[Senate Executive Report 106-10]
[From the U.S. Government Publishing Office]
106th Congress Exec. Rpt.
SENATE
1st Session 106-10
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PROTOCOL AMENDING THE TAX CONVENTION WITH GERMANY
_______
November 3, 1999.--Ordered to be printed
_______
Mr. Helms, from the Committee on Foreign Relations,
submitted the following
R E P O R T
[To accompany Treaty Doc. 106-13]
The Committee on Foreign Relations, to which was referred
the Protocol Amending the Convention between the United States
of America and the Federal Republic of Germany for the
Avoidance of Double Taxation with Respect to Taxes on Estates,
Inheritances, and Gifts, signed at Bonn on December 3, 1980,
signed at Washington on December 14, 1998, having considered
the same, reports favorably thereon, with one declaration and
one proviso, and recommends that the Senate give its advice and
consent to ratification thereof, as set forth in this report
and the accompanying resolution of ratification.
CONTENTS
Page
I. Purpose..........................................................1
II. Background.......................................................2
III. Summary..........................................................2
IV. Entry Into Force.................................................3
V. Committee Action.................................................3
VI. Committee Comments...............................................3
VII. Budget Impact....................................................5
VIII.Explanation of Proposed Protocol.................................5
IX. Text of the Resolution of Ratification..........................10
I. Purpose
One of the principal purposes of the existing treaty is to
reduce or eliminate double taxation on estate, gift, and
inheritance taxes. A general principle of the existing treaty
is that the country in which a donor or decedent was domiciled
may tax the estate or gifts of that individual on a worldwide
basis but must credit tax paid to the other country with
respect to certain types of property located in such other
country. One of the principal purposes of the proposed protocol
is to expand the United States' jurisdiction to tax its
citizens and certain former citizens and long-term residents.
The proposed protocol also would provide a pro rata unified
credit to the estate of a German domiciliary and a U.S. estate
tax marital deduction for estates of limited value if the
surviving spouse is not a U.S. citizen.
II. Background
The proposed protocol was signed on December 14, 1998. The
proposed protocol amends the current estate, gift, and
inheritance tax treaty between the United States and Germany
that was signed in 1980.
The proposed protocol was transmitted to the Senate for
advice and consent to its ratification on September 21, 1999
(see Treaty Doc. 106-13). The Committee on Foreign Relations
held a public hearing on the proposed protocol on October 27,
1999.
III. Summary
In general
An estate, gift, and inheritance tax treaty currently is in
force between the United States and Germany. In the case of the
United States, the treaty applies to the U.S. estate, gift, and
generation-skipping transfer taxes. These taxes apply to the
transfer of property by a decedent's estate or a donor, at
death, during life, or by a generation-skipping transfer.
Generation-skipping transfers generally involve transfers that
skip a generation, as would be the case of a transfer by a
donor to the donor's grandchild. In the case of Germany, the
treaty applies to the inheritance and gift taxes. Generally,
these taxes apply to similar transfers, but are imposed on the
recipient of property from an estate or donor, rather than on
the transferor.
Proposed modifications to the estate, gift, and inheritance tax treaty
The proposed protocol would make several modifications to
the U.S.-Germany estate, gift, and inheritance tax treaty.
First, the proposed protocol would modify certain tiebreaker
rules in the treaty, that determine which country has the right
to tax on a worldwide basis when a decedent or donor is treated
as domiciled in both the United States and Germany at the time
of death or at the time of making a gift. In this regard, the
proposed protocol would extend from five to ten years the
period of time during which a citizen of one country can be
domiciled in the other country without becoming subject to the
primary taxing jurisdiction of the other country.
Second, the proposed protocol would modify certain
exemptions granted to transfers between spouses. The existing
treaty provides that interspousal transfers of property are
granted a 50-percent exemption. The proposed protocol would
provide that the United States need not provide this exemption
if the decedent or donor was a U.S. citizen, or was a former
U.S. citizen or long-term resident whose loss of such status
had as one of its principal purposes the avoidance of tax.
