Updated September 30, 2026
Introduction – Aroeste v. United States
Who you are is different from what you must do! Filing the wrong kind of tax return (1040 instead of a 1040NR) will NOT convert a treaty nonresident into a U.S. resident for tax purposes!!
Where an individual is a resident for tax purposes is determined under the law of each country.
A treaty nonresident is an individual who:
– is a tax resident under the laws of both countries; and
– and is deemed by the treaty residency “tie break” provision to be a tax resident of one country but not the other.
– in the Aroste case, Mr. Aroeste was (1) a tax resident of both Mexico and the United States and (2) was deemed under the residency tie break section in the treaty to be a resident of Mexico.
Warning!! Warning!! Warning!!
Green Card holders who are “long term residents” and who file as “treaty non-residents” may be deemed to have expatriated and will be subjected to the exit tax rules to determine whether they are “covered expatriates”. Do NOT ever file as a treaty nonresident without proper advice.
(This does NOT seem to have been explored in the Aroeste case.)
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Background and context – The initital decision and the appeal
Initial Decision: February 12, 2023 – Hon Karen S. Crawford, United States Magistrate Judge
The upshot of this statutory and regulatory framework applicable to this action, in which tax treaties provide a potential escape hatch that excuses certain “United States persons” from filing FBARs, can be expressed as a 5-step process:
(1) Under 26 U.S.C. § 7701(b)(6), anyone allowed to permanently reside within the United States by virtue of U.S. immigration laws is a “lawful permanent resident” for tax purposes unless an applicable tax treaty allows that person to be treated as a resident of a foreign country for tax purposes only;
(2) Under 26 U.S.C. § 7701(b)(1)(A)(i), any “lawful permanent resident” is a “resident alien”;
(3) Under 31 C.F.R. § 1010.350(b)(2), any “resident alien” is a “resident of the United States”;
(4) Under 31 C.F.R. § 1010.350(b), Any “resident of the United States” is a “United States person” required to file an FBAR;
(5) Therefore, any person allowed to permanently reside in the United States by virtue of U.S. immigration laws must file an FBAR unless that person is entitled to be treated as a resident of a foreign country under a tax treaty.
https://www.casemine.com/judgement/us/63ec5ff0af09263801d0c383
Appeal: November 20. 2023 – Hon Athony J. Battaglia – United States District Court
The Court finds this unavailing. The Government’s argument does not refute the
plain language of the FBAR regulations, which explicitly invoke provisions of Title 26,
including the provision that requires consideration of an individual’s status under an
applicable tax treaty for the purpose of determining whether an individual is a “United
States person” subject to FBAR filing. Specifically, Title 31 C.F.R. § 1010.350, which
governs reporting of FBARs, subsection (b)(2) states that a “resident of the United States
is an individual who is a resident alien under 26 U.S.C. 7701(b) and the regulations
thereunder . . . .” The Government fails to cite to any case law or statue indicating
otherwise, and the Court finds none. As such, because the Court finds the Treaty applicable to Aroeste, then the residence provisions of the Treaty, or the “tie breaker rules” dictates whether Aroeste may be treated as a nonresident alien.
– page 14
The summary of Aroeste is found in the conclusion …
IV. CONCLUSION
Based on the foregoing, the Court DENIES the Government’s motion for summary judgment and GRANTS IN PART AND DENIES IN PART Aroeste’s motion for summary judgment.
Specifically, the Court finds Aroeste is a United States person, but ceased to be treated as a lawful permanent resident of the United States because he commenced to be treated as a resident of Mexico under the Treaty, did not waive the benefits of such Treaty, and notified the Secretary of the commencement of such treatment. Thus, Aroeste is not subject to FBAR penalties. The Government must discharge Aroeste’s liability for penalties still outstanding for the non-filing of a FBAR for the years 2012 and 2013 pursuant to 31 U.S.C. § 5321, totaling $21,851.76, and must refund Aroeste’s payment of $3,004.
