there was an Omnibus Budget Reconciliation Act of 

1990, which added § 6038C to the Code. Omnibus Budget Reconciliation Act of 

1990, Pub. L. No. 101-508, § 11315(a), 104 Stat. 1388, 1456-58 (1990). Congress 

expressed an opinion that this Act did not override any treaty positions and failed to 

indicate the consequences if such a conflict were to exist. Sachs, supra note 51, at 

874 (citing H.R. Rep. No. 101-881 at 325-26 (1990)).   

196. IRC § 7701(l) (1993). 

197. Overriding Tax Treaties, supra note 7, at 111, n. 144.  

198. IRC § 163(j)(3)(B) (1993). Prior to this amendment, a corporation 

could deduct interest payments to an unrelated tax-exempt lender for a loan which is 

guaranteed by a third party that is related to the borrower. Overriding Tax Treaties, 

supra note 7, at 102. Corporations would take advantage of this loop-hole and take 



746                                                 Florida Tax Review                                   [Vol. 9:7  

 The Health Insurance Portability and Accountability Act of 1996 

followed suit by amending its expatriation tax provisions to expand and 

substantially strengthen the present-law provisions targeting U.S. citizens 

who lose their citizenship for tax avoidance purposes.
199

 The House bill 

affirmed that “it is intended that the purpose of the expatriation tax 

                                                                                                                                         

interest deductions by having the U.S. subsidiary finance through an unrelated lender 

with the foreign parent corporation guaranteeing the loan.  For example,  

USCO, a U.S. corporation, borrows money from FORBANK, a 

foreign bank unrelated to USCO. Interest payments from USCO to 

FORBANK are not subject to Code § 163(j). Suppose, instead, that 

USCO’s foreign parent, FORCO guarantees the loan from 

FORBANK. Prior to OBRA 1993, as long as USCO paid interest 

to FORBANK, the interest would have been deductible. 

Id. at 102-03. The OBRA 1993 amendment to § 163(j)(3)(B) intended to end this 

type of behavior. Id. Congress determined that “[a]lthough the interest on guaranteed 

debt is paid to an unrelated lender, the debt serves as a substitute for a direct related 

party loan to the extent that money is fungible.” Id. (quoting Committee on Ways 

and Means, Fiscal Year 1994 Budget Reconciliation Recommendations of the 

Committee on Ways and Means, WMCP Doc. No. 11, 103d Cong., 1st Sess. 244-45 

(May 18, 1993)). Congress reasoned “[a]n affiliated group requires funding for all of 

its activities and assets, and has flexibility as to the source and use of its funds. Even 

money borrowed for a specific purpose frees up funds for other purposes.” Id. 

(quoting Committee on Ways and Means, Fiscal Year 1994 Budget Reconciliation 

Recommendations of the Committee On Ways and Means, WMCP Doc. No. 11, 

103d Cong., 1st Sess. 244-45 (May 18, 1993)). 

199. Health Insurance Portability and Accountability Act, H.R. Conf. Rep. 

104-736, 1996 U.S.C.C.A.N. 1990, 2136.   

First, the House bill extends the expatriation tax provisions to 

apply not only to U.S. citizens who lose their citizenship but also 

to certain long-term residents of the United States whose U.S. 

residency is terminated. Second, the House bill subjects certain 

individuals to the expatriation tax provisions without inquiry as to 

their motive for losing their U.S. citizenship or residency, but 

allows certain categories of citizens to show an absence of tax-

avoidance motive if they request a ruling from the Secretary of the 

Treasury as to whether the loss of citizenship had a principal 

purpose of tax avoidance. Third, the House bill expands the 

categories of income and gains that are treated as U.S. source (and 

therefore subject to U.S. income tax under § 877) if earned by an 

individual who is subject to the expatriation tax provisions and 

includes provisions designed to eliminate the ability to engage in 

certain transactions that under current law partially or completely 

circumvent the 10-year reach of § 877. Fourth, the House bill 

provides relief from double taxation in circumstances where 

another country imposes tax on items that would be subject to U.S. 

tax under the expatriation tax provisions.  

Id. 



