ERLICH et al v. USA
Filing
59
PUBLISHED OPINION granting 38 Cross Motion; denying 13 Motion for Partial Summary Judgment; denying 30 Motion for Partial Summary Judgment. Signed by Judge Victor J. Wolski. (hri) Copy to parties.
In the United States Court of Federal Claims
No. 08-832T
(Filed March 2, 2012)
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ANDRE B. ERLICH and
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TERESA I. POZNANSKI-ERLICH, *
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Plaintiffs,
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v.
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THE UNITED STATES,
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Defendant.
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Partial summary judgment; foreign tax
credit, 26 U.S.C. § 901(b)(1); Section
317(b)(4) of the Social Security Amendments of 1977; Totalization Agreement,
42 U.S.C. § 433; plain meaning of “in
accordance with the terms”; loss of tax
credit for French social security payments
by U.S. citizen employed by non-American
corporation in France.
Stuart E. Horwich, Washington, D.C., for Plaintiff.
Michael J. Ronickher, Court of Federal Claims Section, Tax Division, Department of
Justice, with whom were John A. DiCicco, Acting Assistant Attorney General, Steven I. Frahm,
Chief, Court of Federal Claims Section, all of Washington, D.C., for Defendant. Mary M. Abate,
Washington, D.C., of counsel.
MEMORANDUM OPINION AND ORDER
WOLSKI, Judge.
The motions before the Court concern whether the plaintiffs, married United States
citizens who jointly file their tax returns, are allowed foreign tax credits under 26 U.S.C.
§ 901(b)(1) for certain taxes paid to France during tax years 2004 through 2006. Both sides have
moved for partial summary judgment. For purposes of these motions, five different categories of
these taxes are assumed to be social security taxes, 1 requiring the Court to determine whether
Section 317(b)(4) of the Social Security Amendments of 1977 (“SSA 1977”) precludes plaintiffs
from basing foreign tax credits on those particular taxes. The parties stipulate that, if Section
317(b)(4) does not apply, the government will not challenge plaintiffs’ claim that these taxes are
1
The parties have stipulated that, for purposes of this litigation, the French taxes maladie
(national health insurance contribution), vieillesse déplafonnée (uncapped pension contribution),
and vieillesse TA (pension contribution assessed on income within “Tranche A,” that is, up to the
social security ceiling) are social security taxes. See Jt. Stip. of Fact ¶¶ 1-3. Plaintiffs, for
purposes of these motions, assume that the contribution sociale généralisée (health services tax)
and contribution pour le remboursement de la dette sociale (tax to reduce health services debts)
are also social security taxes. See Pls.’ Second Mem. Supp. Mot. Partial Summ. J. at 4, 7.
creditable against their U.S. income tax liability under 26 U.S.C. § 901(b)(1). See Jt. Stip. of
Fact ¶ 4.
Section 317(b)(4) reads:
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.
SSA 1977 § 317(b)(4), Pub. L. No. 95-216, 91 Stat. 1509. Section 233 of the Social Security
Act, referenced in this provision, was added by Section 317(a) of SSA 1977, and authorizes
agreements with foreign countries to establish “totalization arrangements” concerning the social
security systems of our nation and those other countries. 42 U.S.C. § 433 (2006). Eligibility for
social security benefits in the U.S., and presumably other countries, is earned when individuals
accumulate a sufficient number of time periods of work credited under the social security
system. See 42 U.S.C. § 414(a). A totalization agreement with another country must allow
certain individuals who have contributed to the social security systems of both nations to
combine the respective “periods of coverage” under each for purposes of determining entitlement
to benefits, which are then prorated. 42 U.S.C. § 433(c)(1)(A), (C). By law, the agreement must
also provide:
(i) that employment . . . or any service which is recognized as
equivalent to employment . . . under [the subchapter of title 42
governing the federal social security program] or the social
security system of a foreign country which is a party to such
agreement, shall . . . result in a period of coverage under the
system established under this subchapter or under the system
established under the laws of such foreign country, but not under
both, and (ii) the methods and conditions for determining under
which system employment . . . or other service shall result in a
period of coverage . . . .