Third, the proposed protocol would provide a pro rata
unified credit to the estate of an individual domiciled in
Germany (who is not a U.S. citizen) for purposes of computing
the U.S. estate tax. Under this provision, such an individual
domiciled in Germany is entitled to a credit against U.S.
estate tax based on the extent to which the assets of the
estate are situated in the United States.
Fourth, the proposed protocol would provide a limited U.S.
estate tax marital deduction when the surviving spouse is not a
U.S. citizen. This provision would apply in the case of certain
estates of limited value.
Finally, the proposed protocol would expand the saving
clause of the treaty by expanding the types of persons who may
be taxed by the United States. This provision would allow the
United States to apply its estate and gift tax rules to former
U.S. citizens and long-term residents whose loss of such status
had as one of its principal purposes the avoidance of tax.
IV. Entry Into Force
The proposed protocol generally would enter into force upon
the exchange of instruments of ratification and would take
effect with respect to deaths occurring and gifts made after
that date. A special effective date rule applies with respect
to the pro rata unified credit and the limited U.S. estate tax
marital deduction (Article 3 of the proposed protocol), as well
as the expansion of the saving clause (Article 4 of the
proposed protocol). Such provisions take effect with respect to
deaths occurring and gifts made after November 10, 1988,
provided that any return or claim for refund asserting the
benefits of the proposed protocol are filed within one year of
entry into force of the protocol or within the otherwise
applicable period for filing such claims under domestic law.
V. Committee Action
The Committee on Foreign Relations held a public hearing on
the proposed protocol with Germany (Treaty Doc. 106-13), as
well as on other proposed treaties and protocols, on October
27, 1999. The hearing was chaired by Senator Hagel. The
Committee considered these proposed treaties and protocols on
November 3, 1999, and ordered the proposed protocol with
Germany favorably reported by a voice vote, with the
recommendation that the Senate give its advice and consent to
ratification of the proposed treaty, subject to a declaration
and a proviso.
VI. Committee Comments
On balance, the Committee on Foreign Relations believes
that the proposed protocol with Germany is in the interest of
the United States and urges that the Senate act promptly to
give advice and consent to ratification. The Committee has
taken note of certain issues raised by the proposed protocol,
and believes that the following comments may be useful to the
Treasury Department officials in providing guidance on these
matters should they arise in the course of future treaty
negotiations.
A. RECIPROCAL BENEFITS
Pro rata unified credit for German residents
In the Technical and Miscellaneous Revenue Act of 1988
(``TAMRA''), Congress passed Code section 2102(c)(3), which
permits a ``pro rata'' unified credit for nonresidents to the
extent provided by treaty. The pro rata portion of the unified
credit is based upon the ratio that the decedent's gross estate
situated in the United States at the time of his death bears to
his worldwide gross estate. Paragraph 5 of Article 3 of the
proposed protocol provides such a pro rata unified credit to
German residents who are not U.S. citizens.\1\
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\1\ The saving clause of the proposed protocol preserves the
ability of the United States to reduce to $13,000 the pro rata unified
credit allowable under the proposed protocol with respect to former
U.S. citizens and long-term residents whose loss of status had as a
principal purpose the avoidance of tax, for a period of ten years
following the loss of such status.
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Under the proposed protocol, however, U.S. citizens and
residents who are subject to situs-based taxation in Germany
would not have the benefit of a provision similar to the pro
rata unified credit. For example, under the proposed protocol,
a German citizen or resident who has U.S.-situated property
which passes to a German resident beneficiary would receive the
benefit of the pro rata unified credit, whereas a U.S. citizen
or resident who has German-situated property which passes to a
U.S. resident beneficiary would not be entitled to a benefit
similar to a pro rata unified credit.
Estate tax marital deduction for German residents
To determine the taxable estate of a decedent for U.S.
estate tax purposes, a deduction generally is allowed for the
value of any property that passes to his or her surviving
spouse. TAMRA, however, eliminated this marital deduction where
the surviving spouse is not a U.S. citizen (except for
transfers to a ``qualified domestic trust'' (``QDOT'') or where
the surviving spouse becomes a U.S. citizen). Several countries
have sought U.S. treaty relief from this TAMRA provision,
including some countries with pre-TAMRA U.S. estate tax
treaties that have provisions relating to the marital
deduction. The proposed protocol contains an agreement by the
United States to provide such relief.
