Late last month the Federal Circuit issued its opinion in Bruyea v. United States, a tax case we have been following because it attracted an amicus brief. In this case, the government appealed a judgment of the Court of Federal Claims based on its view that bilateral tax treaties relieve U.S. taxpayers from double taxation with respect to net investment income tax. In an opinion authored by Judge Stark and joined by Judges Chen and Hughes, the panel reversed the judgment. This is our summary of the court’s opinion.
Judge Stark began by outlining the factual and procedural background:
Bruyea was a U.S. citizen who lived in British Columbia, Canada, during the 2015 tax year. That year, he sold a property in Canada that generated gains on which he owed tax to both countries, including $263,523 in U.S. [net investment income tax (NIIT)]. When Bruyea filed his U.S. tax return for 2015, he claimed a foreign tax credit equal to the $263,523 he had paid to Canada on the income generated by the sale and sought to apply it against the NIIT he owed. The IRS disallowed the credit, so Bruyea paid the NIIT in full.
Thereafter, in 2023, Bruyea filed a tax refund lawsuit in the Court of Federal Claims, alleging that his NIIT payment constituted improper double taxation in violation of the Convention. He sought the return of the $263,523, plus interest and costs. In 2024, the Court of Federal Claims granted Bruyea’s motion for summary judgment, agreeing that Article XXIV of the Convention creates a foreign tax credit against the NIIT that Bruyea was entitled to claim.
Coming to the dispute at hand, Judge Stark addressed Bruyea’s argument that “the Convention’s two Credit Clauses create a broad foreign tax credit beyond those provided in the [Internal Revenue] Code — a credit he insists is not subject to the Code’s chapter 1 restriction on foreign tax credits.” Bruyea suggested “this Convention-created credit is applicable against the NIIT, consistent with the [g]eneral [p]rinciple of avoiding or eliminating double taxation.”
Judge Stark disagreed. Instead, he agreed with the government’s counterargument that part of the Convention “restricts the scope of the Credit Clauses, in such a manner as to not allow the Convention’s foreign tax credit to be applied against the NIIT.”
In finding for the government, Judge Stark rested his conclusion “on two independent propositions.” First, he said, “as the parties agree . . . the Code itself does not authorize a foreign tax credit against the NIIT.” Second, he continued, “any credit created by Article XXIV of the Convention is, by its own terms, subject to the very Code provisions that foreclose the credit in the first place.”
Regarding the first proposition, Judge Stark concluded that “the plain language of the Code does not allow for a taxpayer’s NIIT liability to be reduced by foreign tax credits.” When looking at the language of the Code, he noted, “the Code authorizes the use of foreign tax credits only against taxes set out in chapter 1.” But, he explained, “[t]he NIIT is not contained in chapter
1.” As such, Judge Stark indicated, provisions of the Code “do not authorize the taxes paid by a U.S. taxpayer to Canada to be credited against the NIIT, even where the NIIT is based on income that was already taxed by Canada.”
Regarding the second proposition, Judge Stark noted “the identical language ‘tax imposed by this chapter [1]'” is present within two other provisions of the Code. Judge Stark found this notable, highlighting that “Congress knows how to place taxes within and outside of chapter 1.” This, he said, supports the notion that “Congress’ placement of the NIIT” outside of chapter 1 “means the NIIT is not subject to” the relevant tax credits.
Judge Stark then turned to Bruyea’s contention that “the Convention creates a credit independent of, and not subject to, the Code.” Judge Stark disproved Buryea’s argument on four grounds. First, he observed that Article II of the Convention expressly carves out special treatment for certain taxes otherwise excluded, noting that “when the treaty drafters intended for the Convention to alter the Code’s default treatment of a category of credit-excepted taxes (like the NIIT), they said so explicitly.” No such explicit alterations were made, he said. Second, Judge Stark pointed to Article XXIV’s “re-sourcing” provisions, reasoning that these provisions “would have been unnecessary” if the treaty-created credit operated independently of the Code. Third, Judge Stark noted, Bruyea’s reading would produce “anomalous results.” He found, in particular, “no basis to conclude that the parties to the Convention intended” disparate treatment of similarly-situated citizens. Fourth, Judge Stark observed, his conclusion is “consistent with those of three other courts to have considered the same dispute.”
Toward the end of his opinion, Judge Stark dismissed six additional counterarguments made by Bruyea.
As a result of Judge Stark’s analysis, the panel reversed the lower court’s judgment.