Tax Court needs to do more work in interpreting totalization agreement.

• Author: Beavers, James A.

The D.C. Circuit held that the meaning of "amend or supplement" with respect to a social security totalization agreement could not be interpreted, as the Tax Court had, by reference to dictionary definitions of the words "amend" or "supplement." Rather, the meaning of these terms must be determined in light of the full text of the totalization agreement and the shared expectations of the contracting governments.

Totalization Agreements

In 42 U.S.C. Section 433, Congress authorized the president to enter into social security coordination agreements--known as totalization agreements--with other countries. Absent such agreements, workers who divide their careers among and pay taxes to multiple countries might pay into the social security systems of various nations, yet fail to qualify for benefits under any one system. Totalization agreements permit those workers to combine periods of payment into different countries' social security systems to eventually become eligible to receive benefits under a signatory country's system. Workers' wages and self-employment income are generally exempt from U.S. Social Security taxation to the extent that they are subject to foreign social security taxation.

The United States generally taxes income earned by its citizens regardless of where the citizen resides, but a U.S. citizen may take a tax credit against his or her U.S. income tax liability for taxes paid to a foreign country. That credit shields taxpayers from double-taxation. In contrast, taxes paid to a foreign country in accordance with a social security totalization agreement are not eligible for such a tax credit:

Notwithstanding any other provision of law, taxes paid by any individual to any foreign country with respect to any period of employment or self-employment which is covered under the social security system of such foreign country in accordance with the terms of an agreement entered into pursuant to section 233 of the Social Security Act shall not, under the income tax laws of the United States, be deductible by, or creditable against the income tax of, any such individual. [Section 317(b)(4) of the Social Security Amendments of 1977, P.L. 95-216]

Under that provision, a foreign tax is not eligible for a tax credit if a taxpayer pays it with respect to a period of employment covered under the social security system of a foreign country and "in accordance with" the terms of a totalization agreement.

U.S.-France Totalization Agreement

In 1987, the United States and France entered...