[00:00:00] Speaker 01:
The second appeal of the morning is Christensen versus United States.

[00:00:05] Speaker 01:
Ms.

[00:00:05] Speaker 01:
Lyon, whenever you're ready.

[00:00:06] Speaker 01:
This time around, we will be holding you to your time.

[00:00:11] Speaker 04:
Thank you, Your Honor, and may it please the court, Kathleen Lyon for the United States.

[00:00:14] Speaker 04:
Article 242A of the U.S.-France Tax Treaty provides that the United States will grant a credit against U.S.

[00:00:20] Speaker 04:
income tax for income taxes paid to France in accordance with the provisions and subject to the limitations of U.S.

[00:00:27] Speaker 04:
law.

[00:00:27] Speaker 04:
From before the treaty was signed to today,

[00:00:30] Speaker 04:
The Internal Revenue Code's foreign tax credit statutory scheme has limited the foreign tax credit to applying only against Chapter 1 taxes as set out in paragraphs 27 and 901 of the code.

[00:00:42] Speaker 04:
The 2010 enactment of the net investment income tax in Chapter 2A.

[00:00:46] Speaker 03:
So can we just take a question?

[00:00:48] Speaker 03:
Yes.

[00:00:48] Speaker 03:
We obviously have dealt with it.

[00:00:50] Speaker 03:
I'm more interested in, because Judge Horn, I think, agreed with you on the issue we just talked about in the Brea case.

[00:00:58] Speaker 04:
Right, in paragraph 2A.

[00:00:59] Speaker 03:
Right.

[00:01:00] Speaker 03:
But then she found a separate basis in paragraph to be for a subset of people that allows the credit.

[00:01:11] Speaker 03:
Can you just address that?

[00:01:12] Speaker 03:
I mean, we spent a lot of time on the first issue.

[00:01:15] Speaker 03:
I want to know why she's wrong on this, because it's a different structure and a different placement of the provisions and limitations clause.

[00:01:26] Speaker 04:
Correct.

[00:01:27] Speaker 04:
We think the court erred in two ways.

[00:01:30] Speaker 04:
First, the court read paragraph 2B1 in isolation.

[00:01:35] Speaker 04:
It acknowledged our argument with respect to 2B2, the resourcing provision, but it never addressed it.

[00:01:46] Speaker 04:
Again, there would be no reason to have the resource in the rule in the first place if the parties had not understood that the code provisions apply, the 904 limitations in specific, but the code in general.

[00:01:59] Speaker 03:
Do you have a site for the whole 3D in your appendix, or at least where this provision is?

[00:02:07] Speaker 03:
Is it addendum 24?

[00:02:26] Speaker 04:
So the court erred by reading B1 in isolation.

[00:02:29] Speaker 04:
And I would also point out that at appendix page 361, the technical explanation specifically says that 2B applies so that the credit will fit into the foreign tax credit limitation in 904.

[00:02:46] Speaker 04:
So they're clearly anticipating that, understanding that the code applied.

[00:02:53] Speaker 01:
Do you feel like we have to do some kind of treaty reformation in the sense that we have to take language that's in the first paragraph and put it into the first subparagraph to put it into the next subparagraph?

[00:03:10] Speaker 04:
Well, we think that the general rule in paragraph 2a does apply in 2b1 and b2.

[00:03:17] Speaker 04:
And we know that because the resourcing provision is in 2b2.

[00:03:22] Speaker 04:
And there would be no reason for it unless the parties understood the code.

[00:03:25] Speaker 01:
I understand that.

[00:03:26] Speaker 01:
But the language is not literally in 2b.

[00:03:31] Speaker 04:
That's correct.

[00:03:32] Speaker 01:
It's literally in 2a.

[00:03:34] Speaker 04:
Correct.

[00:03:35] Speaker 01:
And now we have to sort of

[00:03:38] Speaker 04:
Correct.

[00:03:39] Speaker 01:
Free our minds and some imagination and say, oh, it's also in 2B.

[00:03:44] Speaker 04:
I don't think you have to be the resourcing provision.

