What the treaty says

The U.S.-France treaty contains the general rule allowing the U.S. citizen or resident a credit for income tax paid to France, "subject to the limitations of the law of the United States."

It also adds a mechanism known as the "three-bite rule”: First, France provides a credit for the U.S. tax that the United States could impose under the treaty if the individual were not a U.S. citizen. France may then collect any residual tax due based on the individual’s French residence. Finally, the United States provides a foreign tax credit for the residual French tax collected by treating any U.S.-source income taxed by France as income from French sources so that it qualifies for the credit under the Code.

The taxpayers’ argument

The Christensens’ main argument centered on the three-bite rule. The limiting language in the general rule that makes the foreign tax credit “subject to the limitations of the law of the United States” is absent from the special three-bite rule for U.S. citizens residing in France. In their view, that contrast meant the credit under the three-bite rule “operates independently of the Code,” including the Code’s rule that foreign tax credits reduce only chapter 1 tax. Because the treaty defines “United States income tax” broadly enough to include the NIIT under section 2A, the mandatory language of the three-bite rule—that the United States “shall allow as a credit ... the French income tax paid”—applies to NIIT as well as income tax.

The Christensens filed a disclosure statement acknowledging that their position conflicted with the IRS's position in the regulation preamble and citing supporting briefs from tax law scholars.

The trial court’s ruling (2023)

The Court of Federal Claims granted the taxpayers partial summary judgment, accepting their argument that the three-bite rule in the treaty makes no reference to the limitation in the general rule and thus operates outside the Code, and therefore the credit should apply against NIIT as well as income tax.

Why the Federal Circuit reversed

The Federal Circuit agreed that the general treaty rule gives no credit against the NIIT but further held that “the U.S. Law Limitation applies equally” to the general rule and the three-bite rule. Its reasons:

• Read the paragraph as a whole. Although the limitation appears at the start of the general treaty rule, it “serves as an overarching qualifier to both subparagraphs,” so the drafters had no need to repeat it. Courts, the panel said, “are not guided by a single sentence or member of a sentence.”
• The re-sourcing rule only makes sense inside the Code. The portion of the treaty's three-bite rule that re-sources income as French-source income to qualify it for the U.S. foreign tax credit under the Code "would have been unnecessary" if the three-bite rule operated outside the Code, as the taxpayers claimed.
• The taxpayers’ reading produced anomalies. The court noted that under the taxpayers’ argument, a U.S. citizen in Paris could credit French tax against the NIIT while an otherwise identical citizen in New York could not. A Paris resident could also claim both the treaty credit and the foreign earned income exclusion on the same income—a “double benefit” that section 911(d)(6) otherwise prohibits.

The court also relied on its companion ruling in Bruyea (discussed below). It did not address the parties’ separate arguments about the three-bite rule.

What the treaty says

The Canada treaty contains the same limitation as the France treaty, allowing a foreign tax credit for income tax paid to Canada "subject to the limitations of the law of the United States.” The Canada treaty also includes a provision requiring the U.S. to allow a credit against U.S. tax for income tax paid or accrued to Canada when a U.S. citizen resides in Canada. The treaty treats income as arising in Canada where needed to make that credit work.

The taxpayer’s arguments

• The limitation governs the math, not the existence of the credit. Similar to the taxpayer in Christensen, the taxpayer in Bruyea argued that the Canada treaty’s definition of U.S. tax encompasses NIIT as well as income tax. He argued that the "subject to the limitations" language applied only to the computational rules in the Code, such as the foreign tax credit limitation of section 904.
• Congress can’t change the bargain. U.S. law may change only “without changing the general principle hereof.” Enacting a new covered income tax and denying any credit against it, the taxpayer argued, changes that principle.
• The special rule stands alone. As an alternative, he argued that the U.S. credit the treaty requires for U.S. citizens in Canada is not limited by the Code because the treaty does not contain language that makes the credit "subject to the limitations of the law of the United States."
• Canada agrees. He relied on a 2023 Canada Revenue Agency letter stating that Canada, “as the country of source,” has the right to tax the gain, along with interpretive canons that favor reading treaties to protect treaty rights.

The trial court’s ruling (2024)

The Court of Federal Claims agreed with the taxpayer’s main argument. It held that “[t]he U.S. Law Limitation clause is focused on how a Treaty-based credit is computed but not its existence,” relying on the Technical Explanation and the Joint Committee on Taxation’s explanation of the treaty. It read the general principle language as an interpretive rule requiring that the principle of avoiding double taxation “be effectuated,” and found that “the NIIT contains no text specifically and expressly inconsistent” with the treaty. It declined to defer to Treasury’s contrary view, citing the Supreme Court’s 2024 decision in Loper Bright, and noted that Canada shared the taxpayer’s reading. It did not accept the alternative argument, holding that the U.S.-law limitation applies to the special rule as well.

Why the Federal Circuit reversed

The Federal Circuit held that the Canada treaty “does not independently provide for a credit that can be taken notwithstanding the Code.” Its reasons:

• No textual basis for a computation-only reading. The court noted that the Code governs in all instances except when the treaty "expressly states that it does not"; where the drafters wanted special treatment for particular taxes, they said so explicitly.
• The general principle is to avoid double taxation, not to eliminate it in every case. The treaty says double taxation “shall be avoided.” It also anticipates leftover cases: one provision in the treaty lets the two governments consult “for the elimination of double taxation in cases not provided for” in the treaty. Any remedy for a breach, the court suggested, would be determined between the two governments rather than being automatically allotted to the taxpayer as a credit.
• Extrinsic evidence can’t override clear text. The court called the Technical Explanation “extrinsic evidence, which we need not consider,” noting that it has declined in the past to defer to Treasury’s contemporaneous treaty interpretations. It held also that materials like the Canada Revenue Agency letter “cannot alter our interpretation of the unambiguous provisions of the Convention.”
• Anomalies and consistency. The court noted that the taxpayer’s reading would treat a U.S. citizen in Toronto better than one in Buffalo. The court further noted that every other court to decide the question, including the Tax Court in Toulouse and a federal district court in Kim v. United States (2023) under the Korean treaty, had rejected the credit.

The special rule is limited too. For the reasons given in Christensen, the court determined that the U.S.-law limitation also governs the U.S. credit the treaty requires for U.S. citizens in Canada.