The taxpayers, both U.S. citizens, are a married couple living in Paris who filed a joint return for 2015 – the tax year in issue. On their original return they reported foreign-source passive income and U.S.-source passive income on which they paid NIIT. In addition, they paid French income tax on their foreign-source passive income. In 2020, they filed an amended return for 2015, claiming a refund plus interest in relation to the NIIT imposed on their foreign-source passive income, which they claimed was offset by an FTC pursuant to the Relief from Double Taxation article (Article 24) of the treaty.
The court provided a detailed analysis of the treaty provisions and their relationship to the U.S. Internal Revenue Code FTC provisions. The court held that the taxpayers could not claim a treaty-based FTC against the NIIT under Article 24(2)(a) of the treaty because the wording of that subparagraph requires that the credit must be “in accordance with the provisions and subject to the limitations” of the Code. Specifically, the court held that Article 24(2)(a) is limited by Code sections 27 and 901(a), which only allow FTCs against tax imposed under Chapter 1 of the Code. Because the NIIT is imposed by Code section 1411, which is in Chapter 2A, it cannot be offset by FTCs under paragraph 2(a) of the treaty.2
However, 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.
As noted, 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.