Court of Federal Claims Archives - TAX CONTROVERSY 360

Court Rules Taxpayer Can Offset Foreign Tax Credits With NIIT Liability Under Tax Treaty

by Steven Hadjilogiou and Le Chen | Oct 26, 2023 | Court Procedure Matters, Tax Reform, Tax Refunds, Trial Courts

In 2013, the net investment income tax (NIIT) found in Internal Revenue Code (IRC) Section 1411 went into effect. Since then, United States taxpayers residing outside of the US have lived with uncertainty as to whether the taxes they pay in their local country can be used as a tax credit to offset the NIIT. A recent court decision held that certain tax treaties may allow for US foreign tax credits (FTCs) to be applicable, allowing eligible taxpayers to seek refunds for potentially up to 10 years of paid NIIT.

On October 23, 2023, in Christensen v. United States, the US Court of Federal Claims ruled that two US citizens residing in France were permitted, under a tax treaty between the US and France, to use FTCs arising from French income tax liability to offset NIIT liability. Christensen is the first case to hold that, although FTCs cannot be used to offset NIIT liability under US domestic law, this restriction can be overridden by a US-France tax treaty provision, which is replicated in many US tax treaties, that provides broader FTC coverage for US citizens residing abroad.

The taxpayers in Christensen were married US citizens residing in France. The taxpayers earned income that was subject to both French income tax and (by virtue of their US citizenship) US federal income tax, including the NIIT. On their US federal income tax return, the taxpayers netted the FTCs arising from their French income tax liability against their NIIT liability, relying on Articles 24(2)(a) and 24(2)(b) of the US-France tax treaty for support.

Article 24(2)(a) of the treaty is a general provision that provides that the US shall grant its citizens a credit against US federal income tax for French income taxes paid “[i]n accordance with the provisions and subject to the limitations of the law of the United States.” In Christensen, the Court of Federal Claims noted that the NIIT was a tax imposed by IRC Chapter 2A and that the FTC provisions in IRC Section 901 et seq. restricted FTCs from offsetting US federal income tax liability arising under IRC Chapter 1. Therefore, the Court held that Article 24(2)(a) did not permit the taxpayers to use FTCs to offset NIIT liability because granting FTCs under Article 24(2)(a) was “subject to the limitations of the law of the United States,” including the limitation that FTCs could not offset liability incurred pursuant to Chapter 2A. This holding was consistent with holdings in two other recent cases that also addressed the interaction of FTCs and NIIT: Toulouse v. Commissioner, 157 T.C. 49 (2021), and Kim v. United States, 2023 WL 3213547 (C.D. Cal. Mar. 28, 2023).

However, Article 24(2)(b) of the treaty contains a special provision applicable to US citizens residing in France. This provision generally provides that, when applying the “three bites” rule for determining the order in which US and French FTCs are applied with respect to such persons, the US shall grant such persons a credit against US [...]

Continue Reading

Congress Allows Transfer of Improperly Filed Cases to Tax Court

by McDermott Will & Emery | Dec 21, 2018 | Appellate Courts, Court Procedure Matters, Tax Reform, Trial Courts, Uncategorized

Taxes and tax litigation can be complex and confusing. Taxpayers have the option of filing a petition in the United States Tax Court (Tax Court) prior to payment of any asserted deficiency. Alternatively, taxpayers can pay the deficiency, file a claim for refund with the Internal Revenue Service and, if that claim is denied or more than six months have elapsed, file a complaint in local District Court or the Court of Federal Claims requesting a refund. These forum rules sometimes trip up taxpayers and can lead to the filing of a suit in the wrong court.

In the Protecting Access to the Courts for Taxpayers Act (H.R. 3996), Congress has provided relief for taxpayers in this type of situation through an amendment to 28 USC section 1631:

Whenever a civil action is filed in a court as defined in section 610 of this title or an appeal, including a petition for review of administrative action, is noticed for or filed with such a court and that court finds that there is a want of jurisdiction, the court shall, if it is in the interest of justice, transfer such action or appeal to any other such court (or, for cases within the jurisdiction of the United States Tax Court) in which the action or appeal could have been brought at the time it was filed or noticed, and the action or appeal shall proceed as if it had been filed in or noticed for the court to which it is transferred on the date upon which it was actually filed in or noticed for the court from which it is transferred.

