Late last month the Federal Circuit issued its opinion in Christensen v. United States, a tax case we have been following because it attracted an amicus brief. Like the case we discussed yesterday, 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.
Judge Stark began by outlining the factual and procedural background:
Matthew and Katherine Christensen (the “Christensens”) are U.S. citizens who lived in Paris, France, during the 2015 tax year. That year, the Christensens sold shares of stock they held in a French company and realized a profit on the sale. As required under U.S. and French law, the Christensens paid income tax to both countries for the gain on their investment, including a [net investment income tax (“NIIT”)] payment of $3,851 to the U.S. Internal Revenue Service (“IRS”).
In 2020, the Christensens filed a tax refund lawsuit in the Court of Federal Claims seeking the return of the $3,851 they paid as NIIT, plus interest and costs. They argued that two provisions of the Convention – Article 24(2)(a) and Article 24(2)(b) – created a tax credit for the amounts they paid in French income tax that should have offset their NIIT liability. In 2023, the Court of Federal Claims granted summary judgment to the Christensens, holding that they were entitled to an offset under the Convention.
After providing this background, Judge Stark first turned to Article 24(2)(a). He agreed with the lower court’s conclusion that it “‘provides foreign tax credits against taxes imposed by Chapter 1 of the [Code], but does not provide a foreign tax credit against the net investment income tax imposed . . . in Chapter 2A of the [Code].‘” Judge Stark noted the reasoning for this conclusion is set out in detail in the companion case of Bruyea v. United States, which we discussed yesterday.
Judge Stark, however, noted the Christensens made an argument not addressed in Bruyea. They argued “they are entitled to a foreign tax credit against the NIIT because the paragraph 2(b) Credit Clause is not constrained” by Article XXIV of the Convention. Judge Stark disagreed. In applying the “whole-text canon,” Judge Stark explained that courts must “consider the entire text, in view of its structure and of the physical and logical relation of its many parts,” rather than treating provisions as isolated. He found that Article XXIV, appearing “in the very first part of paragraph 2, serves as an overarching qualifier to both subparagraphs (a) and (b).”
Judge Stark next turned to a “re-sourcing provision” that treats certain U.S.-source income as French-source income “to the extent necessary to give effect” to other provisions. He reasoned this provision “would have been unnecessary” had the drafters believed the treaty-created credit operated independently of the Code. As a result, he said, reading it in the way proposed by the Christensens would improperly “render the re-sourcing provision superfluous.”
Judge Stark also warned the Christensens’ interpretation would produce “anomalous results.” He explained that, under their view, a U.S. citizen residing in Paris could claim a NIIT credit unavailable to a similarly-situated citizen in New York, and could as a result secure a prohibited “double benefit.” He said there is “no basis to conclude that the parties to the Convention intended” such disparate treatment of similarly-situated citizens.
As a result of Judge Stark’s analysis, the panel reversed the lower court’s judgment.