In Uncategorized on 08/16/2021 at 17:03

The much-denounced Affordable Care Act of 2010 (whose survival against all odds is a story that could only happen in America…but this is a nonpolitical blog) has an as-yet-unrepealed provision, the net investment income tax imposed by section 1411, s/a/k/a  the Obamacare Override. And neither our tax treaty with the French Republic, nor that with the Republic of Italy, can override the Override.

I must here give full marks to the trusty tax counsel for Catherine S. Toulouse, 157 T. C. 4, filed 8/16/21. When it came to full disclosure, they laid it out, laid it on, and laid it on thick. She “timely filed Form 1040… under extension, with a filing status of married filing separately….She attached to her return Form 1116, Foreign Tax Credit, that reported that she had paid… tax to Italy and France…. She also reported that she had a carryover of foreign tax credits of approximately $340,000 and used a portion of the carryover to offset her tax. Line 60 of her Form 1040, where taxpayers are to report net investment income tax, is blank. Line 60 is in the section of Form 1040 labeled “Other Taxes”. On line 61, petitioner reported “total tax” of zero. Petitioner attached Form 8960, Net Investment Income Tax–Individuals, Estates, and Trusts, to her return, reporting net investment income tax…. She reported this amount as required by the Form’s instructions on line 17, which is labeled ‘Net investment income tax for individuals.’ Line 17 also instructs taxpayers on how to compute the tax and transfer the amount of the tax reported there to Form 1040, line 60. She modified Form 8960 by adding two lines under line 17. She labeled the first added line ‘Less: Foreign Tax Credit” and entered [what she claimed]. This amount is in addition to the… foreign tax credit that she claimed on line 47. She labeled the second added line ‘Net Investment Income Tax Due’ and entered an amount of zero. She did not transfer the… net investment income tax shown on Form 8960, line 17, to Form 1040, line 60, in accordance with the instructions on the Forms.

“Petitioner also attached to her return two Forms 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), disclosing her position that she used the foreign tax credit carryover to offset the net investment income tax…. She also attached Form 8275, Disclosure Statement, providing a detailed explanation of 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, Fr.-U.S., Aug. 31, 1994, 1963 U.N.T.S. 67, as supplemented by Protocols dated Dec. 8, 2004 and Jan. 13, 2009 (U.S.-France Treaty), and article 23(2)(a) of 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, It.-U.S., Aug. 25, 1999, T.I.A.S. No. 09-1216, as supplemented by Protocol dated Aug. 25, 1999 (U.S.-Italy Treaty), permit a foreign tax credit against the net investment income tax.” 157 T. C. 4, at pp. 4-5.

All that was missing was a little handwritten notecard saying “Please audit me.”

IRS didn’t bother; they claimed arithmetic error and assessed. So Catherine went to Appeals on a refund claim when IRS disallowed her credit claim. Catherine petitions that, and the Section 6651(a)(2) failiure-to-pay add-on.

Judge Goeke has this one.

Congress sneakily included the Obamacare Override in Title A, Chapter 2A. The treaties only cover whatever Section 901 covers, the Title A, Chapter 1 taxes.

“Section 1411 is in chapter 2A, subtitle A, Income Taxes. Thus, the foreign tax credit under section 27–which applies to ‘the tax imposed by this chapter [1]’–does not by its terms apply to offset net investment income tax. Section 1.1411-1(a), Income Tax Regs., provides that ‘[e]xcept as otherwise provided, all Internal Revenue Code (Code) provisions that apply for chapter 1 purposes in determining taxable income (as defined in section 63(a)) of a taxpayer also apply in determining the tax imposed by section 1411.’ But tax credits (including the foreign tax credit under section 27) are not taken into account in determining taxable income under section 63(a). See sec. 63(a) (defining ‘taxable income’ to mean gross income minus the deductions allowed by chapter 1 other than the standard deduction). Section 1.1411-1(a), Income Tax Regs., therefore does not provide for a foreign tax credit against the net investment income tax.” 157 T. C. 4, at pp.11-12 (Footnote omitted; it deals with waived procedural argy-bargy.)

OK, the IRC doesn’t allow the credit. But that’s why we have treaties, no? They have the force of law.

Yes and yes, but no.

The Obamacare Override was enacted after the treaties. But a court won’t find an intention to override a treaty unless Congress says so. And the treaties say they’re subject to US law.

And Chapter 2A is a standalone. It only has one (count it, one) provision, the Obamacare Override. So Catherine’s clerical misstep argument fails.

“It is immaterial that the Code does not affirmatively state that a foreign tax credit against the net investment income tax is disallowed. Section 1411(c)(1)(B) expressly provides for deductions allowed by subtitle A in the computation of net investment income. There is no provision for any credits against the section 1411 tax. The enactment of a 3.8% net investment income tax as part of chapter 2A is a clear expression of congressional intent that credits against section 1 not apply against the section 1411 tax.” 157 T. C. 4, at pp. 18-19.

Anyway, both treaties recognize that laws may change. The aim is to reduce, not eliminate, double taxation. The credit is preserved, not embalmed. Besides, Catherine only relied on one provision in each treaty. There may be others elsewhere that aren’t removable by subsequent legislation.

As for the Section 6651(a)(2) failure-to-pay add-on, IRS didn’t seek summary J on that, although they get it on the tax being due. So maybe good-faith reliance is in play, and that’s a fact question.

Taishoff notes that despite the fact the entire repeal of the ACA failed by one (count it, one) vote in the Senate in July of the year Congress enacted the TCJA, the Obamacare Override survived. Although the net investment tax plus add-on at issue here is less than $20K, I anticipate an appeal. Maybe the wannabe repeal forces, if any are left, will file amici here.


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