FTC against the NIIT? TBD

This week’s topic: the current state of the Christensen and Bruyea cases, and what it means for the upcoming tax season.

Foreign Tax Credits Against the NIIT: Where We Are Now

U.S. taxpayers are exposed to paying the net investment income tax: 3.8% of net investment income above a certain threshold income amount, on passive investment income. IRC §1411.

Two court cases are winding their way through the federal appeals process. For U.S. taxpayers abroad who pay foreign income tax on that investment income, the resolution of these case might allow them to claim a foreign tax credit against the net investment income tax liability.

Here’s a quick status update on the litigation–and what it means for preparing 2025 income tax returns.

The Basic Problem: The Code Says No

The Internal Revenue Code does not allow you to claim a foreign tax credit against your NIIT liability. This isn’t an IRS interpretation or an aggressive reading. It’s baked right into the statutory language. IRC §901(a) says the foreign tax credit applies against your Chapter 1 tax (the regular income tax):

“If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this chapter shall, subject to the limitation of section 904, be credited with the amounts provided in the applicable paragraph of subsection (b) . . . .”

The net investment income tax lives in Chapter 2A—a completely different chapter. And the Section 1411 regulations confirm this: foreign taxes you pay do not reduce your NIIT. Reg. §1.1411-1(e).

So if the Code says no, how did taxpayers win two cases, allowing them to take a treaty-based reporting position and use their foreign income tax paid to reduce their U.S. net investment income tax liability?.

Christensen: The France Treaty Case

The Christensens are U.S. citizens living in France. They paid net investment income tax to the IRS. They also paid French tax on the same investment income. They asked for a refund, arguing that the France-U.S. income tax treaty gave them the right to claim a credit for the French tax against their NIIT.

In 2023, the Court of Federal Claims ruled in their favor. Christensen v. United States, 168 Fed. Cl. 263 (2023).

The court found that the treaty’s double tax relief provisions created an independent right to claim a credit—one that exists outside the normal foreign tax credit rules in the Code. The treaty language, the court concluded, meant what it said: relief from double taxation.

The government appealed. The case is now pending before the United States Court of Appeals for the Federal Circuit.

Bruyea: The Canada Treaty Case

Paul Bruyea is a U.S. citizen living in Canada. Same problem: he paid NIIT and he paid Canadian tax on the same investment income. He, too, asked for a refund based on treaty language.

In December 2024, the Court of Federal Claims ruled in his favor. Bruyea v. United States, 174 Fed. Cl. 238 (2024).

The Canada-U.S. treaty has different language from the France treaty, but the court reached the same conclusion: the treaty provides an independent basis for claiming a foreign tax credit against the NIIT.

The government appealed this one, too. It’s also pending before the United States Court of Appeals for the Federal Circuit.

The Cases Are Consolidated

Here’s an interesting procedural development. The two cases have been consolidated into companion cases. The Federal Circuit judges will decide both cases together in a single opinion. It makes sense. They are largely identical–only the specific treaty language used in each case differs.

Stuart Horwich, an American lawyer in London, represents the taxpayers in both cases.

The Briefs Are Filed

In 2025, both sides filed their briefs with the Federal Circuit. An amicus brief was also filed in support of the taxpayers. Links are below:

If you want to dig into the nerdy technical arguments, you can download the briefs. Yes, students. This will be on the final exam at the end of the semester. :-)

What Happens Next

Oral arguments haven’t been scheduled yet. Expect them to happen sometime in 2026, and the opinion to be issued in late 2026 (wish for luck) or sometime in 2027 (more likely).

What Should You Do for Your 2025 Tax Return?

That means the question is unresolved, and tax return season is upon us. FTC for the NIIT? TBD.

So what do you do?

My recommendation: don’t claim the foreign tax credit against your NIIT on your 2025 income tax return. There is no downside for waiting for the outcome on appeal.

If the taxpayers are successful on appeal, you will have plenty of time to file Form 1040X and claim a refund.

On the other hand, if you YOLO your 2025 income tax return and claim foreign tax credit against your net investment income tax liability, you might have an unpleasant surprise if the government wins the appeal. You might receive a computerized love letter from the IRS, inviting you to pay some tax, penalties, and interest.