Category Archives: Foreign Tax Credits

Bonjour Part 4 – What The Bruyea Case And The § 2801 Regs Suggest About The “Last In Time” Rule And Tax Treaty Overrides

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This is the fourth in a series of posts about “treaty based” foreign tax credits. The purpose of this post is NOT to discuss how the foreign tax credit rules work. The purpose is to discuss when a later statute can override an earlier tax treaty. It just so happens that this principle will be discussed in the context of foreign tax credit issues.

(The three previous posts discussed the foreign tax credit rules in the context of the NIIT (“Net Investment Income Tax“). For a description of the first three posts, see the Appendix to this post.)

The governing principle for when a statute can override a tax treaty seems to be that:

1. Generally statutes and treaties are (if possible) to be interpreted to give effect to both.

2. A later statute will override an earlier treaty only when the the statute reflects a clear legislative intent to do override the treaty.

When Can A Statute Override A Tax Treaty?

The principle will be explored in the context of:

A. The Bruyea Case

B. The Section 2801 Regulations Governing Covered Gifts

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Treasury’s Claim That The FEIE Is A Costly Expenditure, Whether True Or False, Is A Strong Argument FOR Tax Reform

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Prologue

On January 29, 2025 a post by Keith Redmond on X.com suggested that Treasury had identified the Foreign Earned Income Exclusion (“FEIE”) – found in Internal Revenue Code 911 – as a tax expenditure costing the Treasury 5.6 billion dollars a year.

Keith’s post immediately generated discussion with CPA Phil Hogan. Phil noted that those Americans abroad who used the FEIE probably would not owe tax on income excluded by the FEIE. He noted that Foreign Tax Credits could be used to offset the taxes owed on the income excluded by the FEIE. Phil’s point (confirmed by CPA Kevyn Nightingale) is incredibly important.

(I have included, as an Appendix to this post an analysis of WHY many (if not most) Americans abroad who file using the Foreign Earned Income Exclusion would NOT owe U.S. tax, if the income excluded under the FEIE were included as U.S. taxable income. The short explanation is that if the income were INCLUDED on the U.S. tax return, taxes paid in the country of residence, would be used to effectively pay the U.S. tax on that included income. See the Appendix for further discussion).

Is The Claim That The Foreign Earned Income Exclusion Costs The U.S. Tax Revenue Really Credible?

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Bonjour Part 3 – From Christensen To Bruyea: Boldly Go Where No Interpretation Of Foreign Tax Credits For The NIIT Has Gone Before!

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Congratulations to Stuart E. Horwich, Horwich Law LLP, London, United Kingdom, and Max Reed,
Polaris Tax Counsel, Vancouver, British Columbia, Canada, for Plaintiff.

Introduction

IRS Medic Presentation – January 20, 2025

The slides are here:

NIIT Tax Credit 2

This is the third in a series of posts about “treaty based” foreign tax credits.

The first post detailed the provisions of the U.S. France tax treaty which created the “three bite rule”. By creating the “three bite rule” the U.S. France treaty was used to create a treaty based foreign tax credit.

Bonjour: Different US Tax Treaties Provide Different US Taxation For Different Groups Of Americans Abroad

Bonjour: Different US Tax Treaties Provide Different US Taxation For Different Groups Of Americans Abroad

The second post (also based on the U.S. France tax treaty) described how the U.S. France tax treaty was used to create an independent treaty based foreign tax credit. The purpose was to allow for a foreign tax credit against the NIIT (“Net Investment Income Tax”). Although a major breakthrough, it’s important to note that this case (Christensen):

1. Found that the treaty should be interpreted to create an a foreign tax credit that was independent of the credits allowed under the Internal Revenue Code;

2. Specifically ruled that the language “subject to the limitations of the law of the United States” (found in the opening paragraph of the double taxation clause) should be interpreted to preclude a foreign tax credit for payment of foreign tax on foreign investment income.

Bonjour Part 2 – US Citizens Living In France Can Use French Tax As A Credit To Offset The Obamacare Surtax!

Bonjour Part 2 – US Citizens Living In France Can Use French Tax As A Credit To Offset The Obamacare Surtax!

This third post continues the “NIIT Tax Treaty Chronicles”. Specifically, this post details how Judge Solomson, in the case of Paul Bruyea, determined that (contrary to Judge Blank’s ruling in Christensen) that the “subject to the limitations of the law of the United States”clause in Article XXIV, Paragraph 1:

1. Does NOT preclude the use of a foreign tax credit to offset the NIIT; and

2. That Article XXIV, Paragraph 1 allows a U.S. citizen or U.S. resident living in Canada to use taxes paid to Canada as a credit against the U.S. NIIT!

Judge Blank in Christensen and Judge Solomson in Bruyea reached opposite conclusions with respect to whether the following clause (as represented in the 2016 U.S. Model Tax Treaty) can be used to create a foreign tax credit which is independent of the foreign tax credit rules in the Internal Revenue Code (Sections 27, 901 and 904).

Article 23

RELIEF FROM DOUBLE TAXATION

1. In the case of __________, double taxation will be relieved as follows:

2. In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a resident or citizen of the United States as a credit against the United States tax on income applicable to residents and citizens:

a) the income tax paid or accrued to __________ by or on behalf of such resident or citizen; and

Therefore, I expect that this issue has NOT been fully resolved.

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