Many individuals have no idea that, under the legal principles confirmed in the federal district court case I litigated — Aroeste v United States, 22-cv-00682-AJB-KSC (20 Nov. 2023) – they may already be treated as “covered expatriates” as a matter of law.
Along Comes Section 2801 – and 2025 Final Regulations – The “Forever Taint” to Family and Friends (Paying the Taxman)
Aroeste – Landmark Decision Confirms the Law – Tax Treaty Law Applies – Taxpayers Do Not Waive Benefits per Gov’t
These writings all addressed the same underlying legal and policy expectations that courts would eventually be required to confront — issues now directly addressed in Aroeste. The Aroestedecision is also consistent with positions I successfully advanced in three separate U.S. Tax Court cases involving green card holders, none of which resulted in published opinions because the government ultimately conceded to my arguments and my clients prevailed prior to trial.
This case law has great impact on green card holders who are living principally outside of the U.S. There are 3.88 million individuals who are living outside the U.S. – per the 2024 report by the U.S. federal government. Many of them live in a treaty country. Many of these individuals might be considering their immigration law consequences (particularly after the latest announcement from the USCIS – impact these immigration consequences: U.S. Citizenship and Immigration Services Will Grant ‘Adjustment of Status’ Only in Extraordinary Circumstances (May 2026) Few have considered the tax law implications.
Most important Questions for “Green Card” Holders (“lawful permanent residents”): Part I of VI
Those individuals who have green cards and live in and outside of the United States, should understand the tax and legal implications to them.
There are millions of individuals in this category. i.e., those who have “emigrated” with an “e” from the United States. There are 3.88 million of these green card holders, as of 2024 according to the U.S. federal government’s latest report. The statistics are striking – that so many individuals reside outside the U.S.
These nearly 4 million individuals who do not reside principally in the U.S. are similar to the fact pattern of Mr. Aroeste residing in Mexico City. See the case where yours truly, Patrick W. Martin, was lead counsel in that landmark case – and the analysis of the District Court in Aroeste v. United States. The government lost.
Today’s post is a series of simple and key questions for those with green cards, to help them better hone in on the legal issues and U.S. tax risks that may be applicable to them:
Am I still a U.S. taxpayer?
What does it mean to be a U.S. taxpayer, when there are technical tax terms such as “United States person” and an individual who is a “lawful permanent resident” (not defined in the immigration law)?
I have a green card but I’ve lived outside the U.S. for years — do I still have to file U.S. tax returns?
The date on my physical green card has expired – does that mean I am no longer a a “lawful permanent resident” for tax purposes?
Does it matter whether my green card is expired, taken back at the airport, or just sitting in a drawer overseas?
Is there a difference between “giving up” my green card and just letting it lapse?
Aroeste v. United States — what does it mean for me? –
Why are all of the above questions so important to me – since I previously obtained a “green card”?
Subsequent posts will address additional key questions that can have a significant legal consequence to individuals who had or have a green card and spend substantial time outside of the United States. For a preview, look at Oops.. .Did I Expatriate and Never Know It – International Tax Journal 2014
Quaint?: U.S. Treasury 1998 Report: Income Tax Compliance by U.S. Citizens and U.S. Lawful Permanent Residents Residing Outside the United States and Related Issues (Part I of Part II)
This is a classic report that now reads quaintly.
This 1998 U.S. Treasury report was written before the IRS and the Department of Justice started enforcing what has now become numerous international information reporting penalty provisions in the law. The author watched the change over these years, and the introduction of some new statutory penalties (e.g., 26 USC § 6039F in 1996; § 6039D in 2010; § 6039G in 1996; and major modifications in 2010 to § 6048, among others and increased FBAR penalties). Most importantly, the biggest change was how international individual taxpayers can (and often are) severely penalized by the IRS.
This 1998 report is full of sensible ideas. The Treasury explains the complex tax laws applicable to United States citizens (“USCs”) and lawful permanent resident (“LPR”) residing outside the U.S. The report has suggestions on how to best educate international taxpayers living overseas who are impacted by these laws.