42 U.S.C. § 433(c)(1)(B) (emphasis added).
Since a “period of coverage” is defined as “a period of payment of contributions or a
period of earnings based on wages for employment” under a social security system, 42 U.S.C.
§ 433(b)(2), a totalization agreement between two countries has the result of ensuring that
individuals would not have to pay social security taxes based on the same wages to both
countries. Accordingly, another provision of Section 317(b) of SSA 1977 amended the tax code
to exempt wages from the employer and employee portions of the social security payroll tax
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“[d]uring any period in which there is in effect” a totalization agreement “to the extent that such
wages are subject under such agreement to taxes or contributions for similar purposes under the
social security system of such foreign country.” SSA 1977 § 317(b)(2); see also 26 U.S.C.
§§ 3101(c), 3111(c) (2000). 2
The foregoing is important because in 1987, an “Agreement on Social Security between
the United States and the French Republic” (“Totalization Agreement”), and an “Administrative
Arrangement” providing the procedural mechanisms for application of the Totalization
Agreement, were signed by representatives of the United States and France. Pls.’ Second Mem.
Supp. Mot. Partial Summ. J. (“Pls.’ Br.”), Ex. A. The two agreements went into effect July 1,
1988. See Def.’s Opp’n to Pls.’ Second Mot. Partial Summ. J. & Cross-Mot. Partial Summ. J.
(“Def.’s Br.”), App. D at A-20. The taxes giving rise to plaintiffs’ claimed tax credits were
levied by France upon the income of plaintiff Andre B. Erlich, a citizen of both France and the
United States. 3 After working for over ten years in the United States for a U.S. subsidiary of the
Dutch Antilles company Schlumberger Ltd., Mr. Erlich was reassigned to a French subsidiary of
the company in late 1997, and since that time plaintiffs have lived in France while Mr. Erlich
was employed by either French subsidiaries or the parent company. Def.’s Resp. to Pls.’ Prop.
Findings of Fact at 3-4. Thus, Mr. Erlich and his wife Teresa I. Poznanski-Erlich, a citizen of
both the United States and Germany, see id. at 2, were French residents during the tax years in
question, and the taxes at issue fell upon the income Mr. Erlich earned while working for a nonAmerican employer.
The fact that Mr. Erlich’s employers while he was working in France were non-American
is at the center of plaintiffs’ arguments concerning the availablity of the foreign tax credit.
Regardless of the existence of the Totalization Agreement, Mr. Erlich’s remuneration received
from these employers would not have been subject to U.S. social security taxes --- as these taxes
fall on wages received “with respect to employment,” 26 U.S.C. §§ 3101(a), 3111(a), and
“employment” outside the U.S. is defined as service performed “for an American employer.” 26
U.S.C. § 3121(b)(B) (2006). 4 As was noted above, the enabling legislation requires that
totalization agreements provide that after their effective dates, employment will “result in a
period of coverage” (and, hence, may result in taxes or contributions) under the social security
2
The social security tax provisions have subsequently been amended to clarify that a worker’s
wages are exempt from the U.S. taxes even when the worker has the option not to pay foreign
social security contributions and so chooses. These provisions now state that wages “shall be
exempt from the taxes imposed by this section to the extent that such wages are subject under
such agreement exclusively to the laws applicable to the social security system of such foreign
country.” 26 U.S.C. §§3101(c), 3111(c) (2006).
3
For purposes of these motions for partial summary judgment, the defendant assumes that the
facts regarding the citizenship, employment, and tax history of Mr. Erlich are true. See Def.’s
Resp. to Pls.’ Prop. Findings of Fact at 2-5.
4
A corporation is an American employer only when it is “organized under the laws of the
United States or of any State.” 26 U.S.C. § 3121(h)(5).
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systems of either the U.S. or its foreign agreement partner, “but not under both.” 42 U.S.C.
