The Tax Times: Federal Circuit Just Killed the NIIT Treaty Credit Refund Strategy

Americans living in Canada or France just lost a major argument for avoiding double taxation on investment income. On August 31, 2026, the U.S. Court of Appeals for the Federal Circuit ruled in two companion cases — Estate of Paul Bruyea v. United States, No. 2025-1563 (opinion), and Christensen v. United States, No. 2024-1284 (opinion) — that foreign tax credits under the U.S.-Canada and U.S.-France income tax treaties cannot offset the 3.8% Net Investment Income Tax (NIIT) imposed by IRC § 1411 (KPMG).

Why the NIIT Falls Outside the Foreign Tax Credit

The NIIT sits in Chapter 2A of the Code, entirely separate from Chapter 1, where the foreign tax credit rules of IRC §§ 27 and 901 live. Because those sections limit credits to "the tax imposed by this chapter" (Chapter 1), and § 26(b) confirms the NIIT isn't a Chapter 1 tax, the Code itself has never allowed a credit against it — a gap taxpayers had hoped their treaties would fill.

The Two Cases

· Bruyea: A U.S. citizen in British Columbia paid Canadian tax and $263,523 in U.S. NIIT on a Canadian real estate sale, then sued for a refund under Article XXIV of the U.S.-Canada treaty. The Court of Federal Claims agreed with him in 2024 — reversed on appeal.

· Christensen: U.S. citizens in Paris paid French tax and $3,851 in NIIT on a stock sale, relying on Article 24(2)(b) of the U.S.-France treaty (the provision specific to dual U.S. citizen/French residents). The Court of Federal Claims sided with them in 2023 — also reversed.

The Court's Reasoning: The "U.S. Law Limitation" Controls

Both treaties grant relief "in accordance with the provisions and subject to the limitations of the law of the United States." The Federal Circuit held this phrase incorporates the Code's Chapter 1 restriction directly into the treaty — it isn't merely a computational cross-reference.

In Christensen, the taxpayers argued that Article 24(2)(b) escaped this limitation because it doesn't repeat the language. The court disagreed, applying the "whole-text canon": the limitation appears once, up front in Article 24(2), and governs both subparagraphs. The court also noted that the treaties' re-sourcing provisions would be pointless if the credit already operated independently of the Code, and that the taxpayers' reading would let citizens abroad claim both a treaty credit and the foreign earned income exclusion on the same income — a "double benefit" the Code expressly bars for U.S. residents.

Why This Reaches Beyond Canada and France

The "subject to the limitations of U.S. law" language the court relied on is standard across the U.S. treaty network, not unique to these two treaties. Practitioners should expect the same analysis to apply to clients under other bilateral treaties with comparable clauses (Current Federal Tax Developments).

What Clients Should Do Now

· Drop the treaty-credit refund theory. It's no longer viable under Canada or France treaties, and likely not under most others.

· Consider the § 164 deduction for foreign taxes as a partial offset, since it reduces the NIIT base even without a dollar-for-dollar credit.

· Review timing and character of gains to see if income can avoid "net investment income" classification under § 1411(c).

· Know that Mutual Agreement Procedure relief remains a government-to-government option, separate from a self-help credit on a tax return.

Bottom Line

Bruyea and Christensen confirm that the NIIT's placement in Chapter 2A puts it outside the reach of both statutory and treaty-based foreign tax credits unless a treaty explicitly overrides the Code — and none currently does. Expatriate clients facing double taxation on investment income need updated planning now.

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