This is part of a series of posts on: (1) “tax residency“, (2) the use of “treaty tiebreakers” when an individual is a “tax resident” of more than one jurisdiction and (3) how to use “treaty tiebreakers” to end “tax residency” in an undesirable tax jurisdiction.
Topsnik 1: It’s about the taxation (not expatriation) of Green Card Holders
The 2014 decision in Topsnik is an interesting example of how these components interact. Mr. Topsnik was given a Green Card in 1977. He moved from the United States in 2003 and did NOT formally abandon his Green Card. He then attempted to argue that because he was a “tax resident” of Germany that he could use a “treaty tie breaker” to argue that he was NOT a “U.S tax resident”.
In summary the court ruled on a number of questions which INCLUDED:
1. Was Mr. Topsnik a U.S. “tax resident”?
Because Mr Topsnik never formally abandoned his Green Card (as required by the regulations) that he WAS a “U.S. tax resident” for ALL relevant years. This meant that he was taxable in the United States on all of his world income.
For clarity the regulations to Internal Revenue Code 7701(b) specifically state:
(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 Resident status is deemed to continue unless it is rescinded or administratively or judicially determined to have been abandoned.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 Resident status is considered to be rescinded if a final administrative or judicial order of exclusion or deportation is issued regarding the alien individual.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.
Green Card holders must understand that they do NOT end their status as “U.S. tax residents” by leaving the United States and taking up residence in another country! Specific steps (related to notification) are required.
2. Could Mr. Topsnik use the “treaty tiebreaker” to argue that he was a “tax resident” of Germany and NOT a “tax resident” of the United States?
No. The use of a “treaty tiebreaker” requires that an individual be a “tax resident” of both countries. In this case the “treaty tie breaker” could be used ONLY if Mr. Topsnik was a “tax resident” of both Germany and the United States. The court held that Mr. Topsnik was NOT a “tax resident” of Germany but was a “tax resident” of the United States.
Note that the fact that Mr. Topsnik was NOT a “tax resident” of Germany meant that he was NOT eligible to use the “tax treaty tie breaker” rules. Eligibility to use the “tax treaty tie breaker” rules would NOT guarantee that Mr. Topsnik would be a “German tax resident”.
Conclusion: Mr. Topsnik was ONLY a “U.S. tax resident” and was therefore taxable in the United States on his world income!
Moral of the story: If a Green Card Holder ceases to reside in the United States he as NOT ended his status as a U.S. “tax resident”.
Further commentary (guaranteed to confuse the issue) …
Prologue – January 1, 1984 …
Q. A Green Card gives a person the right to live permanently in the United States of America. Should the person be subject to taxation as a resident, even if the person does NOT actually reside in the United States or had lost the right to live in the U.S. under the immigration laws?
A. “The [House Ways and Means Committee] believes that aliens who have entered the United States as permanent residents and who have not officially lost or surrendered the right to permanent U.S. residence should be taxable as U.S. residents. These persons have rights that are similar to those afforded [U.S.] citizens (including the right to enter the United States at will); equity demands that they contribute to the cost of running the government as much as citizens. [H.R. Rept. No. 98-432 (Part 2), 1984 U.S.C.C.A.N. 697, 1163.]”
The 2014 Topsnik decision (see the link below) reminds us of this principle.
The facts in Topsnik 2014 …
143 T.C. No. 12
UNITED STATES TAX COURT
GERD TOPSNIK, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 22577-11.
Filed September 23, 2014.
In 2004, P, a German citizen, made an installment sale of his stock in a U.S. corporation, and he received payments in 2004-09 (years in issue) pursuant to a promissory note executed in connection with the sale. The 2004 payments consisted of a large downpayment and four smaller, equal monthly payments, which continued throughout 2005-09. He filed U.S. individual income tax returns for 2004 and 2005 on which he erroneously reported identical portions of the gain. He did not file U.S. returns for 2006-09. R challenged P’s installment sale reporting for 2004 and 2005 and filed substitutes for returns for 2006-09 on which he included in P’s income appropriate portions of P’s installment sale gain. R alleges that P is liable for income tax deficiencies for 2004 and 2006-09, almost entirely attributable to the gain on his installment sale of stock, additions to tax under I.R.C. sec. 6651(a)(1) and (2) for 2004 and 2006-09, and an addition to tax under I.R.C. sec. 6654 for 2005, all of which were included in a jeopardy assessment pursuant to which R levied on the installment payments due P in partial satisfaction of P’s liabilities.
P-2 alleges that, during the years in issue, he was a German resident and a U.S. nonresident alien, having “informally” abandoned his status as a lawful permanent resident (LPR) (i.e., a resident alien taxable on his worldwide income) in 2003 and, therefore, was not subject to U.S.taxation pursuant to arts. 4 and 13 of the U.S.-Germany Income Tax Treaty (treaty). R counters that (1) because P did not formally abandon his LPR status (obtained in 1977) until 2010, he remained an LPR during the years in issue and (2) because he was not taxable by Germany as a German resident during those years, he was not a German resident under art. 4 of the treaty.
Therefore, he was not exempted from U.S. taxation by the treaty. P also alleges that, because R moved to dismiss P’s 2011 Federal District Court suit to review R’s jeopardy assessments and levies encompassing the years in issue, in part, for lack of venue on the ground that P was a resident of Germany, R is now judicially estopped from arguing that P was not a German resident during the years in issue.
A summary of part of the ruling in Topsnik 2014 …
1. Held: Because Topsnik did not formally abandon his LPR status pursuant to sec. 301.7701(b)-1(b)(1) and (3), Proced. & Admin. Regs., until 2010, P remained an LPR during the years in issue, taxable by the United States on his worldwide income, including the gain on his 2004 installment sale of stock.
2. Held, further, LPR status for Federal income tax purposes turns on Federal income tax law and is only indirectly determined by immigration law.
3. Held, further, because P was not subject to German taxation as a German resident during the years in issue, he was not a German resident pursuant to art. 4 of the treaty and, therefore, is not exempted by the treaty from U.S. taxation during those years.
4. Held, further, as a U.S. but not a German resident, P is taxable by the United States, pursuant to art. 13, para. 5 of the treaty, on his gain recognized during the years in issue from his 2004 installment sale of stock in a U.S. corporation.
5. Held, further, because the prior Federal District Court litigation concerned only P’s status as a German resident for a year after the years in issue, R is not estopped from asserting that P was not a German resident under the treaty during the years in issue.
6. Held, further, R’s additions to tax sustained except for the I.R.C. sec. 6651(a)(2) addition to tax for 2004, which must be recalculated.