Estate of Paul Bruyea v. United States, __ F.4th __, No. 25-1563, ECF No. 58 (Fed. Cir. Aug. 31, 2026), reversing Bruyea v. United States, 174 Fed. Cl. 238 (2024).

Matthew Christensen & Katherine Kaess Christensen v. United States, __ F.4th __, No. 24-1284, ECF No. 71 (Fed. Cir. Aug. 31, 2026), reversing Christensen v. United States, 168 Fed. Cl. 263 (2023)

On August 31, 2026, the United States Court of Appeals for the Federal Circuit issued two highly anticipated companion decisions that definitively resolve a long-standing controversy regarding the interaction between treaty-based foreign tax credits and the Net Investment Income Tax (NIIT) imposed under Internal Revenue Code (IRC) § 1411. In Estate of Paul Bruyea v. United States and Matthew Christensen & Katherine Kaess Christensen v. United States, the court reversed previous taxpayer victories in the Court of Federal Claims, holding that neither the U.S.-Canada Income Tax Convention nor the U.S.-France Income Tax Convention provides a foreign tax credit (FTC) to offset the NIIT. For tax professionals, these rulings establish a strict, text-first standard for treaty interpretation, confirming that double taxation is not absolutely prohibited under bilateral agreements and that statutory limitations in the Code remain paramount unless explicitly overridden by treaty text.

Factual Background of Estate of Paul Bruyea v. United States

During the 2015 tax year, Paul Bruyea, a United States citizen residing in British Columbia, Canada, sold real estate he owned in Canada. He paid income taxes to Canada on the proceeds of this transaction. Because of his status as a U.S. citizen, he also faced a U.S. net investment income tax liability of $263,523 under IRC § 1411 on the same gains. Bruyea sought to offset this NIIT liability by claiming an FTC for the taxes already paid to Canada, relying on Article XXIV of the U.S.-Canada Income Tax Convention (the “Canadian Treaty”). The Internal Revenue Service (IRS) disallowed the credit, prompting Bruyea to pay the tax in full.

In 2023, Bruyea filed a refund lawsuit in the Court of Federal Claims, alleging that his NIIT payment constituted improper double taxation in violation of the treaty. Chief Judge Matthew H. Solomson agreed with Bruyea’s interpretation, granting summary judgment in his favor in 2024 and holding that the treaty created an independent credit applicable against the NIIT. (Following Bruyea’s passing in June 2026, his estate was substituted as the plaintiff-appellee).

Factual Background of Christensen v. United States

Matthew and Katherine Christensen, U.S. citizens residing in Paris, France, realized capital gains during the 2015 tax year from the sale of stock in a French company. They paid French income tax on these gains and were also assessed U.S. income tax, including $3,851 in NIIT under IRC § 1411. Like Bruyea, the Christensens attempted to offset their U.S. NIIT liability using French tax credits under Article 24 of the U.S.-France Income Tax Convention (the “French Treaty”). The IRS disallowed their claimed credits.

The taxpayers filed a refund suit in the Court of Federal Claims in 2020. In 2023, Senior Judge Marian Blank Horn granted summary judgment for the Christensens, agreeing that while Article 24(2)(a) did not allow the credit, Article 24(2)(b) (the specific provision for U.S. citizens residing in France) provided an independent basis to claim the credit free from Code restrictions.

Taxpayers’ Requests for Relief

In both cases, the taxpayers sought full refunds of the NIIT paid to the IRS, plus interest and costs. Their fundamental legal position was that bilateral tax treaties—entered into by the United States to fulfill the “general principle” of avoiding double taxation—created an independent foreign tax credit that could be applied against any “United States tax on income,” which undisputedly encompasses the NIIT. They argued that these treaty-based credits operated on a “limitless canvas” separate from, and not constrained by, the restrictive provisions of the Internal Revenue Code that limit the use of statutory foreign tax credits.

The Statutory Framework: Chapter 1 vs. Chapter 2A of the Internal Revenue Code

To evaluate these arguments, the Federal Circuit first analyzed the statutory architecture of the Internal Revenue Code. The Code is structured into subtitles, and “subtitles are divided into chapters, which impose separate and distinct taxes” (citing Toulouse v. Comm’r, 157 T.C. 49, 55 (2021)). Statutory foreign tax credits are established under Subtitle A, Chapter 1 (“Normal Taxes and Surtaxes”). Specifically, IRC § 27(a) provides that foreign taxes “shall be allowed as a credit against the tax imposed by this chapter to the extent provided in section 901”. In turn, IRC § 901(a) specifies that “the tax imposed by this chapter shall... be credited,” with the crucial caveat that “[t]he credit shall not be allowed against any tax treated as a tax not imposed by this chapter under section 26(b)”. IRC § 26(b) lists twenty-six exceptions of taxes that “shall not be treated as tax imposed by this chapter”. Together, the Federal Circuit observed, §§ 26(b), 27, and 901(a) establish a “closed universe of taxes within chapter 1 to which a taxpayer may apply a foreign tax credit”.

