The Federal Circuit Gets The NIIT Treaty Cases Wrong

On August 31, 2026, the United States Court of Appeals for the Federal Circuit issued two important decisions, Christensen v. United States and Estate of Bruyea v. United States, holding that U.S. citizens resident in France and Canada cannot use treaty-based foreign tax credits to offset the 3.8% NIIT imposed under section 1411 of the Internal Revenue Code. The decisions reversed taxpayer victories in the Court of Federal Claims and concluded that the relevant treaty provisions do not provide relief from NIIT double taxation.

In our respectful view, the Federal Circuit reached the wrong result.

When Congress enacted the NIIT in 2010, practitioners recognized that it raised unusual treaty issues for U.S. citizens resident abroad. In a 2013 article discussing the newly enacted surtax, one of us noted that section 1411 had been placed outside Chapter 1 of the Internal Revenue Code and considered how the new regime would interact with the treaty foreign tax credit provisions applicable to U.S. citizens resident in Canada. The view expressed then, which we share today, was that the treaty foreign tax credit provisions provided relief from double taxation notwithstanding the structure of the Internal Revenue Code.

The issue has now reached the Federal Circuit. Unfortunately, the court rejected an interpretation that judges of the Court of Federal Claims had accepted. In our view, the lower courts had the better interpretation.

What the Federal Circuit Held

The Federal Circuit accepted several propositions that are important and largely undisputed:

• The Canada-U.S. and France-U.S. treaties are intended to avoid or eliminate double taxation.
• The NIIT is a covered U.S. income tax for treaty purposes.
• The relevant treaty provisions create foreign tax credit mechanisms intended to provide relief from double taxation.

Nevertheless, the court concluded that those treaty credit provisions remain subject to the limitations imposed by domestic U.S. law. Because sections 27 and 901 of the Internal Revenue Code generally allow foreign tax credits only against taxes imposed under Chapter 1, and because the NIIT is imposed under Chapter 2A, the court held that treaty-based foreign tax credits cannot offset NIIT liability.

As a result, the Federal Circuit held that a U.S. citizen resident in Canada or France who pays tax in their country of residence and also incurs NIIT liability may bear both taxes without treaty relief.

Why We Disagree

The fundamental flaw in the Federal Circuit’s analysis is that it treats these cases primarily as disputes about the Internal Revenue Code.

They are not. They are treaty cases.

The domestic foreign tax credit provisions explain why the problem arose. The treaties explain why the problem should be solved.

Congress’s decision to place the NIIT outside Chapter 1 created the possibility of double taxation. The question before the courts was whether treaties designed to prevent double taxation nevertheless provide relief. The Court of Federal Claims answered that question in the affirmative. In our view, correctly so.

The Federal Circuit effectively concluded that the chapter of the Internal Revenue Code in which Congress chose to place a tax is determinative. That elevates domestic Code organization over treaty substance.

Double taxation is an economic reality. It does not depend on whether a tax appears in Chapter 1, Chapter 2A, or elsewhere in the Internal Revenue Code.

If a Canadian resident pays Canadian tax on Canadian investment income and then pays an additional 3.8% U.S. tax on that same income without meaningful relief, double taxation has occurred regardless of the Code’s internal architecture.

Tax Neutrality and Treaty Policy

The broader policy concern is even more significant.

For decades, U.S. tax treaty policy has generally not been aimed at affirmatively creating double taxation between the United States and a full treaty partner. The opposite is true.

Modern tax treaties allocate taxing jurisdiction and then provide mechanisms, principally through foreign tax credits and resourcing provisions, to ensure that taxpayers do not bear tax twice on the same item of income.

That objective is reflected in both the Canada-U.S. and France-U.S. treaties and was expressly acknowledged by the Federal Circuit itself.

Viewed in that context, the NIIT presents a unique problem.

Congress enacted a new income tax but placed it outside the traditional foreign tax credit regime. The resulting gap creates double taxation in situations where treaty relief would otherwise be expected.

