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RUWE, J., dissenting: Section 842(b) was enacted to prevent
foreign insurance companies operating permanent business
establishments in the United States from being able to shift
profits on investments out of the U.S. taxing jurisdiction.
Section 842(b) does this by attributing a minimum amount of
income to the permanent U.S. business establishment. This
minimum amount of U.S. income is computed by a statutory formula
that essentially uses the investment experience of comparable
domestic insurance companies and applies that data to the U.S.
branch of the foreign company, based on the actual insurance
coverage liabilities incurred by the U.S. branch as a result of
insurance sold by its U.S. business. This provision was to serve
as a backstop in recognition that assets and liabilities can be
moved between the U.S. business and the foreign corporation,
resulting in the reduction of U.S. tax.
The parties agree that section 842(b) applies, unless it is
trumped by provisions of the Treaty between the United States and
Canada. Convention with Respect to Taxes on Income and on
Capital, Sept. 26, 1980, U.S.-Can., T.I.A.S. No. 11087.
Respondent argues that section 842(b) is a permissible method of
attributing profits to a permanent establishment within the terms
of the Treaty. Petitioner contends that article VII, paragraph
(2) of the Treaty requires the income of a permanent
establishment to be measured by its own specific operations as
reflected in its books and precludes taxing Canadian companies on
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