The Court further finds Aroeste untimely notified the Secretary of the commencement of treatment as a resident of Mexico, and thus is subject to penalties pursuant to I.R.C. § 6712(a) equal to $1,000 per failure to timely report his Treaty position, totaling $2,000 for 2012 and 2013. The Government may proceed accordingly in this later regard.
The Court ORDERS the Clerk of Court to CLOSE THIS CASE.
Aroeste-v-United-States-Order-Nov-2023
Government abandons appeal – May 3, 2024
As announced by Ruchelman law:
By withdrawing its appeal, the government has shielded itself from a potentially adverse ruling by the appellate court, ultimately reducing the precedential value for similarly situated taxpayers.
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Purpose of this post
The purpose of this post is to compile both the Aroeste decision and the relevant provisions of the statutes, regulations and treaty in one place for easier reference.
In January of 2024 the U.S. Government announced that it would appeal the decision in Aroeste. On May 3, 2024 the Government withdrew the appeal.
At present (subject to a contrary ruling in another jurisdiction) the Aroeste case stands for these principles:
1. The determination of whether an individual is a “resident” for the purposes of Treasury Reg 1010.350 is initially determined by Internal Revenue Code 7701(b). Those who are “residents” under 7701(b) can be deemed to be nonresidents under the residency tie break provisions of a treaty. (Although Mr. Aroste was a Green Card holder, there is no reasons why those who are “residents” under the “substantial presence test” should not be able to use treaty “tie break” provisions to avoid “resident” status. The context of Aroste was that he had a Green Card.)
2. A Green Card holder who is treated as a nonresident under a tax treaty who gives “notice to the Secretary” (even if late notice) is NOT a “U.S. Person” for the purposes of the FBAR regulation 1010.350 and is NOT required to file an FBAR.
3. Notice can be given to the government retrospectively. In 2016 Mr. Aroeste notified the government that he was a treaty nonresident pursuant to 7701(b)(6) and the provisions of the U.S. Mexico Tax Treaty.
4. Having filed the wrong kind of tax return. (1040 instead of 1040NR) does NOT waive the treaty benefits!
5. Notice 2009-85 may not be valid because of a failure to meet the APA requirements for notice and comment. (Although this is I believe a peripheral issue in the case.)
Al link to the Aroeste decision is here …
Aroeste-v-United-States-Order-Nov-2023
Part A – The FBAR Statute – 31 U.S.C. 5314
31 U.S. Code § 5314 – Records and reports on foreign financial agency transactions
(a) Considering the need to avoid impeding or controlling the export or import of monetary instruments and the need to avoid burdening unreasonably a person making a transaction with a foreign financial agency, the Secretary of the Treasury shall require a resident or citizen of the United States or a person in, and doing business in, the United States, to keep records, file reports, or keep records and file reports, when the resident, citizen, or person makes a transaction or maintains a relation for any person with a foreign financial agency. The records and reports shall contain the following information in the way and to the extent the Secretary prescribes:
(1) the identity and address of participants in a transaction or relationship.
(2) the legal capacity in which a participant is acting.
(3) the identity of real parties in interest.
(4) a description of the transaction.
(b) The Secretary may prescribe—
(1) a reasonable classification of persons subject to or exempt from a requirement under this section or a regulation under this section;
(2) a foreign country to which a requirement or a regulation under this section applies if the Secretary decides applying the requirement or regulation to all foreign countries is unnecessary or undesirable;
(3) the magnitude of transactions subject to a requirement or a regulation under this section;
(4) the kind of transaction subject to or exempt from a requirement or a regulation under this section; and
(5) other matters the Secretary considers necessary to carry out this section or a regulation under this section.
(c) A person shall be required to disclose a record required to be kept under this section or under a regulation under this section only as required by law.
(Pub. L. 97–258, Sept. 13, 1982, 96 Stat. 997.)
Regulations under 1010.350 – Who is a U.S. person?
https://www.law.cornell.edu/cfr/text/31/1010.350
Part B – The FBAR Regulation
Regulations under 1010.350 – Who is a U.S. person?
https://www.law.cornell.edu/cfr/text/31/1010.350
31 CFR § 1010.350 – Reports of foreign financial accounts
§ 1010.350 Reports of foreign financial accounts.
