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Part 6 – What Would A Ban On Dual Citizenship Mean For U.S. Citizens?

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The Little Red Dual Citizenship Book

See the Appendix for a list of posts making up the “Little Red Dual Citizenship Book”

Whether or not it’s “fake news” …

It started with what purported to be a post by President Trump on “Truth Social” that he was going to attempt to end dual citizenship. This was immediately exposed as a “Fake Post”. Nevertheless, I came across an interesting video of what it would mean if Americans were somehow banned from being dual citizens. Without regard to the “fakeness” of the claim that President Trump was interested in ending dual citizenship, the video is interesting.

John Richardson – Follow me on X.com @ExpatriationLaw

Appendix – Posts That Make Up The “Little Red Dual Citizenship Book”

Part 1 – Dual Citizenship Reporting

Part 1 – Citizenship-based reporting: Russia’s "citizenship reporting" requirements – will the United States be next?

Part 2 – Under What Circumstances Is Citizenship By Ancestry Justified?

Part 2 – Citizenship Matters With @RonanMcCrea: Citizenship By Descent Can Be High Risk For A Country In A Less Global World

Part 3 – Could U.S./Canada Dual Citizens Residing In Canada Determine The Outcome Of A U.S. Election? (The Democrats Hope So)

Part 3 – Could The November 3, 2020 US Election Be Decided By Canadian Residents With US/CDN Dual Citizenship?


Part 4 – A Change In Canadian Law Increase Canadian “Citizenship Through Ancestry” Options For Americans

Part 4 – Canada Bill – C71 Will Increase Citizenship By Descent Options For US Citizens Seeking Canada/US Dual Citizenship

Part 5 – When Dual Citizenship For The Individual, Becomes “Duel Citizenship” For The State

Part 5 – The Clash Of Citizenships: When Dual Citizenship For The Individual Becomes Duel Citizenship For The State

Part 6 – What Would Ending Dual Citizenship Look Like For U.S. Citizens?

Part 6 – What Would A Ban On Dual Citizenship Mean For U.S. Citizens?

The Principles Of President Trump’s Pledge to End Citizenship Based Double Taxation: A Series Of Discussions

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Introduction and context:

In October of 2024, Candidate Donald Trump pledged to end the double taxation of Americans abroad. In the
Appendix* to this post I have included three videos discussing this pledge.

I have created a specific X.com community for the purpose of discussing President Trump’s pledge to end the double taxation of Americans abroad. You are invited to join that community here:

https://x.com/i/communities/1857659137892692026

Thinking about “Ending Double Taxation”

The pledge to #enddoubletaxation requires definition. What does it mean? Does it represent severing citizenship from tax residency? Does it represent a move to “territorial taxation”? What does it mean?

In this context I have been creating a series of “Principles” that should be discussed to define, refine and articulate the goal of “ending the double taxation of Americans abroad”.

To date (see below)I have identified a number of principles which have been explored on X.com. I would like to supplement each of the principles by a live discussion on X.com Spaces. What follows are the principles. I will add the dates in the next few days. Please circulate this post widely. It represents an opportunity for those in the X.com community to contribute to the discussions (which will be recorded).

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“Saving Clause” In U.S. Mexico Tax Treaty Informs Meaning Of “Renounced U.S. Citizenship For The Purpose Avoiding Taxation By The United States (Reed Amendment)”

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Summary and purpose:

This post is a continuation of my posts about the “saving clause” in U.S. tax treaties. For an introduction to the “saving clause” see:

Croatia Agrees To Allow The US To Impose Tax, Forms And Penalties On Its US Citizen Residents

This post will also identify how the 2003 Protocol to the U.S. Mexico tax treaty makes expatriation with an “intention to avoid taxation”, relevant from BOTH a tax and immigration perspective.

Part A – Taxation: The tax treaty saving clause and expatriation with an intention to avoid U.S. taxation

The 1992 U.S. Mexico tax treaty “saving clause”

A basic “saving clause” appeared in the 1992 U.S. Mexico tax treaty. It gave either the country the right to tax its citizens as though the treaty did not exist. See Appendix A for the full text and Appendix B for the technical interpretation

The 1992 “saving clause” stated that:

“the term “citizen” shall include a former citizen whose loss of citizenship had as one of its principal purposes the avoidance of tax, but only for a period of 10 years following such loss.”

The 1992 “saving clause” made no mention of “Green Card” holder or of the specific principles to be used to determine whether the expatriation “had as one of its principal purposes the avoidance of tax:,

The 2003 U.S. Mexico tax treaty protocol

The 2003 protocol to the U.S. Mexico tax treaty included a “saving clause” that is unlike any I have seen elsewhere. The Mexico “saving clause” has four unusual features:

1. While continuing the principle that the United States always has the right to tax its citizens (the purpose of any “saving clause”) it defines “citizen” to include BOTH citizen or long term resident who expatriated for the purpose of avoiding U.S. taxation (Paragraph 6. a));

2. It defines the meaning of “long term resident” (Paragraph 6.b) – notably this follows the definitions in the U.S. Internal Revenue Code 877(e)(2) as it was in 2003 and continues to be);

3. It provides specific criteria (reiterated in the technical interpretation) to be used as factors to determine whether a citizen expatriated for the purpose of avoiding U.S. taxation (Paragraph 7). See Appendix C of this post.

