CFC Rejects Government Interpretation of Canada Double Tax Treaty (12/12/24)

Tax treaty cases in U.S. courts are not that common. I am interested in tax treaty cases because, years ago, I wrote an article on tax treaty interpretation: Tax Treaty Interpretation, 55 Tax Law. 219 (2001), here, and have retained my interest since.

Bruyea v. United States (CFC 12/5/24), CFC here and GS here, is a tax treaty case with significant discussion of tax treaty interpretation. (Slip Op. pp. 4-7 under the outline heading “Principles of Treaty Interpretation.”) Bottom-line, the Court held that Bruyea is entitled to a refund arising from a credit to avoid double taxation under the U.S and Canada tax treaty (“Canada Tax Treaty”). The Canada Tax Treaty is titled the Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital; the treaty and relevant documents may be viewed or downloaded here. This type of treaty is often called a double tax treaty because a primary goal is to avoid the treaty partners’ double taxing the same quantum of income. The U.S. has similar double tax treaties with many other countries.

I report on Bruyea because the court throws out some glittering generalities about tax treaty interpretation.

First, of course are the relevant facts, which the court summarizes succinctly (Slip Op. p. 2, cleaned up and footnotes omitted):

          On November 7, 2016, Mr. Bruyea filed an amended tax return (Form 1040X) with the Internal Revenue Service claiming a refund of $263,523 by virtue of a foreign tax credit that offsets the NIIT [Net Investment Income Tax] In particular, Mr. Bruyea asserts he is entitled to a foreign tax credit based on the provisions of Article XXIV of the Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital. The IRS rejected the refund claim, concluding that the Canada Tax Treaty did not provide an independent basis for a foreign tax credit to offset the NIIT and that such a foreign tax credit is not allowed under U.S. statutory foreign tax credit rules.

          When Mr. Bruyea failed to convince the IRS, he invoked the Simultaneous Appeal Procedure pursuant to which he sought the opinions of the U.S. and Canadian competent authorities to resolve a situation in which double taxation is present (i.e.Canadian income tax and U.S. NIIT on the same items of income and gain with no foreign tax credit offset available). The Canadian tax authority agrees with Mr. Bruyea. ECF No. 18-6 (“The position of the Canadian competent authority in this regard is that Canada, as the country of source, has the right to tax the gain, while the US, [*3] as the country which has residual taxation rights, must provide relief in accordance with Article XXIV of the Convention.”). Following the IRS’s denial of his tax refund claim, Mr. Bruyea filed his complaint in this court, asserting that he is entitled to a refund of the NIIT that he paid in the amount of $263,523 for the 2015 tax year.

          On February 14, 2024, Mr. Bruyea moved for partial summary judgment, arguing that he is entitled to a foreign tax credit for his 2015 tax year under the terms of the Canada Tax Treaty. The government filed a cross-motion for summary judgment and response in opposition to plaintiff’s motion. Each party filed a reply brief.

Eleventh Circuit Sustains IRS Summons Issued For French Tax Investigation (12/18/19)

In Redfern v. United States (11th Cir. Dkt. 19-12649 12/17/19) (unpublished), here, the Court affirmed the IRS’s issuance of summonses to various banks “at the request of the French government, pursuant to the United States–France Income Tax Treaty, to aid an ongoing investigation into Redfern’s [French] tax liability.” 

For background on the process, I cut and paste this (footnotes omitted) from a version of the working draft of my Federal Tax Procedure Book (basically same as in my Federal Tax Procedure 2019 editions):

In an increasingly globalized economy, records relevant to tax administration in one country may be possessed by someone in another country. Under many U.S. bilateral tax treaties, one treaty partner is obligated to assist the other in gathering information relevant to the latter's tax administration. For example, the Canadian tax authority (referred to as the “competent authority” in treaty parlance) under the U.S./Canada Double Tax Treaty may request the U.S. tax authority (i.e., the U.S. competent authority) to obtain information in the U.S. for Canadian tax administration. (This is commonly referred to as an “exchange of information” provision.) If the request is within the scope of the treaty, the U.S. competent authority will authorize the IRS to issue an administrative summons. The ultimate taxpayer involved may then bring a motion to quash if the summons is to a third party or, if the summons is to the taxpayer, may invoke any basis for noncompliance and await the IRS's pursuit of a summons enforcement proceeding.  

In United States v. Stuart, 109 S. Ct. 1183 (1989), Canada made such a request to the U.S., the U.S. issued summonses to third parties, and the taxpayer brought a motion to quash. The issue presented was whether the Code's limitation on the use of administrative summonses when a DOJ referral is in effect (§ 7602(d)) applies in the case of a summons issued under the Canadian treaty in relation to the Canadian tax. That Code limitation had been enacted after the U.S./Canadian double tax treaty in question had been negotiated and entered into force. Arguably, even if that limitation were not in the treaty, Congress's subsequent legislation may have created a treaty override. The taxpayer argued that the status of the Canadian tax investigation was the equivalent of a DOJ referral and thus the use of an IRS administrative summons was not proper. The Court held that, notwithstanding the subsequent enactment, the treaty itself controlled and had no such limitation, so that it need not inquire into the status of the Canadian investigation.  

In subsequent cases, courts have held that the propriety of the foreign country’s tax investigation is not relevant to whether the IRS can issue and enforce the summons (or avoid a petition to quash the summons); rather, the issue is whether the IRS has met the Powell requirements for the summons focusing on its actions and not that of the foreign treaty partner requesting the IRS to use its processes to obtain the requested information.  

 Similar processes are available under the OECD Convention on Mutual Assistance in Tax Matters, which is a multilateral treaty, and possibly other treaties as well, although most of the litigated cases appear to involve the bilateral double tax treaties.

The process employed in Redfern for the summons as follows (Slip Op. p. 2):

As required by Internal Revenue Code § 7609(a)(1), the IRS provided Redfern, as the holder of the accounts, with notice of the summons and an explanation of the recipient’s right to bring a proceeding to quash the summons. Specifically, it mailed the required notice to Redfern at (1) the address that appeared on his most recently filed and processed federal tax return and (2) the address identified by France as the address he reported to the government, as well as (3) to Leslie R. Kellogg, an attorney at Hodgson Russ LLP, from whom the IRS had received a power of attorney signed by Redfern authorizing her to receive confidential tax information on Redfern’s behalf.