For several years, U.S. taxpayers living abroad have watched an important dispute over whether foreign tax credits can reduce the 3.8% net investment income tax (“NIIT”). Two taxpayer victories in the U.S. Court of Federal Claims offered hope that certain income tax treaties could provide relief even though the Internal Revenue Code does not ordinarily permit the offset.
That hope has now suffered a major setback. On August 31, 2026, the U.S. Court of Appeals for the Federal Circuit reversed the lower-court decisions in Estate of Paul Bruyea v. United States and Christensen v. United States. The appellate court held that neither the U.S.-Canada income tax treaty nor the U.S.-France income tax treaty allows foreign income taxes to be credited against the NIIT.
These precedential decisions are especially important for U.S. citizens in high-tax countries. Even when foreign tax credits eliminate their regular U.S. income tax, they may still owe NIIT on investment income already taxed abroad.
BACKGROUND ON THE NIIT AND FOREIGN TAX CREDITS
Section 1411 imposes the 3.8% NIIT on certain investment income of individuals whose modified adjusted gross income exceeds the applicable threshold. Net investment income generally includes interest, dividends, rents, royalties, and gains from property sales.
The foreign tax credit system reduces double taxation when foreign-source income is taxed by both the United States and another country. A qualifying foreign income tax may ordinarily be credited against U.S. income tax, subject to Sections 27, 901, and 904.
The problem is that statutory FTCs apply to Chapter 1 taxes. Congress placed the NIIT in a separate Chapter 2A, and Treasury regulations provide that foreign tax credits are not allowed in computing it. The Code therefore does not authorize an FTC against the NIIT.
The taxpayers therefore argued that the applicable treaties created an independent credit broad enough to reach the NIIT.
THE EARLIER TAXPAYER VICTORIES
We first discussed this issue in our 2023 blog, “Case Review – Court Considers If Foreign Tax Credits Can Reduce the NIIT”. That article examined the Court of Federal Claims’ decision in Christensen.
The Christensens were U.S. citizens living in France who sold shares in a French company. They paid French income tax and $3,851 of U.S. NIIT on their gain. Although Article 24(2)(a) expressly made its credit subject to U.S.-law limitations, the Claims Court viewed paragraph 2(b), which did not repeat that language, as a separate credit provision not constrained by the Code’s Chapter 1 limitation.
In 2024, the Claims Court went further in Bruyea. Paul Bruyea, a U.S. citizen residing in Canada, sold Canadian real estate and paid Canadian tax on the gain, as well as $263,523 of U.S. NIIT. The court held that Article XXIV of the U.S.-Canada treaty allowed a treaty-based credit against that NIIT.
As explained in our 2024 follow-up, “Case Review – Taxpayer Wins Foreign Tax Credit NIIT Case”, Bruyea appeared to provide broader relief than Christensen. We cautioned that the government could appeal and would likely continue challenging such claims. That is exactly what happened.
WHY THE FEDERAL CIRCUIT REVERSED
In the Bruyea opinion, the Federal Circuit began with the structure of the Code. Sections 27 and 901 allow foreign tax credits only against Chapter 1 taxes. Because Congress placed Section 1411 in Chapter 2A, the court treated that placement as an intentional decision to keep the NIIT outside the foreign tax credit regime.
Article XXIV generally requires the United States to grant a credit for Canadian income tax, but does so “in accordance with” and “subject to” U.S.-law limitations. The Federal Circuit held that this incorporates the Code provisions restricting FTCs to Chapter 1 taxes. It rejected the argument that the treaty refers only to rules for calculating a credit, not rules governing whether the credit exists.
The court also rejected Bruyea’s reliance on the treaty’s objective of avoiding double taxation. A broad purpose could not override specific language, and the treaty did not promise to eliminate every instance of double taxation. Finding the text unambiguous, the court declined to rely on extrinsic materials, including the Treasury Technical Explanation and a Canada Revenue Agency letter.
WHY CHRISTENSEN DID NOT PROVIDE A SEPARATE ROUTE
The Christensen opinion addressed an additional argument. Article 24(2)(b) of the U.S.-France treaty does not repeat the U.S.-law limitation appearing at the beginning of Article 24(2)(a). The Christensens argued, and the Claims Court had agreed, that paragraph 2(b) therefore supplied an independent treaty credit unrestricted by Sections 27 and 901.
Reading Article 24(2) as a whole, the Federal Circuit concluded that the U.S.-law limitation is an introductory qualification applicable to both subparagraphs. It did not need to be repeated in paragraph 2(b).
The treaty’s re-sourcing rule provided further support. Section 904 generally limits FTCs to U.S. tax attributable to foreign-source income, while the treaty re-sources certain income to France when necessary to make the credit mechanism work. The court reasoned that this special rule would be unnecessary if the treaty credit otherwise operated independently of the Code. The treaty thus overrides selected Code limitations expressly while leaving the others in place.
The court also believed the taxpayers’ interpretation could create unintended disparities. A U.S. citizen living in Paris or Toronto might receive an NIIT credit unavailable to an otherwise similarly situated citizen living in New York. The court saw no indication that the treaty parties intended that result.
WHAT THE DECISIONS MEAN FOR U.S. EXPATS
Taxpayers cannot now rely on the U.S.-Canada or U.S.-France treaties to claim FTCs against the NIIT. The reasoning may also apply to treaties with similar language making credits subject to U.S.-law limitations. Each treaty should still be reviewed separately, but the Federal Circuit leaves little room for the same argument under this common structure.
Taxpayers who filed amended returns or protective refund claims based on the lower-court decisions should revisit those positions. Unless the decisions are reheard, reviewed by the Supreme Court, or addressed legislatively, the IRS has strong precedential support for denial. Because the Federal Circuit hears appeals from the Court of Federal Claims, its rulings close the route that produced the earlier victories.
Qualifying FTCs may still offset Chapter 1 income tax under the usual sourcing, limitation, and basket rules. The narrower but significant problem is that they cannot reduce the separate NIIT.
For U.S. taxpayers abroad, advance planning therefore remains important when a large property sale, securities disposition, or other investment event could trigger both foreign tax and NIIT. The timing and character of the income, the taxpayer’s modified adjusted gross income, the availability of deductions, and whether an applicable trade-or-business exception removes income from the NIIT base should all be reviewed before the transaction occurs.
The broader lesson is an unwelcome one for many expats. Tax treaties are intended to mitigate double taxation, but they do not guarantee its complete elimination. After Bruyea and Christensen, the NIIT remains one of the clearest examples of how genuine double taxation can survive even when a U.S. taxpayer lives and pays tax in a treaty country.