2009]                        Congressional Unilateral Tax Treaty Overrides                    747 

 

 
 

provisions, as amended, not be defeated by any treaty provision.”
200

  

However, “beginning on the tenth anniversary of the enactment of the House 

bill, any conflicting treaty provisions that remain in force would take 

precedence over the expatriation tax provisions as revised.”
201

 

 The Taxpayer Relief Act of 1997 was a denial of treaty benefits for 

certain payments through hybrid entities. Regarding the application to certain 

payments, it stated,  

 

A foreign person shall not be entitled under any income tax 

treaty of the United States with a foreign country to any 

reduced rate of any withholding tax imposed by this title on 

an item of income derived through an entity which is treated 

as a partnership (or is otherwise treated as fiscally 

transparent) for purposes of this title if (A)  “such item is not 

treated for purposes of the taxation laws of such foreign 

country as an item of income of such person, (B) the treaty 

does not contain a provision addressing the applicability of 

the treaty in the case of an item of income derived through a 

partnership.
202

   

 

26 USCA section 894 (relating to income affected by treaty) is 

amended by inserting subsection (C) which states “the foreign country does 

not impose tax on a distribution of such item of income from such entity to 

such person.”
203

 

                                                           

200. Id. at 2142. 

201. Id. 

202. Taxpayer Relief Act of 1997, 111 Stat 788, 943 

(1997). 

203. Id. The section also added a regulations subsection.   

(2) Regulations. – The Secretary shall prescribe such regulations 

as may be necessary or appropriate to determine the extent to 

which a taxpayer to which paragraph (1) does not apply shall not 

be entitled to benefits under any income tax treaty of the United 

States with respect to any payment received by, or income 

attributable to any activities of, an entity organized in any 

jurisdiction (including the United States) that is treated as a 

partnership or is otherwise treated as fiscally transparent for 

purposes of this title (including a common investment trust under § 

584, a grantor trust, or an entity that is disregarded for purposes of 

this title) and is treated as fiscally nontransparent for purposes of 

the tax laws of the jurisdiction of residence of the taxpayer.   

Id. at 943, 944. 



748                                                 Florida Tax Review                                   [Vol. 9:7  

As one can see, not only is case law filled with statutory overrides of 

treaty provisions, but the Code also contains numerous overrides.
204

 The 

justification and flawed analysis allowing for such effect stems from several 

poorly analyzed cases from the mid-nineteenth and early-twentieth centuries, 

all of which can easily be distinguished from each other.
205

   

 

VII. CONCLUSION 

 

Although the United States champions globalization, its conflicting 

priorities are evidenced by the treaty enactment process. The inherent tension 

regarding the later-in-time doctrine among the Senate and the House of 

Representatives is not conducive to developing and sustaining the United 

States’ foreign relations. While globalization is one of the United States’ 

main priorities, the U.S. still favors its domestic economy with protectionist 

actions.
206

  

Commitment to globalization may be seen through United States’ 

membership in several international organizations: the United Nations (UN); 

the World Trade Organization (WTO); the World Bank; and the International 

Monetary Fund. These organizations promote the idea of trade liberalization 

as a means to eradicate poverty, achieve sustained economic growth, and 

promote a sustainable development that will eventually lead to a fully 

inclusive and equitable global economic system.
207

 As a member of these 

organizations, the United States is expected to fulfill the obligations it 

assumes in good faith so that all participating nations may benefit from their 

membership.
208

 

                                                           

204. See Richard L. Doernberg, Hi Ho Silver! Congress Rides, or Rather 

Overrides, Again: The Proposed Tax on Capital Gains of Foreign Shareholders, 2 

Tax Notes Int’l 464 (1990) (providing an examination of proposed Code 

amendments which would override existing treaty provisions); Overriding Tax 

Treaties, supra note 7, at 105-09 (examining proposed Code legislation that would 

override existing treaty provisions). 

205. Taylor, 23 F. Cas. at 784; The Cherokee Tobacco, 78 U.S. at 616; 

Chew Heong, 112 U.S. at 536; Edye, 112 U.S. at 580; Whitney, 124 U.S. 190); Chae 

Chan Ping, 130 U.S. at 581. 

206. Developed countries want to protect their declining industries and gain 

market access for their expanding industries. However the declining industries are 

declining largely because of competitive pressures from the developing countries. 