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would not be there if the code did not apply.

[00:03:51] Speaker 04:
If the parties had agreed the code had not applied, the source wouldn't matter.

[00:03:57] Speaker 04:
The source does matter.

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And although the resourcing rule affects how things work in section 904, the foreign source limitation provision, there's nothing in 2B that limits the code to 904.

[00:04:18] Speaker 03:
The second error that the court made... In your view, 2A and 2B aren't kind of alternatives.

[00:04:23] Speaker 03:
It's 2A provides a basic rule that then applies to the rest of Section 2.

[00:04:28] Speaker 04:
Yes, yes.

[00:04:30] Speaker 04:
2A applies to all US citizens and residents.

[00:04:33] Speaker 04:
2B makes special rules for US citizens who are residing in France who would be subject to taxation on the same income.

[00:04:44] Speaker 04:
The second error the court made.

[00:04:45] Speaker 03:
No.

[00:04:46] Speaker 03:
I mean, is there any rationale that?

[00:04:55] Speaker 03:
Because this is a subset of the people, right?

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that could use this and be like a US citizen residing in France?

[00:05:06] Speaker 04:
Correct.

[00:05:08] Speaker 03:
But the foreign tax credit can be used by US citizens residing in the US for a foreign income tax?

[00:05:14] Speaker 04:
If they have foreign income, yes.

[00:05:15] Speaker 03:
Right.

[00:05:16] Speaker 03:
And is there any reason to suggest that countries intended to treat those different groups of people differently?

[00:05:25] Speaker 03:
Because in the other

[00:05:27] Speaker 03:
conventions, it doesn't seem they are treated differently.

[00:05:32] Speaker 04:
Well, in the Canada treaty, they also paragraph 4.

[00:05:36] Speaker 03:
There's special rules about sourcing and stuff.

[00:05:38] Speaker 04:
Sure.

[00:05:39] Speaker 03:
But what I mean is, is there any suggestion that US citizens and US residents

[00:05:50] Speaker 03:
are supposed to be subject to a different set of rules than US citizens and French residents, based upon that position and limitations language.

[00:05:59] Speaker 04:
Right.

[00:06:00] Speaker 04:
I mean, what we have argued in our brief is the anomalous results.

[00:06:03] Speaker 04:
And one of them is that

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This would give U.S.

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citizens in France a much greater tax benefit than U.S.

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citizens could get under paragraph 2a.

[00:06:20] Speaker 03:
smaller tax credit than US citizens that reside in France.

[00:06:24] Speaker 04:
Correct.

[00:06:25] Speaker 03:
Under Judge Horn's interpretation.

[00:06:27] Speaker 04:
Yes.

[00:06:27] Speaker 04:
And another anomalous result is that the US citizens residing in France would potentially get a double tax benefit because they would be able to exclude foreign income under the code.

[00:06:42] Speaker 04:
But then also under Judge Horn's reading, they would also get to get a credit against US tax for that same amount.

[00:06:51] Speaker 04:
Moving on to my second point, the court also failed to apply the correct rule, which requires deference to the technical explanation.

[00:07:02] Speaker 04:
As the agency tasked with negotiating and enforcing the treaty, the executive branches

[00:07:07] Speaker 04:
interpretation of the treaty is entitled to great weight.

[00:07:13] Speaker 04:
And the technical explanation expressly states that the resourcing provision in 2B2 is to permit the additional credit to fit within foreign tax credit limitations in 904.

[00:07:24] Speaker 04:
That's on page, at the bottom of page 361.

[00:07:26] Speaker 01:
What circumstances does Treasury employ deference in these situations?

[00:07:31] Speaker 01:
When the treaty language is ambiguous and then if Treasury

[00:07:36] Speaker 01:
announces a reasonable interpretation of an ambiguous term in a treaty, then they get deference?

[00:07:44] Speaker 04:
No, it's not an ambiguity statement.

[00:07:46] Speaker 04:
I mean, as we've laid out in our brief, technical explanations are legitimate aids to interpretation.