Paragraph 6 of Article 3 of the proposed protocol provides
a limited marital deduction against the U.S. estate tax on
property passing to a noncitizen spouse if the decedent and the
surviving spouse meet certain requirements regarding
citizenship and residency. In addition, the deduction is
available only if the executor of the decedent's estate
irrevocably waives the benefits of any estate tax marital
deduction that may otherwise be allowed.
The deduction allowed under the proposed protocol equals
the lesser of (1) the value of the qualifying property or (2)
the decedent's unified credit applicable exclusion amount
(within the meaning of U.S. law determined without regard to
any gift previously made by the decedent). This provision is
similar to the approach taken in recent proposed legislation to
grant a limited marital transfer credit to employees of
``qualified international organizations.'' \2\ The deduction
amount under the proposed protocol generally is sufficient to
resolve a principal area of concern--the reduction of the
estate tax burden on transfers of personal residences and
retirement annuities.
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\2\ See, for example, H.R. 2760, 106th Cong., 1st Sess., introduced
by Rep. Amo Houghton on August 5, 1999.
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The proposed protocol does not, however, provide a similar
marital deduction against the German inheritance and gift tax
on property passing to a spouse who is neither a citizen nor
resident of Germany.\3\ Thus, under the proposed protocol, a
German citizen or resident who has U.S.-situated property that
passes to a German resident spouse would receive the benefit of
the limited marital deduction, whereas a U.S. citizen or
resident who has German-situated property which passes to a
U.S. resident spouse would not be entitled to a similar marital
deduction.
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\3\ Under German inheritance and gift tax law, when neither the
decedent nor the surviving spouse who receives German-situated property
reside in Germany, there is no marital exemption for the transfer of
such property to the surviving spouse.
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Committee conclusions
The Committee recognizes that changes to the U.S. estate
tax marital deduction as a result of TAMRA in 1988 prompted
negotiations with Germany regarding the marital deduction
provision in the proposed protocol. Furthermore, the
willingness of the United States to enter into the proposed
protocol was an important factor in Germany's ratification of
the U.S.- Germany income tax treaty, which was signed in August
1989. The Committee also recognizes that the U.S. estate, gift,
and generation-skipping transfer taxes and the German
inheritance and gift taxes are not identical, and the credits,
exclusions, and deductions under the U.S. regime and the
exemptions under the German regime are dissimilar.
Nonetheless, the Committee expects that, in future treaty
negotiations, the Treasury Department will seek appropriate
benefits for U.S. citizens and residents even when the tax
systems are different between the United States and the other
country.\4\ Moreover, the Committee wishes to stress that the
granting of such relief to German citizens and residents under
the proposed protocol without obtaining similar benefits for
U.S. citizens and residents should not be viewed as precedent
in future treaty negotiations with other countries that seek
similar relief.
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\4\ Benefits similar to the pro rata unified credit and marital
deduction were provided to Canadian residents in the protocol to the
income tax treaty between the United States and Canada in 1995. An
issue was raised at that time regarding the fact that it was the first
time the United States entered into a tax treaty covering estate taxes
with a country that does not impose an estate or inheritance tax.
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VII. Budget Impact
The Committee has been informed by the staff of the Joint
Committee on Taxation that the proposed treaty is estimated to
cause a negligible change in fiscal year Federal budget
receipts during the 1999-2008 period.
VIII. Explanation of Proposed Protocol
A detailed, article-by-article explanation of the proposed
protocol to the estate, gift, and inheritance tax treaty
between the United States and Germany is set forth below.
Article 1
The proposed protocol would modify certain tiebreaker rules
in the treaty which determine an individual's country of
domicile where an individual is treated as domiciled in both
countries. Under these rules, an individual is deemed to be
domiciled in the country in which he or she has a permanent
home. If the individual has a permanent home in both countries
(or in neither country), then the individual's domicile is
deemed to be the country in which his or her personal and
economic relations were closest (i.e., the individual's
``center of vital interests''). If the individual's center of
vital interests cannot be determined, then the individual's
domicile is deemed to be the country in which he or she has an
habitual abode. If the individual has an habitual abode in both
countries (or in neither country), then the individual's
domicile is deemed to be the country of which he or she is a
citizen. If the individual is a citizen of both countries (or
of neither country), then the competent authorities of the
countries will settle the issue of domicile by mutual
agreement.