(a) In general. Each United States person having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country shall report such relationship to the Commissioner of Internal Revenue for each year in which such relationship exists and shall provide such information as shall be specified in a reporting form prescribed under 31 U.S.C. 5314 to be filed by such persons. The form prescribed under section 5314 is the Report of Foreign Bank and Financial Accounts (TD–F 90–22.1), or any successor form. See paragraphs (g)(1) and (g)(2) of this section for a special rule for persons with a financial interest in 25 or more accounts, or signature or other authority over 25 or more accounts.
(b) United States person. For purposes of this section, the term “United States person” means—
(1) A citizen of the United States;
(2) A resident of the United States. A resident of the United States is an individual who is a resident alien under 26 U.S.C. 7701(b) and the regulations thereunder but using the definition of “United States” provided in 31 CFR 1010.100(hhh) rather than the definition of “United States” in 26 CFR 301.7701(b)–1(c)(2)(ii); and
Part C – IRC 7701(b)(6)
6) Lawful permanent resident For purposes of this subsection, an individual is a lawful permanent resident of the United States at any time if—
(A) such individual has the status of having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws, and
(B) such status has not been revoked (and has not been administratively or judicially determined to have been abandoned).
An individual shall cease to be treated as a lawful permanent resident of the United States if such individual commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country, does not waive the benefits of such treaty applicable to residents of the foreign country, and notifies the Secretary of the commencement of such treatment.
https://www.law.cornell.edu/uscode/text/26/7701
Part D – IRC 7701(b)(6) Treasury Regulations
See the Appendix below.
https://www.law.cornell.edu/cfr/text/26/301.7701(b)-7
Part E – The U.S. Mexico Tax Treaty
ARTICLE 4
Residence
1. For the purposes of this Convention, the term “resident of a Contracting State” means any person
who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation, or any other criterion of a similar nature. However, this term does not include any person who is liable to tax in that State in respect only of income from sources in that State.
2. Where by reason of the provisions of paragraph 1, an individual is a resident of both Contracting States, then his residence shall be determined as follows:
a) he shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (center of vital interests);
b) if the State in which he has his center of vital interests cannot be determined, or if he does not have a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode;
c) if he has an habitual abode in both States or in neither of them, he shall be deemed to
be a resident of the State of which he is a national;
d) in any other case, the competent authorities of the Contracting States shall settle the
question by mutual agreement.
https://www.irs.gov/pub/irs-trty/mexico.pdf
Note that commentary on the OECD Model Tax Treaty can be used to interpret the meaning of the treaty.
John Richardson – Follow me on Twitter @Expatrationlaw
Appendix A – 26 CFR § 301.7701(b) – Who is a U.S. tax “resident”?.
26 CFR § 301.7701(b)-1 – Resident alien.
https://www.law.cornell.edu/cfr/text/26/301.7701(b)-1
§ 301.7701(b)-1 Resident alien.
(a) Scope. Section 301.7701(b)-1(b) provides rules for determining whether an alien individual is a lawful permanent resident of the United States. Section 301.7701(b)-1(c) provides rules for determining if an alien individual satisfies the substantial presence test. Section 301.7701(b)-2 provides rules for determining when an alien individual will be considered to maintain a tax home in a foreign country and to have a closer connection to that foreign country. Section 301.7701(b)-3 provides rules for determining if an individual is an exempt individual because of his or her status as a foreign government-related individual, teacher, trainee, student, or professional athlete. Section 301.7701(b)-3 also provides rules for determining whether an individual may exclude days of presence in the United States because the individual was unable to leave the United States because of a medical condition. Section 301.7701(b)-4 provides rules for determining an individual’s residency starting and termination dates. Section 301.7701(b)-5 provides rules for applying section 877 to a nonresident alien individual. Section 301.7701(b)-6 provides rules for determining the taxable year of an alien. Section 301.7701(b)-7 provides rules for determining the effect of these regulations on rules in tax conventions to which the United States is a party. Section 301.7701(b)-8 provides procedural rules for establishing that an individual is a nonresident alien. Section 301.7701(b)-9 provides the effective dates of section 7701(b) and the regulations under that section. Unless the context indicates otherwise, the regulations under §§ 301.7701(b)-1 through 301.7701(b)-9 apply for purposes of determining whether a United States citizen is also a resident of the United States. (This determination may be relevant, for example, to the application of section 861(a)(1) which treats income from interest-bearing obligations of residents as income from sources within the United States.) The regulations do not apply and §§ 1.871-2 and 1.871-5 of this chapter continue to apply for purposes of the bona fide residence test of section 911. See § 1.911-2(c) of this chapter. For purposes of determining whether an individual is a resident of the United States for estate and gift tax purposes, see § 20.0-1(b)(1) and (2) and § 25.2501-1(b) of this chapter, respectively.