[00:07:52] Speaker 04:
And although we think the text is clear in itself, the technical explanation is additional evidence, certainly in support of that.

[00:08:02] Speaker 04:
Here, the court of federal claims failed to give any difference whatsoever to the technical explanation.

[00:08:08] Speaker 04:
Instead, the court required evidence that France had agreed or acquiesced.

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to Treasury's interpretation.

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But the Supreme Court has never conditioned deference to the executive branch's interpretation on evidence that the other party agrees.

[00:08:26] Speaker 04:
I would note also that the taxpayers here have offered no plausible alternative explanation for why that resourcing provision in 2b2 is there.

[00:08:37] Speaker 04:
At pages 34 through 37, they lay out a very elaborate

[00:08:40] Speaker 04:
explanation.

[00:08:42] Speaker 04:
And the gist of it, as I understand it, is that paragraph 2B itself provides a source-based limitation that is equivalent to section 904 of the code, but that operates independent of it.

[00:08:55] Speaker 04:
There's no textual basis for that.

[00:08:57] Speaker 04:
2B says nothing about a source-based limitation.

[00:09:01] Speaker 04:
All that 2B does in 2B2 is resource

[00:09:06] Speaker 04:
U.S.

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income to give effect to the provisions in 2B1.

[00:09:12] Speaker 04:
The actual source-based limitation is in the code.

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And there would be no reason to have that resourcing provision if the code did not apply.

[00:09:21] Speaker 03:
Are these resourcing things we're talking about for the France treaty similar to paragraphs four and six in the Canada Treaty?

[00:09:32] Speaker 04:
Yes.

[00:09:33] Speaker 04:
I mean, they operate pretty much the same.

[00:09:35] Speaker 04:
And the language is slightly different, but they operate the same.

[00:09:41] Speaker 01:
Can I ask you a question that came up in the earlier appeal about Chapter 1 taxes and how there are some Chapter 1 taxes that are clearly not subject to a foreign tax credit?

[00:09:59] Speaker 04:
They can't be offset, yeah.

[00:10:00] Speaker 01:
They can't be offset.

[00:10:02] Speaker 01:
Were any of those particular subset of taxes already in Chapter 1 at the time of these treaties?

[00:10:09] Speaker 04:
There were exclusions that were in the treaty at the time the parties signed it.

[00:10:15] Speaker 04:
I don't know if they were exactly the same ones, but right now those exclusions are in 26B.

[00:10:23] Speaker 04:
At the time the treaty was signed in 1980, those exclusions were listed in Section 901A itself.

[00:10:30] Speaker 04:
And there were, I believe, seven written into that provision at the time the treaty was signed.

[00:10:37] Speaker 03:
So since then, there have been more put in at 26.

[00:10:39] Speaker 03:
Yes.

[00:10:40] Speaker 04:
Yes.

[00:10:41] Speaker 04:
Now there's a fairly longish list.

[00:10:43] Speaker 04:
Even earlier, back in the Internal Revenue Code of 1954, there were three listed in 901A, and then expanded to seven, and then now there's more, but in 26B.

[00:10:54] Speaker 04:
Of course, there's no questions.

[00:11:00] Speaker 01:
OK.

[00:11:00] Speaker 01:
We'll reserve the remainder of your time.

[00:11:02] Speaker 04:
Thank you.

[00:11:14] Speaker 00:
Good morning.

[00:11:14] Speaker 00:
Stuart Horowitz on behalf of the Appellees, Matthew and Catherine Case Christensen.

[00:11:23] Speaker 00:
In answer to the question of how the treaty came about, 24 came about as a result of the Filler case where France changed its rules and therefore they had to implement the three-byte rule that was in 24-2.

[00:11:44] Speaker 00:
However, as you can see from the plain text, there is no limitations language there.

[00:11:52] Speaker 00:
You will see from the Toulouse case where the courts, obviously we think they got the first part of the Toulouse case, got the issue wrong.

