The US-Canada Treaty

In the case of Bruyea v. United States, U.S. Court of Federal Claims (2024), the U.S. Court of Federal Claims (“Court”) issued a partial summary judgment entitling a U.S. citizen residing in Canada to claim a treaty-based foreign tax credit (“FTC”) against his net investment income tax (“NIIT”) liability under Article XXIV of the U.S.–Canada income tax treaty (“Treaty”).

The U.S. government argued that the treaty-based FTC is subject to the limitations of the U.S. law as provided in the U.S. law limitation clause in paragraph 1 of Article XXIV; thus, the NIIT cannot be offset by the treaty-based FTC as it is not allowed under the Code. 

The Court rejected the government’s arguments and ruled in favor of the taxpayer.  The Court held that the U.S. law limitation clause in paragraph 1 of Article XXIV is focused on how a treaty-based credit is computed, not whether such credit is applicable to the NIIT under the Treaty.  The Court concluded that the purpose of the Treaty is to eliminate or avoid double taxation and parties to the Treaty contemplated a treaty-based credit, even if such credit may be inconsistent with the Code. 

The US-French Treaty

In the case of Christensen v. United States, the court held that Article 24(2)(b) of the treaty could be construed to allow U.S. citizens who are residents of France to claim a treaty-based FTC against NIIT for French income tax imposed on foreign-source income.  Unlike Article 24(2)(a), Article 24(2)(b) does not include the “subject to the limitations …” language and stands on its own as “Article 24(2)(b) neither contains nor refers to the Article 24(2)(a) limitations.”  Hence, the taxpayers could claim a treaty-based FTC under Article 24(2)(b) for French income tax imposed on their passive foreign-source income to offset the NIIT imposed on that income.

The IRS has appealed the decision, therefore whether an FTC is available to offset the NIIT under the U.S.-France income tax treaty is uncertain.

1. KPMG, United States – Court Allows Treaty-Based Foreign Tax Credit Against Net Investment Income Tax. https://kpmg.com/xx/en/our-insights/gms-flash-alert/flash-alert-2024-244.html ;
2. KPMG, United States – IRS Appeals Decision Allowing FTC Claim Against Net Investment Income Tax. https://kpmg.com/xx/en/our-insights/gms-flash-alert/flash-alert-2024-007.html ;
3. Bruyea v. United States, U.S. Court of Federal Claims (2024);
4. Christensen v. United States, 168 Fed.Cl. 263 (U.S. Ct. Fed. Claims 2023), appeal docketed, No. 24-1284 (Fed. Cir. Dec. 22, 2023);