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the research credit for many taxpayers. Double Taxation With Respect to Taxes
However, taxpayers must be aware that on Income and the Prevention of Fraud The court
the use of statistical sampling does not or Fiscal Evasion (Aug. 25, 1999) (U.S.–
circumvent the requirement that the Italy treaty). found that it is
four-part test be analyzed and substanti- In February 2015, the IRS issued a immaterial that
ated at the business-component level. math error notice, proposed an adjust-
From Tae Song, GStat, Washington, ment of $11,540, and on the same the Code does not
D.C.; Hamid Ashtiani, GStat, Wash- day assessed tax in that amount under state that a credit
ington, D.C.; Jason Seo, J.D., LL.M., Sec. 6213(b). Toulouse did not pay the
Washington, D.C.; Dennis St. Martin, assessment and sent the IRS a letter is unavailable or
CPA, Washington, D.C.; Kevin Benton, reiterating her position that a foreign is merely silent
E.A., Dallas; and Wendy Rotz, PStat, tax credit could be used to offset her net on the matter; the
Washington, D.C. investment income tax liability. In Feb-
ruary 2016, the IRS informed Toulouse Code must provide
by letter that her claim for a foreign tax a credit for one to
Foreign Income & Taxpayers credit had been disallowed because the
foreign tax credit does not apply against exist.
Tax credit did not the net investment income tax.
independently arise In August 2018, the IRS assessed a
under treaties Sec. 6651(a)(2) failure-to-pay penalty to a foreign tax credit against the net
Taxpayer Catherine Toulouse, a U.S. of $2,885 against Toulouse for 2013. In investment income tax based on the
citizen residing in France, timely filed September 2018, the IRS issued Tou- provisions of the U.S.–France and U.S.–
her 2013 federal income tax return louse a final notice of intent to levy and Italy tax treaties. Because the validity of
reporting tax on line 44 of her Form a Notice of a Federal Tax Lien filing. Toulouse’s case was a collection review
1040, U.S. Individual Income Tax Return, Toulouse requested a Collection Due proceeding and her underlying tax liabil-
of $63,632, offset by foreign tax credits Process (CDP) hearing with respect to ity was properly at issue, the Tax Court
in the same amount shown on line 47. both notices, challenging her underlying reviewed Toulouse’s liability de novo.
Toulouse also submitted a modified liability for the net investment income
Form 8960, Net Investment Income tax. While reasserting that her net Tax Court discussion
Tax — Individuals, Estates, and Trusts, investment income tax was offset by for- In evaluating the cross-motions, the Tax
where she properly reported $11,540 in eign tax credits under the U.S.–France Court first observed that there was no
net investment income on line 17 but and U.S.–Italy tax treaties, Toulouse also dispute that the Code and its associated
also added lines to the form to show a objected to the IRS’s failure to issue her regulations do not permit a foreign tax
foreign tax credit of $11,540 and the a notice of deficiency. credit against the net investment income
amount of net investment income tax A CDP hearing was held by phone in tax (Toulouse, 157 T.C. No. 4 (2021)).
due as $0. March 2019, and in September 2019 the Foreign tax credits are provided under
Toulouse included two Forms 8833, settlement officer issued a determination Secs. 27 and 901. Sec. 27 provides that
Treaty-Based Return Position Disclosure sustaining the proposed levy action but “[t]he amount of taxes imposed by
Under Section 6114 or 7701(b), disclos- not the filing of the federal tax lien. Ac- foreign countries and possessions of
ing her position using carryover foreign cording to the notice of determination, the United States shall be allowed as a
tax credits from Italy and France to the settlement officer determined that credit against the tax imposed by this
offset her net investment income tax Toulouse was not entitled to a foreign chapter to the extent provided in section
liability. The position disclosed included tax credit against her net investment 901.” Sec. 901 similarly states that the
a detailed explanation claiming treaty income tax. “tax imposed by this chapter shall …
benefits under both Article 24(2)(a) of Toulouse ultimately filed a petition in be credited” essentially with taxes paid
the Convention for the Avoidance of Tax Court in October 2019 requesting a to foreign countries. Secs. 27 and 901
Double Taxation and the Prevention of review of the IRS’s determination from are both part of Chapter 1 of the Code.
Fiscal Evasion With Respect to Taxes the CDP hearing. Toulouse and the IRS However, the net investment income
on Income and Capital (Aug. 31, 1994) filed cross-motions for summary judg- tax is imposed under Sec. 1411, which
(U.S.–France treaty) and Article 23(2)(a) ment with the court, primarily on the is part of Chapter 2A of the Code. As
of the Convention for the Avoidance of issue of whether Toulouse was entitled the court noted, by its terms, the foreign

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