The Department of Justice’s April 22 appeal of a case involving foreign tax credits may prove to be influential for US expats. Assuming the appeal is denied, the court’s decision could translate into noteworthy refunds for many US taxpayers residing overseas.
In 2023, the US Court of Federal Claims ruled that the IRS incorrectly denied taxpayers Matthew and Katherine Christensen from using the US-France income tax treaty to claim the foreign tax credit to offset their net investment income tax (NIIT) liability. It is worth noting that this ruling in
Christensen v. United States marks the first instance a court has agreed that the NIIT can be reduced by the foreign tax credit.
The NIIT is among the few US taxes imposed that can often lead to double taxation for American citizens abroad as the Internal Revenue Code does not permit the NIIT offset using the foreign tax credit.
Given that regular refunds may only be claimed for three years past the original filing date, refunds based on foreign tax credits may be claimed for as long as ten years. While the IRS probably will not issue any refunds while the appeal is ongoing, both taxpayers and practitioners might want to consider filing amended returns to ensure the statute of limitations does not expire on the refunds that might be owed to them if the ruling is left standing.
The claim by taxpayers in a 2021 case,
Toulouse v. Commissioner, which was nearly identical to one in Christensen, was denied by the US Tax Court. Both Toulouse and Christensen argued that Article 24, Relief from Double Taxation from the US-France income tax treaty, permitted them to use the foreign tax credit to mitigate their NIIT liability.
The tax treaty language under review in Christensen is not limited solely to the US-France income tax treaty. A successful appeal could have repercussions for US taxpayers residing in several other nations with which the US has an active income treaty.
As the case of Christensen v. United States so brilliantly highlights, international taxation can be remarkably intricate – subtle differences in interpretation can induce large alterations in US tax liabilities. US taxpayers with foreign income should consult with a trusted tax adviser to remain in compliance but avoid overpayment.