Paragraph 7

7. In the case of an individual who is a former citizen of a Contracting State, the following factors shall be considered favorably in determining whether or not one of the principal purposes of that individual’s loss of citizenship of that Contracting State was the avoidance of tax:

a) at the time of the individual ceasing to be a citizen of that Contracting State or within a reasonable period thereafter, the individual is or becomes a resident fully liable to income tax in the other Contracting State, and

b) i) the individual was a citizen of both Contracting States at birth and has remained a citizen of the other Contracting State;
ii) at the time of the loss of such citizenship (or within a reasonable period thereafter), the individual was or became a citizen of the other Contracting State, and that other Contracting State was that individual’s country of birth, or the country of birth of that individual’s spouse or of either of that individual’s parents;
iii) in the 10 years preceding the loss of such citizenship, the individual was present in that Contracting State for no more than 30 days in each taxable year or year of assessment; or
iv) the loss of citizenship occurred before the individual attained the age of 18 and one half years.

Notice that “dual citizenship” from birth is identified as being a factor negating expatriation with the intention of avoiding U.S. taxation. This continues the U.S. obsession with both “citizenship taxation” and “citizenship non-taxation”!

Because “Accidental Americans” are more likely to have dual citizenship from birth it is unlikely that the treaty would be interpreted to allow them to be taxed by the USA after expatriation!!

4. It provides specific criteria in Paragraph 8 (reiterated in the technical interpretation) to be used as factors to determine whether a Green Card holder expatriated for the purposes of avoiding U.S. taxation. See Appendix D of this post.

Paragraph 8

In the case of an individual who is a former long-term resident of a Contracting State, a number of factors may be considered by that Contracting State in determining whether or not one of the principal purposes of that individual’s loss of long-term resident status (“expatriation”) was the avoidance of tax. Paragraph 8 sets forth the following factors which will be considered favorably for purposes of determining whether a former long-term resident had a tax avoidance purpose for expatriating: (1) at the time of the individual’s expatriation (or within a reasonable time thereafter) the individual is or becomes a resident fully liable to tax in the other Contracting State and that other Contracting State is the individual’s country of birth, the country of birth of that individual’s spouse, or the country of birth of either of that individual’s parents; (2) in the 10 years prior to expatriation, the individual was present in the Contracting State from which he expatriated for no more than 30 days in each taxable year or year of assessment; or (3) the individual expatriated before he reached the age of 18 ½ years. This provision is consistent with U.S. law.

Notice that moving back to the “country of birth” is identified as a factor to negate any presumption of tax avoidance. In addition, becoming a “tax resident” in the new country of residence is relevant.

The 2003 protocol to the U.S. Mexico tax treaty is consistent with the principle that the “saving clause” mirrors the expatriation provisions of the time of negotiating the tax treaty.

Part B – Immigration: The tax treaty saving clause, expatriation with an intention to avoid U.S. taxation and how the tax treaty may bear on the application of the Reed amendment

Expatriation with an intention to avoid U.S. taxation is theoretically relevant for immigration purposes. This is the provision of U.S. immigration law that makes individuals who renounced for tax reasons inadmissible to the United States. This is commonly known as the “Reed Amendment”.

INA 212(d)(10)(E) reads:

“Any alien who is a former citizen of the United States who officially renounces United States citizenship and who is determined by the Attorney General to have renounced United States citizenship for the purpose of avoiding taxation by the United States is inadmissible.”

An excellent discussion and history of the Reed amendment is here. A 2020 podcast with U.S. tax lawyer Virginia La Torre Jeker discussing the Reed Amendment is here.

The U.S. Mexico tax treaty as an aid to interpreting the “Reed Amendment”

Assuming that the criteria for “expatriation to avoid U.S. taxation” can be used to interpret the Reed amendment (found in the Immigration and Nationality Act) it is clear that

– dual citizens from birth (most Accidental Americans are dual citizens from birth) are unlikely to be deemed “excludable aliens” within the meaning of the Reed amendment.

– long term Americans abroad (because they are less likely to be dual citizens from birth) do NOT enjoy the benefits of dual citizens from birth. (Nevertheless, I have no reason to believe that their renunciations would be deemed to be for the purposes of avoiding U.S. taxation.)

In other words, the Reed amendment is almost certainly inapplicable to “Accidental Americans”. It is not likely to be applicable to the circumstances generally of Americans abroad who are renouncing U.S. citizenship.

The 2003 protocol to the U.S. Mexico tax treaty is consistent with the principle that the “saving clause” mirrors the expatriation provisions of the time of negotiating the tax treaty.

Conclusion

Dual citizenship from birth continues to matter!

John Richardson – Follow me on X.com/Expatriationlaw

Appendix A

The U.S. Mexico 1992 Tax Treaty – Article I

ARTICLE 1

General Scope

1. This Convention shall apply to persons who are residents of one or both of the Contracting States, except as otherwise provided in the Convention.