The existing treaty contains an exception to the tiebreaker
rules described above. This exception applies where an
individual was: (1) a citizen of one, but not the other,
country; (2) domiciled in both countries according to the
domestic laws of those countries; and (3) domiciled in the
country of which he or she was not a citizen for not more than
five years. When these conditions are met, the individual is
deemed to be domiciled in the country in which he or she was a
citizen for purposes of the treaty. This exception to the
tiebreaker rules is based on the notion that a country should
not tax the worldwide estate, gifts, or inheritances with
respect to an individual domiciled therein if that individual
has not been present in the country for a significant period of
time.
The proposed protocol would amend the exception to the
tiebreaker rules to extend from five to ten years the period
during which an individual who otherwise meets the exception
described above may be domiciled in the country of which he was
not a citizen without being treated as domiciled in that
country for purposes of the treaty. Thus, a U.S. citizen who is
domiciled in both the United States and Germany under the laws
of each country and who is domiciled in Germany for not more
than 10 years would be deemed to be domiciled only in the
United States (i.e., his or her country of citizenship) for
purposes of the treaty.
Article 2
The proposed protocol would modify certain exemptions
granted for transfers between spouses under the treaty. Under
the existing treaty, a country in which a decedent or donor was
not domiciled may tax certain assets situated in that country
(e.g., immovable property, business property of a permanent
establishment in that country, assets pertaining to a fixed
base in that country for the purpose of performing independent
personal services, and certain interests in partnerships). That
country is required to provide certain deductions and
exemptions with respect to the taxation of such property. For
example, under the treaty, a country exercising its rights to
impose a situs-based tax on such property is required to grant
a 50-percent marital exclusion for interspousal transfers of
certain types of non-community property from individuals
domiciled in or citizens of the other country. Under this rule,
interspousal transfers of such property may be included in the
taxable base of the country where the property is located, but
only to the extent that the value of such property exceeds 50
percent of the value of all property that may be taxed in that
country.
The proposed protocol would provide that the 50-percent
exemption described above would not apply if the decedent or
donor was a U.S. citizen domiciled in Germany, or was a former
U.S. citizen or long-term resident of the United States whose
loss of such status had as one of its principal purposes the
avoidance of tax. Thus, the United States would not be
obligated to provide the marital exclusion benefits described
above to the estate of or a gift made by such a person.
According to the Treasury Department's Technical Explanation
(the ``Technical Explanation''), for example, a U.S. citizen
who is domiciled in Germany under German law could, for
purposes of the treaty, be deemed to have his domicile in
Germany under the tiebreaker rules described above. In such a
case, under the proposed protocol, the United States would not
be required to provide the 50-percent marital exclusion with
respect to interspousal transfers from that U.S. citizen to a
spouse who is not a U.S. citizen.
Article 3
Pro rata unified credit
U.S. internal law
In general, under U.S. domestic law, U.S. citizens and
residents are allowed a unified credit of $211,300 in 1999
against their cumulative lifetime U.S. estate and gift tax
liability. The unified credit increases through 2006. The
unified credit effectively exempts from the U.S. estate and
gift tax transfers in the amount of $650,000 in 1999, $675,000
in 2000 and 2001, $700,000 in 2002 and 2003, $850,000 in 2004,
$950,000 in 2005, and $1,000,000 in 2006 and thereafter (also
referred to as the ``applicable exclusion amount'').
In general, the estate of a nonresident who is not a U.S.
citizen is subject to U.S. estate tax only on his or her assets
situated in the United States. Under Code section 2102(c)(1),
the unified credit against the estate tax allowed to such
nonresidents is $13,000.
