The decision in Aroeste v. United States, continues to affect how U.S. tax treaty rules apply to green card holders. In Aroeste, the federal district court rejected important IRS-DOJ arguments concerning when a lawful permanent resident is not treated as a resident of the United States under an income tax treaty. I refer to the broader consequences of the case as the Aroeste Effect, which rears its head in proposed Treasury Regulations to be discussed for another day.
For years, the IRS Large Business and International Division (LB&I) published a Practice Unit titled Determining Tax Residency Status of Lawful Permanent Residents. Issued in 2013 and updated in 2014, it was used to help IRS personnel determine the U.S. tax residency of green card holders—the very subject litigated in Aroeste. That Practice Unit has now been removed from the IRS website.
The removal is notable because the IRS continues to publish other related international tax Practice Units. For example, its 2018 Practice Unit, remains available: Determining an Individual’s Residency for Treaty Purposes PDF This 2018 Practice Unit has not been updated to address Aroeste. Importantly, however, it does not repeat the government’s argument in Aroeste that a taxpayer can lose or waive treaty benefits by failing to timely “take” a treaty position. The district court rejected the government’s position on that issue.
The IRS has not publicly explained why it removed the Practice Unit specifically addressing lawful permanent residents. Nevertheless, its disappearance after Aroeste is significant. For green card holders living outside the United States, the practical issue is straightforward: holding a green card does not necessarily mean the individual must always be a “United States person” – i.e., a U.S. tax resident. An applicable tax treaty can change that result.
The intricacies of the law can be complex, depending upon the facts of each person. The IRS’s removal of its own Practice Unit on this subject is another noteworthy example of the Aroeste Effect.
