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This Week

The discussion is thanks to an email I received from Susan Brown Otto, CPA.

If the Tax Court can put a wooden stake through a vampire’s heart and then dance on its grave, they did it last week, in the case of Topsnik vs. Commissioner (PDF).

There is no do-it-yourself abandonment of green card status, as far as the IRS and the Tax Court are concerned.

Green card holders:  if you want to stop being U.S. taxpayers, you have to do the paperwork.  File Form I-407.  Until you do that, you are supposed to file U.S. income tax returns and pay U.S. income tax. Even if you have lived for the last 40 years in the deepest reaches of Burkina Faso and have no intentions of setting foot in the United States ever again, you are a U.S. taxpayer.

Details

Mr. Topsnik had a green card for many years. He left the United States after selling a business, and started living abroad. He was receiving installment payments from the sale, and predictably he looked around for ways to, well, not pay tax. The “I’m not a U.S. taxpayer so you can’t tax me” strategy looked good to him.

The IRS begged to differ. After tussling a while, the combatants ended up in Tax Court. The ruling went the government’s way.

The important part of the Tax Court’s opinion starts at page 19 (!). The logic chain is simple and quick.

    • Internal Revenue Code Section 1 and Treasury Regulations Section 1.1-1(a)(1) impose income tax on citizens and people who are noncitizens but residents of the United States. (Let’s call a noncitizen who is a resident of the United States a “resident alien” because that’s what U.S. tax law calls such a person.)
    • A resident alien includes someone who is a noncitizen (duh) who is a lawful permanent resident. See Internal Revenue Code Section 7701(b)(1)(A)(i).
  • A lawful permanent resident is someone who has the immigration status of being allowed to permanently reside in the United States. Importantly, status as a lawful permanent resident continues until that immigration status is administratively terminated. See Internal Revenue Code Section 7701(b)(6) and Treasury Regulations Section 301.7701(b)-1(b)(1).

Because Tax Court judges are nothing if not painfully over-thorough, a piece of legislative history is quoted to show exactly what was going through the Congressional Borg-mind when it passed the laws defining “resident alien”:

The bill defines lawful permanent resident to mean an individual who 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, if such status has not been revoked or administratively or judicially determined to have been abandoned. Therefore, an alien who comes to the United States so infrequently that, on scrutiny, he or she is no longer legally entitled to permanent resident status, but who has not officially lost or abandoned that status, will be a resident for tax purposes. [H.R. Rept. No. 98-432 (Part 2), at 226 (1983), 1984 U.S.C.C.A.N. 697, 1166.]

The Fat Lady’s gotta sing!

The Treasury Regulations tell us the song that the Fat Lady must sing–this is exactly how you terminate your immigration status as a permanent resident, which in turn suffices to terminate your lawful permanent resident status for tax purposes, which (whew! finally) means you are no longer a resident alien and you no longer need to file U.S. income tax returns. Treasury Regulations Section 301.7701(b)-1(b)(3) tells us:

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.

From a tax point of view, it could not be clearer. If you, the taxpayer, want to cancel your green card and stop being a U.S. income taxpayer, you have to do it on paper.

This was Mr. Topsnik’s first failure. He just bailed out and did not file Form I-407. He was still a green card holder, and therefore continued to be a U.S. taxpayer.

Here are the arguments he raised:

    • “I was out of the country so long that if the Immigration Boffins had found me, they would have cancelled my green card, so I really wasn’t a green card holder anymore.” You fail, said the Tax Court. Your tax status as a resident alien (who is supposed to pay tax in the United States) is only loosely coupled to the immigration laws and what the Immigration Boffins might do to you. Tax status is defined in the Internal Revenue Code and you didn’t follow those rules.
  • “I was a resident of Germany under the income tax treaty, so I was a nonresident of the United States for income tax purposes.” No you weren’t, says the Tax Court. Your own behavior, Mr. Topsnik, says otherwise.

Unremarkable

All of this is unremarkable and should be taken to heart by green card holders: that green card is a Tar Baby and once you have held it for the magic “in at least 8 of the last 15 years” time period, the Internal Revenue Service reserves the right take a slice of everything you earn, no matter where you happen to be on Planet Earth.

Disclaimer, Waiver, Warning Shot, Pre-emptive Strike, Etc.

Now of course is a prudent moment to remind you that this is not legal advice. Find someone experienced who can look at your situation and tell you exactly how to do things right.

Next Week

Next Tuesday there will be another expatriation-related question and answer. Send yours in. Hit “Reply” and start typing. When you’re done, hit “Send”.

Phil.