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Dual Resident Can't Informally Abandon U.S. Resident Status and Escape Tax on Stock Sale. (Parker Tax Publishing October 19, 2014)

The Tax Court rejected a taxpayer's claim that he was not subject to tax on a sale of U.S. corporate stock because he became a German resident and a U.S. nonresident alien when he "informally" abandoned his status as a lawful permanent resident; the taxpayer was subject to tax on the stock sale under the U.S. - Germany Treaty. Topsnik v. Comm'r, 143 T.C. No. 12 (9/23/14).

In 2004, Gerd Topsnik, a German citizen, made an installment sale of his stock in a U.S. corporation, and he received payments in 2004 through 2009 pursuant to a promissory note executed in connection with the sale. A large down payment was transferred in 2004 along with four smaller equal monthly payments, which continued throughout 2005 and 2009. Gerd filed U.S. individual income tax returns for 2004 and 2005 on which he erroneously reported identical portions of the gain. He did not file U.S. returns for 2006 through 2009.

The IRS challenged Gerd's installment sale reporting for 2004 and 2005 and filed substitutes for returns for 2006 through 2009 on which it included in Gerd's income appropriate portions of Gerd's installment sale gain. According to the IRS, Gerd was liable for income tax deficiencies for 2004 and 2006 through 2009, almost entirely attributable to the gain on his installment sale of stock, and various penalties for 2004 through 2009, all of which were included in a jeopardy assessment under which the IRS levied on the installment payments in partial satisfaction of Gerd's tax liabilities.

Gerd argued that, during the years in issue, he was a German resident and a U.S. nonresident alien because he "informally" abandoned his status as a lawful permanent resident (LPR) in 2003 when he sold his home in Hawaii and allegedly moved back to Germany. Therefore, he said, he was not subject to U.S. tax pursuant to Articles 4 and 13 of the U.S.-Germany Income Tax Treaty.

In support of his argument that an individual may informally abandon resident alien status, Gerd cited U.S. v. Yakou, 428 F.3d 241 (D.C. Cir. 2005). In Yakou, the court concluded that LPR status turned on immigration law. In the case, a taxpayer under investigation by federal agents, left his home in California in 1993, lived in London until 1998, and then returned to his native Baghdad where he lived and worked thereafter, making occasional trips of short duration to the United States to visit his family. He was subsequently arrested and charged with engaging in brokering activities in violation of the Arms Export Control Act and the International Traffic in Arms Regulations (ITAR). He never formally renounced his LPR status by filing Form I-407 with the immigration authorities, and the Board of Immigration Appeals (BIA) had not adjudged that his LPR status had changed. After noting that the controlling statutes and the ITAR were all silent regarding the manner and the point at which LPR status changes, the court looked to decisions of the BIA for guidance. The court and found numerous BIA decisions express in dicta the BIA's view that LPR status can change outside the formal adjudicatory process associated with removal.

Gerd also alleged that, because the IRS moved to dismiss a 2011 district court suit by Gerd to review the IRS's jeopardy assessments and levies encompassing the years in issue, in part, for lack of venue on the ground that Gerd was a resident of Germany, the IRS was now precluded from arguing that Gerd was not a German resident during the years in issue.

In response, the IRS argued that (1) because Gerd did not formally abandon his LPR status (obtained in 1977) until 2010, he remained an LPR during the years in issue, and (2) because he was not taxable by Germany as a German resident during those years, he was not a German resident under Article 4 of the Treaty. Therefore, he was not exempted from U.S. tax by the Treaty.

The Tax Court held that LPR status for federal income tax purposes turns on federal income tax law and is only indirectly determined by immigration law. The court held further that because Gerd did not formally abandon his LPR status as explicitly required by Code Sec. 7701(b)(6)(B) and Reg. Sec. 301.7701(b)-1(b)(1) and (3) until 2010, he remained an LPR during the years in issue, taxable by the United States on his worldwide income, including the gain on his 2004 installment sale of stock. Further, because Gerd was not subject to German tax as a German resident during the years in issue, he was not a German resident pursuant to the Treaty and, therefore, is not exempted by the Treaty from U.S. tax during those years. As a U.S. resident, the Tax Court held that Gerd was subject to U.S. tax under the Treaty on his gain recognized during the years in issue from his 2004 installment sale of the U.S. corporation stock.

With respect to the prior district court litigation, the court noted that such litigation only concerned Gerd's status as a German resident for a year after the years in issue. Thus, the Tax Court concluded, the IRS was not precluded from asserting that Gerd was not a German resident under the treaty during the years in issue. Finally, the Tax Court upheld the penalties but required that the 2004 penalty be recalculated.

For a discussion of who qualifies as a resident alien, see Parker Tax ¶220,110. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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