Eshel v. Comm'r

• Decision Date: 05 August 2016
• Docket Number: No. 14-1215,14-1215
• Citation: 831 F.3d 512
• Parties: Ory Eshel and Linda Coryell Eshel, Appellants v. Commissioner of Internal Revenue Service, Appellee.
• Court: U.S. Court of Appeals — District of Columbia Circuit

831 F.3d 512

Ory Eshel and Linda Coryell Eshel, Appellants

v.Commissioner of Internal Revenue Service, Appellee.

No. 14-1215

United States Court of Appeals, District of Columbia Circuit.

Argued October 6, 2015

Decided August 5, 2016

Stuart E. Horwich argued the cause and filed the briefs for appellants.

Julie Ciamporcero Avetta, Attorney, U.S. Department of Justice, argued the cause for appellee. With her on the brief was Bridget M. Rowan, Attorney. Andrew Weiner, Attorney, entered an appearance.

Before: Griffith, Millett, and Pillard, Circuit Judges.

Millett, Circuit Judge:

As a general rule, workers in the United States are taxed to support the payment of social security benefits to the retired and to individuals with disabilities. The expectation is that, having contributed to the national economy while actively employed, those workers will later become eligible beneficiaries rather than supporters of the social security system. See Flemming v. Nestor , 363 U.S. 603, 608–610, 80 S.Ct. 1367, 4 L.Ed.2d 1435 (1960).

That system gets complicated, however, for Americans who work overseas for part of their careers and, during those years, are required to pay taxes into a foreign government's social security system. Foreign workers temporarily employed within the United States can sometimes confront a similar problem.

With Congress's blessing, Presidents have entered into so-called “totalization agreements” with foreign governments to limit social-security taxing rights to the country where the work is being done. The agreements also allow overseas workers from both countries to obtain social security benefits based on the periods for which they make social security contributions to foreign governments.

This case involves a totalization agreement between the United States and France. Specifically, the issue on appeal is whether or not two French taxes enacted into law after that totalization agreement was adopted “amend[ ] or supplement[ ]” the French social security laws covered by the agreement, and thus fall within the agreement's ambit. The tax court declared the status of those French laws not by analyzing the text of the totalization agreement or the understanding of the parties, but by resorting to American dictionaries. That was legal error. Because insufficient consideration was given to the text and the official views of the United States and French governments, we reverse and remand.

I

A

In 42 U.S.C. § 433, Congress authorized the President to enter into social security coordination agreements—known as totalization agreements—with other countries, see id . § 433(a). 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 United States social-security taxation to the extent that they are subject to foreign social-security taxation. See 26 U.S.C. §§ 1401(c), 3101(c), 3111(c).

Section 433 treats contributions to different countries' social security systems as establishing “periods of coverage,” which are “period[s] of payment of contributions or [periods] based on wages for employment or on self-employment income[.]” 42 U.S.C. § 433(b)(2). Under a totalization agreement, employment creates a “period of coverage” under the social security system of one of the two signatories, but not both. Id. § 433(c)(1)(B)(I). That is, under Section 433, a citizen working in a foreign country makes payments to—and accrues periods of coverage under—only one social security system at a time.

Periods of coverage accrued under a foreign system may be combined with periods of coverage under the United States system “for the purposes of establishing entitlement” to United States social security benefits. 42 U.S.C. § 433(c)(1)(A). An individual may also qualify for separate benefit payments from multiple countries, in which case the benefits payable by each system are based on the proportion of the taxpayer's total periods of coverage accrued in each system. Id. § 433(c)(1)(C). Thus taxpayers whose careers take them from the United States to other countries do not suffer a diminution in their social security benefits upon retirement.

The United States generally taxes income earned by its citizens regardless of where the citizen resides, but a United States citizen may take a tax credit against his or her United States income tax liability for taxes paid to a foreign country. 26 U.S.C. §§ 901(a) & (b). 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 [42 U.S.C. § 433 ] shall not, under the income tax laws of the United States, be deductible by, or creditable against the income tax of, any such individual.

26 U.S.C. § 1401 note.

Under that provision, a foreign tax will not be eligible for a tax credit if it is paid (i) with respect to a period of employment covered under the social security system of a foreign country, and (ii) “in accordance with” the terms of a totalization agreement. See Erlich v. United States , 104 Fed.Cl. 12, 17 (2012) (A tax is not creditable under this section when the “payment is consistent with the obligation of the taxpayer under the [totalization] agreement.”).

B

In 1987, the United States and France entered into a social security totalization agreement (“Totalization Agreement”). See Agreement on Social Security Between the United States of America and the French Republic, March 2, 1987, 2260 U.N.T.S. 145, available at https://www.ssa.gov/international/Agreement_Texts/french.html. In Article 2(1), the Totalization Agreement identifies the laws of each country under which qualifying taxes may be paid. The covered United States laws are specified provisions of the Social Security Act and the Internal Revenue Code.¹ The covered French laws are eight enumerated categories of French social security laws.² The Totalization Agreement also covers taxes paid under “legislation which amends or supplements the laws specified[.]” Totalization Agreement, Art. 2(3).

This case involves two payments made to the French government: Contribution Sociale Géneralisee (General Social Contribution, abbreviated as CSG) and Contribution pour le Remboursement de la Dette Sociale (Contribution for the Repayment of Social Debt, abbreviated as CRDS). Both were enacted after the Totalization Agreement went into effect.

The CSG law was enacted in December 1990. It is codified in the Code de la Sécurité Sociale (Social Security Code), which is not an enumerated French law in Article Section 2(1)(b) of the Totalization Agreement, but includes most provisions governing social security benefits in France. CSG on employment income is withheld by the employer in the same manner as other social security taxes and appears on the employee's pay stub as a social contribution. Employers remit CSG directly to the Unions de Recouvrement des Cotisations de Sécurité Sociale et d'Allocations Familiales (Union for the Recovery of Social Security and Family Allowances Premiums). The Union is a network of private organizations, the main task of which is to collect the employee and employer social security contributions that finance France's social security system.

CSG revenues are allocated to five separate funds within the French government: the National Family Allowances Fund, compulsory health schemes, the Old-Age Solidarity Fund, the National Solidarity Fund for Autonomy for the elderly and disabled, and the Social Debt Redemption Fund. The Social Debt Redemption Fund is dedicated primarily to the retirement of debt incurred to fund French social security programs in the 1990s, but it also appears to finance certain payments made to France's general budget. The percentage of CSG devoted to the National Solidarity Fund and the Social Debt Redemption Fund is variable.

The CRDS law was enacted in January 1996 and is not codified. CRDS is withheld and collected in the same manner as CSG. CRDS proceeds go to the Social Debt Redemption Fund.

In 2001, the French government amended the 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.

C

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 United States citizens, the Eshels were liable for United States 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 Internal Revenue Service initially denied the entire foreign tax credit for both years, but later conceded that all of the claimed credits were...