Practice Point: Allowing improperly filed cases to be transferred to the Tax Court is a welcome development for taxpayers. The amendment to 28 USC section 1631 protects taxpayers in situations where a complaint is filed within 90 days of receipt of a Notice of Deficiency in a refund jurisdiction when it should have been filed in the Tax Court.

SOL and the 1603 Cash Grant – File Now or Forever Hold Your Peace

by Kevin Spencer, Natalie Colvin and Philip Tingle | May 10, 2018 | Appellate Courts, Court Procedure Matters, Tax Refunds, Uncategorized

Taxpayers are running out of time to file refund claims against the government. If the government reduced or denied your Section 1603 cash grant, you can file suit in the Court of Federal Claims against the government to reclaim your lost grant money. Don’t worry, you will not be alone. There are numerous taxpayers lining up actions against the government and seeking refunds from this mismanaged renewable energy incentive program. Indeed, the government lost in round one of Alta Wind I Owner-Lessor C. v. United States, 128 Fed. Cl. 702 (2016). In that case, the trial court awarded the plaintiffs more than $206 million in damages ruling that the government unreasonably reduced their Section 1603 cash grants.

Access the full article.

When Can a Taxpayer Dismiss a Tax Court Case as Moot?

by McDermott Will & Emery and McDermott Will & Emery | Oct 13, 2017 | Settlements, Trial Courts, Uncategorized

Faced with the prospect of potential tax liability after an unsuccessful audit, taxpayers are faced with the options of filing a petition in the US Tax Court (Tax Court) prior to paying the liability or paying the liability, making a claim for refund, and (if denied or more than six months have passed) suing the government for a refund in local district court or the Court of Federal Claims. For taxpayers that select the Tax Court route, sometimes a question later arises as to whether they can seek to dismiss their case in order to refile in a different forum. The problem that arises is that Internal Revenue Code (Code) Section 7459(d) provides that if a Tax Court petition in a deficiency proceeding is dismissed (other than for lack of jurisdiction), the dismissal is considered as a decision that the deficiency is the amount determined by the Internal Revenue Service (IRS).

Taxpayers have attempted to avoid this rule in the past, presumably so that they could refile a lawsuit in another forum either because they believe that forum would be more favorable or because they desire a jury trial (Tax Court cases are bench trial; no juries are allowed). More than 40 years ago, the Tax Court rejected this tactic in Estate of Ming v. Commissioner, 62 TC 519 (1974), holding that under Code Section 7459(d), a taxpayer who petitions the court for a redetermination of a deficiency may not withdraw a petition to avoid the entry of decision. Specifically, the court held: “It is now a settled principle that a taxpayer may not unilaterally oust the Tax Court from jurisdiction which, once invoked, remains unimpaired until it decides the controversy.” Since Ming, the Tax Court has distinguished its holding in collection due process cases which involve the review of the IRS’s collection action, not the redetermination of a tax deficiency. See Wagner v. Commissioner, 118 TC 330 (2002). The Tax Court has further extended Wagner to non-deficiency cases involving whistleblower claims under Code Section 7623(b)(4) and stand-alone innocent spouse cases under Code Section 6015(e)(1). See Jacobson v. Commissioner, 148 TC No. 4 (Feb. 8, 2017); Davidson v. Commissioner, 144 TC 273 (2015). (more…)

Overview of Tax Litigation Forums

by Elizabeth Chao and McDermott Will & Emery | Apr 21, 2017 | Appellate Courts, Court Procedure Matters, IRS Guidance, Tax Refunds, Trial Courts, Uncategorized

Taxpayers can choose whether to litigate tax disputes with the Internal Revenue Service (IRS) in the US Tax Court (Tax Court), federal district court or the Court of Federal Claims. Claims brought in federal district court and the Court of Federal Claims are tax refund litigation: the taxpayer must first pay the tax, file a claim for refund, and file a complaint against the United States if the claim is not allowed. Claims brought in the Tax Court are deficiency cases: the taxpayer can file a petition against the IRS Commissioner after receiving a notice of deficiency and does not need to pay the tax beforehand.

As demonstrated in the chart below, approximately 97 percent of tax claims are instituted in the Tax Court. It should be noted that, after a taxpayer files a petition in Tax Court, the taxpayer no longer has the option of bringing the claim in any other court for the year(s) at issue.

Tax Court Versus Tax Refund Litigation