Fast forward more than 25 years later (post 9/11/2001; post USA Patriot Act of 2001; post Swiss Bank scandals 2009+; post FATCA 2010+, etc.) and we are in a world of international tax penalties galore.
The U.S. international tax world in 2024 is a very different world, even though the core of the U.S. international tax law of how much tax is owing has largely remained the same for individuals. The calculation of income taxes for USCs and LPRs living overseas in 2024 is largely the same as it was in 1998. Plus, the IRS reports that only 10,684 resident income tax returns (IRS Form 1040) were filed by these individuals living overseas in the last year the IRS Office of Statistics reporting tax returns with IRS Form 2555 (Foreign Earned Income).
What has changed over these years is the IRS enforcement and easy found money on penalty collections. One example is the penalty for reporting tax-free gifts and inheritances. The reporting requirement of that law (26 U.S. Code § 6039F – Notice of large gifts received from foreign persons) was adopted in 1996.
The IRS has been increasingly aggressive in asserting international tax penalties: The available data shows . . . there were over 4,000 penalties assessed against individuals and businesses, totaling $1.7 billion [just for this penalty under 6039F]. During this period, the average penalty was . . . $426,000 . . .
Taxpayer Advocate Report (2023): Most Serious Problem #8 – The IRS’s Approach to International Information Return Penalties Is Draconian and Inefficient
The IRS assessed US$1.7 billion of penalties for this simple 6039F reporting violation over the four years of 2018-2021. The 2018 amounts tripled or quadrupled in subsequent years (e.g., $77M v. $238M v. 282M). Not all of these taxpayers are residing overseas, but certainly USCs and LPRs residing outside the U.S. are likely to encounter foreign gifts and foreign bequests, simply because their lives are foreign!
On the flip side, there have been few favorable changes to the U.S. citizen and lawful permanent resident (“LPR”) living outside the U.S. over these 25 years.
The most favorable developments have come in the last year or so. Importantly, the U.S. Supreme Court rejected the IRS interpretation of multiple per year non-willful FBAR penalties inUnited States v. Bittner, 143 S. Ct. 713 (2023). The author of this blog worked on the ACTEC amicus brief in Bittner, cited by the majority opinion (Justice Gorsuch) and the dissent (Justice Sotomayor).
Also of significance for individuals living in tax treaty countries is the case of Mr. Aroeste. The author of this blog represents the Mexico City resident who had not formally abandoned his LPRs. The case law provides significant relief for different groups of international taxpayers pursuant per the ruling by the federal district court in Aroeste v United States, 22-cv-00682-AJB-KSC (20 Nov. 2023). That case had over $3M of penalties assessed for IRS Forms 5471, 3520 and FBAR filings.
Plus, the DOJ conceded the penalty assessed against a Polish immigrant for a foreign gift in Wrzesinski v. United States, No. 2:22-cv-03568, (E.D. Pa. Mar 7, 2023) for not filing IRS Form 3520 based upon reasonable cause. Finally, the U.S. Tax Court decision in Farhy v. Commissioner of Internal Revenue (2023) concluded the IRS could not automatically assess penalties for not filing IRS Form 5471.
Indeed, the international tax world has changed much over this past quarter century since the 1998 U.S. Treasury report. These recent string of cases in favor of international taxpayers is starting to look like a positive trend. See, Six Weeks, Three International Information Reporting Decisions (18 Sept. 2023).
Countries From Which Viewers Read Posts – Tax-Expatriation.com – First Week of 2024 (Which Ones are Tax Treaty Countries?) – Applying the “Escape Hatch”
The whole idea of the “escape hatch” for tax treaties is an excellent way of explaining how and when tax treaty law applies in different circumstances. Importantly, the U.S. federal government cannot deny an individual (or presumably a company either) from properly applying the law of a tax treaty – even if they “gave [an] untimely notice of his treaty position “. See further comments at the end of this post and the District Court’s opinion here – Aroeste v United States – Order (Nov 2023). Meanwhile, see below the 22 countries from where global readers viewed Tax-Expatriation.comduring the first full week of 2024.
