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Saturday, May 21, 2016

Tax Treaty Savings Clause Question

Facts: A U.S. citizen and permanent resident of Israel incurs capital gains from the sale of stock of a U.S. corporation.

U.S. - Israel Income Tax Treaty Provisions:

Article 15, Paragraph 1: “[a] resident of one of the Contracting States shall be exempt from tax by the other Contracting State on gains from the sale, exchange, or other disposition of capital assets.”

Article 6, Paragraph 3: ““[n]otwithstanding any provisions of this Convention except paragraph (4), a Contracting State may tax its residents and its citizens as if this Convention had not come into effect.”

Question: Can the U.S. subject the taxpayer’s gain to U.S. income tax?

Answer: Yes. The Article 6 savings clause overrides the exclusion from tax in Article 15.

One has to wonder why the taxpayer took this all the way to the Tax Court. Nonetheless, the case is illustrative of a basic principle for U.S. citizens and residents - treaty provisions will often provide benefits for them vis-a-vis the taxes of the OTHER country, but not as to their U.S. taxes. Still, each treaty and fact pattern must be looked at, since sometimes the applicable savings clause that allows the U.S. to tax its citizens and residents without regard to the treaty will not always apply to all provisions of the treaty.

Cole, TC Summary Opinion 2016-22

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