[00:12:02] Speaker 00:
But the court was quite clear that there would be other provisions that would allow for a foreign tax credit, which pointed directly to 242B in this case.

[00:12:15] Speaker 00:
If the saving clause in Article 29, the saving clause generally provides that U.S.

[00:12:22] Speaker 00:
citizens cannot rely on the treaty, if the savings clause wanted to carve out

[00:12:30] Speaker 00:
article 24 it specifically carved out article 24 didn't carve out 24-1 didn't carve out 24-2 it carved out the whole article on that basis the provisions from our point of view it's quite clear that article 24-2 does provide an independent credit and that independent credit is assuming that you are going to take a

[00:12:57] Speaker 00:
different view from the taxpayers on what is the limitations language, what it means, then his absence here creates the result that we think.

[00:13:11] Speaker 02:
Can you talk about resourcing and isn't that what B2 is doing and it only makes sense if the US law limitation carries over to B2?

[00:13:27] Speaker 00:
The resource and provisions in our mind creates an item by item approach which means that you cannot cross credit one against another and you do not need to go as far as requiring or looking to code provisions.

[00:13:45] Speaker 00:
So it's specifically the way that the technical explanation makes it work.

[00:13:48] Speaker 00:
It's quite clear that the technical explanation makes it work so that you have

[00:13:53] Speaker 00:
pay tax that is the source makes it an item by item approach.

[00:14:02] Speaker 02:
The argument, if I understand the government correctly, is that

[00:14:07] Speaker 02:
If we were to affirm the Court of Federal Claims on this basis, that would render the resourcing rule in 24 to be superfluous.

[00:14:17] Speaker 02:
I assume you disagree that it would be superfluous, so can you help me again understand what work it would be doing?

[00:14:24] Speaker 00:
Okay, so if you looked at 24.2b1, without the resourcing rule, it is written broadly enough that if a U.S.

[00:14:37] Speaker 00:
citizen living in France incurred French tax,

[00:14:42] Speaker 00:
in excess of the U.S.

[00:14:45] Speaker 00:
tax that that would be refunded, that the U.S.

[00:14:48] Speaker 00:
would have to provide a credit for that tax in excess of the U.S.

[00:14:55] Speaker 00:
tax that would have been charged on that item of income, and the resourcing provision stops that from happening.

[00:15:08] Speaker 03:
So there's been a couple cases in the tax court and the district court.

[00:15:11] Speaker 03:
Has any other circuit looked at this issue yet, to your knowledge?

[00:15:15] Speaker 00:
No.

[00:15:16] Speaker 00:
You're the first, I'm afraid.

[00:15:18] Speaker 03:
Lucky us.

[00:15:37] Speaker 04:
I'll just address the the resourcing question again the Example the explanation and the example and the technical explanation that the taxpayers rely on in their brief and pages 34 through 37 I think it's more specifically 35 and 36 specifically refers to

[00:16:04] Speaker 04:
the source-based limitation in 904.

[00:16:07] Speaker 04:
At the bottom of page 361 of the appendix, the technical explanation says that the resource and provision is there to permit the credit to fit into the source-based limitation of section 904.

[00:16:22] Speaker 04:
In the example itself, which is at the page

[00:16:24] Speaker 04:
The top of page 362 it says this is how to be works and a walk walks through some of the Three-byte rule and then you don't have to understand the math of that of that example to understand that there was an excess of like 7% French income tax

[00:16:42] Speaker 04:
And it expressly says that the US dividend, which was US source income in that example, could not be offset by the tax because it was US source income.

[00:16:52] Speaker 04:
And so it very clearly had to be resourced in order to have the foreign tax credit applied against it.

[00:17:03] Speaker 04:
And again, the resource and provision wouldn't be there if the code didn't apply.

[00:17:09] Speaker 04:
And so it is correct that it would render that provision superfluous if the lower court's opinion were upheld.

[00:17:18] Speaker 01:
OK.

[00:17:22] Speaker 01:
Thank you very much.

[00:17:22] Speaker 01:
Thank you.

[00:17:23] Speaker 01:
The case is submitted.