Below is the list of 22 countries (including the United States) from where readers hailed, who read Tax-Expatriation.comduring the first week of 2024. All, but Brazil, Croatia, Nigeria, the United Arab Emirates, Colombia, Kenya and Bermuda have income tax treaties with the United States.
This means that all other individuals are connected with the following 14 countries that have tax treaties with the United States:
Mexico
India
Canada
United Kingdom
Switzerland
Australia
China
Spain
Turkey
Germany
Japan
Romania
Portugal
Netherlands
Further, all individuals who might have never formally abandoned their lawful permanent residency (“green card”), maybe never filed specific IRS tax forms, and yet reside in one of these fourteen (14) treaty countries could be eligible for the application and the specific benefits of international income tax treaty law. This, along the lines of the decision in Aroeste v United States (Nov. 2023). In addition, there could be other tax treaty benefits applicable to those individuals in these fourteen countries depending upon where are their assets, what type of income they have, where does the income come from, and where do they reside.
The tax treaty rights discussed here are established by law, as elucidated by the Federal District Court in Aroeste v United States (Nov. 2023). The Court determined that the IRS cannot simply assert an individual’s ineligibility for treaty law provisions based solely on the failure to file specific IRS forms within the government-defined “timely” period. The Court emphasized that there is no automatic waiver of treaty benefits as a matter of law, while acknowledging: “. . . Aroeste gave untimely notice of his treaty position. . .” For specific excerpts from the opinion, please refer to the highlighted portions below. To access the complete opinion, please consult Aroeste v United States – Order (Nov 2023).
* * * * * * * * *
B. Whether Aroeste Did Not Waive the Benefits of the Treaty Applicable to Residents of Mexico and Notified the Secretary of Commencement of Such Treatment.
To establish Mexican residency under the Treaty, and thus avoid the reporting requirements of “United States persons,” Aroeste must have filed a timely income tax return as a non-resident (Form 1040NR) with a Form 8833, Treaty-Based Return Position Case 3:22-cv-00682-AJB-KSC Document 90 Filed 11/20/23 PageID.2722 Page 8 of 17 9 22-cv-00682-AJB-KSC Disclosure Under Section 6114 or 7701(b). Indeed, Aroeste did not submit Form 8833 to notify the IRS of his desired treaty position for the years 2012 and 2013 until October 12, 2016, when he submitted an amended tax return for both years at issue. (Id.) The Government asserts that because Aroeste did not timely submit these forms, he cannot establish that he notified the IRS of his desire to be treated solely as a resident of Mexico and not waive the benefits of the Treaty. (Id. at 4.) The Government relies upon United States v. Little, 828 Fed. App’x 34 (2d Cir. 2020) (“Little II”), a criminal appeal in which the court held a lawful permanent resident of a foreign country was a “‘resident alien’ or ‘person subject to the jurisdiction of the United States’ with an obligation to file an FBAR.” Id. at 38 (quoting 31 C.F.R. § 1010.350(a), (b)(2)).
