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Rev. Rul. 59-56, 1959-1 CB 737

REV-RUL, Rev. Rul. 59-56, 1959-1 CB 737, (Jan. 01, 1959)

UNITED STATES-FEDERAL REPUBLIC OF GERMANY INCOME TAX CONVENTION
(Also Income Tax Conventions between the United States and Austria, Belgium, Canada, Denmark, Finland, France, Greece, Honduras, Italy, Japan, Netherlands, Norway, Sweden, Switzerland, the Union of South Africa, and the United Kingdom.) (See also Part I, Sections 901, 904; 26 CFR 1.901-1, 1.904-1.) Even though the income tax conventions to which the United States is a party contain a provision that income from real property shall be subjected to tax only in the country in which the property is situated, a citizen of the United States or an alien resident thereof is, by reason of a saving clause in the convention, liable for United States income tax on the income from such property. In order substantially to avoid double taxation in this type of case, a credit against United States income tax is allowable as provided in section 901 of the Internal Revenue Code of 1954, subject to the limitation of section 904.

[Text]

Advice has been requested with respect to the effect of a "saving clause" as found in most of the tax conventions to which the United States is a party.

For purposes of illustration, the question for consideration is whether income derived from the cutting and sale of timber in Germany by a United States citizen residing in the United States is subject only to German tax by reason of Article IX of the Income Tax Convention between the United States and the Federal Republic of Germany, C.B. 1955-1, 635.

Article IX of the Income Tax Convention between the United States and the Federal Republic of Germany, supra, reads, in part, as follows:

(1) Income from real property situated in one of the contracting States (including gains derived from the sale or exchange of such property and interest on debts secured by mortgages on farms, timberlands, or real property used wholly or partly for housing purposes * * * derived by a resident or corporation or other entity or company of the other contracting State, shall be taxable only by the former State.

* * * * * * *

(2) (b) A resident or corporation or other entity of the United States deriving from sources in the Federal Republic any item of income coming within the scope of paragraph (1) of this Article, may, for any taxable year, elect to be subject to tax by the Federal Republic on a net income basis as if such resident or corporation or other entity were engaged in trade or business within the Federal Republic through a permanent establishment therein.

Article XV of the convention reads, in part, as follows:

(1) It is agreed that double taxation shall be avoided in the following manner:

(a) The United States, in determining its taxes specified in Article I of this convention in the case of its citizens, residents or corporations, may, regardless of any other provision of this convention, include in the basis upon which such taxes are imposed all items of income taxable under the revenue laws of the United States as if this Convention had not come into effect. * * *

* * * * * * *

(2) The provisions of this Article shall not disturb the exemptions from tax of the United States * * * granted by Article XI(1) of the present convention.

Provisions similar to those in Article XV(1)(a) are contained in the tax conventions between the United States and Austria, C.B. 1957-2, 985; Belgium, T.C. 6160, C.B. 1956-1, 815; Canada, C.B. 1951-1, 624; Denmark, T.C. 5777, C.B. 1950-1, 76; Finland, T.D. 6202, C.B. 1956-2, 1067; France, T.D. 5499, C.B. 1946-1, 134; Greece, effective as of January 1, 1953; Honduras, C.B. 1957-2, 1033; Italy, C.B. 1956-2, 1096; Japan, C.B. 1955-1, 658; Netherlands, T.D. 5778, C.B. 1950-1, 92; Norway, T.D. 6150, C.B. 1955-2, 793; Sweden, T.D. 4975, C.B. 1940-2, 43; Switzerland, T.D. 6149, C.B. 1955-2, 814; and the Union of South Africa, C.B. 1954-2, 651. Although the convention with the United Kingdom of Great Britain and Northern Ireland contains no specific provision such as Article XV(1)(a) of the German convention, other provisions of the United Kingdom convention are interpreted as having the same effect as Article XV(1)(a) of the German convention. T.D. 5569, C.B. 1947-2, 100, regulations section 7.514.

The meaning of Article XV(1)(a) of the German convention and of similar provisions in other income tax conventions is that the United States income tax liability of United States citizens, residents, or corporations is determined "as if this Convention had not come into effect." The purpose of this "saving clause" is to make it plain that the United States reserves the right, in the case of its citizens, residents, or corporations, to include in its tax base all items of income taxable under its revenue laws. However, this right is made subject, in certain of the conventions, to an exception such as is provided in Article XV(2) of the convention with the Federal Republic of Germany.

One of the fundamental principles of interpretation of a statute or treaty is that particular clauses and phrases should not be studied as detached expressions, but that every part of a treaty must be considered in determining the meaning of any of its parts. A treaty must be considered as a whole, its parts making it an integral whole. Accordingly, Article IX of the convention with Germany must be read in the light of Article XV.

It is apparent from the foregoing that the income derived and/or loss sustained from the cutting and sale of timber in Germany by a citizen of the United States, irrespective of his place of residence, or by a resident of the United States, is treated for United States income tax purposes in the same manner as if the convention had not come into effect. The status for United States tax purposes of such income or loss would not be affected by the taxpayer's election under Article IX(2)(b) of the Convention, supra, to be subject to tax by the Federal Republic of Germany on a net income basis.

Subject to the provisions of section 901 and the limitation provided in section 904 of the Code, a citizen or an alien resident of the United States is entitled to a credit against his United States income tax for income taxes paid or accrued during the taxable year to any foreign country provided that he does not use the tax table or claim the standard deduction in computing his United States income tax liability.