Therefore, the sectors that they are most interested in protecting are precisely the 

sectors that are of the greatest concern to the developing world. Protection elicits 

concerns about equity and social justice within the developed countries – but the 

failure to extend these concerns to developing countries shows a particularly narrow 

vision which is out of step with economic globalization.  

207. The Monterrey Consensus on Financing for Development, Mar. 2002.  

208. Charter of the United Nations and Statute of the International Court of 

Justice, Chapter 1, Purposes and Principles, Article II, Sec 2.  



2009]                        Congressional Unilateral Tax Treaty Overrides                    749 

 

 
 

As previously stated, the twin aims of tax treaties are the avoidance 

of double taxation and the prevention of tax evasion, which have the effect of 

promoting investment, growth, and commerce.
209

 There are a number of 

incidental effects and benefits outside of these aims. For example, if taxes 

imposed on foreign investors are kept to a minimum, foreign firms will have 

a greater profit margin after taxes have been assessed. Of course, any change 

in tax rates, or a reclassification of taxable income that changes the original 

terms of the tax treaty relied upon,
210

 lowers the profit margin that foreign 

investors expect.  

Another consequence of Congress’ conflicting priorities is the 

alteration of domestic tax law leading to overrides of existing treaty 

obligations and increases in the amount of taxes foreign corporations and 

nonresident investors pay on income derived from their foreign investments. 

This action reduces profit for a wealthy individual purchasing investment 

properties within the United States, and reduces the appeal of the United 

States for potential treaty partners. For example, when a property is sold, the 

gross profit will be reduced by income taxes paid on that profit. For foreign 

corporations, the allowable tax credit limitations will also have a similar 

reduction on gross profits.  

The World Bank, through various empirical studies, has found that 

increasing corporate taxes has a substantial adverse effect on investments, 

entrepreneurship, and foreign direct investment.
211

 Congress’ decision to 

                                                           

209. Newman, supra note 8. “Double taxation occurs when two 

jurisdictions, due to overlapping authority, tax the same income or assets. The effect 

discourages investment and creates artificial barriers to the free flow of commerce.  

Both international cooperation and goodwill are correspondingly undermined.” Id. 

“Tax treaties also limit fiscal evasion by authorizing close administrative 

coordination and mutual exchange of information between contracting jurisdictions.”  

Id. at 1004. Another form of tax evasion occurs through treaty shopping. “[T]reaty 

shopping is the practice of rerouting income through one or more artificial entities in 

different countries for the main or sole purpose of obtaining treaty benefits that are 

not directly available to the true earner of income.” Haug, supra note 8. 

210. Such as in the Tax Reduction Act of 1975, which provided a reduction 

in the tax credit allowed; Tax Reform Act of 1976, which changed the method of 

computing the foreign tax credit; The Foreign Investment in Real Property Act of 

1980, which taxed foreign corporations and non resident individuals on the 

disposition of direct or indirect interests in the U.S. real property; and the Omnibus 

Budget Reconciliation Act of 1993, which allowed for the secretary to prescribe 

regulations to re-characterize any financing transactions in order to prevent the 

avoidance of taxes.  

211. The effect of corporate taxes on investments and entrepreneurship, 

available at http://www.doingbusiness.org/documents/AEJ-Manuscript.pdf. The 

Doing Business project of The World Bank established through their extensive 

research that raising the first year effective tax rate by 10% points reduces the 



750                                                 Florida Tax Review                                   [Vol. 9:7  

increase U.S. tax revenues by overriding tax treaties that provide tax credits 

to foreign investors and by excluding certain forms of income substantially 

reduces foreign investments.  

Such effects are thought to have fueled the United States’ Great 

Depression during the 1930’s and quite conceivably contributed to the 

frictions ultimately helping to ignite World War II.
212

 This is very alarming 

considering the current recession which has striking similarities to the U.S. 

economy of the 1930’s.   

