Facts
Matthew and Katherine Kaess Christensen were US citizens living in France. They filed a joint return claiming a credit against their net investment income tax. The Christensens claimed the credit under Article 24(b) of the US-France Income Tax Treaty ("Treaty"). They disclosed the treaty-based return position on IRS Form 8833 and filed a disclosure statement on IRS Form 8275. The IRS denied the credit and the Christensens commenced litigation against the government in the Court of Federal Claims and won.
Applicable law
Congress enacted the net investment income tax in 2010. The net investment income tax is a 3.8% tax on high-income individuals, trusts, and estates. The tax is sometimes referred to as the unearned Medicare contribution tax or the NIIT. Congress enacted the net investment income tax in Section 1411. Section 1411 is found in Chapter 2A of the Code so the foreign tax credit of Sections 27 and 901 cannot offset the net investment income tax.
Taxpayers can credit foreign income taxes paid or accrued during the year against their US income tax pursuant to Sections 27 and 901. By the terms of those provisions, the foreign tax credit applies only to US taxes imposed under Chapter 1 of the Code.
Article 24(2)(a) of the Treaty provides that "[i]n accordance with the provisions and subject to the limitations of the law of the United States", the United States will allow a credit to US citizens and residents for French income taxes paid.
Article 24(2)(b) provides that the United States will allow to a US citizen resident of France a credit against the US income tax for the French income tax paid by the US citizen. Importantly, Article 24(2)(b) does not include the same "provisions and limitations" language as is included in Article 24(2)(a).
Christensen is not the only case that has considered the ability to use foreign tax credits against the net investment income tax. In fact, it's not the only case to do so under the Treaty. The Tax Court in Toulouse v. Commissioner, 157 T.C. 49 (2021) did not allow the taxpayer to credit French and Italian income taxes against the US net investment income tax. Different from Christensen, in Toulouse the Tax Court interpreted Article 24(2)(a) but not Article 24(2)(b).
The court's holding
In Christensen, the court held that Article 24(2)(b) provides a treaty-based credit. The court highlighted the absence of the provisions and limitations language in Article 24(2)(b). Because Article 24(2)(b) was not subject to the limitations of United States law, the Treaty's credit under that paragraph should not be disallowed solely because the net investment income tax happens to reside in Chapter 2A of the Code.
The government argued among other things that the Treaty did not provide an independent credit and that the Treaty did not override the Code's foreign tax credit provisions rooted in Chapter 1. The court did not afford great deference to the government's interpretation of the Treaty because the government did not provide evidence that its interpretation represented the shared expectations of the United States and France regarding the creditability question.
The court concluded in line with Toulouse that Article 24(2)(a) of the Treaty does not allow a foreign tax credit against the net investment income but went beyond the analysis in Toulouse and held that Article 24(2)(b) of the Treaty does allow such a credit independent of the Code.