(b) Lawful permanent resident—(1) Green card test. An alien is a resident alien with respect to a calendar year if the individual is a lawful permanent resident at any time during the calendar year. A lawful permanent resident is an individual who has been lawfully granted the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws. Resident status is deemed to continue unless it is rescinded or administratively or judicially determined to have been abandoned.
(2) Rescission of resident status. Resident status is considered to be rescinded if a final administrative or judicial order of exclusion or deportation is issued regarding the alien individual. For purposes of this paragraph, the term “final judicial order” means an order that is no longer subject to appeal to a higher court of competent jurisdiction.
(3) Administrative or judicial determination of abandonment of resident status. An administrative or judicial determination of abandonment of resident status may be initiated by the alien individual, the Immigration and Naturalization Service (INS), or a consular officer. If the alien initiates this determination, resident status is considered to be abandoned when the individual’s application for abandonment (INS Form I-407) or a letter stating the alien’s intent to abandon his or her resident status, with the Alien Registration Receipt Card (INS Form I-151 or Form I-551) enclosed, is filed with the INS or a consular officer. If INS replaces any of the form numbers referred to in this paragraph or § 301.7701(b)-2(f), refer to the comparable INS replacement form number. For purposes of this paragraph, an alien individual shall be considered to have filed a letter stating the intent to abandon resident status with the INS or a consular office if such letter is sent by certified mail, return receipt requested (or a foreign country’s equivalent thereof). A copy of the letter, along with proof that the letter was mailed and received, should be retained by the alien individual. If the INS or a consular officer initiates this determination, resident status will be considered to be abandoned upon the issuance of a final administrative order of abandonment. If an individual is granted an appeal to a federal court of competent jurisdiction, a final judicial order is required.
(c) Substantial presence test—(1) In general. An alien individual is a resident alien if the individual meets the substantial presence test. An individual satisfies this test if he or she has been present in the United States on at least 183 days during a three year period that includes the current year. For purposes of this test, each day of presence in the current year is counted as a full day. Each day of presence in the first preceding year is counted as one-third of a day and each day of presence in the second preceding year is counted as one-sixth of a day. For purposes of this paragraph, any fractional days resulting from the above calculations will not be rounded to the nearest whole number. (See § 301.7701(b)-9(b)(2) for transitional rules for calendar years 1985 and 1986.)
(2) Determination of presence—(i) Physical presence. For purposes of the substantial presence test, an individual shall be treated as present in the United States on any day that he or she is physically present in the United States at any time during the day. (But see § 301.7701(b)-3 relating to days of presence that may be excluded.)
(ii) United States. For purposes of section 7701(b) and the regulations thereunder, the term United States when used in a geographical sense includes the states and the District of Columbia. It also includes the territorial waters of the United States and the seabed and subsoil of those submarine areas which are adjacent to the territorial waters of the United States and over which the United States has exclusive rights, in accordance with international law, with respect to the exploration and exploitation of natural resources. It does not include the possessions and territories of the United States or the air space over the United States.
(3) Current year. The term current year means any calendar year for which an alien individual is determining his or her resident status.
(4) Thirty-one day minimum. If an individual is not physically present for more than 30 days during the current year, the substantial presence test will not be applied for that year even if the three-year total is 183 or more days. For purposes of the substantial presence test, it is irrelevant that an individual was not present for more than 30 days in the first or second year preceding the current year.
