Last week the Federal Circuit heard oral argument in Christensen v. United States, a second tax case from March’s argument week that we have been following because it attracted an amicus brief. In this case, the United States is appealing a decision of the Court of Federal Claims allowing two American citizens residing in France to claim a foreign tax credit. Judges Chen, Hughes, and Stark heard the oral argument. This is our argument recap.
Kathleen Lyon argued on behalf of the United States. She began by explaining the “U.S.-France tax treaty provides” American taxpayers with a “credit against U.S. income taxes for income taxes paid to France.” But, she emphasized, since the treaty was signed, the “Internal Revenue Code’s foreign tax credit statutory scheme” has not extended that credit to “net investment income.”
A judge asked Lyon to address the lower court’s conclusion that there was a “separate basis” to grant the credit “for a subset of people.” Lyon answered by arguing the “court erred” by reading the relevant provision “in isolation.” Under the lower court’s interpretation, she suggested, “there would be no reason” for the next provision to contain a “resourcing provision.” That provision, she argued, instead supports the government’s reading of the treaty.
Another judge asked whether “U.S. Citizens and U.S. residents” living in France would effectively be “subject to a different set of rules.” Lyon answered by arguing the lower court’s interpretation would produce precisely that “anomalous result.” Under that approach, U.S. citizens residing in France would receive a “much greater tax benefit than U.S. citizens” living in the United States. She added that “another anomalous result” would follow as well, because U.S. citizens living in France “would potentially get a double tax benefit.”
The panel asked about “interpretive deference.” One judge questioned whether the Department of the Treasury “enjoys deference” when “treaty language is ambiguous.” In response, Lyon argued “technical explanations are legitimate aids to interpretation.” In the government’s view, she continued, the lower court “failed to give any deference whatsoever to the technical explanation” of the statute. Instead, she said, the lower court “required evidence that France had agreed or acquiesced to Treasury’s interpretation.” Lyon argued that requirement was erroneous because the “Supreme Court has never conditioned deference” on such proof.
Stuart Horwich argued on behalf of the Christensens. Horwich began with the text of the treaty, contending “the plain text” contains “no limitations language” that would prevent taxpayers from claiming “a foreign tax credit.” Turning to the relevant treaty article, Horwich argued “it’s quite clear” the provision “does provide an independent credit.”
A judge asked how the treaty’s “resourcing provisions” operate under the Christensens’ interpretation. Horwich answered by saying, in their view, “the resourcing provisions” establish “an item by item approach.” Because of that structure, he contended, “you do not need to go as far as requiring or looking to code provisions.” According to Horwich, that reading is “quite clear” and also consistent with the treaty’s “technical explanation.”
The same judge pressed further, asking whether that interpretation “would render the resourcing rule” in the article “superfluous,” as the government contended. Horwich disagreed. He said the provision “is written broadly enough” that the “resourcing provisions” serve a limiting function — that is, preventing a U.S. resident living in France from claiming a tax credit greater than the taxes actually paid.
Another judge asked Horwich whether any other circuit courts had addressed similar issues. Horwich acknowledged they had not, telling the panel, “you’re the first, I’m afraid.”
In rebuttal, Lyon returned to the treaty’s technical explanation. The explanation, she emphasized, “expressly says” that American source income “could not be offset by the tax,” precisely because “it was U.S. source income.” Interpreting the treaty otherwise, Lyon maintained, “would render that provision superfluous.”
We will continue monitoring this case and report on developments.