On October 29, 1929, the stock market crashed and Black Tuesday 

became synonymous with the Great Depression. In June, 1930, the Senate 

passed the Smoot-Hawley Tariff Act,
213

 of which President Herbert Hoover 

announced his support. The Tariff Act was designed to raise tariffs on over 

20,000 imported goods to a tax rate of 60%. Two days after the 

announcement, the Dow Jones Industrial Average sank 8%
214

 as a direct 

response of the Senate’s passage of the Act. The protectionist measures taken 

by the Act, ultimately had the effect of radically decreasing international 

trade and retaliatory tariffs, causing the world economy to contract and 

                                                                                                                                         

investment rate by 2.2 percentage points and the foreign direct investment rate (FDI) 

by 2.3 percentage points.   

This paper presents basic statistical relationships between corporate taxes, 

investment and entrepreneurship using two new data sets. The first data set computes 

effective 1st year and 5 year corporate income tax rates for 85 countries, using a 

survey of Price Waterhouse Coopers’ local offices. The second data set, collected 

from national statistical offices, presents official registration rates by new firms in 62 

countries. The research ultimately suggests that government regulatory and tax 

policies may have large consequences for the business environment as well as for 

economic development. Id. at 24-25.   

212. Foreign Capital: Friend or Foe? William H Peterson paraphrases 

French economist Frederic Bastiat: When goods – and capital – can’t cross frontiers, 

armies will.  

213. The Smoot-Hawley Tariff Act was signed into law on Jun. 17, 1930, 

and raised U.S. tariffs on over 20,000 imported goods to record levels, and, in the 

opinion of most economists, worsened the Great Depression. Smoot-Hawley 

imposed an effected tax rate of 60% on more than 3,200 products and materials 

imported into the U.S. quadrupling previous tariff rates. The Act was the successor 

of the Fordney-McCumber Tariff Act, which was intended to increase the market 

share of domestic firms. The weakening labor markets in 1927 prompted the need 

for another round of tariff hikes. Although the Tariff Act was passed after the stock 

market crash of 1929, many economic historians consider the political discussion 

leading up to the passing of the Act as a factor in causing the crash and/or recession 

that began in 1929, and its eventual passage led to the deepening of the Great 

Depression. Unemployment after the Act was passed jumped from 7.8% in 1930, to 

16.3% in 1931, 24% in 1932, and 25% in 1933.  

214. Pat Toomey, Economist against Protectionism, The Wall Street 

Journal, Aug. 1, 2007.  



2009]                        Congressional Unilateral Tax Treaty Overrides                    751 

 

 
 

unemployment to sky rocket. The international trade war
215

 continued to 

drive the market down until the Dow hit a 41 low on July 8, 1932. It took the 

Dow Jones 25 years to recover its 1929 peak.  

In comparison to actions taken by Congress in response to the Great 

Depression, the United States is currently in the process of eradicating tariffs 

on U.S. exports to Colombia.
216

  Congress, with the Great Depression in 

mind, has realized the important role that taxes play with regard to foreign 

countries and their contribution to our economy, resulting in economic 

growth. Congress’ realization and actions taken in furtherance of this 

awareness, signifies the necessity for binding tax law and encouraging 

foreign investment in our country. This also exemplifies the problems 

associated with the instability of tax treaty overrides and their effect on 

deterring foreign relations. 

Over the past fifty years, the United States increased its public 

national debt to over eleven trillion dollars.
217

 This amount is not expected to 

decrease due to projected deficits.
218

  This debt is composed of money the 

United States government owes itself, private investors, and foreign 

investors. In 2007, 46% of the National debt was held by foreign nations.
219

 

This form of external debt has the effect of directly reducing the available 

lifetime consumption of the individual taxpayer and reducing his disposable 

income, savings, and thus, capital stock.
220

 At best, the effect of this national 

debt will reduce the amount of money Americans could invest in business, 

                                                           

215. Id. 

216. Department of Commerce, http://www.commerce.gov/ (last visited 

Jun. 9, 2008). 

217. Treasury Direct, Monthly Statement of the Public Debt of the United States 

(2009), http://www.treasurydirect.gov/govt/reports/pd/mspd/2009/opds052009.pdf.  

See also, Recovery.Gov, http://www.recovery.gov/?q=content/act. (last visited Jun. 

9, 2009) which provides a summary of the American Recovery and Reinvestment 

Act of 2009. To view the Recovery Act in its’ entirety, visit 

http://www.treasurydirect.gov/recovery.htm, which provides access to Act in PDF 

format.   