(d) Application of section 7701(b) to the possessions and territories—(1) Application to aliens for purposes of mirror systems. Section 7701(b) provides the basis for determining whether an alien individual is a resident of a United States possession or territory that administers income tax laws that are identical (except for the substitution of the name of the possession or territory for the term “United States” where appropriate) to those in force in the United States, for purposes of applying such laws with respect to income tax liability incurred to such possession or territory.
(2) Non-application for bona fide resident determination. Section 7701(b) does not provide the basis for determining whether an individual (including an alien individual) is a bona fide resident of a United States possession or territory for Federal income tax purposes. For the applicable rules for making this determination, see section 937(a) and § 1.937-1 of this chapter.
(e) Examples. This section may be illustrated by the following examples:
Example 1.
B, an alien individual, is present in the United States for 122 days in the current year. He was present in the United States for 122 days in the first preceding calendar year and for 122 days in the second preceding calendar year. In determining his status for the current year, B counts all 122 days in the United States in the current year plus 1/3 of the 122 days in the United States in the first preceding calendar year (40 2/3 days) and 1/6 of the 122 days in the United States during the second preceding calendar year (20 1/3 days). The total of 122 + 40 2/3 + 20 1/3 equals 183 days. B meets the substantial presence test and is a resident alien for the current year.
Example 2.
C, an alien individual, is present in the United States for 25 days during the current year. She was present in the United States for 365 days during the first preceding year and 365 days during the second preceding year. The substantial presence test does not apply because C is present in the United States for fewer than 31 days during the current year.
Example 3.
D, an alien individual, is present in the United States for 170 days during the current year. He was present in the United States for 30 days during the first preceding year and 30 days during the second preceding year. In determining his status for the current year, D counts all 170 days in the United States in the current year plus 1/3 of the 30 days in the United States in the first preceding calendar year (10 days) and 1/6 of the 30 days in the United States during the second preceding calendar year (5 days). The total of 170 + 10 + 5 equals 185 days. D meets the substantial presence test and is a resident alien for the current year notwithstanding the fact that he was present in the United States for fewer than 31 days in each of the two preceding years.
[T.D. 8411, 57 FR 15242, Apr. 27, 1992; 57 FR 28612, June 26, 1992; 57 FR 37190, Aug. 18, 1992, as amended by T.D. 9194, 70 FR 18947, Apr. 11, 2005; T.D. 9391, 73 FR 19377, Apr. 9, 2008]
§ 301.7701(b)-7 Coordination with income tax treaties.
https://www.law.cornell.edu/cfr/text/26/301.7701(b)-7
26 CFR § 301.7701(b)-7 – Coordination with income tax treaties.
(a) Consistency requirement—(1) Application. The application of this section shall be limited to an alien individual who is a dual resident taxpayer pursuant to a provision of a treaty that provides for resolution of conflicting claims of residence by the United States and its treaty partner. A “dual resident taxpayer” is an individual who is considered a resident of the United States pursuant to the internal laws of the United States and also a resident of a treaty country pursuant to the treaty partner’s internal laws. If the alien individual determines that he or she is a resident of the foreign country for treaty purposes, and the alien individual claims a treaty benefit (as a nonresident of the United States) so as to reduce the individual’s United States income tax liability with respect to any item of income covered by an applicable tax convention during a taxable year in which the individual was considered a dual resident taxpayer, then that individual shall be treated as a nonresident alien of the United States for purposes of computing that individual’s United States income tax liability under the provisions of the Internal Revenue Code and the regulations thereunder (including the withholding provisions of section 1441 and the regulations under that section in cases in which the dual resident taxpayer is the recipient of income subject to withholding) with respect to that portion of the taxable year the individual was considered a dual resident taxpayer.
(2) Computation of tax liability. If an alien individual is a dual resident taxpayer, then the rules on residency provided in the convention shall apply for purposes of determining the individual’s residence for all purposes of that treaty.