2. The Convention shall not restrict in any manner any exclusion, exemption, deduction, credit, or other allowance now or hereafter accorded:

a) by the laws of either Contracting State; or
b) by any other agreement between the Contracting States.

3. Notwithstanding any provision of the Convention except paragraph 4, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and by reason of citizenship may tax its citizens, as if the Convention had not come into effect. For this purpose, the term “citizen” shall include a former citizen whose loss of citizenship had as one of its principal purposes the avoidance of tax, but only for a period of 10 years following such loss.

4. The provisions of paragraph 3 shall not affect

a) the benefits conferred by a Contracting State under paragraph 2 of Article 9 (Associated Enterprises), under paragraphs 1(b) and 3 of Article 19 (Pensions, Annuities, Alimony, and Child Support), and under Articles 22 (Exempt Organizations), 24 (Relief from Double Taxation), 25 (Non-Discrimination), and 26 (Mutual Agreement Procedure); and
b) the benefits conferred by a Contracting State under Articles 20 (Government Service), 21 (Students), and 28 (Diplomatic Agents and Consular Officers), upon individuals who are neither citizens of, nor lawful permanent residents in, that State.

https://www.irs.gov/pub/irs-trty/mexico.pdf

Appendix B

Technical Interpretation To The 1992 Treaty

Paragraph 3 contains the traditional “saving” clause, which provides that each country may tax in accordance with its domestic law, without regard to the Convention, its residents, citizens, and former citizens whose loss of citizenship had tax avoidance as one of its principal purposes. Although the paragraph is drafted reciprocally, Mexico does not now tax the income on the basis of citizenship. The taxation of former citizens is limited to a period of ten years, as provided in section 877 of the Code. “Residence”, for the purpose of the saving clause, is determined under Article 4 (Residence). Thus, for example, if an individual who is not a U.S. citizen is a resident of the United States under the Code, e.g., a “green card” holder, and is also a resident of Mexico under Mexican law, and the tie-breaker rules of paragraph 2 of Article 4 determine that he is a resident of Mexico, he will be entitled to U.S. benefits under the Convention.

As a consequence of the saving clause, each Article should be read as not providing benefits with respect to the U.S. taxation of U.S. citizens (wherever resident) or residents or with respect to Mexico’s taxation of Mexican citizens or residents. However, paragraph 4 provides certain exceptions to the saving clause. Under subparagraph (a), for example, U.S. residents and citizens are entitled to certain U.S. benefits provided under the Convention. Those benefits are:
the correlative adjustments authorized by paragraph 2 of Article 9; the exemption of social security benefits paid by the other State and of child support and alimony paid by residents of the other State, that are provided in paragraphs 1(b) and 3 of Article 19; the deductibility of certain contributions to Mexican charities and the relief from expenditure responsibilities provided in Article 22; the guarantee of a foreign tax credit provided in Article 24; the non-discrimination protection of Article 25; and the competent authority procedures of Article 26. Mexican residents are entitled to the benefits provided by Mexico under the same Articles (and Mexican citizens or former citizens would be entitled to the same benefits, if relevant).

Under subparagraph (b) certain additional benefits are available to U.S. residents who are neither U.S. citizens nor “green card” holders; these are the U.S. benefits extended to employees of the Mexican Government under Article 20, to visiting students, under Article 21, and to members of diplomatic and consular missions under Article 28. This subparagraph also applies reciprocally.

https://www.irs.gov/pub/irs-trty/mexicotech.pdf

Appendix C

2003 Protocol to the U.S. Mexico Tax Treaty

ARTICLE I

Article 1 of the Convention is deleted and the following Article is substituted:

“ARTICLE 1

General Scope

1. This Convention shall apply to persons who are residents of one or both of the Contracting States, except as otherwise provided in the Convention.

2. This Convention shall not restrict in any manner any exclusion, exemption, deduction, credit or other allowance now or hereafter accorded:

a) by the laws of either Contracting State; or
b) by any other agreement between the Contracting States.

3. Notwithstanding the provisions of subparagraph b) of paragraph 2:

a) any question arising as to the interpretation or application of this Convention and, in particular, whether a taxation measure is within the scope of this Convention, shall be determined exclusively in accordance with the provisions of Article 26 (Mutual Agreement Procedure) of this Convention; and
b) the provisions of any other agreement shall not apply to a taxation measure unless the competent authorities agree that the measure is not within the scope of Article 25 (Non-Discrimination) of this Convention.

For the purposes of this paragraph, a “measure” is a law, regulation, rule, procedure, decision, administrative action, or any similar provision or action.

4. Notwithstanding any provision of this Convention except paragraph 5, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and by reason of citizenship may tax its citizens, as if the Convention had not come into effect.

5. The provisions of paragraph 4 shall not affect:

a) the benefits conferred by a Contracting State under paragraph 2 of Article 9 (Associated Enterprises), under subparagraph b) of paragraph 1 and paragraph 3 of Article 19 (Pensions, Annuities, Alimony, and Child Support), and under Articles 22 (Exempt Organizations), 24 (Relief from Double Taxation), 25 (Non-Discrimination), and 26 (Mutual Agreement Procedure); and
b) the benefits conferred by a Contracting State under Articles 20 (Government Service), 21 (Students), and 28 (Diplomatic Agents and Consular Officers), upon individuals who are neither citizens of, nor lawful permanent residents in, that State.

