NIIT Relief and Income Tax Treaties: Recent Court Ruling in Christensen v. U.S., Foreign Tax Credit, Reporting

The NIIT, also known as the 3.8 percent Medicare tax, applies to the net investment income of individuals in upper-income brackets and is generally viewed as an alternative to employment taxes on earned income. However, the application of income tax treaty provisions as a mechanism to allow taxpayers certain tax savings is uncertain amid the recent court ruling in Christensen v. United States which significantly impacts the NIIT.

U.S. tax law imposes a 3.8 percent NIIT on the "net investment income" of certain U.S. taxpayers with income above certain thresholds. The NIIT applies to U.S. citizens or residents, trusts, and estates that have net investment income and income above those thresholds. The NIIT for individuals is 3.8 percent of the lesser of net investment income for the taxable year or the excess of the individual's modified adjusted gross income, over the threshold amount.

On Oct. 23, 2023, the U.S. Court of Federal Claims ruled in Christensen v. United States, that U.S. citizens are permitted to use the FTC arising from foreign income tax liability to offset their NIIT liability. The court's ruling is based on the premise that although the FTCs can't offset NIIT under U.S. tax law, the income tax treaty between France and the U.S. should override such rule in order to avoid double taxation. Recently, the IRS has appealed this ruling which is likely to suspend the processing of refund claims filed on this basis.

Listen as our panel discusses the recent ruling in Christensen v. United States and the IRS' appeal of such ruling, and the potential for U.S. citizens to use FTCs to offset NIIT.

1. NIIT basics
2. Understanding FTCs, NIIT, and tax treaties
3. Christensen v. United States; analysis and impact to taxpayers
4. Guidance for seeking NIIT relief under treaty terms
5. Best practices and pitfalls to avoid for taxpayers

The panel will discuss these and other key issues:

• What are the basics of NIIT and its application to certain income?
• What is the interplay of NIIT with FTC and income tax treaties?
• What are the key issues and opportunities stemming from Christensen v. United States?
• How can you obtain NIIT relief under treaty terms and potential challenges?

Learning Objectives

After completing this course, you will be able to:

• Identify recent case law developments regarding NIIT relief
• Recognize the basics of income tax treaties and NIIT application
• Understand processes for seeking NIIT relief under a tax treaty

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience at mid-level within the organization, preparing transaction documents and partnership agreements, supervising other attorneys or accountants. Specific knowledge and understanding of foreign income tax rules, including U.S. tax disclosure and withholding requirements; familiarity with tax treaty structures and U.S. tax rules mitigating the impact of dual taxation on economic activities carried on by U.S. taxpayers in other countries and tax jurisdictions.

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