In response, Aroeste asserts that while he agrees with the Government that I.R.C. § 6114 requires disclosure of a treaty position, he disagrees as to the consequences for a taxpayer’s failure to timely file the disclosure. (Doc. No. 75-1 at 6.) While the Government asserts the failure to timely file Forms 1040NR and 8833 deprives individuals of the Treaty benefits provided, Aroeste argues instead that I.R.C. § 6712 provides explicit consequences for failure to comply with § 6114. Specifically, § 6712 states that “[i]f a taxpayer fails to meet the requirements of section 6114, there is hereby imposed a penalty equal to $1,000 . . . on each such failure.” I.R.C. § 6712(a). Based on the foregoing, Aroeste argues the taxpayer does not lose the benefits or application of the treaty law.1 (Doc. No. 75-1 at 6.) In United States v. Little, 12-cr-647 (PKC), 2017 WL 1743837, at *5 (S.D. N.Y. 1 Aroeste further asserts that published agency guidance, letter rulings, and technical advice support his position. (Doc. No. 75-1 at 7.) For example, in 2007, an IRS agent sought advice from IRS Counsel asking, “Do we have legal authority to deny a tax treaty because Form 8833 is not attached or the treaty is claimed on the wrong Form (1040EZ or 1040)?” Legal Advice Issued to Program Managers During 2007 Document Number 2007-01188, IRS. IRS Counsel responded, “No, you cannot deny treaty benefits if the taxpayer is entitled to them. You may impose a penalty of $1,000 under section 6712 of the Code on an individual who is obligated to file and does not.” Id. As to this, the Court finds it has no precedential value under I.R.C. § 6110(k)(3), which states that “a written determination may not be used or cited as precedent.” See Amtel, Inc. v. United States, 31 Fed. Cl. 598, 602 (1994) (“The [Internal Revenue] Code specifically precludes [plaintiff] and the court from using or citing a technical advice memorandum as precedent.”) Case 3:22-cv-00682-AJB-KSC Document 90 Filed 11/20/23 PageID.2723 Page 9 of 17 10 22-cv-00682-AJB-KSC May 3, 2017) (“Little I”), a criminal case for the plaintiff’s willful failure to file tax returns, the court stated the plaintiff’s same argument “that the failure to take a Treaty position can result only in a financial penalty also lacks merit. 26 U.S.C. § 6712(c) expressly states that ‘[t]he penalty imposed by this section shall be in addition to any other penalty imposed by law.’” (emphasis added).
I have been consulted over the years by other taxpayers which are cited now as published decisions by the government and the Federal District Court (Southern District of California). These cases are referenced and cited in my own most recent case of Aroeste v United States (Nov. 2023).
However, in Little I, the plaintiff never attempted to take a treaty position. Next, in Shnier v. United States, 151 Fed. Cl. 1, 21 (2020), the court denied the plaintiffs’ claims for relief based on tax treaties because they failed to disclose a treaty based position on their tax returns pursuant to I.R.C. § 6114 “and did not attempt to cure this omission in their briefing[.]” Although the plaintiffs in Shnier were naturalized U.S. citizens who attempted to recover their income taxes under I.R.C § 1297, the court’s brief discussion of I.R.C. § 6114 in relation to a treaty-based position is instructive that an untimely notice of a treaty position does not bar the individual from taking such position. Moreover, in Pekar v. C.I.R., 113 T.C. 158 (1999), the court noted that a taxpayer who fails to disclose a treaty-based position as required by § 6114 is subject to the $1,000 penalty, but stated “there is no indication that this failure estops a taxpayer from taking such a position.” Id. at 161 n.5.2 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.
* * * * * * * * *
For individuals living in any of these 14 tax treaty countries (or any of the total 67 income tax treaty countries), the key takeaway is that, based on their specific circumstances, they might be eligible to leverage the international tax treaty principles outlined in the Aroeste v United States case (Nov. 2023). The forthcoming post will pose questions for consideration by the potentially millions of individuals affected by these rules of law.
The author has extensively discussed the appropriate IRS Form for individuals to sign under penalties of perjury when dealing with their banks and third parties, irrespective of the banks’ location. The choice between IRS Forms W-8 and W-9 hinges on the U.S. income tax residency status of the individual. Forms W-8 and W-9 serve the purpose of conveying the tax residency status of the individual to third parties. The correct (or incorrect form) can have a range of different tax and legal consequences to the individual. A non-resident is generally not subject to income taxation in the United States, except for on limited types of income. In contrast, a resident (for federal income tax purposes) is subject to taxation on their worldwide income. If an income tax resident of the United States falsely certifies their status using Form W-8, severe adverse legal consequences can follow. See e.g., W-8s for U.S. Citizens Abroad: Filing False Information with Non-U.S. Banks (2016)
IRS Forms W-8 or W-9 (or Other)?
For U.S. citizens, the process is straightforward—they must sign IRS Form W-9. However, for individuals without U.S. citizenship, the situation becomes more intricate. The following posts delve into critical legal considerations surrounding IRS Form W-8BEN.