§ 433(c)(1)(B)(i). Plaintiffs maintain that since one of the two purposes of a totalization
agreement is to avoid the situation where both signatories to the agreement seek to impose social
security taxes on the same income of an individual, the agreement (for tax purposes) is relevant
only to individuals facing this double taxation. See Pls.’ Br. at 10-11. 5 Thus, plaintiffs argue, it
is only when absent the totalization agreement an individual would be subject to social security
taxes payable to both countries, that it can be said that taxes paid to just one country are “in
accordance with the terms of” the totalization agreement, under Section 317(b)(4). Pls.’ Br. at
18-19.
The Erlichs argue that “in accordance with the terms of” a totalization agreement means
“caused by,” as when the agreement is the “tie-breaker” deciding which of two nations seeking
to impose social security taxes is requited. See Pls.’ Opp’n to Def.’s Cross-Mot. for Partial
Summ. J. & Reply to Def.’s Resp. (“Pls.’ Reply”) at 4, 9, 12; Tr. (Jan. 28, 2010) (“Tr.”) at 26,
33. But they also argue that the purpose of Section 317(b)(4) was to address a circumstance in
which a totalization agreement assigns taxing authority to a nation which otherwise may not have
been imposing social security taxes --- the so-called detached worker situation. See Pls.’ Br. at
11-13. Under a “detached worker” rule, as plaintiffs describe it, a worker sent from one nation to
another to work for a relatively short period of time (up to five years under the Totalization
Agreement) can be subject to the social security taxes of just the former country --- even where
that country would not have taxed the individual in the absence of this term in a totalization
agreement. Id. at 11-13, 15-17. 6 Plaintiffs speculate, without reference to authority or evidence,
that Congress enacted Section 317(b)(4) to prevent foreign detached workers employed in the
U.S. from enjoying both an exemption from U.S. social security taxes and a tax credit based on
the social security taxes paid to another country. Id. at 12-13. It is not clear whether plaintiffs’
theory is that Congress intended to eliminate the tax credits only for detached workers employed
in the U.S. but used language broad enough to fortuitously capture individuals who pay a foreign
5
The Court notes that the other purpose, the “totalization” of benefits, was identified by
Congress in the SSA 1977 as the purpose of these agreements:
The President is authorized . . . to enter into agreements
establishing totalization arrangements . . . for the purposes of
establishing entitlement to and the amount of old-age, survivors,
disability, or derivative benefits based on a combination of an
individual’s periods of coverage under the social security system
established by this subchapter and the social security system of
such foreign country.
42 U.S.C. § 433(a).
6
The Erlichs explain that in 1983 Congress amended the definition of “employment” for
purposes of social security taxes, to include service deemed “employment” or its equivalent in a
totalization agreement. Pls.’ Br. at 17 (discussing 26 U.S.C. § 3121(b)). This extended taxing
authority over the wages of detached workers employed by non-American employers abroad.
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social security tax under a “tie-breaking” provision, or if it is that Congress first recognized the
double-benefit problem because of the detached workers and intentionally devised a provision
broad enough to eliminate the tax credits for all individuals who avoid paying the U.S. tax
because of a totalization agreement. But in any event, plaintiffs can point to nothing to support
their speculation that the detached worker situation motivated Congress to enact Section
317(b)(4). 7
At bottom, plaintiffs maintain that because “Mr. Erlich is not avoiding U.S. social
security tax in accordance with the provisions of a totalization agreement where both
jurisdictions assert social security taxing rights,” Pls.’ Br. at 18, this means that “Mr. Erlich’s
liability for French social security taxes exists wholly independent of the French Totalization
Agreement.” Id. at 9. Thus, plaintiffs assert that the social security taxes were not paid to
France “in accordance with the terms of” the Totalization Agreement. See Pls.’ Reply at 12.
And they argue that three revenue rulings incorrectly (and arbitrarily) interpreted section
317(b)(4) as applying where a totalization agreement exists or is in effect between the United
States and the country imposing the social security taxes. Pls.’ Br. at 15-17 & n.5 (discussing
Rev. Rul. 79-291, 1979-2 C.B. 273; Rev. Rul. 80-94, 1980-1 C.B. 170; Rev. Rul. 81-39, 1981-1
C.B. 396).