6. a) A former citizen or long-term resident whose loss of citizenship or long-term resident status had as one of its principal purposes the avoidance of tax (as defined under the laws of the Contracting State of which the person was a citizen or long-term resident) shall be treated for purposes of paragraph 4 of this Article as a citizen of that Contracting State, but only for a period of 10 years following the loss of such status. This paragraph shall apply only in respect of income from sources within that Contracting State (including income deemed under the domestic law of that State to arise from such sources).
b) The term “long-term resident” shall mean any individual who is a lawful permanent resident of a Contracting State in 8 or more taxable years during the preceding 15 taxable years. In determining whether the threshold in the preceding sentence is met, there shall not count any year in which the individual is treated as a resident of the other Contracting State under this Convention, or as a resident of any country other than the first-mentioned Contracting State under the provisions of any other tax treaty of that Contracting State, and, in either case, the individual does not waive the benefits of such treaty applicable to residents of the other country.

7. In the case of an individual who is a former citizen of a Contracting State, the following factors shall be considered favorably in determining whether or not one of the principal purposes of that individual’s loss of citizenship of that Contracting State was the avoidance of tax:

a) at the time of the individual ceasing to be a citizen of that Contracting State or within a reasonable period thereafter, the individual is or becomes a resident fully liable to income tax in the other Contracting State, and

b) i) the individual was a citizen of both Contracting States at birth and has remained a citizen of the other Contracting State;
ii) at the time of the loss of such citizenship (or within a reasonable period thereafter), the individual was or became a citizen of the other Contracting State, and that other Contracting State was that individual’s country of birth, or the country of birth of that individual’s spouse or of either of that individual’s parents;
iii) in the 10 years preceding the loss of such citizenship, the individual was present in that Contracting State for no more than 30 days in each taxable year or year of assessment; or
iv) the loss of citizenship occurred before the individual attained the age of 18 and one half years.

8. In the case of an individual who is a former long-term resident of a Contracting State, the following factors shall be considered favorably in determining whether or not one of the principal purposes of that individual’s ceasing to be a long-term resident of that Contracting State was the avoidance of tax:
a) at the time of the individual ceasing to be a long-term resident of that Contracting State or within a reasonable period thereafter, the individual is or becomes a resident fully liable to income tax in the other Contracting State, and that other Contracting State is:
i) the country in which the individual was born;
ii) the country in which the individual’s spouse was born; or
iii) the country where either of the individual’s parents was born;
b) in the 10 years preceding the individual’s ceasing to be a long-term resident of that Contracting State, the individual was present in that Contracting State for no more than 30 days in each taxable year or year of assessment; or
c) the individual ceases to be a long-term resident of that Contracting State before reaching the age of 18 and one half years.”

https://home.treasury.gov/system/files/131/Treaty-Mexico-Pr2-10-26-2002.pdf

Appendix D

Technical Interpretation To The 2003 Protocol

Paragraph 4

Paragraph 4 contains the traditional saving clause found in U.S. tax treaties. The Contracting States reserve their rights, except as provided in paragraph 5, to tax their residents and citizens as provided in their internal laws, notwithstanding any provisions of the Convention to the contrary. For example, if a resident of Mexico performs professional services in the United States and the income from the services is not attributable to a permanent establishment in the United States, Article 7 (Business Profits) would by its terms prevent the United States from
taxing the income. If, however, the resident of Mexico is also a citizen of the United States, the saving clause permits the United States to include the remuneration in the worldwide income of the citizen and subject it to tax under the normal Code rules (i.e., without regard to Code section 894(a)). However, subparagraph 5(a) of this Article preserves the benefits of special foreign tax credit rules applicable to the U.S. taxation of certain U.S. income of its citizens resident in Mexico. See paragraph 4 of Article 24 (Relief from Double Taxation).

For purposes of the saving clause, “residence” is determined under Article 4 (Residence). Thus, an individual who is a U.S. resident under the Internal Revenue Code but who is deemed to be a resident of Mexico under the tie-breaker rules of Article 4 would be subject to U.S. tax only to the extent permitted by the Convention. For example, if an individual who is not a U.S. citizen is a resident of the United States under the Code, and is also a resident of Mexico under its law, and that individual has a permanent home available to him in Mexico and not in the United States, he would be treated as a resident of Mexico under Article 4 and for purposes of the saving clause. The United States would not be permitted to apply its statutory rules to that person if they are inconsistent with the treaty.

However, the person would be treated as a U.S. resident for U.S. tax purposes other than determining the individual’s U.S. tax liability. For example, in determining under Code section 957 whether a foreign corporation is a controlled foreign corporation, shares in that corporation held by the individual would be considered to be held by a U.S. resident. As a result, other U.S. citizens or residents might be deemed to be United States shareholders of a controlled foreign corporation subject to current inclusion of Subpart F income recognized by the corporation. See
Treas. Reg. section 301.7701(b)-7(a)(3). The application of the saving clause to former citizens and long-term residents is not addressed in paragraph 4, but in paragraphs 6, 7, and 8.