These comments provide in-depth insights into the legal consequences of filing and signing specific IRS forms (or their equivalents produced by financial institutions: W-8 vs. W-9). Notably, UBS’s explanation titled “UBS One Source Understanding tax forms—non U.S. taxpayers” sheds light on the efforts foreign financial institutions need to dedicate to assist clients who are not “United States persons” for federal tax purposes, ensuring compliance with U.S. federal tax laws.
Green Card Holders Living Abroad Have Further Analysis to Consider
The complexity heightens for “Green Card” holders living abroad, especially those residing in countries covered by an income tax treaty with the United States. See, Aroeste v. United States, Case No. 22-cv-00682-AJB-KSC. Aroeste v United States – Order Nov 2023, emphasizes a 5-step analysis for Green Card holders who have not formally abandoned their status. The ultimate test is whether the individual is entitled to be treated as a resident of a foreign country under a tax treaty.
Aroeste v. United States: Decision’s Impact on LPR Individuals
The decision could potentially affect millions of Green Card holders living outside the U.S. Aroeste Court’s 5-step analysis becomes crucial for the 3+ million LPRs residing abroad, determining whether they qualify as “United States persons” under the law.
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 around 66 countries. The 1973 U.S. – U.S.S.R. income tax treaty applies to Armenia, Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, and Uzbekistan. Some have been cancelled.
Importance of Figuring Out your Residency Status if you Never Formally Abandoned your Green Card and Live in an Income Tax Treaty Country.
The impact of the Aroeste v United States decision presents a dual scenario for individuals who have not formally abandoned their “lawful permanent residency” status. On the positive side, there is an opportunity to inform the Internal Revenue Service (IRS) of their non-resident status by utilizing the applicable income tax treaty. There are specific steps to take as explained by the Court in Aroeste vs. United States. This action can relieve them of U.S. federal income tax filing obligations and Foreign Bank Account Report (FBAR) filing requirements, helping to steer clear of potential penalties and taxes that might otherwise be owed. The Court in Aroeste concluded such late filings could subject the individual ” . . . to penalties pursuant to I.R.C. § 6712(a) equal to $1,000 per failure to timely report his Treaty position. . . “
Potential Downside for “LPRs” Living in an Income Tax Treaty Country.
However, on the flip side, this termination of U.S. income tax residency status may lead to the individual “cease[ing] to be a lawful permanent resident of the United States (within the meaning of section 7701(b)(6)).” Such a shift can trigger adverse U.S. tax consequences, affecting not only the individual but also extending to children, spouses, family members, and friends who could receive “covered gifts” or “covered bequests.” This classification may result in the individual being deemed a “covered expatriate” under the expatriation tax law, as outlined in IRC 877A(g)(3). See, IRC 877A(g)(3). Potentially severe adverse tax consequences can follow from this edge of the sword. The Court in Aroeste vs. United States did not address these adverse tax consequences as they were not at issue.
This Blog is intended to provide general information about tax expatriation legal concepts under U.S. law to help readers better understand often very complex issues within the U.S. international tax field for citizens and lawful permanent residents. General legal information is not the same as legal advice, that is, the concrete application of law to a specific case with unique and particular facts.
Legal advice also should include strategic planning and advice to a particular case. A legal adviser should be able to assist an individual in taking important decisions and steps, related to the specific goals of the individual, while understanding the legal and tax consequences of each step. There are a range of consequences that the “U.S. tax expatriation” laws impose upon different types of transactions, transfers, reorganization of assets, etc. None of these items are discussed in this Blog.
Although the author has taken great care to make sure that the information contained herein is accurate and useful, it is necessary that you consult an experienced attorney to address any particular situation. Most importantly, if you are contemplating renouncing (or proving relinquishment) of U.S. citizenship or formally abandoning your LPR status, you must get legal advice. This is a very important decision with a range of complex legal consequences.