(3) Other Code purposes. Generally, for purposes of the Internal Revenue Code other than the computation of the individual’s United States income tax liability, the individual shall be treated as a United States resident. Therefore, for example, the individual shall be treated as a United States resident for purposes of determining whether a foreign corporation is a controlled foreign corporation under section 957 or whether a foreign corporation is a foreign personal holding company under section 552. In addition, the application of paragraph (a)(2) of this section does not affect the determination of the individual’s residency time periods under § 301.7701(b)–4.
(4) Special rules for S corporations. [Reserved]
(b) Filing requirements. An alien individual described in paragraph (a) of this section who determines his or her U.S. tax liability as if he or she were a nonresident alien shall make a return on Form 1040NR on or before the date prescribed by law (including extensions) for making an income tax return as a nonresident. The individual shall prepare a return and compute his or her tax liability as a nonresident alien. The individual shall attach a statement (in the form required in paragraph (c) of this section) to the Form 1040NR. The Form 1040NR and the attached statement, shall be filed with the Internal Revenue Service Center, Philadelphia, PA 19255. The filing of a Form 1040NR by an individual described in paragraph (a) of this section may affect the determination by the Immigration and Naturalization Service as to whether the individual qualifies to maintain a residency permit.
(c) Contents of statement—(1) In general—(i) Returns due after December 15, 1997. The statement filed by an individual described in paragraph (a)(1) of this section, for a return relating to a taxable year for which the due date (without extensions) is after December 15, 1997, must be in the form of a fully completed Form 8833 (Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)) or appropriate successor form. See section 6114 and § 301.6114–1 for rules relating to other treaty-based return positions taken by the same taxpayer.
(ii) Earlier returns. For returns relating to taxable years for which the due date for filing returns (without extensions) is on or before December 15, 1997, the statement filed by the individual described in paragraph (a)(1) of this section must contain the information in accordance with paragraph (c)(1) of this section in effect prior to December 15, 1997 (see § 301.7701(b)–7(c)(1) as contained in 26 CFR part 301, revised April 1, 1997).
(2) Controlled foreign corporation shareholders. If the taxpayer who claims a treaty benefit as a nonresident of the United States is a United States shareholder in a controlled foreign corporation (CFC), as defined in section 957 or section 953(c), and there are no other United States shareholders in that CFC, then for purposes of paragraph (c)(1) of this section, the approximate amount of subpart F income (as defined in section 952) that would have been included in the taxpayer’s income may be determined based on the audited foreign financial statements of the CFC.
(3) S corporation shareholders. [Reserved]
(d) Relationship to section 6114(a) treaty-based return positions. The statement required by paragraph (b) of this section will be considered disclosure for purposes of section 6114 and § 301.6114–1(a), but only if the statement is in the form required by paragraph (c) of this section. If the taxpayer fails to file the statement required by paragraph (b) of this section on or before the date prescribed in paragraph (b) of this section, the taxpayer will be subject to the penalties imposed by section 6712. See section 6712 and § 301.6712–1.
(e) Examples. The following examples illustrate the application of this section:
Example 1.
B, an alien individual, is a resident of foreign country X, under X’s internal law. Country X is a party to an income tax convention with the United States. B is also a resident of the United States under the Internal Revenue Code. B is considered to be a resident of country X under the convention. The convention does not specifically deal with characterization of foreign corporations as controlled foreign corporations or the taxability of United States shareholders on inclusions of subpart F income, but it provides, in an “Other Income” article similar to Article 21 of the 1981 draft of the United States Model Income Tax Convention (U.S. Model), that items of income of a resident of country X that are not specifically dealt with in the convention shall be taxable only in country X. B owns 80% of the one class of stock of foreign corporation R. The remaining 20% is owned by C, a United States citizen who is unrelated to B. In 1985, corporation R’s only income is interest that is foreign personal holding company income under § 1.954A-2 of this chapter. Because the United States-X income tax convention does not deal with characterization of foreign corporations as controlled foreign corporations, United States internal income tax law applies. Therefore, B and C are United States shareholders within the meaning of § 1.951–1(g) of this chapter, corporation R is a controlled foreign corporation within the meaning of § 1.957–1 of this chapter, and corporation R’s income is included in C’s income as subpart F income under § 1.951–1 of this chapter. B may avoid current taxation on his share of the subpart F inclusion by filing as a nonresident (i.e., by following the procedure in § 301.7701(b)–7(b)).