Paragraph 5

Some provisions are intended to provide benefits to citizens and residents even if such benefits do not exist under internal law. Paragraph 5 sets forth certain exceptions to the saving clause that preserve these benefits for citizens and residents of the Contracting States.

Subparagraph (a) lists certain provisions of the Convention that are applicable to all citizens and residents of a Contracting State, despite the general saving clause rule of paragraph 4:

(1) Paragraph 2 of Article 9 (Associated Enterprises) grants the right to a correlative adjustment with respect to income tax due on profits reallocated under Article 9.
(2) Subparagraph 1(b) and paragraph 3 of Article 19 (Pensions, Annuities, Alimony, and Child Support) provide exemptions from source or residence State taxation for certain pension distributions, social security payments and child support.
(3) Article 22 (Exempt Organizations) provides for reciprocal recognition of tax-exempt, charitable organizations resident in a Contracting State and qualifying for benefits of the Convention under paragraph 1(e) or 2 of Article 17 (Limitation on Benefits).
(4) Article 24 (Relief from Double Taxation) confirms the benefit of a credit to citizensand residents of one Contracting State for income taxes paid to the other, even if such a credit may not be available under the Code.
(5) Article 25 (Non-Discrimination) requires one Contracting State to grant national treatment to nationals of the other Contracting State in certain circumstances. Excepting this Article from the saving clause requires, for example, that the United States give such benefits to a national of Mexico even if that person is a citizen of the United States.
(6) Article 26 (Mutual Agreement Procedure) may confer benefits on residents or nationals of the Contracting States. For example, the statute of limitations may be waived for refunds and the competent authorities are permitted to use a definition of a term that differs from the internal law definition. As with the foreign tax credit, these benefits are intended to be granted by a Contracting State to its citizens and residents.

Subparagraph (b) of paragraph 5 provides a different set of exceptions to the saving clause. The benefits referred to are all intended to be granted to temporary residents of a Contracting State (for example, in the case of the United States, holders of non- immigrant visas), but not to citizens or to persons who have acquired permanent residence in that State. If beneficiaries of these provisions travel from one of the Contracting States to the other, and
remain in the other long enough to become residents under its internal law, but do not acquire permanent residence status (i.e., in the U.S. context, they do not become “green card” holders) and are not citizens of that State, the host State will continue to grant these benefits even if they conflict with statutory rules. The benefits preserved by this paragraph are the host country exemptions for the following items: government service salaries and pensions under Article 20 (Government Service); certain income of visiting students or business apprentices under Article 21 (Students); and the income of diplomatic agents and consular officers under Article 28 (Diplomatic Agents and Consular Officers).

Paragraph 6

Under subparagraph (a) of paragraph 6, each Contracting State reserves for a period of ten years its right to tax former citizens and long-term residents whose loss of citizenship or long-term resident status had as one of its principal purposes the avoidance of tax. Thus, the saving clause in paragraph 4 applies to such persons for a period of ten years. In the case of the United States, section 877 of the Code applies to former citizens and long-term residents of the United States whose loss of citizenship or long-term resident status had as one of its principal purposes the avoidance of tax. Under section 877, the United States generally treats an individual as having a principal purpose to avoid tax if either of the following criteria exceed established thresholds: (a) the average annual net income tax of such individual for the period of 5 taxable years ending before the date of the loss of status, or (b) the net worth of such individual as of the date of the loss of status. The thresholds are adjusted annually for inflation. Section 877(c) provides certain exceptions to these presumptions of tax avoidance. Paragraphs 7 and 8 provide similar factors that will be considered in favor of the taxpayer for purposes of determining whether one of the principal purposes of a change in status of a former citizen or long-term resident is the avoidance of tax.
Subparagraph (b) of paragraph 6 defines the term “long-term resident” of a Contracting State as an individual (other than a citizen of that State) who is a lawful permanent resident of that State in at least 8 of the 15 taxable years ending with the taxable year in which the individual ceased to be a long-term resident. In determining whether this threshold is met, the Convention provides that an individual will not be treated as a lawful permanent resident for any year in which the individual is: (1) treated as a resident of the other Contracting State, or as a resident of
any country other than the first-mentioned State under the provisions of any other tax treaty of that Contracting State, and (2) the individual does not waive the benefits of such treaty applicable to residents of the other country. This test is consistent with U.S. law.

Paragraph 7

In the case of an individual who is a former citizen of a Contracting State, a number of factors may be considered by that Contracting State in determining whether or not one of the principal purposes of that individual’s loss of citizenship (“expatriation”) was the avoidance of tax. Paragraph 7 sets forth the following factors which will be considered in favor of the taxpayer for purposes of determining whether a former citizen had a tax avoidance purpose for expatriating: (1) the individual is, at the time of his expatriation, a resident fully liable to tax in the other Contracting State, or becomes a resident fully liable to tax within a reasonable period after his expatriation; and (2) the individual meets one of the following four additional requirements: (a) the individual was a citizen of both Contracting States at birth and has remained a citizen of the other Contracting State; (b) at the time of expatriation (or within a reasonable period thereafter), the individual was or became a citizen of the other Contracting State, and that other Contracting State is the individual’s country of birth, the country of birth of that individual’s spouse, or the country of birth of either of that individual’s parents; (c) in the 10 years prior to expatriation, the individual was present in the Contracting State from which heexpatriated for no more than 30 days in each taxable year or year of assessment; or (d) the individual expatriated before he reached the age of 18 ½ years. This provision is consistent with U.S. law.