By contrast, Congress enacted the NIIT in 2010 as part of the Health Care and Education Reconciliation Act, codifying it in IRC § 1411, which resides in Chapter 2A (“Unearned Income Medicare Contribution”) of Subtitle A—entirely separate from Chapter 1. Because the statutory FTC mechanism is explicitly confined to Chapter 1 taxes under IRC §§ 27 and 901, the “foreign tax credit under Section 27 – which applies to ‘the tax imposed by this chapter’ – does not by its terms apply to offset [the] net investment income tax” (quoting Toulouse, 157 T.C. at 56).

The Federal Circuit recognized that the placement of the NIIT in Chapter 2A was a deliberate legislative act, noting that “the placement of the NIIT in chapter 2A, in view of Congress’ presumed knowledge that the Code only authorizes foreign tax credits to apply against chapter 1 taxes, constitutes an intentional decision to exclude the NIIT from the offset regime”. This established the “foundational axiom” that the Code itself does not provide a credit against the NIIT.

The Treaty Framework and the U.S. Law Limitation

The resolution of the dispute turned on the interaction between this statutory bar and the respective bilateral tax conventions. Both the U.S.-Canada Treaty and the U.S.-France Treaty contain core clauses establishing foreign tax credits, but both contain an identical, critical condition. Article XXIV(1) of the U.S.-Canada Treaty provides that double taxation shall be avoided “[i]n accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof)”. Similarly, Article 24(2)(a) of the U.S.-France Treaty introduces its credit-granting clause with the identical language: “[i]n accordance with the provisions and subject to the limitations of the law of the United States...”.

The Federal Circuit held that this “U.S. Law Limitation” serves as an explicit incorporation of the Code’s substantive limitations, including the Chapter 1 restriction on foreign tax credits. The court rejected the taxpayers’ argument that the U.S. Law Limitation was merely computational, stating: “Nothing in the Convention’s express language – ‘In accordance with the provisions and subject to the limitations of the law of the United States’ – suggests a meaning restricted to computation-related ‘provisions’ and ‘limitations’ of the Code”.

Thus, the treaty-created credit cannot be used to offset the NIIT because the “provisions” and “limitations” of the Code (specifically IRC §§ 27 and 901) restrict such credits to Chapter 1, and the NIIT is a Chapter 2A tax. The court summarized: “the credit for foreign taxes paid can only cancel out U.S. tax on the portion of income that is treated as foreign-sourced; it cannot be used to cancel out U.S. tax on income that is treated as U.S.-sourced. Thus, generally, a U.S. citizen cannot take a foreign tax credit on U.S.-source income”.

The Core Treaty Interpretive Battle: Do Specific Resident Clauses Evade the Limitation?

A central point of contention was whether specific credit clauses—designed specifically for U.S. citizens residing in the treaty partner country—were exempt from the U.S. Law Limitation.

In the Canadian context, Article XXIV(4)(b) provides that the United States “shall allow as a credit against United States tax the income tax paid or accrued to Canada,” without repeating the “U.S. Law Limitation” text found in Article XXIV(1).
In the French context, Article 24(2)(b) provides that in the case of a dual U.S. citizen and French resident, the U.S. “shall allow as a credit against the United States income tax the French income tax paid,” also without repeating the “U.S. Law Limitation”.

The taxpayers argued that the omission of the U.S. Law Limitation in these paragraph-specific credit clauses indicated that the treaty negotiators intended to provide a credit unconstrained by the Code for citizens residing abroad.

The Federal Circuit strongly rejected this “standalone” reading, employing fundamental principles of treaty interpretation. Relying on the “whole-text canon,” the court held that “the U.S. Law Limitation, which appears in the very first part of paragraph 2, serves as an overarching qualifier to both subparagraphs (a) and (b)”. The court observed: “Rather than repeat the U.S. Law Limitation at the beginning of each subparagraph... paragraph 2 presents the U.S. Law Limitation once, up front, as an overarching qualifier. It is commonplace to speak—and, more to the point, for Congress to draft—in economies that eliminate such redundancy”. To treat these subparagraphs as entirely divorced from each other “makes no sense when both are subsections of the same overall provision” (citing DWA Holdings LLC, 889 F.3d at 1369).

The Structural Significance of Re-Sourcing Provisions

To further demonstrate that the treaty-created credits are bound by the Code, the Federal Circuit pointed to the treaties’ “re-sourcing” provisions (Article XXIV(3) and (6) of the Canada Treaty, and Article 24(2)(b)(ii) of the France Treaty). Under IRC § 904(a), a taxpayer’s FTC is capped at the amount of U.S. tax owed on foreign-source income; a credit cannot be used to offset U.S. tax on U.S.-source income. The treaties’ re-sourcing provisions override this by deeming certain U.S.-source income to arise in the foreign country “to the extent necessary to avoid the double taxation of such income”.