Example 2.
The facts are the same as in Example 1, except that B also earns United States source dividend income. The United States-X income tax convention provides that the rate of United States tax on United States source dividends paid to residents of country X shall not exceed 15 percent of the gross amount of the dividends. B’s United States tax liability with respect to the dividends would be smaller if he were treated as a resident alien, subject to tax on a net basis (i.e., after the allowance of deductions) than if he were treated as a nonresident alien. If, however, B chooses to file as a nonresident in order to claim treaty benefits with respect to his share of R’s subpart F income, his overall United States tax liability, including the portion attributable to the dividends, must be determined as if he were a nonresident alien.
Example 3.
C, a married alien individual with three children, is a resident of foreign country Y, under Y’s internal law. Country Y is a party to an income tax convention with the United States. C is also a resident of the United States under the Internal Revenue Code. C is considered to be a resident of country Y under the convention. The convention specifically covers, among other items of income, personal services income, dividends and interest. C is sent by her country Y employer to work in the United States from January 1, 1985 until December 31, 1985. During 1985, C also earns United States source dividends and interest and incurs mortgage interest expenses on her personal residence. The United States-Y treaty provides that remuneration for personal services performed in the United States by a country Y resident is exempt from United States tax if, among other things, the individual performing such services is present in the United States for a period that is not in excess of 183 days. The treaty provides that the rate of United States tax on United States source dividends paid to residents of Y shall not exceed 15 percent of the gross amount of the dividends and it exempts residents of Y from United States tax on United States source interest. In filing her 1985 tax return, C may choose to file either as a resident alien without claiming any treaty benefits or as a nonresident alien if she desires to claim any treaty benefit. C files as a nonresident (i.e. by following the procedure described in § 301.7701(b)–7(b)). Because C does not satisfy the requirements of the United States-Y treaty with regard to exempting personal services income from United States tax, C will be taxed on her personal services income at graduated rates under section 1 of the Code pursuant to section 871(b) of the Code. She will not be entitled to deduct her mortgage interest expenses or to claim more than one personal exemption because she is taxed as a nonresident alien under the Code by virtue of her decision to claim treaty benefits, and section 873 of the Code denies nonresidents the deduction for personal residence mortgage interest expense and generally limits them to only one personal exemption. C will be subject to a tax of 15 percent of the gross amount of her dividend income under section 871(a) of the Code as modified by the treaty, and she will be exempt from tax on her interest income. C is not entitled to file a joint return with her spouse even if he is a resident alien under the Code for 1985.
Example 4.
The facts are the same as in Example 3, except that C does not choose to claim treaty benefits with respect to any items of income covered by the treaty (i.e., she files as a resident). Therefore, she is taxed as a resident under the Code and pays tax at graduated rates on her personal services income, dividends, and interest. In addition, she is entitled to deduct her mortgage interest expenses and to take personal exemptions for her spouse and three children. C will be entitled to file a joint return with her spouse if he is a resident alien for 1985 or, if he is a nonresident alien, C and her spouse may elect to file a joint return pursuant to section 6013.
[T.D. 8411, 57 FR 15251, Apr. 27, 1992; 57 FR 28612, June 26, 1992, as amended by T.D. 8733, 62 FR 53387, Oct. 14, 1997]
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Appendix B – Aroste through the eyes of Patrick Martin (the lawyer who argued Aroste)
December 6, 2023
August 13, 2026
September 6, 2026
Aroeste v. United States: Frequently Asked Questions for Green Card Holders
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Appendix C – A superb analysis of Aroeste presented after the November 20, 2023 decision and before May 3, 2024 when the government abandoned the appeal
Karlin-Aroeste-v.-the-United-States-2192024
https://karlinpeebles.com/wp-content/uploads/Karlin-Aroeste-v.-the-United-States-2192024.pdf
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Appendix D – IRS Practice Unit to determine tax residency under treaties