Proposed treaty modification
The proposed protocol would provide a pro rata unified
credit to the estate of an individual domiciled in Germany (who
is not a U.S. citizen) for purposes of computing the U.S.
estate tax. The unified credit for such persons would be the
greater of (1) a pro rata portion of the unified credit which
is allowed to U.S. citizens and residents, or (2) the unified
credit allowed to the estate of a nonresident who is not a U.S.
citizen under U.S. law (i.e., $13,000). The pro rata portion
would be based upon the ratio that the German resident's gross
estate situated in the United States at the time of his death
bears to his worldwide gross estate. The Technical Explanation
states that, for example, if a non-U.S. citizen domiciled in
Germany died in 1999 and half of his entire gross estate (by
value) were situated in the United States, the U.S. estate
would be entitled to a pro rata unified credit of $105,650.
This credit must be reduced for any gift tax unified credit
previously allowed for any gift made by the decedent. Allowance
of the pro rata unified credit is conditioned upon the taxpayer
providing sufficient documentation to verify the amount of the
credit.
U.S. estate tax marital deduction
Where a surviving spouse is not a U.S. citizen, the
proposed protocol would allow an estate to elect a limited U.S.
estate tax marital deduction for property that would qualify
for the marital deduction if the surviving spouse had been a
U.S. citizen, provided that the following conditions are met:
(1) at the time of the decedent's death, the decedent was
domiciled in either Germany or the United States; (2) the
decedent's surviving spouse was at the time of the decedent's
death domiciled in either Germany or the United States; (3) if
both the decedent and the decedent's surviving spouse were
domiciled in the United States at the time of the decedent's
death, one or both was a citizen of Germany; and (4) the
executor of the decedent's estate irrevocably waives the
benefits of any other estate tax marital deduction that would
be allowed under the Code.
The marital deduction would equal the lesser of (1) the
value of the qualifying property, or (2) the decedent's unified
credit applicable exclusion amount (within the meaning of U.S.
law determined without regard to any gift previously made by
decedent). The Technical Explanation states that qualifying
property must pass to the surviving spouse (within the meaning
of U.S. domestic law) and be property that would have qualified
for the estate tax marital deduction under U.S. domestic law if
the surviving spouse had been a U.S. citizen and all applicable
elections specified by U.S. domestic law had properly been
made. As described above, the applicable exclusion amount for
decedents dying in 1999 is $650,000.
The Technical Explanation provides an example of the
operation of the new pro rata unified credit and the marital
deduction that would be added by the proposed protocol. For
example, assume husband (H) and wife (W) are both citizens and
residents of Germany. H dies in the year 2000, when the unified
credit is $220,550 and the applicable exclusion amount is
$675,000. H has U.S. real property worth $2,000,000, all of
which he bequeaths to W. The remainder of H's estate consists
of $3,000,000 of property situated in Germany. Under the
existing treaty, H's U.S. gross estate equals $1,000,000 (the
amount by which $2,000,000 of U.S. real property bequeathed to
W exceeds 50 percent of the total value of U.S. property
taxable in the United States under the treaty, or $1,000,000).
H's worldwide gross estate equals $4,000,000 ($1,000,000 plus
$3,000,000 of property situated in Germany).
Under the proposed protocol, H's $1,000,000 U.S. gross
estate would be reduced by a $675,000 marital deduction (i.e.,
the lesser of the applicable exclusion amount ($675,000) or the
value of qualifying property transferred to the spouse
($2,000,000 in this case). This would result in a $325,000 U.S.
taxable estate. The tentative tax on the taxable estate would
be $96,300. However, under the proposed protocol, H's estate
would also be entitled to a new pro rata unified credit of
$55,138 (i.e., $220,500 (the full unified credit for 1999)
times $1,000,000/$4,000,000 (the U.S. gross estate over the
worldwide gross estate)). Thus, under the proposed protocol,
the total U.S. estate tax liability would be $96,300 minus
$55,138, or $41,162.
Article 4
The proposed protocol would amend the saving clause of the
existing treaty. Under the existing treaty, the United States
retains the right to tax under U.S. law the estates or gifts of
U.S. citizens. A ``citizen'' for this purpose includes a former
U.S. citizen whose loss of citizenship had as one of its
principal purposes the avoidance of U.S. tax, but only for a
period of 10 years after such loss of citizenship.