Paragraph 8

In the case of an individual who is a former long-term resident of a Contracting State, a number of factors may be considered by that Contracting State in determining whether or not oneof the principal purposes of that individual’s loss of long-term resident status (“expatriation”) was the avoidance of tax. Paragraph 8 sets forth the following factors which will be considered favorably for purposes of determining whether a former long-term resident had a tax avoidance purpose for expatriating: (1) at the time of the individual’s expatriation (or within a reasonable time thereafter) the individual is or becomes a resident fully liable to tax in the other Contracting State and that other Contracting State is the individual’s country of birth, the country of birth of that individual’s spouse, or the country of birth of either of that individual’s parents; (2) in the 10 years prior to expatriation, the individual was present in the Contracting State from which he expatriated for no more than 30 days in each taxable year or year of assessment; or (3) the individual expatriated before he reached the age of 18 ½ years. This provision is consistent with U.S. law.

https://home.treasury.gov/system/files/131/Treaty-Mexico-Pr2-TE-3-5-2003.pdf

Moving From Canada To The USA? If You Owe Money To The Canada Revenue Agency – Will The IRS Collect For Canada?

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A quick post based on the following tweet …

The facts:

A Canadian citizen (not a dual Canada/U.S. citizen) with tax debts owing to the Canada Revenue Agency moves to the United States. The Canada Revenue Agency (surprise, surprise) wants its money. The decision of the court explained it this way:

P owes approximately $200,000 in Canadian tax for tax years 1993 and 1994. In 2017 the Canada Revenue Agency sent the Internal Revenue Service (IRS) a mutual collection assistance request (MCAR) under the Canada-U.S. Income Tax Treaty (Treaty). Once the U.S. Competent Authority granted the MCAR, the IRS filed a notice of federal tax lien (NFTL) against P. The IRS notified P of the NFTL filing but stated that she had no right to a collection due process (CDP) hearing under I.R.C. §§6320 and 6330. P nonetheless requested a CDP hearing within 30 days of the IRS’s notice. When the IRS denied P’s request, she petitioned for review of that denial under the color of I.R.C. §6330(d)(1).

Held: We have jurisdiction under I.R.C. §6330(d)(1) to review a determination only if, in making that determination, the IRS was subject to one or more obligations imposed by I.R.C. §6320 or §6330.

Held, further, Treaty Article XXVI A requires the United States to collect an accepted Canadian revenue claim as it would a U.S. tax assessment for which the taxpayer’s right to a CDP hearing (among other rights) has lapsed or been exhausted. Consequently, P has no additional rights under I.R.C. §6320 or §6330 with respect to the IRS’s collection of her Canadian tax liability, and those statutes imposed no obligations on the IRS with respect to P’s hearing request.

Held, further, we lack jurisdiction over P’s Petition because the IRS did not issue a determination letter to P that would invoke our jurisdiction under I.R.C. §6330(d)(1), and it had no obligation to do so.

The question:

What collection options are available to the Canada Revenue Agency? Will the IRS assist Canada? (An excellent article by Kreig Mitchell – describing the general process is here.)

The answer:

Yes, the Canada/US tax treaty contains a (Article XXVI A) an “Assistance In Collection” provision. The full text of the collection article is reproduced in the Appendix.

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All U.S. citizens relinquishing U.S. citizenship are required to be reported in the Federal Register “Name And Shame” list

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Purpose of this post:

The following is a description of the reporting rules that apply to the State Department and U.S. Treasury when a U.S. citizen relinquishes U.S. citizenship. This discussion applies to individuals relinquishing after June 16, 2008. This brief description does NOT discuss Green Card holders who abandon their Green Cards or any reporting rules that may have been different prior to June 16, 2008*. (For practical purposes U.S. citizens who relinquish and fail to file Form 8854 will become “covered expatriates“. “Covered expatriate” status means that are subject to the 877A Exit Tax rules and the Section 2801 “covered gift” rules.) The term “relinquishment” includes “renunciation”.

The confusion continues over whether ONLY “covered expatriates are reported on the Federal Register. The names appearing in the Federal Register are here.

Commentary from Helen Burggraf and others reveals that:

– some individuals renouncing citizenship have been reported more than once
– some individuals renouncing citizenship have NOT been reported at all
– some individuals renouncing citizenship who were reported were NOT “covered expatriates”

With respect to U.S. citizenship relinquishment:

– IRC 6039G imposes specific requirements on the State Department to notify the Treasury Secretary of ALL Certificates Of Loss of Nationality issued;

– IRC 6039G requires the Treasury Secretary to publish the names of ALL relinquishers in the Federal Register. (Whether a “relinquisher” is a “covered expatriate” is NOT relevant.)