From a tax neutrality perspective, that result is difficult to justify.

Whether one characterizes the NIIT as a Medicare contribution, surtax, or separate income tax is largely beside the point. Economically, taxpayers are paying tax twice on the same income.

The lower courts recognized that reality. The Federal Circuit focused instead on statutory structure.

The Court’s “Anomaly” Analysis Misses the Point

The Federal Circuit expressed concern that taxpayers resident in Canada or France could obtain relief unavailable to taxpayers resident in the United States. The court regarded that result as anomalous.

We view the true anomaly differently.

Tax treaties exist specifically because cross-border taxpayers face circumstances that domestic taxpayers do not.

A U.S. citizen resident in Toronto or Paris is subject to taxation by another sovereign. The purpose of a treaty foreign tax credit is not to place that taxpayer in the same position as a taxpayer residing in Buffalo or New York. The purpose is to prevent international double taxation.

The real anomaly is not that treaty residents receive relief.

The real anomaly is that a taxpayer can pay full tax to Canada or France on income arising there and still bear an additional U.S. tax burden without effective treaty relief notwithstanding treaty provisions specifically directed at avoiding double taxation.

The Broader Treaty Context

The Federal Circuit repeatedly emphasized that the treaties do not guarantee the complete elimination of every instance of double taxation and that their objective is to “avoid” rather than absolutely eliminate double taxation.

That observation is undoubtedly correct.

The problem, however, is that the decisions effectively permit a form of double taxation that many practitioners would have expected the treaties to address.

The issue here is not a gap created by differing domestic tax rates, differing tax bases, timing mismatches, or limitations that have long existed within the treaty framework. Rather, the issue arises because Congress introduced a new income tax and placed it outside the domestic foreign tax credit regime without making corresponding changes to the treaty framework.

The lower courts viewed the treaty foreign tax credit provisions as sufficient to address that problem. In our view, that interpretation better reflects the object and purpose of the treaties.

Will the Supreme Court Take the Case?

Probably not.

These decisions are thoughtful, unanimous, and highly technical. There is no circuit split, and the issues involve specialized questions of treaty interpretation and tax law. While the issue is enormously important to affected taxpayers, the practical reality is that the prospects for Supreme Court review appear limited.

Absent congressional action, Treasury action, or future treaty amendments, these decisions may become the final judicial word on the subject.

What This Means for You

If you are a U.S citizen residing in Canada, France, or another treaty country with investment income, such as dividends, capital gains, rental income, or similar, this decision may directly affect your U.S. tax liability going forward. Specifically:

• You may no longer be able to claim a treaty-based foreign tax credit against NIIT, even if you are already paying tax on that income to the country you reside in.
• This could result in owing the additional 3.8% NIIT on top of your foreign tax liability, with no offsetting credit.
• The decision is binding on the Court of Federal Claims and is likely to be persuasive in future litigation involving similar claims. Supreme Court review appears unlikely.

If this applies to you, now is a good time to review your exposure and options.

Conclusion

This issue is hardly new, and frankly hard to swallow thirteen years later. When the NIIT was introduced, practitioners questioned how a tax imposed outside the traditional foreign tax credit regime would operate in a treaty context. More than a decade of litigation has now produced an answer. The Court of Federal Claims concluded that the treaty foreign tax credit provisions prevented the resulting double taxation. The Federal Circuit disagreed.

In our view, the lower courts reached the correct result.

The relevant treaties were negotiated to prevent double taxation between full treaty partners. The Federal Circuit’s interpretation permits it. Whatever one thinks of the court’s textual analysis, the outcome is difficult to reconcile with tax neutrality, treaty reciprocity, and the longstanding policy objective that tax treaties should relieve, rather than affirmatively create, international double taxation.

That, ultimately, is why we believe the Court of Federal Claims got it right and the Federal Circuit got it wrong.