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By Edward Tanenbaum
Alston & Bird LLP, New York, NY
If you want to abandon "lawful permanent resident" status, or if you want to rely on a treaty tie-breaker to claim nonresident status, you need to take some affirmative steps. Unfortunately, the taxpayer in Gerd Topsnik v. Commissioner1 did not do so.
The taxpayer, a German citizen, applied for and received lawful permanent resident status (a "Green Card") back in 1977. Between that year and 2003, he took a number of steps to declare himself at the customs border to be a lawful permanent resident and he even renewed his status as such in 2003. In 2010, he filed Form I-407, formally abandoning (and surrendering) his Green Card.
In 2004, the taxpayer sold his stock in a California corporation on the installment basis with a down payment being made in 2004 and installment payments being made in each of the years 2005–2009. Though not timely, he filed U.S. tax returns reflecting installment payments in 2004 and 2005 but did not file U.S. tax returns for 2006–2009. Thereafter, the IRS made substitute returns on his behalf for each of those years. The taxpayer subsequently filed for a refund of his 2005 taxes and filed nonresident income tax returns for the 2006–2009 period showing no taxes due in each year.
The taxpayer's position was that, although he did not formally abandon his Green Card until 2010 (by the filing of Form 1-407), he had "informally" abandoned it as early as 2003 (when he sold a Hawaiian residence and moved back to Germany) and that he was a German resident in all of the years in issue. Thus, he claimed that he was not subject to tax under Articles 4 and 13 of the U.S.–Germany Income Tax Treaty ("Treaty"). The IRS, on the other hand, claimed that he was a U.S. tax resident by virtue of not having formally abandoned his Green Card until 2010 and that, based on all of the facts, he was not a German resident in any of the years in question. Thus, according to the IRS, the taxpayer was subject to U.S. tax on his installment sale.
The court sided with the IRS and did not find for the taxpayer because, well, sometimes the facts (and the rules) get in the way.
In response to the taxpayer's position that he informally "abandoned" his Green Card, the court quite correctly indicated that, while there may have been a basis for such an argument under immigration law, tax law controls. Indeed, regulations under Reg. §301.7701(b)-1(b)(3) are clear, to wit: lawful permanent resident status continues until that status is administratively or judicially abandoned; abandonment by the taxpayer is recognized only when INS Form I-407 (or an equivalent letter) is filed by the alien together with surrender of the Green Card.
The court also cited the House Ways and Means Committee report accompanying the House bill (which was generally adopted in conference leading up to the relevant part of the Deficit Reduction Act of 19842) to the effect that, even if an alien comes to the United States so infrequently that he is not legally entitled to permanent resident status for immigration purposes, he will continue to be a resident for tax purposes in the event that lawful permanent resident status is not officially lost or abandoned.
Having concluded that the taxpayer continued to be a U.S. resident for tax purposes during the years in issue, the court then turned to the second of the taxpayer's argument that he was a German resident under the Treaty and, therefore, not subject to U.S. tax under Articles 4 and 13 of the Treaty. Again, the facts got in the way.
Because of the saving clause of the Treaty, the court observed that the only way the taxpayer's argument could prevail (assuming the facts supported it) would be if he were treated as a German resident and successfully implicated the tie-breaker provision in the Treaty in favor of Germany.
In reviewing the taxpayer's German ties (both economic and social), the court noted that he was born in Germany, had a German driver's license and German passport, and owned a few parcels of improved real estate in Germany in which he had space available to him. While that may have been the beginnings of a good case under the "center of vital interests" test under the Treaty tie-breaker rule, the facts went south from there, to wit: a response by the German Competent Authority that the taxpayer was not registered in the community where the real estate premises were made available to him; that it was not clear whether he had a domicile or habitual residence in Germany; that the taxpayer, in fact, registered as a taxpayer with "limited" liability in Germany, i.e., a nonresident individual taxed in Germany only on German-source income.
Thus, he was not considered a resident of Germany because he was not liable to tax in Germany by reason of domicile or residence and was liable to tax only on income from sources in Germany. Therefore, the Treaty tie-breaker rule did not apply and his gain on the installment sale of the stock was taxable to him as a U.S. tax resident.
So, the lesson to be learned by all those who have Green Cards is that if they do not wish to continue that status for tax purposes, they must officially take affirmative steps to abandon lawful permanent residence status, absent which they continue to be treated as U.S. tax residents. (Of course, if they are "long-term residents," the mark-to-market exit tax of §877A needs to be considered when doing that.)
On the other hand, if an individual wishes to rely on a treaty tie-breaker provision to claim taxation as a nonresident alien of the United States, he needs to minimize his contacts in the United States and establish significant social and economic contacts in the foreign country, sufficient to establish him as a resident of that country under its internal law and sufficient to show that his center of vital interests lies in that country. However, if, at the same time, he wishes to continue holding the Green Card, then claiming U.S. nonresident status under a treaty jeopardizes that status for immigration purposes. Claiming U.S. nonresident status under a treaty also implicates the mark-to-market exit tax of §877A under the right set of facts.
This commentary also will appear in the January 2015 issue of the Tax Management International Journal. For more information, in the Tax Management Portfolios, see Bissell, 907 T.M., U.S. Income Taxation of Nonresident Alien Individuals, Williamson, 943 T.M., U.S. Income Tax Treaties -- Provisions Relating Only to Individuals, and in Tax Practice Series, see ¶7160, U.S. Income Tax Treaties.
1 143 T.C. No. 12 (Sept. 23, 2014).
2 Pub. L. No. 98–369, p. 142.
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