Tax credit did not independently arise under treaties.

• Author: Paxson, Sarah

Taxpayer Catherine Toulouse, a U.S. citizen residing in France, timely filed her 2013 federal income tax return reporting tax on line 44 of her Form 1040, U.S. Individual Income Tax Return, of $63,632, offset by foreign tax credits in the same amount shown on line 47. Toulouse also submitted a modified Form 8960, Net Investment Income Tax--Individuals, Estates, and Trusts, where she properly reported $11,540 in net investment income on line 17 but also added lines to the form to show a foreign tax credit of $11,540 and the amount of net investment income tax due as $0.

Toulouse included two Forms 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), disclosing her position using carryover foreign tax credits from Italy and France to offset her net investment income tax liability. The position disclosed included a detailed explanation claiming treaty benefits under both Article 24(2)(a) of the Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income and Capital (Aug. 31, 1994) (United States--France treaty) and Article 23(2)(a) of the Convention for the Avoidance of Double Taxation With Respect to Taxes on Income and the Prevention of Fraud or Fiscal Evasion (Aug. 25, 1999) (United States--Italy treaty).

In February 2015, the IRS issued a math error notice, proposed an adjustment of $11,540, and on the same day assessed tax in that amount under Sec. 6213(b). Toulouse did not pay the assessment and sent the IRS a letter reiterating her position that a foreign tax credit could be used to offset her net investment income tax liability. In February 2016, the IRS informed Toulouse by letter that her claim for a foreign tax credit had been disallowed because the foreign tax credit does not apply against the net investment income tax.

In August 2018, the IRS assessed a Sec. 6651(a)(2) failure-to-pay penalty of $2,885 against Toulouse for 2013. In September 2018, the IRS issued Toulouse a final notice of intent to levy and a Notice of a Federal Tax Lien filing. Toulouse requested a Collection Due Process (CDP) hearing with respect to both notices, challenging her underlying liability for the net investment income tax. While reasserting that her net investment income tax was offset by foreign tax credits under the U.S.--France and U.S.--Italy tax treaties, Toulouse also objected to the IRS's failure to issue her a notice of deficiency.

A CDP hearing was held by phone...