218. Historical Tables, Office of Management and Budget, Budget of the 

United States Government, Fiscal year 2009, available at http://www. 

whitehouse.gov/omb/budget/fy2009/pdf/hist.pdf. 

219. The top ten nations holding the U.S. national debt are Japan ($571 

billion), China ($405 billion), UK ($299 billion), Brazil ($128 billion), Oil Exporters 

(including Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, etc.) ($126 

billion), Caribbean Banking Centers (including The Bahamas, Bermuda, Cayman 

Islands, Netherlands Antilles, and Panama)($81 billion), Luxembourg ($76 billion), 

Hong Kong ($54 billion), Taiwan ($51 billion) and Korea ($45 billion).   

220. Peter A. Diamond, National Debt in a Neoclassical Growth Model, 1.  

A national debt of 9 trillion dollars equates to about $79,000 on average for each 

American taxpayer.  



752                                                 Florida Tax Review                                   [Vol. 9:7  

resulting in an economic slow down, which could then end in a recession. At 

worst, the United States could lose its international power, allowing for other 

economically thriving countries to take the lead.  

These issues are of greater concern than ever before as the United 

States’ recession has developed into a full fledge depression.
221

 Overriding 

tax treaties may deter foreign countries from financing our national debt, 

since these countries have rightfully come to expect that the tax benefits 

promised to them by the United States in international treaty agreements may 

possibly be extinguished.   

 In 2006, foreign investors spent $184 billion investing in U.S. 

business and real estate. Foreign Direct Investment creates new jobs,
222

 

boosts wages,
223

 strengthens U.S. manufacturing,
224

 brings new research and 

technology,
225

 increases U.S. productivity,
226

 contributes to tax revenues,
227

 

keeps interest rates low,
228

 and can help U.S. companies penetrate foreign 

markets and increase U.S. exports.
229

 The United States is unique in its status 

                                                           

221. An Independent Streak, The Economist, Jan. 26, 2008. This threat of 

American recession hits close to home for the middle-class elements of the country 

as one of the principal concerns arising from the recession is the major hit taken by 

the housing market, causing a huge “mortgage mess” and “great financial losses.” A 

Long Slog, The Economist, Jan. 12, 2008. 

222. U.S. Department of State, Fact Sheet, Mar. 13, 2006, 

http://www.state.gov/r/pa/prs/ps/2006/63041.htm. Bureau of Economic Analysis 

(BEA), U.S. Department of Commerce: U.S. affiliates of foreign companies employ 

5.5 million U.S. workers, or 4.7% of private industry employment.  

223. Id., National Bureau of Economic Research – Robert Lipsey working 

paper 9293: U.S. affiliates of foreign companies tend to pay higher wages than U.S. 

Companies. Foreign companies support an annual U.S. payroll of $318 billion, with 

an average annual compensation per employee of over $60,000. Average foreign 

companies pay up to 15% more than wages paid by U.S. companies.  

224. Id., BEA: 41% of the jobs related to U.S. affiliate of foreign 

companies are in the manufacturing sector. 

225. Id., BEA: Affiliates of foreign companies spent $30 billion on research 

and development in 2003 and $109 billion on plants and equipment.    

226. Id., Bureau of Economic and Business Affairs, U.S. Department of 

State: The increased investment and competition from FDI leads to higher 

productivity growth, a key ingredient that increases U.S. competitiveness abroad and 

raises living standards at home.  

227. Id., Internal Revenue Service: In 2002, foreign affiliates paid $17.8 

billion in taxes, representing 12% of U.S. corporate tax revenue and in 2004 paid 

$44 billion in taxes.  

228. Id., Bureau of Economic and Business Affairs, U.S. Department of 

State: The inflow of foreign capital also decreases the cost of borrowing money for 

domestic entrepreneurs, especially in the small to medium sized enterprise sector.  

229. Id., BEA: U.S. companies can use multinationals’ distribution 

networks and knowledge about foreign tastes to export into new markets. 



2009]                        Congressional Unilateral Tax Treaty Overrides                    753 

 

 
 

as the largest Foreign Direct Investor in the world and the largest recipient of 

Foreign Direct Investment. This dual role signifies globalization’s prominent 

role in the U.S. economy.
230

  

By overriding tax treaties, the United States places an unnecessary 

strain on its international relations without realizing the significance of those 

relationships to its economic well being. As stated above, overriding tax 

treaties causes an unexpected fluctuation in profit margins to foreign 

investors. Consequently, this changes the investment climate which can lead 

to a decrease in overall Foreign Direct Investment.  

