Tax treaties do not provide a foreign tax credit against net investment income tax.

• Author: Beavers, James A.

A U.S. taxpayer living abroad was not entitled to take a foreign tax credit against her net investment income tax based on provisions in the United States-France and United States-Italy tax treaties.

Background

Catherine Toulouse is a U.S. citizen who resides outside the United States. For the 2013 tax year, she timely filed Form 1040, U.S. Individual Income Tax Return, filing married filing separately. On page 2 of Form 1040, she reported tax of $63,632 and claimed a foreign tax credit of $63,632. On Form 1116, Foreign Tax Credit, she reported that she had paid $51,456 in tax to Italy and France for 2013, as well as a carryover of foreign tax credits of approximately $340,000.

Toulouse had net investment income for 2013. With her 2013 return, she included Form 8960, Net Investment Income Tax--Individuals, Estates, and Trusts, reporting net investment income tax of $11,540 on line 17 of Form 8960. Apparently, Toulouse was aware that, in general, the IRS's position was that a taxpayer could not offset her net investment income tax with a foreign tax credit. However, she (as described below) believed she could, and added two new lines to the bottom of Form 8960 to do so. She labeled the first added line "Less: Foreign Tax Credit" and entered $11,540. She labeled the second added line "Net Investment Income Tax Due" and entered an amount of zero. She did not transfer the $11,540 net investment income tax from line Form 8960, line 17, to Form 1040, line 60, as taxpayers are told to do by the instructions on line 17.

To explain her offset of the net investment tax with a foreign tax credit and her unsanctioned modifications to Form 8960, she included with her return two Forms 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), disclosing that she used the foreign tax credit carryover to offset the net investment income tax. She also attached Form 8275, Disclosure Statement, which explained in detail her position that Article 24(2)(a) of the U.S. income tax treaty with France (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), as supplemented by protocols dated Dec. 8, 2004, and Jan. 13, 2009 (U.S.-France Treaty)) and Article 23(2)(a) of the U.S. income tax treaty with Italy (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), as supplemented by a protocol dated Aug. 25, 1999 (U.S.-Italy Treaty)) permit a foreign tax...