Recent Articles re: Aroeste v. United States (Tax Treaty – Nonresident; Lawful Permanent Resident) – IRS Notice 2009-85 Lacks Authority
There have been numerous articles being written about the key case of the author (Patrick W. Martin) who has represented Mr. and Mrs. Aroeste for nearly 8 years.
Federal Court Determines IRS “Guidance for Expatriates Under Section 877A” – IRS Notice 2009-85: “Is Not Binding Authority”
The Federal District Court made numerous key legal findings in its Order on November 20, 2023; in Aroeste v. United States, Case No. 22-cv-00682-AJB-KSC. One of the more significant findings was that IRS Notice 2009-85 is not binding authority. This blog is dedicated to tax expatriation related matters under U.S. law.
IRS Notice 2009-85 is Not Binding Authority per the Court
expatriation.com has represented him for several years throughout the IRS audits and the on-going U.S. Tax Court cases along with his wife.
While many may consider this case to be a Title 31/FBAR case (which it is), it has greater ramifications under the tax expatriation laws in the author’s view. The finding by this Court regarding IRS Notice 2009-85 is significant with far reaching implications. The IRS Notice 2009-85 is broad in its scope and is more than 60 pages in length. It notes that, “Section 877A(i) provides that the Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of section 877A.” (p.4)
No Treasury Regulations Ever Issued – After 15 Years of IRS Notice 2009-85
The Treasury Department never issued regulations under 877A, which is now 15 years old. The notice provides the historical background as follows:
Notice 2009-85 PURPOSE Section 301 of the Heroes Earnings Assistance and Relief Tax Act of 2008 (the “Act”) added new sections 877A and 2801 to the Internal Revenue Code (“Code”), amended sections 6039G and 7701(a), made conforming amendments to sections 877(e) and 7701(b), and repealed section 7701(n) with respect to individuals who on or after June 17, 2008, relinquish U.S. citizenship or cease to be lawful permanent residents of the United States. This notice provides guidance for individuals who are subject to section 877A.
The Court in Aroeste concluded that Mr. Aroeste ceased to be a lawful permanent resident.
Specifically, the Court finds Aroeste . . . 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.
Many practitioners have questioned the accuracy and validity of many of the conclusions asserted in the 2009 notice; such as the timing of when someone becomes a “covered expatriate”. How and why they become a “covered expatriate” by the concepts introduced in the 2009 notice. The multiple examples presented, reflecting various tax outcomes according to the IRS, were never commented on by the public.
Another question many have raised is the effectiveness of IRS Form 8854? Throughout the notice, the IRS uses the word “must” some 88 times regarding the individual who ceased to be a U.S. citizen or a “lawful permanent resident” (or in some instances references to third parties). Does the IRS imply that if any of these “must”/conditions imposed under the notice are not satisfied, the individual is necessarily a “covered expatriate” with the adverse tax consequences that might follow?
Are their other adverse tax consequences that might follow? For instance, can the IRS repeatedly assert international information penalties regarding the individual’s
companies in her own country,
beneficiary rights of a trust or an estate in her own country, or
other investment assets or financial accounts in her country of residence that might be deemed a “specified foreign financial asset” if the individual is a United States person”?
For instance, the 2009 notice provides that a “covered expatriate” must file a “dual status return” and file a Form 1040NR with a 1040 attached as a schedule for the “year of expatriation”. See, IRS Notice 2009-85, p. 49.
The IRS goes on to say in that notice that individuals “must file Form 8854 in order to certify, under penalties of perjury, that they have been in compliance with all federal tax laws during the five years preceding the year of expatriation.” Id., p. 50. The government asserts that if this condition is not satisfied, the individual will necessarily be treated as ” . . . covered expatriates within the meaning of section 877A(g) whether or not they also meet the tax liability test or the net worth test.“
These would be pretty damning consequences to an individual, if they otherwise met the statutory test of certifying compliance with the tax laws for the preceding five years.
Importantly, the Court in Aroeste v. United States concluded as a matter of law that 2009-85 is not binding authority as it fails to comply with the Administrative Procedures Act (“APA”). It concluded Mr. Aroeste did not need to file Form 8854 with his amended returns. He had filed Form 8833 – treaty based reporting.