The court noted that these re-sourcing provisions would be completely superfluous if the treaty-created credit operated independently of the Code’s limitations. The court concluded: “These re-sourcing provisions would have been unnecessary had the Convention’s drafters shared the Christensens’ view that the treaty-created foreign tax credit operates independently of the Code... Because a reading of a treaty that ‘renders [a provision] superfluous’ is unlikely to be correct... their view is not correct” (quoting Water Splash, Inc. v. Menon, 581 U.S. 271, 278 (2017)).

Preventing Absurdity: The Avoidance of Anomalous Results

The Federal Circuit also emphasized that accepting the taxpayers’ interpretations would yield “anomalous results” that the treaty parties could not have intended. First, the court pointed to geographic discrimination: a U.S. citizen residing in Toronto or Paris could claim an FTC against their NIIT, while an otherwise identical U.S. citizen residing in Buffalo, New York, or New York City could not. “We have no basis to conclude that the parties to the Convention intended these anomalous results of treating U.S. citizens living [abroad] better than their similarly-situated counterparts living in the U.S.”.

Second, the court identified the potential for an impermissible double benefit windfall. Under IRC § 911(a)(1), a U.S. citizen residing abroad can exclude “foreign earned income” from gross income. IRC § 911(d)(6) strictly prohibits claiming an FTC on income that is already excluded from gross income. Under the taxpayers’ reading of the treaties as completely independent of the Code, a resident of Canada or France could claim both the foreign earned income exclusion and a treaty credit against the NIIT on the same income. Since such a windfall is expressly prohibited by the Code, the court refused to endorse an interpretation that would bypass this statutory safeguard.

Procedural and Analytical Evolution: Comparing Bruyea and Christensen

While both appeals resulted in reversals of the taxpayers’ victories, there are significant analytical and procedural differences in how the Court of Appeals arrived at each decision. In Bruyea, the primary battleground was the scope and meaning of the “U.S. Law Limitation” itself and its interaction with the recently created NIIT. The taxpayer had argued that the U.S. Law Limitation only applied to computation and that the “general principle” of double taxation avoidance must override statutory limits when new taxes like the NIIT are introduced. The Bruyea opinion focuses on the statutory mechanics of Chapters 1 and 2A, the legislative intent behind the placement of § 1411, and the rejection of the taxpayer’s extrinsic evidence (such as the Technical Explanation and letters from the Canada Revenue Agency).

In contrast, Christensen addressed the structural and grammatical issue of whether the U.S. Law Limitation carried over into a subsequent paragraph (paragraph 2(b)) that lacked any explicit limitation language. Because the Court of Federal Claims in Christensen had actually agreed with the government on the general Chapter 1 restriction under paragraph 2(a), but ruled for the taxpayer solely under paragraph 2(b), the Federal Circuit’s Christensen opinion represents a masterclass in treaty hermeneutics, relying heavily on grammatical canons such as the “whole-text canon” and the “distributive canon” to bridge the paragraphs.

Procedurally, the two cases were integrated: the Federal Circuit used Bruyea to establish the general substantive tax principles (specifically incorporating those holdings into Christensen) and used Christensen to resolve the structural drafting arguments (specifically incorporating those hermeneutic principles back into Bruyea to dismiss the taxpayer’s “alternative ground” under paragraph 4(b) of the Canada Treaty).

Professional Impact and Planning Considerations for Tax Advisors

For CPAs and EAs, these decisions provide a definitive and sobering clarification. The Net Investment Income Tax cannot be offset by foreign tax credits under either the U.S.-Canada or U.S.-France Treaties. This ruling extends by implication to other bilateral tax treaties containing similar “subject to the limitations of the law of the United States” clauses.

Tax professionals must advise expatriate clients that they face double taxation on passive investments and property sales if they are subject to both foreign income taxes and the U.S. NIIT. To mitigate this double taxation, practitioners should consider:

Foreign Tax Deductions: While IRC § 27 restricts foreign tax credits to Chapter 1 taxes, foreign taxes can sometimes be taken as an itemized deduction under IRC § 164, which may reduce overall adjusted gross income and taxable income, thereby indirectly reducing the base for the NIIT, though this is less advantageous than a dollar-for-dollar credit.
Structural Planning: Advisors should evaluate the timing of property sales, or investigate whether income can be structured to avoid being classified as “net investment income” under IRC § 1411(c), such as active trade or business income.
Mutual Agreement Procedures (MAP): As noted by the Federal Circuit, if a tax treaty’s general principle is violated, the appropriate remedy is sovereign-to-sovereign consultation under Article XXVI of the U.S.-Canada Treaty, rather than a taxpayer-initiated credit on a tax return.

Prepared with assistance from Gemini Notebook.