Introduction

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Today March 3, 2026 the Christensen (France) and Bruyea (Canada) appeals were argued. The issue is whether FTCs can be used to offset the 3.8% NIIT. The NIIT is found in Chapter 2A of the Internal Revenue Code instead of Chapter 1 which has the the FTC rules. Of course, FTCs (foreign tax credits) are available only as a credit against foreign taxes paid on foreign source income. In the context of the NIIT, it appears well settled (under the provisions of the Internal Revenue Code) that because the NIIT is found in Chapter 2A, that foreign tax credits cannot be used as a credit against U.S. tax owing. To put it simply, in enacting the NIIT, Congress imposed pure double taxation on “foreign” net investment income. Think of it (like PFIC) as a “tariff” on investing in foreign financial assets. This is a huge problem for Americans abroad because their assets (and income streams) are more likely to be foreign. Hence, it is no surprise that this litigation arises from the circumstances of American citizens living outside the United States. Both Mr. Bruyea and the Christensens are Americans abroad.

Hence, the issue in both Bruyea and Christensen is whether the tax treaties provide a foreign tax credit, where the Internal Revenue Code does not.

Do tax treaties create a foreign tax credit under circumstances where the U.S. Internal Revenue Code would NOT allow a foreign tax credit?

Paragraph 1 of Article XXIV of the Canada/U.S. Tax Treaty reads as follows:

Elimination of Double Taxation

1. In the case of the United States, subject to the provisions of paragraphs 4, 5 and 6, double taxation shall be avoided as follows: 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 citizen or resident of the United States, or to a company electing to be treated as a domestic corporation, as a credit against the United States tax on income the appropriate amount of income tax paid or accrued to Canada; and, in the case of a company which is a resident of the United States owning at least 10 per cent of the voting stock of a company which is a resident of Canada from which it receives dividends in any taxable year, the United States shall allow as a credit against the United States tax on income the appropriate amount of income tax paid or accrued to Canada by that company with respect to the profits out of which such dividends are paid.

The France U.S. tax treaty has a similar provision which INCLUDES as follows:

ARTICLE 24

Relief From Double Taxation

1. (a) 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 citizen or a resident of the United States as a credit against the United States income tax:
(i) the French income tax paid by or on behalf of such citizen or resident;

U.S. Treasury position’s is that the language in italics In accordance with the provisions and subject to the limitations of the law of the United States allows the United States to DENY a foreign tax credit if a foreign tax credit is not allowed under the Internal Revenue Code. Obviously this interpretation would make Article XXIV meaningless. Why would it be needed? In fact, it would turn Article XXIV, which purports to be a vehicle for the “Elimination of Double Taxation”, into an Article which would guarantee double taxation. Nevertheless, that is the Orwellian position of U.S. Treasury.

On March 3, 2026 the United States Court of Appeals heard the appeals from BOTH Bruyea (Canada) and Christensen (France). The decisions of the courts of first instance (which conflicted on this question) were:

Bruyea (Canada)– The words In accordance with the provisions and subject to the limitations of the law of the United States should NOT be read to allow the United States to deny a foreign tax credit; and

Christensen (France) – The words In accordance with the provisions and subject to the limitations of the law of the United States SHOULD be read to allow the United States to deny a foreign tax credit. (The Christensen’s were successful based on arguing that a second section of the “double taxation” clause created an independent treaty based foreign tax credit.)

In accordance with the provisions and subject to the limitations of the law of
the United States

The meaning of those words is what the court has been asked to resolve. Specifically, do treaties create a foreign tax credit that extends beyond what is allowed under the IRC. If you are interested in this issue, I think you will find the oral arguments in Bruyea and Christensen interesting. They were heard back to back.

The cases are huge and the stakes are very high! If Bruyea and/or Christensen lose, I would think think that the terms of the treaty would allow the USA to deny a foreign tax credit by simply keeping a tax out of Chapter 1.

Interested to hear your thoughts on the prognosis and/or how you handle the issue of the NIIT payable on non-U.S. source income now.
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