The proposed protocol would expand the saving clause to
cover, in the case of the United States, two additional classes
of individuals. First, under the proposed protocol, the United
States generally would retain the right to tax under U.S. law
the estates or gifts of individuals who, at the time of the
transfer, were domiciled (within the meaning of Article 4
(Fiscal Domicile) of the treaty) in the United States. Second,
under the proposed protocol, the United States generally would
retain the right to tax under U.S. law the estates or gifts of
individuals who, at the time of the transfer, were former long-
term residents of the United States whose loss of such status
had as one of its principal purposes the avoidance of tax, but
only for ten years following the loss of such status.
In addition, the proposed protocol would permit Germany to
retain the right to tax in accordance with German law an heir,
donee, or another beneficiary who was domiciled (within the
meaning of Article 4 (Fiscal Domicile) of the treaty) in
Germany at the time of the death of the decedent or the making
of the gift.
The existing treaty provides exceptions to the saving
clause that preserve certain obligations of the countries under
the treaty. The proposed protocol would add to these exceptions
from the saving clause the pro rata unified credit and the U.S.
estate tax marital deduction that would be added under the
proposed protocol. However, these additional exceptions from
the saving clause would not apply to the estates of former U.S.
citizens and long-term residents whose loss of status had as a
principal purpose the avoidance of tax, for a period of ten
years following the loss of such status.
Article 5
The proposed protocol provides that it is subject to
ratification in accordance with the applicable procedures in
the United States and Germany, and that instruments of
ratification will be exchanged as soon as possible. The
proposed protocol generally would enter into force upon the
exchange of instruments of ratification and would have effect
with respect to deaths occurring and gifts made after that
date.
A special effective date rule applies with respect to the
pro rata unified credit and the limited U.S. estate tax marital
deduction (Article 3 of the proposed protocol), as well as the
expansion of the saving clause (Article 4 of the proposed
protocol). The proposed protocol provides that such provisions
would have effect with respect to deaths occurring and gifts
made after November 10, 1988,\5\ notwithstanding any limitation
imposed under the law of a country on the assessment,
reassessment, or refund with respect to a person's or estate's
return, and provided that any return or claim for refund
asserting the benefits of the proposed protocol are filed
within one year of the date on which the proposed protocol
enters into force or within the otherwise applicable period for
filing such claims under domestic law.
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\5\ November 10, 1988, is the effective date of TAMRA. In TAMRA,
Congress passed several significant estate and gift tax changes
affecting alien individuals. First, the marital deduction generally was
disallowed on transfers to non-U.S. citizen spouses. Second, the
special tax rates and credits applicable to the estates of nonresident
aliens prior to TAMRA were repealed. Third, section 2102(c)(3) was
passed, which permits a pro rata unified credit for nonresidents to the
extent provided by treaty.
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IX. Text of the Resolution of Ratification
Resolved, (two-thirds of the Senators present concurring
therein), That the Senate advise and consent to the
ratification of the Protocol Amending the Convention between
the United States of America and the Federal Republic of
Germany for the Avoidance of Double Taxation with Respect to
Taxes on Estates, Inheritances, and Gifts signed at Bonn on
December 3, 1980, signed at Washington on December 14, 1998
(Treaty Doc. 106-13), subject to the declaration of subsection
(a) and the proviso of subsection (b).
(a) Declaration.--The Senate's advice and consent is
subject to the following declaration, which shall be binding on
the President:
(1) Treaty interpretation.--The Senate affirms the
applicability to all treaties of the constitutionally
based principles of treaty interpretation set forth in
Condition (1) of the resolution of ratification of the
INF Treaty, approved by the Senate on May 27, 1988, and
Condition (8) of the resolution of ratification of the
Document Agreed Among the States Parties to the Treaty
on Conventional Armed Forces in Europe, approved by the
Senate on May 14, 1997.
(b) Proviso.--The resolution of ratification is subject to
the following proviso, which shall be binding on the President:
(1) Supremacy of constitution.--Nothing in the
Protocol requires or authorizes legislation or other
action by the United States of America that is
prohibited by the Constitution of the United States as
interpreted by the United States.