If there are no tax incentives, security, or stability in the tax 

legislation for foreign investors in the United States, the $184 billion will be 

lost to more attractive investment climates. “Capital is not free, nor 

permanent; it must be nurtured and it is highly sensitive in that it is at once 

risk-tolerant and risk adverse. It can be sullied and bullied, but not for long.  

It can flee to safer climes.”
231

  

On March 7, 2007, the Investment Trade Administration (ITA) 

announced it would undertake a new Invest in America initiative
232

 aimed at 

attracting Foreign Direct Investment. ITA’s main concern was if the United 

States does not play an active role in promoting inward investment, its 

investment climate is in danger of being perceived around the world only by 

its growing difficulties.
233

  

With a current recession, and our economy continuing to weaken 

while facing a growing national debt and national widespread inflation, 

Foreign Direct Investment seems to be our only hope for surviving the 

impending depression. The dramatic increases of real estate foreclosures, 

surges in oil prices, sky rocketing levels of unemployment, and increases in 

commodity goods, are further causing fear and apprehension in the U.S. In 

                                                                                                                                         

Approximately 21% of all U.S. exports come from U.S. subsidiaries of foreign 

companies.  

230. CRS Report for Congress; Foreign Direct Investment: Current Issues, 

Apr. 27, 2007.  

231. Foreign Capital: Friend or Foe, quote by William H. Peterson, Member 

of California State Assembly 2nd District. http://www.theadvocates.org/ 

freeman/8901pete.html.  

232. Lavin, Frank L., Role of Foreign Investment in U.S. Economic 

Growth, Mar. 7, 2007. The initiative will have 3 key responsibilities: (1) outreach to 

the international investment community, (2) serve as an ombudsman in Washington 

D.C. for the concerns of the international investment community as well as work on 

policy issues that affect the attractiveness of the United States in foreign 

investments, and (3) supporting state and local governments engaged in foreign 

investment promotions. 

233. Lavin, Frank L., Role of Foreign Investment in US Economic Growth, 

Mar. 7, 2007, P. 1. http://trade.gov/press/speaches/lavin_030707.asp.  



754                                                 Florida Tax Review                                   [Vol. 9:7  

today’s U.S. economy, much like in 1929, people are being forced to 

drastically cut expenditures to keep up with their payments, ultimately 

resulting in an economic slow down. As businesses are failing, construction 

work and factory orders plunge. U.S. banks are claiming huge losses, as 

debtors default on their debts. This pattern is identical to the Great 

Depression, save the fact that in the late 1920’s, Foreign Direct Investment 

was not a dominating force in the United States.  

Research conducted by the NBRE finds that direct investors, chiefly 

those who operate manufacturing facilities in foreign countries, are much 

more likely to ride out economic squalls than those involved in foreign 

bonds, equities, bank loans, and other forms of investments.
234

 Direct 

investment is bound up in enterprises that, in times of instability, can redirect 

sales from the country’s local markets to export markets. The drop in the 

currency value of a troubled country makes national products cheaper to 

foreign buyers and easier to export. This may allow for a host country to 

maintain levels of sustainable employment. It may ease the riding out of the 

economic storm.  

With so much to gain from Foreign Direct Investment, it is difficult 

to rationalize why the United States is willing to bite the hand that feeds it. It 

is inevitable that foreign countries must pay taxes. However, how and what 

should be taxed should be established by the tax treaties negotiated between 

the United States and the foreign country. Congress’ position that the later-

in-time rule applies to tax treaties that contradict the tax code is not 

conducive to Foreign Direct Investments, international relations, or to 

globalization as a whole. Congress needs to act pragmatically by reinstating 

section 7852(d) of the 1939 Tax Code which respected treaty obligations and 

declared that treaty obligations prevailed over domestic tax laws.   
 

                                                           

234. Foreign Direct Investors in Three Financial Crises, Mathew Davis, 

available at http://www.nber.org/digest/jun01/w8084.html.