Among other things, the government argues that under normal usage the phrase “‘in
accordance with’ is much closer in meaning to ‘in harmony with’ than (as plaintiffs would have
it) ‘because of.’” Def.’s Reply in Supp. of Cross-Mot. (“Def.’s Reply”) at 7. Defendant notes a
dictionary definition of accordance as “agreement, conformity,” and not causality. Id. (citing
Webster’s New Collegiate Dictionary 50 (9th ed. 1986)). The government’s position is that
section 317(b)(4) “bars foreign tax credits where there is a totalization agreement in place.”
Def.’s Br. at 6. In addition to discussing the plain meaning of the text of Section 317(b)(4), the
context of the statutory scheme, and the language of the Totalization Agreement, id. at 14-20,
defendant also discusses its view of the purpose and policy behind Section 317(b)(4) and
totalization agreements, see id. at 20-23; Def.’s Reply at 5-6, which the Court finds unnecessary
to the resolution of these motions.
To construe a statute, a court’s “analysis begins with the language of the statute,” and
“where the statutory language provides a clear answer, it ends there as well.” Hughes Aircraft
Co. v. Jacobson, 525 U.S. 432, 438 (1999) (internal quotation and citations omitted). In deciding
whether sufficient clarity exists, “[t]he plainness or ambiguity of statutory language is
determined by reference to the language itself, the specific context in which that language is
used, and the broader context of the statute as a whole.” Robinson v. Shell Oil Co., 519 U.S.
337, 341 (1997). When statutory language is plain, a court must follow it, and should not hunt
for supposed purposes behind the statute that may rationalize contracting or expanding the plain
meaning of the text. See Henry E. & Nancy Horton Bartels Trust ex rel. Cornell Univ. v. United
7
Indeed, the fact that the tax code amendment to allow U.S. workers abroad to take advantage of
the detached worker provisions of totalization agreements, see supra n.6, was not enacted as part
of SSA 1977 would suggest that Congress was not focused on detached worker issues at the time
Section 317(b)(4) was enacted.
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States, 617 F.3d 1357, 1361 (Fed. Cir. 2010). Here, the Court has been given no reason to
believe that in Section 317(b)(4) Congress used the phrase “in accordance with” to mean
anything other than the usual “in agreement with” or “in conformity with.” See American
Heritage Dictionary of the English Language 9 (1976) (defining “accordance” as “[a]greement;
conformity”); Random House Dictionary of the English Language 9 (unabridged ed., 1973)
(same). 8 Under Section 317(b)(4), then, taxes are “paid by an[] individual to a[] foreign country
with respect to a[] period of employment . . . which is covered under the social security system
of such foreign country in accordance with the terms of” a totalization agreement when this
payment is consistent with the obligation of the taxpayer under the agreement.
Plaintiffs would have the Court interpret Section 317(b)(4) as if it read that credits and
deductions are lost only when the sole reason an individual did not pay U.S. social security taxes
was because a totalization agreement gave the foreign country the exclusive coverage of that
individual. This interpretation is predicated on the notion that totalization agreements govern the
treatment of only individuals who would otherwise be covered under the laws of both parties to
an agreement. This notion is not supported by the language of SSA 1977. As was discussed
above, a provision of the enabling legislation requires that totalization agreements assign to just
one of the signatories the power to impose social security taxes on the same work of an
individual. See 42 U.S.C. § 433(c)(1)(B)(i). This provision is not limited to situations in which
service is recognized as employment or its equivalent under the systems of both countries, but
rather extends to “employment or self-employment, or any service which is recognized as
equivalent to employment or self-employment under this subchapter or the social security system
of a foreign country which is a party to such agreement.” Id. (emphasis added).
Moreover, the Court notes that the provision of SSA 1977 that exempts individuals from
U.S. social security tax when taxing rights are assigned to a foreign country under a totalization
agreement expressed this by reference to “wages.” 26 U.S.C. §§ 3101(c), 3111(c). This is
understandable, since Congress need only exempt individuals who otherwise would be paying
U.S. social security taxes, and these fall on wages, see 26 U.S.C. §§ 3101(a), 3111(a) --- which
are in turn defined with reference to “employment” that is covered under our system. 26 U.S.C.
