Tax Court Needs to Do More Work in Interpreting Totalization Agreement

By By James A. Beavers, J.D., LL.M., CPA, CGMA

The D.C. Circuit held that the meaning of "amend or supplement" with respect to a social security totalization agreement could not be interpreted, as the Tax Court had, by reference to dictionary definitions of the words "amend" or "supplement." Rather, the meaning of these terms must be determined in light of the full text of the totalization agreement and the shared expectations of the contracting governments.

Totalization Agreements

In 42 U.S.C. Section 433, Congress authorized the president to enter into social security coordination agreements—known as totalization agreements—with other countries. Absent such agreements, workers who divide their careers among and pay taxes to multiple countries might pay into the social security systems of various nations, yet fail to qualify for benefits under any one system. Totalization agreements permit those workers to combine periods of payment into different countries' social security systems to eventually become eligible to receive benefits under a signatory country's system. Workers' wages and self-employment income are generally exempt from U.S. Social Security taxation to the extent that they are subject to foreign social security taxation.

The United States generally taxes income earned by its citizens regardless of where the citizen resides, but a U.S. citizen may take a tax credit against his or her U.S. income tax liability for taxes paid to a foreign country. That credit shields taxpayers from double-taxation. In contrast, taxes paid to a foreign country in accordance with a social security totalization agreement are not eligible for such a tax credit:

Notwithstanding any other provision of law, taxes paid by any individual to any foreign country with respect to any period of employment or self-employment which is covered under the social security system of such foreign country in accordance with the terms of an agreement entered into pursuant to section 233 of the Social Security Act shall not, under the income tax laws of the United States, be deductible by, or creditable against the income tax of, any such individual. [Section 317(b)(4) of the Social Security Amendments of 1977, P.L. 95-216]

Under that provision, a foreign tax is not eligible for a tax credit if a taxpayer pays it with respect to a period of employment covered under the social security system of a foreign country and "in accordance with" the terms of a totalization agreement.

U.S.-France Totalization Agreement

In 1987, the United States and France entered into a social security totalization agreement. The agreement identifies the laws of each country under which qualifying taxes may be paid. However, a recent case involved two types of payments made to the French government, the contribution sociale généralisée (general social contribution, or CSG) and the contribution pour le remboursement de la dette sociale (contribution for the repayment of social debt, or CRDS), which were not included in the agreement because they were enacted after it went into effect.

The French government enacted the CSG law in December 1990, and that law includes most provisions governing social security benefits in France. French employers withhold CSG on employment income by the employer in the same manner as other social security taxes and report it on the employee's pay stub as a social contribution. Employers remit CSG directly to the Unions de Recouvrement des Cotisations de la Sécurité Sociale et d'Allocations Familiales (Union for the Recovery of Social Security and Family Allowances Premiums). The French government allocates CSG revenues to five separate funds including the Social Debt Redemption Fund, which is dedicated primarily to the retirement of debt incurred to fund French social security programs in the 1990s but also appears to finance certain payments made to France's general budget.

The French government enacted the CRDS law in January 1996. CRDS is withheld and collected in the same manner as CSG, with the proceeds going to the Social Debt Redemption Fund.

In 2001, the French government amended its social security code to provide that CSG and CRDS are payable only by individuals who are covered by a compulsory French sickness insurance scheme. However, a 2012 amendment made CSG and CRDS also applicable to gains realized on the sale of French real property by non-French residents.

The Eshels' Case

Ory and Linda Coryell Eshel are married and are dual citizens of the United States and France. In 2008 and 2009, they resided in France, and Mr. Eshel earned a salary for services performed in France. The Eshels paid various French taxes, including CSG, CRDS, and French income, unemployment, and social security taxes. Because Mr. Eshel worked for a non-American employer, he was not required to pay social security taxes to the United States.

As U.S. citizens, the Eshels were liable for U.S. income taxes for 2008 and 2009. They timely filed federal income tax returns for both years, claiming credits for French income tax, French unemployment tax, CSG, and CRDS. The CSG and CRDS credits amounted to $19,061 for 2008 and $32,672 for 2009.

The IRS initially denied the entire foreign tax credit for both years but later conceded that all of the claimed credits were valid except for CSG and CRDS. The Eshels disputed the IRS's determination in Tax Court, and they and the IRS filed cross-motions for summary judgment on the issue of whether CSG and CRDS are foreign taxes that taxpayers can credit against tax liability.

