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By Edward Tanenbaum
Alston & Bird LLP, New York, NY
A recent Tax Court decision1 addressed the tax consequences to a Finnish citizen of wages she received while working as an employee in the United States on behalf of her country's Permanent Mission to the United Nations.
The case involves Sole Abrahamsen, a Finnish citizen, who began working at Finland's Permanent Mission to the United Nations back in the early 1980s. In the mid-to-late 1980s, through 1992, she worked at a Finnish bank at which time she applied for and received permanent resident status, i.e., the Green Card. Although not clear, the taxpayer may have had a G-1 non-immigrant visa at the time of her employment with the Finnish Permanent Mission and an E-1 visa at the time she applied for the Green Card.
As a condition to obtaining the Green Card, she filed an immigration form I-508, Waiver of Rights, Privileges, Exemptions and Immunities, agreeing to waive all of her rights, privileges, exemptions, and immunities otherwise available to her as the prior holder of a non-immigrant visa.
In the mid-1990s, the taxpayer returned to work at the Finnish Mission.
The taxpayer took the position in the later years that the wages from her work at the Mission were excluded under §893 of the Internal Revenue Code. That section provides for an exemption for wages earned by an employee of a foreign government or international organization for services rendered for that entity, provided that:
(1) The person is not a U.S. citizen;
(2) The services performed are similar to those services performed by U.S. government employees abroad; and
(3) The foreign government provides a corresponding exemption to U.S. government employees performing similar services in that country.
Alternatively,2 the taxpayer took the position that Article 19 of the U.S.-Finland Income Tax Treaty precludes taxability of her wages earned for governmental services rendered to the Finnish Mission. That article essentially provides that remuneration received by an individual in respect of services rendered to a Contracting State (or subdivision or local authorities) will be taxed only in that State. However, such remuneration will be taxable only in the Contracting State in which the individual service provider is resident if either the individual is a national of that State or if the individual did not become a resident of that State solely for purposes of rendering the services.
Dealing first with the issue of §893, Judge Lauber pointed out that once the taxpayer applied for lawful permanent residence status in the United States, she was required to (and did) waive all rights, privileges, exemptions, and immunities that she otherwise would have had as a non-immigrant, citing Ying v. Commissioner, 99 T.C . 273 (1992), aff'd in part, rev'd in part, 25 F.3d 84 (2d Cir. 1994). Thus, the taxpayer was no longer eligible to claim the §893 exemption for her wages received from the Finnish Mission.
Focusing on the treaty argument advanced by the taxpayer, Judge Lauber pointed out that, independent of the exemption provided by Article 19 of the treaty, the taxpayer, as a lawful permanent resident, was bound by the saving clause of the treaty which typically overrides any entitlement to benefits under a treaty in the case of U.S. citizens and U.S. residents.
The particular saving clause is interesting although not uncommon as it appears in the current U.S. Model Treaty and in a number of other treaties, e.g., the treaty with Germany. It initially provides for taxation of U.S. residents and U.S. citizens notwithstanding any other provision in the treaty. However, the saving clause does not apply to limit the benefits conferred by a number of treaty articles and, in particular, by Article 19 of the treaty, provided that the individual is neither a U.S. citizen nor has been admitted for permanent residence in the United States.
So, if the individual were to be treated as a U.S. resident under the "substantial presence" test, the saving clause would not apply to limit the benefits of Article 19 and Article 19 would take precedence. However, this benefit did not apply to the taxpayer in the Abrahamsen case since she became a resident under the lawful permanent resident (Green Card) test for determining U.S. tax residency. As such, the basic saving clause applied to the particular taxpayer and Article 19 become subservient to the saving clause.
The case involves the interplay between §893 and a comparable treaty provision and highlights the importance of carefully reading the saving clause of the particular treaty.
This commentary also will appear in the September 2014 issue of the Tax Management International Journal. For more information, in the Tax Management Portfolios, see Dick, Nikravesh, and Maloney, 913 T.M., U.S. Income Taxation of Foreign Governments, International Organizations, Central Banks, and Their Employees, Williamson, 943 T.M., U.S. Income Tax Treaties -- Provisions Relating Only to Individuals, and in Tax Practice Series, see ¶7150, U.S. Persons -- Worldwide Taxation, ¶7160, U.S. Income Tax Treaties..
Copyright©2014 by The Bureau of National Affairs, Inc.
1Abrahamsen v. Commissioner, 142 T.C. No. 22 (2014).
2 The taxpayer also argued that her wages were exempt under the Vienna Convention on Consular Relations and under the International Organization Immunities Act but the court dismissed these claims since the taxpayer was a permanent resident alien not working in a diplomatic position.
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