No, not talking about Texas-Style Chili as reported in the – NYT Cooking Recipe.
Chile, the country in South America and the newest country to have an income tax treaty go into force with the United States. The U.S.-Chile Tax Treaty (in the works for more than a decade) went into force at the end of 2023, on 19 December 2023.
The question is how many “LPRs” are residing in a tax treaty country that are impacted favorably (presumably all of them) by the federal district court decisions we successfully handled against the IRS and DOJ, Tax Division: Aroeste v United States, 22-cv-00682-AJB-KSC (20 Nov. 2023)?
As previously explained, the Aroeste decision will affect potentially millions of “Green Card” holders (a subset of the 3.89M estimated by the government) living outside the U.S. Those who have not formally abandoned their lawful permanent residency status. See, “LPR Tax Limbo” – Formal Abandonment of LPR (Form I-407) – (2020). This “LPR Tax Limbo” is no longer the case after the Aroeste decision.
These individuals who are living in tax treaty countries are not in “LPR Tax Limbo” any more since the Court clarified when the individual is not a United States tax resident. The Court explained, that filing a “late” tax treaty position, does not cause the non-U.S. citizen to have waived the benefits of the income tax treaty. It is the tax treaty with each of the 66 countreis that has the potential of unlocking the “escape hatch” described by the Court.
The Court agrees with Aroeste. Although Aroeste gave untimely notice of his treaty position, the Court finds this does not waive the benefits of the Treaty as asserted by the Government. Rather, I.R.C. § 6712 provides the consequences for failure to comply with I.R.C. § 6114, namely a penalty of $1,000 for each failure to meet § 6114’s requirements of disclosing a treaty position.
The court in Aroeste outlined a 5-step analysis that becomes crucial for the 3.89 million LPRs residing abroad in one of the 66 tax treaty countries, in determining whether they are “United States persons” under the law. This will be covered in Part II.
Millions of LPR Individuals Living in 66 Different Countries Could Be Impacted by Aroeste vs. U.S.
The United States has a total of 58 income tax treaties that covers 66 countries. See, Countries with U.S. Income Tax Treaties & Lawful Permanent Residents (“Oops – Did I Expatriate”?) (2014); ironically reflecting the same tax treaties in force in November 2023 as of 2014 (until the Chile treaty came into effect). The 1973 U.S. – U.S.S.R. income tax treaty applies to Armenia, Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, and Uzbekistan.
Importantly, anyone in these circumstances would be remiss, if they did not consider carefully the “mark to market” tax implications to them if they were to become a “covered expatriate” as defined in the law. These “mark to market” tax consequences can have potentially devastating consequences, including to U.S. beneficiaries in the future if not properly planned and considered.
The U.S. tax law is complex, including when an individual (i) becomes and (ii) ceases to be, a U.S. income tax resident (USITR). USITR is not a technical term used under the tax law. The U.S. tax and information reporting requirements are very different depending the status of an individual. Anyone who is not a United States citizen, is either a –
“Resident alien“, or a
“Nonresident alien” as the tax law defines both of these categories.
You can’t be both.
“Resident aliens” are generally also “United States persons” (both technical terms in the federal tax law).
“Non-resident aliens” as defined are necessarily not “United States persons.”
Being one versus the other has huge U.S. tax and reporting consequences.
An individual who is a “lawful permanent resident” as referenced in the tax law (Section 7701(b)(6)) cross-references the U.S. immigration law. The first requirement of that statutory tax rule in § 7701(b)(6)(A)) is that “(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 [such status not having changed]. . .[emphasis added]” This means the tax definition is dependent upon the immigration laws, which are found in Title 8, Immigration and Nationality Act. Importantly, the last part of that sentence (i.e., [such status not having changed] is a requirement in the immigration law (Title 8), but does not appear in the tax definition.
The term “lawful permanent resident” cannot be found in Title 8 as a noun or object (i.e., the individual). Instead, the immigration law defines the status of a person in 8 U.S. Code § 1101(a) as follows:- “. . . (20) The term “lawfully admitted for permanent residence” means 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, such status not having changed.“
This analysis is fundamental to be able to determine whether an individual who holds a “green card” in their pocket even has the status of being “lawfully admitted for permanent residence. . . such status not having changed.” It’s a fundamental legal question under immigration law that must be answered first, to then be able to answer the tax question.
