reposted from Tax Connections Blog
Written by John Richardson | Posted in International
Introduction – Introducing Gerd Topsnik
“This case will be seen as the first of an (eventual) series of cases that determine how the definition of long term resident applies to Green Card holders. The case makes clear that if one does NOT meet the treaty definition of resident in the second country, that one cannot use that treaty to defeat the long term resident test. A subsequent case is sure to expand on this issue. Otherwise, the case confirms that the S. 877A Exit Tax rules are alive and well and that the 5 year certification test must be met to avoid non-covered status.”
Topsnik may or may not be a bad guy. But even “bad guys” are entitled to have the law properly applied to their facts. It would be very interesting to know how the court would have responded if Topsnik had been paying tax (a nice taxpayer) in Germany as a German resident.
This is part of a series of posts on: (1) tax residency, (2) the use of treaty tiebreakers when an individual is a tax resident of more than one jurisdiction and (3) how to use treaty tiebreakers to end tax residency in an undesirable tax jurisdiction.
This is the second of the two Topsnik posts. Topsnik 1 focused on the tax residence of Green Card Holders.
This post – Topsnik 2 – focuses on the expatriation of Green Card Holders and under what circumstances and in what manner they may be subjected to the S. 877A Exit Tax. The text of Topsnik 2 is here:
The Teachings of Topsnik 2
Green Card Holders ARE U.S. tax residents
Once again, the case confirms that one does NOT abandon the Green Card simply by moving from the United States. The Green must be either taken away by the Government, abandoned by the Green Card Holder, or be the result of a treaty election.
Tax Residence: The case confirms that the U.S. Germany Tax Treaty (as is true of all other treaties) requires that one be a tax resident, as defined by the treaty, to get any benefits of a treaty.
These benefits of being a tax resident of Germany (as defined by the treaty) potentially INCLUDE:
the right to be treated as a tax resident of Germany as well as being treated as tax resident of the United States
the right to use the tax treaty tie breaker (assuming that he is a tax resident of both countries) to make him ONLY a tax resident of Germany
the right to have the years that he is a tax resident of Germany NOT count toward determining whether he is a long term resident of the United States (Internal Revenue Code 877(e)(2)
Topsnik was not a tax resident of Germany as defined by the U.S. Germany tax treaty.
Applicability of the S. 877A Exit Tax:
Abandoning the Green Card by filing the I-407 is an expatriating act. Because, Topsnik was NOT a tax resident of Germany as defined by the tax treaty, he could NOT argue that he was NOT a long term resident (within the meaning of Internal Revenue Code 877(e)(2). As a result, Mr. Topsnik’s (1) expatriating by abandoning his Green Card, coupled with (2) the fact that he was a long term resident, meant that he could prevent the S. 877A Exit Tax ONLY if he was NOT a covered expatriate.
The failure to certify 5 years of tax compliance is a sufficient condition for being a covered expatriate:
Subparagraph (C) provides that a person is a covered expatriate if such individual fails to certify under penalty of perjury that he has met the requirements of this title for the 5 preceding taxable years or fails to submit such evidence of such compliance as the Secretary may require.
Notice 2009-85, sec. 8, 2009-45 I.R.B. at 611, explains that for purposes of certifying tax compliance for the five years before expatriation pursuant to section 877(a)(2)(C):
– 21 All U.S. citizens who relinquish their U.S. citizenship and all longterm residents who cease to be lawful permanent residents of the United States (within the meaning of section 7701(b)(6)) 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. Individuals who fail to make such certification will be treated as covered expatriates within the meaning of section 877A(g)
Because Mr. Topsnik was a covered expatriate he was subject to the S. 877A Exit Tax:
All of the property that he owned on his date of expatriation was deemed to have been sold on the day before his expatriation. This resulted in an Exit Tax payable to the IRS.
IRS Notice 2009-85 is NOT a regulation and is therefore NOT binding:
Section 877A(i) provides that the Secretary shall prescribe regulations as may be necessary and appropriate to carry out the purposes of the section. Such regulations have not been yet been provided. Instead, the IRS has promulgated guidance regarding this section in Notice 2009-85, 2009-45 I.R.B. 598. We are not bound by Notice 2009-85, supra, see Compaq Computer Corp. v. Commissioner, 113 T.C. 363, 372 (1999), but it is an official statement of the Commissioner position and we may let it persuade us, see Nationalist Movement v. Commissioner, 102 T.C. 558, 583 (1994), 37 F.3d 216 (5th Cir.1994).
The 2016 Topsnik decision reminds us tax residence in both countries (as defined by the treaty) is necessary to invoke treaty tiebreaker rules. In addition, in order to avoid covered expatriate status (making one subject to the S. 877A Exit Tax) one must file Form 8854 certifying 5 years of tax compliance
Furthermore the case reminds us that the S. 877A Exit Tax is real, alive, well and brutal confiscatory.