The statutory reasoning – conclusions:

1. The State Department is required to report to U.S. Treasury the names of ALL people who have been issued a Certificate of Loss of Nationality.

2. U.S. Treasury is then required to publish in the Federal Register the names of all people who the State Department has reported were issued CLNs in that quarter.

3. Individual relinquishers: (i) 6039G requires that all “Covered Expatriates” file a Form 8854. (ii)The “Secretary” requires ALL individuals to file Form 8854 in order to order to certify that because they have met their tax compliance obligations they are NOT “covered expatriates”. (Therefore form 8854 is required either by statute or by demand from the IRS.)

The statutory reasoning – tracking the relevant provisions in the Internal Revenue Code:

1. IRC 7701(a)(50) – provides statutory test for when an individual ceases to be a U.S. citizen:

“(50) Termination of United States citizenship
(A) In general

An individual shall not cease to be treated as a United States citizen before the date on which the individual’s citizenship is treated as relinquished under section 877A(g)(4).”

https://www.law.cornell.edu/uscode/text/26/7701

2. IRC 877A(g)(4) – provides the date of relinquishment of U.S. citizenship under the IRC:

“(4) Relinquishment of citizenship A citizen shall be treated as relinquishing his United States citizenship on the earliest of—
(A) the date the individual renounces his United States nationality before a diplomatic or consular officer of the United States pursuant to paragraph (5) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(5)),
(B) the date the individual furnishes to the United States Department of State a signed statement of voluntary relinquishment of United States nationality confirming the performance of an act of expatriation specified in paragraph (1), (2), (3), or (4) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(1)–(4)),
(C) the date the United States Department of State issues to the individual a certificate of loss of nationality, or
(D) the date a court of the United States cancels a naturalized citizen’s certificate of naturalization.
Subparagraph (A) or (B) shall not apply to any individual unless the renunciation or voluntary relinquishment is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the United States Department of State.”

https://www.law.cornell.edu/uscode/text/26/877A

3. State Department: IRC 6039G – imposes obligation on State Department to notify the Secretary of all CLNs issued under INA 358:

“(2) the Secretary of State shall provide to the Secretary a copy of each certificate as to the loss of American nationality under section 358 of the Immigration and Nationality Act which is approved by the Secretary of State,”

https://www.law.cornell.edu/uscode/text/26/6039G

4. Treasury Secretary: IRC 6039G -Imposes obligation on Secretary to report names of ALL relinquishers in Federal Register:

Notwithstanding any other provision of law, not later than 30 days after the close of each calendar quarter, the Secretary shall publish in the Federal Register the name of each individual losing United States citizenship (within the meaning of section 877(a) or 877A) with respect to whom the Secretary receives information under the preceding sentence during such quarter.

https://www.law.cornell.edu/uscode/text/26/6039G

The reporting on the name and shame list has never been accurate!

Conclusion: All people relinquishing U.S. citizenship are required to reported on the “Name and Shame” list. For reasons unknown, not everybody ends up being reported.

*On June 16, 2008 Internal Revenue Code 877A (the exit tax rules) was enacted. In addition to creating 877A, there were other changes to the expatriation rules. My impression is that the “6039G reporting regime” prior to June 16, 2008 applied to fewer people. Hence, I have restricted the above discussion to U.S. citizens relinquishing U.S. citizenship after June 16, 2008.

John Richardson – Follow me on X.com/ExpatriationLaw

Part 9 – Mr. FBAR And The Green Card: Aroeste v. United States – November 2023

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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.)
______________________________________________________________________

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.

_____________________________________________________________

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

Recent Articles re: Aroeste v. United States (Tax Treaty – Nonresident; Lawful Permanent Resident) – IRS Notice 2009-85 Lacks Authority

August 13, 2026

IRS Removes Practice Unit from their Website – titled “Determining Tax Residency Status of Lawful Permanent Residents” – Post-Aroeste

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

tre_p_016_02_01_06

Part 47 – Are Refunds For Payments Of The MRT Possible If The Moore Appeal Succeeds?

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To file a protective refund claim or to not seek a refund, that is question …

Individuals who were subject to the 2017 965 Transition Tax would have responded (whether using the 962 election or not) to the tax obligation in one of two ways:

1. They would have paid the tax in full.

2. They would have chosen to pay the tax over the eight year instalment period.

The Supreme Court will hear the appeal in Moore. It is possible that the Court will issue a decision that means the MRT was unconstitutional with respect to (some or all) individual taxpayers. Are those individuals who paid the tax in full entitled to a refund?

An interesting post from U.S. tax lawyer Virginia La Torre Jeker provides a possible answer:

Virginia’s post (focusing on whether to file a protective refund claim) includes an excellent analysis. I highly recommend taking the time to read it. In relevant part she writes:

Here’s the law in a nutshell:

Section 965(k) provides the IRS 6 years to assess any transition tax that is owed. However, this 6-year statute only favors the IRS. Taxpayers seeking a refund are bound to Section 6511 which deals with refund claims. Pursuant to Section 6511(a) a taxpayer must file a refund claim by the later of 3 years of filing the tax return, or 2 years of paying the tax.