The court cited to ” . . . Green Valley Investors, LLC v. Comm’r of Internal Revenue, 159 T.C. No. 5, at *4 (Nov. 9, 2022)) (under the APA, agencies must follow a three-step procedure for “notice-and-comment” rulemaking, but this requirement does not apply to “interpretive rules, general statements of policy, or rules of agency organization, procedure, or practice.”).) The Court agrees. In Mann Construction, Inc. v. United States, 27 F.4th 1138 (6th Cir. 2022), the court found that Notice 2007-83 failed to comply with the APA’s notice-and-comment procedure. Similarly here, because Notice 2009-85 has not been subject to a notice-and-comment procedure, it does not comply with the APA and thus is not binding. As such, Aroeste was not required to file Form 8854 with his amended returns.”
None of these comments represent legal advice. Complex laws applied to specific facts require a legal expert to opine on the consequences and recommended courses of action. It is worth noting that individuals who have a “green card” and who have not previously articulated the application of a U.S. income tax treaty, should consider taking proactive steps to protect their rights under the law. Also, United States citizens who formally renounced their citizenship, who may never have taken specific tax reporting positions should consider taking proactive steps to help avoid the risk the IRS might assert substantial penalties or conclude the individual became a “covered expatriate”.
Federal District Court Rules in Favor of Mexican Citizen – Aroeste vs. United States (LPR) – Tax Treaty Applies: Government’s Motion for Summary Judgment is Denied
Last week (Nov. 20, 2023), Judge Battaglia in the Southern District of California (San Diego) ruled in favor of our client Mr. Alberto Aroeste regarding the application of the U.S.-Mexico Tax Treaty. The DOJ, Tax Division arguments on behalf of the Internal Revenue Service in the case (and their Motion for Summary Judgment – MSJ) were largely rejected by the Court.
A thorough read of the Order from the Court is recommended to understand the substantial legal findings and legal analysis made by the Court relevant to those who possess a “green card” referred to as “lawfully admitted for permanent residence” in Title 8, § 1101(a)(13) [Immigration and Nationality Act]. Key to this case, Title 26, § 7701(b)(6) [Federal Tax Code] then rather contorts the concept by saying an individual is a “lawful permanent resident” in accordance with immigration laws; but then goes on to put conditions on who apparently is a “lawful permanent resident” for federal tax purposes. While immigration law requires the individual be ” . . . accorded the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws, such status not having changed”; the tax definition seems to ignore that status (i.e., has it changed and is the personal no longer accorded the privilege of residing permanently in the U.S.?).
The Board of Immigration Appeals (the “Board”), has long recognized that an alien’s status may change by operation of law, such that an alien may abandon his LPR status without a finding of removability (or, formerly, deportability or excludability) after a formal adjudicatory process. See United States v. Yakou, 428 F.3d 241, 247 (D.C. Cir. 2005); at 247-51 (discussing case law regarding abandonment and holding that an alien may abandon LPR status without formal administrative action); see also Matter of Quijencio, 15 I. & N. Dec. 95 (B.I.A. 1974); Matter of Kane, 15 I. & N. Dec. 258 (B.I.A. 1975); Matter of Muller, 16 I. & N. Dec. 637 (B.I.A. 1978); Matter of Abdoulin, 17 I. & N. Dec. 458, 460 (B.I.A. 1980); Matter of Huang, 19 I. & N. Dec. 749 (B.I.A. 1988).
The Court did not need to get into the nuances of immigration law to rule against the government in this case.
Some of the substantial takeaways from the decision are:
Waiver of the Tax Treaty: The government cannot assert an individual waived the treaty law because she initially filed the wrong IRS forms (1040) instead of the non-resident form (1040NR) and IRS Form 8833.
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.