Each form an individual files or does not file (e.g., IRS tax form 1040 v. 1040NR; 8833, 5471, 8854, 8621, 3520, 8864, 8858 and FinCEN forms 114; and immigration forms, e.g., I-485, I-407, etc.) can have a potential impact on the tax residency status of an individual.
The immigration law and when forms, such as Form I-485, Application to Register Permanent Residence or Adjust Status are submitted to the U.S. federal government can have an impact on this determination. The government can use it against the individual as they did unsuccessfully in Aroeste (see below – Pages 9 and 11 of 17); asserting that Mr. Aroeste waived the treaty by not submitting certain forms.
The tax residency analysis for those who have kept their “green card” in their pocket, can be even more complex as was analyzed by the Court. There are additional provisions of the law that must be considered including old Treasury Regulations that pre-date many provisions of various U.S. income tax treaties.
For instance, each of the following federal tax statutory rules, which will be considered in more detail in later posts (II and III):
Additional posts will review the impact of these provisions in the law and how various immigration forms (including I-485 and I-407, Record of Abandonment of Lawful Permanent Resident Status) and tax forms (including 1040 v. 1040NR; 8833, 5471, 8854, 8621, 3520, 8864, 8858) and FinCEN form 114, can impact the determination of whether someone who has a “green card” in their pocket is or is not a United States person.
Bienvenido, ex Commissioner del Internal Revenue Service, Charles “Chuck” Rettig, al mejor despacho de abogados especializado en impuestos de América del Norte. Sabemos que serás excepcionalmente valioso para nuestros clientes internacionales en todo el mundo, y especialmente en América Latina y México, en lo que respecta a sus asuntos fiscales.
Huge news for all of us in the tax world, including those of us with a California connection. Chuck Rettig is the most accomplished tax lawyer, to come out of the state of California in my lifetime. It is a true honor for us at a tax focused law firm Chamberlain Hrdlicka, with nearly 80 trained tax lawyers, to have the likes of Chuck Rettig join us.
I was fortunate to follow, about a decade after Chuck, to also serve as the chair of the tax section of the State Bar of California. He has no peers in what he has accomplished professionally in the tax field.
Here’s part of our firms press release of today:
Former IRS Commissioner Charles Rettig Joins Chamberlain Hrdlicka
ATLANTA/HOUSTON/SAN ANTONIO/PHILADELPHIA/LOS ANGELES, March 4, 2024 – Chamberlain Hrdlicka is pleased to welcome former IRS Commissioner Charles “Chuck” Rettig to the firm as a Shareholder. Rettig served as the Commissioner of the IRS from 2018 to 2022, where he oversaw the nation’s tax system and managed an agency of over 83,000 employees with an annual budget of $13.4 billion. He will join the firm’s Tax Controversy & Litigation practice, comprised of attorneys experienced in advising and representing taxpayers before federal, state and local taxing authorities and in federal and state courts throughout the country. Rettig will be based in Los Angeles, California, extending the firm’s national presence for clients.
“To say we are honored to have Chuck Rettig join our firm would be an understatement,” says Larry Campagna, Managing Shareholder at Chamberlain Hrdlicka. “Chuck’s addition to Chamberlain is a testament to our work within the tax controversy market and our clients. His incredible experience at the IRS, focusing on improving service to taxpayers and deep consideration for his employees, makes him a pivotal and instrumental addition to the team.”
“This move to Chamberlain Hrdlicka is a natural progression from my tenure as the IRS Commissioner,” expressed Rettig. “It just makes sense following my work at the biggest tax agency to then join the preeminent tax and tax controversy firm in the country. I am excited to collaborate with longtime friends and colleagues within the firm, collectively dedicated to delivering unparalleled service. I am privileged to have many friends and colleagues in the tax profession and look forward to this opportunity to again work closely with them going forward.”