Lost Opportunity

Under the general refund claim rule, taxpayers that paid the full transition tax on their 2017 income tax return filed in 2018 (or 2018 tax return, filed in 2019, if they report on a fiscal year that is not a calendar year) will not be able to claim a refund. The time for claiming the refund expired in 2021 (or 2022 for fiscal year filers). Normally refund claims must be filed within 3 years of filing the tax return or 2 years from the date the tax was paid so these taxpayers are out of luck.

Clearly “No Good Deed Goes Unpunished”!

Interested in Moore (pun intended) about the § 965 transition tax?

Read “The Little Red Transition Tax Book“.

John Richardson – Follow me on Twitter @Expatriationlaw

Part 39 – The § 965 Transition Tax: Congress Said: “Let There Be Income And There Was Income”

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Outline

Part A – Prologue And Introduction
Part B – A wealth tax may NOT be a 16th Amendment income tax
Part C – The identification of existing income, new income and retroactivity
Part D – “Deferred income”: A newly created form of income or previously existing income exempt from taxation
Part E – The Moore’s visit the Supreme Court Of The United States – The Government’s Response
Part F – Conclusion

Part A – Prologue And Introduction

The Moore transition tax appeal is about whether “income” under the 16th Amendment requires “realization” in order to qualify as income. Resolution of this issue requires an analysis of both the meaning of “income” (whatever “income” may mean) and whether “income” must be “realized” to meet constitutional requirements. Generally, the taxation of income receives its constitutional legitimacy because of the 16th amendment which reads:

The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

The 16th Amendment (1) creates the constitutional jurisdiction for Congress to tax “incomes” but (2) extends the constitutional jurisdiction to tax, ONLY to “income”.

The 16th Amendment does NOT say that Congress has the power to collect taxes on anything that Congress decides to designate as income. Rather the 16th Amendment specifies a tax on “income”. In this respect, the 16th Amendment implies that there are limitations on the kinds of “accessions to wealth, clearly realized, and over which the taxpayers have complete dominion” (or other events) that qualify as income. Something must have some objective characteristics in order to qualify as “income”. Perhaps an “event”. Perhaps an “accession to wealth”. Perhaps “realization”. Perhaps something else.

Income must meet some necessary and objective requirements

The word “income” (difficult as it may be to define) must have some “objective” limitation. Absent an “objective” limitation, Congress could simply “designate” anything as income and then impose taxation on it. Specifically legislating something as income is neither a necessary (See IRC § 61) nor sufficient condition (possibly the 965 transition tax) for something to objectively qualify as income. (That said, there are some who believe that there are no constitutional limitations on what Congress may define as income.)

Income must have some objective meaning and some objective limitation.

In summary:

To be taxable under the 16th Amendment, something must qualify as income.

Although income may not be possible to define with precision and certainty, there are certain things that clearly are NOT income.

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Part 38 – The § 965 Transition Tax Caused The Moore’s To Pay $14,712 Moore In Double Taxation

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In my last post I discussed the fact that the U.S. Supreme Court has agreed to hear the Moore’s challenge to the 965 Transition Tax.

A direct link to the Supreme Court site which will track the progress and filings of all briefs (including what are expected to be a large number of amicus briefs) is here.

Although the 965 Transition Tax was the fact that prompted the litigation, the issue as framed for the Supreme Court was:

22-800 MOORE V. UNITED STATES
DECISION BELOW: 36 F.4TH 930
CERT. GRANTED 6/26/2023

QUESTION PRESENTED:

The Sixteenth Amendment authorizes Congress to lay “taxes on incomes … without apportionment among the several States.” Beginning with Eisner v. Macomber, 252 U.S. 189 (1920), this Court’s decisions have uniformly held “income,” for Sixteenth Amendment purposes, to require realization by the taxpayer. In the decision below, however, the Ninth Circuit approved taxation of a married couple on earnings that they undisputedly did not realize but were instead retained and reinvested by a corporation in which they are minority shareholders. It held that “realization of income is not a constitutional requirement” for Congress to lay an “income” tax exempt from apportionment. App.12. In so holding, the Ninth Circuit became “the first court in the country to state that an ‘income tax’ doesn’t require that a ‘taxpayer has realized income.”‘ App.38 (Bumatay, J., dissenting from denial of rehearing en banc).

The question presented is:

Whether the Sixteenth Amendment authorizes Congress to tax unrealized sums without apportionment among the states.

LOWER COURT CASE NUMBER: 20-36122

The relevant facts as recited in the petition may be found in the Appendix* below.

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Biden 2024 Green Book: Message To Accidental Americans – Either comply or renounce!

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Part I – Summary of post:

The proposals for Americans abroad include:

1. A provision to (and presumption of) heighten enforcement of the 877A exit tax through changes in the Internal Revenue Code

2. A possible “carve out” from the 877A exit tax for certain Americans abroad with limited ties to the United States (under rules prescribed by the Treasury Secretary)

3. NO RELIEF whatsoever from U.S. citizenship taxation and the way that the rules apply to Americans abroad. This assumes a continuation of U.S. citizenship taxation with no evidence of change.

In other words: Either comply or renounce!

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