§§ 3101(a), 3111(a), 3121(a),(b). Had Congress intended to limit the loss of tax credits or
deductions under Section 317(b)(4) to individuals who would have paid U.S. social security
taxes but for a totalization agreement, it could have easily cross-referenced 26 U.S.C. §§ 3101(c)
and 3111(c) (which were added by Section 317(b)(2) of SSA 1977), or the terms “wages” or
“employment” as used in 26 U.S.C. § 3121. It chose none of these options, and instead used
language that does not even mention U.S. social security taxes avoided due to a totalization
agreement. The plain language employed by Congress is not at all suited for the task which
plaintiffs would assign to the provision.
Of course, whether the payment of social security taxes to a foreign country concerned a
period of coverage in conformity (or consistent) with a totalization agreement requires scrutiny
of the language of that agreement, as well. A particular totalization agreement may disclaim
8
See also Webster’s Third New International Dictionary of the English Language Unabridged
12 (1971) (defining “accordance” as “AGREEMENT, ACCORD”).
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coverage over individuals except when individuals are being taxed for the social security systems
of both parties to the agreement. Plaintiffs, however, concede that the work in question is
subject to only the French social security laws, under the language of the Totalization
Agreement. See Tr. at 29-30. Article 3(a) of the Totalization Agreement provides that the
agreement “shall apply to . . . persons who are or have been subject to the laws of either
Contracting State and who are nationals of either Contracting State.” Ex. A to Pls.’ Br. at 4.
Plaintiffs maintain that that Mr. Erlich fits this description. See Pls.’ Prop. Findings of
Uncontroverted Facts ¶¶ 2, 4-7. Article 5(1) of the Totalization Agreement provides that, subject
to exceptions that are not relevant, “a person employed within the territory of one of the
Contracting States shall, with respect to that employment, be subject to the laws of only that
Contracting State . . . .” Ex. A to Pls.’ Br. at 4. 9 Thus, under the terms of the agreement, Mr.
Erlich’s employment in France is not subject to the U.S. social security laws --- including
provisions in the tax code and future amendments. See id. at 2-3 (Totalization Agreement,
Article 2(1)(a) and 2(3)). Even were the tax code to be amended so that work abroad for nonAmerican corporations was subject to U.S. social security taxes, the Totalization Agreement
would continue to insulate individuals such as Mr. Erlich from the U.S. social security laws. It is
plain that the French social security taxes paid by Mr. Erlich for his work in France were paid for
periods of coverage in accordance with the terms of the Totalization Agreement. 10
For the foregoing reasons, defendant’s cross-motion for partial summary judgment is
GRANTED and plaintiffs’ motion for partial summary judgment is DENIED.
IT IS SO ORDERED.
s/ Victor J. Wolski
VICTOR J. WOLSKI
Judge
9
Some provisions of the Totalization Agreement apply only when an individual is subject to
social security taxes in both countries. See Ex. A to Pls.’ Br. at 5 (Article 6(4), concerning
airline personnel “who would otherwise be covered under the laws of both Contracting States”);
id. at 6 (Article 10, extending certain provisions to “apply to persons regardless of their
nationality who would otherwise be covered under the laws of both Contracting States”).
10
In any event, even were the Court to find the phrase “in accordance with the terms of” a
totalization agreement to be ambiguous, the House Committee on Ways and Means’ report on
the legislation explains that this provision, originally section 308(b)(4) of the House bill,
“provides that where an agreement is in . . . effect between the United States and another
country, an individual may not claim an income tax deduction or credit for the payment of the
foreign social security tax.” H.R. Rep. No. 95-702, pt. 1, at 89 (1977) (the ellipsis is inserted to
indicate an apparent type-setting error, as the first lines of the fifth and seventh paragraphs on
that page were obviously transposed).
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