The Tax Court's Decision

The Tax Court granted summary judgment for the IRS. Because both CSG and CRDS were adopted after the totalization agreement went into effect, the court agreed with both parties that the central question was whether the laws adopting those two taxes "amend or supplement" the French laws enumerated in the agreement. To answer that question, the tax court turned to four American dictionaries to define "amend" and "supplement," and on the basis of those definitions concluded that the phrase should mean "(1) formally altering one or more of these laws by striking out, inserting, or substituting words; (2) adding something to make up for a lack or deficiency in one or more of these laws; or (3) adding something to extend or strengthen the French social security system as a whole."

Relying on its dictionary definitions, the tax court reasoned that CSG and CRDS "amend or supplement" the designated French laws as long as they "add[] something to extend or strengthen the French social security system as a whole." The Tax Court also noted that both taxes are administered by French social security officials and are collected in the same manner as French social security taxes. The court then determined that CSG "amends" the French social security laws because it adds words to the Code de la Sécurité Sociale, where most French social security laws are codified. The court also decided that CSG and CRDS "supplement" the French social security laws because they fund some benefits under laws identified in the agreement and discharge debt previously incurred to pay social security benefits.

The Tax Court accordingly ruled that, because CSG and CRDS "amend or supplement" the French social security laws specified in the agreement, they qualify as payments made "in accordance with" the agreement, and taxpayers cannot credit them against U.S. income tax liability. The Eshels appealed this decision to the D.C. Circuit Court of Appeals.

The D.C. Circuit's Decision

The D.C. Circuit held that the Tax Court had erred in its legal analysis of whether the CSG or CRDS had amended or supplemented the French laws covered by the Agreement, and reversed its decision. It found that as a totalization agreement, the agreement is an international executive agreement that a court must interpret in light of its full text and the shared expectations of the contracting governments.

The D.C. Circuit found that the Tax Court had simply asked the wrong legal question in its analysis because the court asked only what "amends or supplements" means in domestic dictionaries, as it might do if construing a purely domestic statute. The problem with this, the appeals court noted, is that a totalization agreement is not a domestic statute but rather is an executive agreement with a foreign country that a court must interpret under the same principles applicable to international treaties.

Under these principles, according to the D.C. Circuit, the Tax Court should have started its analysis with the plain text of the agreement. The D.C. Circuit found that the plain text of the agreement indicated that deciding whether the CSG and CRDS amended or supplemented the laws enumerated in the agreement required an inquiry into those French laws, and the meaning of amending or supplementing should have been informed by French law. The D.C. Circuit also criticized the Tax Court because it had improperly looked at whether the CSG and CRDS amend or supplement the French social security system as a whole, rather than the laws specified in the agreement. The D.C. Circuit further decried the Tax Court's acceptance of the position that if some but not all of the laws in the agreement were supplemented by a tax, the entire tax was subject to the agreement, which the D.C. Circuit said rested on "nothing more than the [IRS's] own say-so."

The D.C. Circuit explained that to the extent ambiguities remained after a review of the plain text of a totalization agreement, the correct course was to consult sources that shed light on the shared expectations of the drafting parties, such as the negotiating and drafting history of the totalization agreement and the post-ratification understanding of the contracting parties regarding it. Both the IRS and the Eshels claimed that evidence they had presented showed the shared expectations of the United States and France in the agreement. The IRS's evidence consisted of a declaration by a U.S. Social Security Administration official and a letter from the head of the U.S. embassy to the French Minister of Social Affairs and Employment.

The Eshels presented three statements of the French government: a 1999 statement by the French Finance Minister in answer to a parliamentary question, a French "Statement of Practice" from 1998, and a statement of the French Minister of Foreign Affairs, as well as a report from a Paris tax lawyer. The D.C. Circuit, however, concluded that neither party's evidence was sufficient for it to determine the shared expectations of the governments of the United States and France regarding the agreement.

Finally, the court determined that where the trial court failed to inquire properly into the meaning of an international agreement, remand was appropriate. As the court observed, on remand, to make a well-informed decision, the Tax Court could insist on a complete presentation on the issues by counsel, engage in its own research or hold a hearing, or request amicus submissions from the United States on its position and ask the State Department to provide the views of the foreign government.


The Tax Court started off on the right foot in this case: "A treaty is to be interpreted in accordance with the ordinary meaning of its terms, consistently with their context and the agreement's object and purpose." However, the court then went astray by trying to apply U.S. legal concepts and dictionary definitions, when it should have followed Article 1(10) of the agreement: "Any term not defined in this article shall have the meaning assigned to it in the laws which are being applied" (emphasis added). The court was briefed on French legal interpretations of the taxes and even discussed European Court of Justice decisions on the nature of the taxes; presumably it will pay more attention to those materials on remand.

Eshel, No. 14-1215 (D.C. Cir. 8/5/16)

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