Christensen and Bruyea reversed; no foreign tax credit for NIIT
Welcome to The Friday Edition. Phil Hodgen here. More international tax stuff for practitioners and aficionados.
Let’s keep it brief this week:
- You’re hip deep in tax season, staring (as we are) at September 15, September 30, and October 15 filing deadlines. You have no time for fun and games.
- I don’t like to read long-form tax articles unless I need to for a specific project. I suspect you are like me.
So let’s keep it short.
No foreign tax credit for net investment income tax
The net investment income tax is a nasty piece of work. It imposes an income tax on investment income (interest, dividends, capital gains), but does not allow a foreign tax credit if another country also imposes income tax on that investment income.
Why? Because IRC Section 1411 imposes “an” income tax on this special category of income, in addition to “the” income tax imposed on all income by IRC Section 1.
And the foreign tax credit of IRC Section 901 can only be used to offset U.S. income tax liability imposed by IRC Section 1 – “the” income tax. The foreign tax credit of IRC Section 901 cannot be used to offset U.S. net investment income tax liability imposed by IRC Section 1411.
The situation is redolent of Eddie Izzard and the difference between transvestite and executive transvestite. (YouTube, 1 minute and 3 seconds). The net investment income tax is oh so special.
Christensen and Bruyea: a glimmer of hope, crushed
For a brief moment, we had hope.
Stuart Horwich argued and won in Christensen (American taxpayer in France) and Bruyea (American taxpayer in Canada), based on technical quirks in the income tax treaties between those countries and the United States. The essence of Stuart’s argument was that income tax treaties, by special negotiation between the two countries, created a foreign tax credit law independent of IRC Section 901.
The Federal Circuit Court of Appeals reversed both cases this week. No foreign tax credit via income tax treaties for either taxpayer, and by extension, for the rest of us.
- Estate of Paul Bruyea v. United States, __ F.4th __, No. 25-1563, ECF No. 58 (Fed. Cir. Aug. 31, 2026), reversing Bruyea v. United States, 174 Fed. Cl. 238 (2024).
- Matthew Christensen & Katherine Kaess Christensen v. United States, __ F.4th__, No. 24-1284, ECF No. 71 (Fed. Cir. August. 31, (2026),reversing Christensen v. United States, 168 Fed. Cl. 263 (2023).
These are interesting cases to read if you are care about the intersection between treaties and the Internal Revenue Code. But for those of us who advise taxpayers–and for American taxpayers abroad, the outcome is clear: double-taxation of net investment income is a reality.
Your alternatives are: (1) hope that you can get a foreign tax credit in your country of residence; (2) tax a tax deduction rather than a credit for foreign income taxes paid; or (3) suck it up, buttercup.
Thanks to John Richardson in Toronto for the first heads-up on this.