Aroeste v United States – Order 20 Nov 2023 (p. 17)
Expatriation Tax form – IRS Form 8854: Validity and its Failure to Comply with the Administrative Procedure Act (“APA”)
C. Whether Aroeste Was Required to File Form 8854 The Government next argues that even if the IRS had accepted Aroeste’s amended returns, neither amended return would have properly notified the IRS of a commencement of treaty benefits because both failed to attach Form 8854, as required by IRS Notice 2009-85. (Doc. No. 76-1 at 4–5.) The Government concedes Aroeste attached Form 8833 to both amended forms. (Id.) Aroeste responds that Notice 2009-85 is not binding authority as it fails to comply with the Administrative Procedures Act (“APA”). (Doc. No. 78-1 at 8 (citing Green Valley Investors, LLC v. Comm’r of Internal Revenue, 159 T.C. No. 5, at *4 (Nov. 9, 2022)) (under the APA, agencies must follow a three-step procedure for “notice-and-comment” rulemaking, but this requirement does
not apply to “interpretive rules, general statements of policy, or rules of agency organization, procedure, or practice.”).) The Court agrees. In Mann Construction, Inc. v. United States, 27 F.4th 1138 (6th Cir. 2022), the court found that Notice 2007-83 failed to comply with the APA’s notice-and-comment procedure. Similarly here, because Notice 2009-85 has not been subject to a notice-and-comment procedure, it does not comply with the APA and thus is not binding. As such, Aroeste was not required to file Form 8854 with his amended returns.
Aroeste v United States – Order 20 Nov 2023 (p. 11)
Tax Treaty Law Applies – Article 4 Regarding Tax Residency
Various detailed analysis and discussions from the Court –
Aroeste v United States – Order 20 Nov 2023 (p. 11-14)
The Preamble to the FBAR Regulations is Not the Law –
. . . the Government points to the preamble to the 31 C.F.R. Part 1010 regulations, providing that “[a] legal permanent resident who elects under a tax treaty to be treated as a non-resident for tax purposes must still file the FBAR.” Amendment to the Bank Secrecy Act Regulations—Reports of Foreign Financial Accounts, 76 Fed. Reg. 10234-01 (Feb. 24, 2011). 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.
Aroeste v United States – Order 20 Nov 2023 (p. 14)
This is the third court case (the other two were in U.S. Tax Court) I have had over the last several years where the IRS tried to assess substantial penalties and taxes against LPRs who resided substantially outside the United States. The other two cases were conceded by the IRS prior to going to trial. One case had over US$40M at stake as assessed by the IRS. This case, in federal district court, was pushed all the way to this favorable (to Mr. Aroeste and those around the world in similar circumstances) outcome by the government. We were successful with all of these non-U.S. citizen cases (two brothers from Mexico and an individual from Germany).
Six Weeks, Three International Information Reporting Decisions –
taxnotes international published a recent article we prepared (myself, with Luz Villegas Banuelos and Sebastien Chain) –
The article was selected as the week’s Special Report and is made available to the public and released from the paywall. Normally, you need to be a paid subscriber.
The article covers three key interconnected cases.
In the space of just over six weeks, courts made three key judicial decisions. Those decisions helped clarify the requirements of individuals and the limitations on the powers of the IRS in assessing international information reporting penalties:
title 31 penalties for foreign bank account reports;
title 26 international information reporting penalties specific to reporting of ownership interests in foreign companies (and trusts1); and
how the federal statutory regimes of titles 31 and 26 cross over into international law as set forth in U.S. income tax treaties.
The three cases are interconnected and have significance for U.S. taxpayers with global lives, global assets, multinational family members, and businesses or accounts in different parts of the world.
Patrick W. Martin, et. al – Six Weeks, Three International Information Reporting Decisions (international taxnotes; September 18, 2023)
Please first read Part I of this series: Most important Questions for “Green Card” Holders (“lawful permanent residents”): Part I of VI, which outlines some of the foundational questions every green card holder should consider before addressing the additional issues questions below.
Many individuals have no idea that, under the legal principles confirmed in the federal district court case I litigated — Aroeste v United States, 22-cv-00682-AJB-KSC (20 Nov. 2023) – they may already be treated as “covered expatriates” as a matter of law.
