In a choice that shocked many worldwide tax advisors, on Oct. 23, 2023 the U.S. Courtroom of Federal Claims dominated in Christensen v. United States, No. 20-935T that Matthew and Katherine Kaess Christensen, Americans residing in France, may declare a international tax credit score (FTC) towards the web funding earnings tax (NIIT) assessed on their U.S. federal earnings tax return. U.S. residents residing overseas and their advisors are hopeful that this can be a major transfer in the direction of decreasing the double taxation they’ve confronted because the 2010 enactment of the NIIT underneath the Inexpensive Care Act.

Prior makes an attempt by People residing overseas to offset the NIIT with FTCs had failed. Citing language in Article 24(2)(a), which is frequent to various tax treaties, the Inside Income Service argued that FTCs may solely be claimed towards earnings described in Chapter 1 of the Inside Income Code. As a result of the NIIT had been launched underneath a brand new Chapter 2A of the of IRC, and was referenced as an “Unearned Earnings Medicare Contribution Surtax,” courts had agreed that it couldn’t be offset by FTCs. 

Nevertheless, the Christensens argued for reduction underneath a unique provision of the U.S.-France Earnings Tax Treaty.  Article 24(2)(b) of this treaty doesn’t comprise the language requiring FTCs for use “in accordance with the provisions and topic to the restrictions” of the IRC. (IRC Sections 27 and 901(a) are notably problematic, as they limit FTC claims to Chapter 1 taxes.) Based mostly on this, the U.S. Courtroom of Federal Claims agreed that the Christensens may declare a treaty-based FTC to offset the NIIT on their foreign-source passive earnings—earnings on which that they had already paid French earnings taxes. 

Far-Reaching Influence

The affect of this resolution might be far reaching. Tax advisors have already famous that the language in Article 24(2)(b) of the U.S.-France Treaty is like that in different U.S. earnings tax treaties, (for instance, United Kingdom, Germany and The Netherlands) whereas some Canadian specialists have already discovered comparable provisions within the U.S.-Canada earnings tax treaty. Additional, as worldwide tax specialists view treaties with renewed scrutiny, some have advised attacking the NIIT primarily based on language within the social safety totalization agreements between the USA and various different nations.

Caveats

Nevertheless, for People residing overseas and their advisors in search of to assert FTCs towards their NIIT on their future U.S. federal earnings tax returns, a couple of caveats are so as.  The relevance of the Christensen case for every taxpayer is dependent upon the particular language within the earnings tax treaty with their international nation of their residence.  Because the saying goes, when you’ve seen one U.S. earnings tax treaty, you’ve seen one U.S. earnings tax treaty.  Though there’s commonality in lots of respects, they aren’t uniform.

And accountants have already famous that there could also be sensible challenges to really claiming a FTC towards NIIT, as the varied IRS varieties wanted to take action don’t presently present for this.

Lastly, though it might be argued that the Christensen resolution, supported by Article 24(2)(b) of the U.S.-France earnings tax treaty, doesn’t battle with prior IRS wins during which taxpayers had sought to assert a FTC underneath Article 24(2)(a), this newest case represents a distinction between the opinions of the Tax Courtroom and that of the U.S. Courtroom of Federal Claims.  So it might open the door for additional litigation if the IRS appeals and/or extra taxpayers contest the IRS’ place.

Protecting Claims

For the quick future, US residents residing outdoors the USA who want to have the correct to scale back their NIIT by claiming a FTC for taxes already paid to their international nation of residence, however who don’t wish to threat being the following IRS check case, could wish to search protecting claims to retain the correct to refunds relying on future developments.

Joan Crain is a world wealth advisor primarily based in The Villages, Fla.