Court allows FTCs for NII tax under US-France treaty


The U.S. Court of Federal Claims has issued a partial opinion in Christensen v. United States (No. 20-935T), holding that U.S. citizens living abroad can claim a foreign tax credit (FTC) against their net investment income tax (NIIT) under the tax treaty between the U.S. and France. The ruling breaks from a 2021 Tax Court decision in Toulouse v. Commissioner (157 T.C. 49) that reached the opposite conclusion and the result may create an opportunity for refund claims.


The NIIT under Section 1411 applies once adjusted gross income exceeds $200,000 (single) or $250,000 (joint). It generally imposes a 3.8% tax on investment income such as capital gains, dividends, interest, rents and royalties, as well as income from a trade or business in which the taxpayer is passive. The tax was created by the Affordable Care Act under a new chapter in the Internal Revenue Code (IRC) and was designed to be equivalent to employment and self-employment taxes imposed on earned income.


The taxpayers bringing the case were married U.S. citizens living in France who filed an amended return for the 2015 tax year, requesting a refund of $3,851 for applying an FTC to their NIIT liability. The IRS denied the refund under a long-standing position that an FTC cannot be claimed against NIIT because it falls outside of Chapter 1 of the IRC.

The regulations under Section 1.1411-1(e) provide that no FTC is allowed against NIIT because Sections 27 and 901 restrict FTC to Chapter 1 income tax. The court therefore analyzed whether the France-U.S. tax treaty itself provided for an FTC.


The U.S.-France treaty applies to “income taxes imposed by the IRC” and provides for FTCs under two separate paragraphs in Article 24. Under Article 24(2)(a), FTCs are allowed only “in accordance with the provisions” and “subject to the limitations of the law of the United States.” The U.S. Court of Federal Claims agreed with the Tax Court and conceded that these restrictions would preclude an FTC against NIIT because under U.S. law (Sections 27 and 901), an FTC is only allowable against Chapter 1 tax.


However, the Court of Federal Claims found that an FTC should be allowed under Article 24(2)(b) because Article 24(b)(2) does not include any restriction that the credit be allowable “in accordance with the provisions” and “subject to the limitations of the law of the United States.” The court dismissed arguments that such a ruling went against congressional intent in putting NIIT in a separate chapter, ruling that there are two separate regimes for allowing FTCs: the statutory credits allowed under Sections 27 and 901 and treaty-based FTCs that are not subject to the limitation of the IRC unless the terms of the treaty mention as such.


The case creates a split on the issue between two courts of national jurisdiction, leaving the issue far from settled for taxpayers. The IRS could appeal the decision to the Federal Circuit Court of Appeals. The IRS may also continue to deny FTCs against NIITs on originally filed returns under Toulouse, for which the Tax Court has jurisdiction. In response, taxpayers may be able to pursue refund claims in the Court of Federal Claims under Chistensen (or argue for their credits in IRS appeals based on Chistensen). Taxpayers can generally file suit in the Court of Federal Claims or district court within two years after a refund claim is denied.


It is unclear how the IRS will treat any refund claims filed on an amended return. It could hold the claims in suspension without rejecting them while it appeals the decision in Chistensen. Taxpayers can generally file suit to claim a refund if the IRS fails to act on a claim for six months. The protective claim process also allows taxpayers to preserve their right to a refund based on the outcome of future contingencies.



Cory Perry

Washington DC, Washington DC

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