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Flash Update
On August 5, 2016, the U.S. Court of Appeals for the D.C. Circuit reversed the Tax Court in Eshel v. Commissioner on the grounds that there was no evidentiary basis for the IRS position that CSG and CRDS are non-creditable social charges rather than creditable income taxes under the relevant bilateral treaties.  The Appeals Court remanded the case to the Tax Court to establish the positions of France and the United States on the interpretation of the relevant treaties as regards CSG and CRDS.

Introduction
This website represents a grass roots effort to share information with American taxpayers about the Internal Revenue Service’s treatment of French CSG and CRDS taxes and the efforts being undertaken to ensure that Americans are not unfairly subjected to double taxation.

What are CSG and CRDS?
The French government assesses contribution social généralisée (CSG) and contribution pour la remboursement de la dette sociale (CRDS) taxes on all types of income, including, but not limited to, wages, pensions, and investment income at the rate of 15.5% on investment income and 8% on professional earnings (wages and independent professional income).

The Internal Revenue Service’s Treatment of CSG and CRDS.
The IRS construes CSG and CRDS paid by U.S. taxpayers to France to be neither creditable as a foreign tax credit nor deductible as a foreign tax because it is a social charge.  It is fair to say that the IRS simply arrived at this conclusion internally as the U.S.-France income tax treaty does not address these taxes nor does any U.S. Treasury regulation or Private Letter Ruling. 

Until recently, to the best of our knowledge, the only official, publicly available statement of this position was on the website of the IRS office in Paris. This statement has now been removed.

The IRS’ position that CSG and CRDS are social taxes directly contradicts France’s position that CSG and CRDS are income taxes.  France’s highest court, the Conseil Constitutionnel, has concluded that these taxes are income taxes.  Additionally, France’s bilateral treaties with some countries, including the United Kingdom and Japan, expressly provide that CSG and CRDS are income taxes, not social charges.  Unlike U.S. social security, payment of CSG and CRDS does not give rise to any entitlement to any social benefits and so the IRS characterization is wrong. For more information, see attached memorandum.

In what appears to be a targeted campaign since about 2012, the IRS has taken aggressive steps to prevent Americans from claiming CSG and CRDS as foreign tax credits on their U.S. income tax returns by auditing hundreds, if not thousands, of returns of American taxpayers living in France and disallowing CSG and CRDS as a foreign tax credit.  The IRS has imposed 20% accuracy related penalties on any resulting assessments, even in cases where taxpayers have properly disclosed their position.

In July 2012, a group of U.S. tax professionals in France sent an open letter to officials in the Senate, House of Representatives, IRS, U.S. Embassy in France, French Embassy in Washington, and the OECD to explain why Americans living in France believe that CSG and CRDS should be allowed to be claimed as a foreign tax credit.  Sadly, this campaign had no effect and the IRS reply was no help.

Several American taxpayers have now sued the IRS regarding assessments for CSG and CRDS in U.S. courts.

Eshel v. Commissioner, U.S. Tax Court
In April 2014, the U.S. Tax Court ruled that CSG and CRDS are not creditable taxes in the case of Eshel v. Commissioner (Tax Court opinion).  The Eshel decision holds that Americans cannot claim CSG and CRDS as foreign tax credits against taxes related to wages and other professional earnings.

The Tax Court’s reasoning also increases the chance that the IRS could move to a broader position that CSG and CRDS assessed on passive investment income, such as interest, dividends, capital gains, and rental income, likewise cannot be claimed as a foreign tax credit.  On this point, the Eshel decision states:

The fact that a tax is imposed on unearned income . . . has little if any bearing on whether it is a social security tax . . . . A sovereign state is free to impose a social security tax on whatever tax base it thinks is proper. . .

To illustrate, Eshel means that Americans whose income is in the highest U.S. and French income tax brackets, will now pay:

58.9% in taxes on ordinary French investment income (at least 39.6% income tax + 3.8% U.S. net investment tax + 15.5% of CSG and CRDS);

59.6% in taxes on French professional earnings (at least 39.6% income tax + 8% CSG and CRDS + roughly 12% in additional French payroll taxes).

D.C. Circuit Appeal Decision
On August 5, 2016, the U.S. Court of Appeals for the D.C. Circuit reversed the Tax Court in Eshel v. Commissioner on the grounds that there was no evidentiary basis for the IRS position that CSG and CRDS are non-creditable social charges rather than creditable income taxes under the relevant bilateral treaties (Appeals Court opinion).  The Appeals Court severely criticized the Commissioner’s handling of the litigation and in particular his failure to provide the position of the United States on interpretation of the relevant bilateral treaties, whereas the taxpaying petitioners had provided evidence of France’s position.

Tax Court Remand
Although the Court of Appeals accepted that the evidence produced by the taxpayers could show the taxes to be creditable income taxes, the Court nonetheless sent the case back to the Tax Court to try to obtain official pronouncements of the French government (as well as the official U.S. State Department view) on specific terms in the U.S./France social security agreement.  The Tax Court's decision should establish the rule for all American taxpayers as to whether CSG and CRDS are creditable as a foreign tax credit at least as relates to professional earnings.  Although Mr. Eshel has very little at stake personally, he has agreed to pursue the case in order to try to help establish settled law that is more favourable to taxpayers.

Call to Action – What To Do Next

The situation is now in a state of flux.  U.S. taxpayers who have not claimed a foreign tax credit for CSG and CRDS may be entitled to a refund of taxes paid to the IRS depending, in part, on their circumstances.  You may consult with your tax advisor or contact Mr. Stuart Horwich, whose firm has handled the Eshel case at seh@horwichlaw.com to discuss whether it would be possible to obtain an IRS refund.

Moreover, to continue the fight on remand in the Tax Court, we - concerned taxpayers organized around this issue - need to raise about $50,000 to cover legal fees as a matter of some urgency.  To date, Mr. Horwich has handled this case on a pro bono basis in Tax Court and at greatly reduced costs on appeal getting the Tax Court's decision reversed.  As this issue is one that affects all Americans who pay, or could potentially pay, CSG and CRDS, it seems only right to seek the support of the broadest possible group to participate in the legal costs associated with the remand.  We need to be united on this issue and unity means everyone helping finance the case, especially as a favorable outcome will be a victory for all Americans facing these French taxes.

Funds raised will in no way benefit Mr. Eshel personally but rather will be deposited directly into the client trust account of the attorney handling the case, Mr. Horwich, and will be applied only to the costs of the Eshel case.

To contribute to the legal fees fund for the Eshel case, please follow the instructions on the attached form (link to donation page here).  Please also email Mr. Horwich’s firm at seh@horwichlaw.com when you make a contribution so that his accounting personnel can ensure that your funds are received and properly applied.  Please include your name, physical address and phone number in your email.

If contributions in excess of the costs of the case are received, a pro rata refund will be made.

If you have questions or wish to share information about CSG and CRDS, please send us an email at contact@american-taxpayers-csg.org.