Two countries form a treaty under the general principles of contract law. A fundamental aspect of contract law requires a meeting of the minds – a shared understanding of the agreed terms. Accordingly, unless expressly stated, a treaty ought to apply only to the two contracting sovereigns. But this is about tax law, tax treaties, and, more importantly, an exploitation point for statutory interpretation. States may, under certain theories of interpretation, be bound to the provisions of a tax treaty between the United States and a foreign country.
A state that defers to the definition of gross income provided in the Internal Revenue Code (“The Code”) opens the door to a persuasive interpretation of law requiring a state to follow a U.S. tax treaty. The Code defines gross income as all income from whatever source derived except as otherwise provided in this subtitle.[1] While one may stop at section 61, the definition forces one to look at other sections of the Code that limit or modify the definition. Section 894 modifies the definition of income and links it to the application of tax treaties. Section 894(a)(1) provides that the provisions of the Code shall be applied to any taxpayer with due regard to any treaty obligation of the United States which applies to such taxpayer. Without an express limitation under a state’s tax laws on the definition of income, these provisions may apply.
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