IRS Failed to Show that Dual Resident's Center of Vital Interests Were in the U.S.
(Parker Tax Publishing December 08, 2013)

The IRS failed to establish that a dual resident's center of vital interests was in the United States for tax purposes and that he was thus taxable as a U.S. resident. Escobedo v. U.S., 2013 PTC 367 (S.D. Cal. 11/14/13).

In 2005 and 2006, Federico Escobedo was a resident of both the United States and Mexico and maintained permanent homes in both counties. He timely filed a Form 1040, U.S. Individual Income Tax Return, for 2005 and 2006. In 2009, Federico filed amended Forms 1040, claiming refunds for all taxes paid for 2005 and 2006. He asserted that he was entitled to a refund because he should have been considered a resident of Mexico for tax purposes and thus not taxed on his worldwide income. The IRS denied Federico's refund claims. Federico filed suit in a district court and the IRS filed a motion for summary judgment.

The U.S.-Mexico bilateral treaty governs the tax liability of dual residents for federal income tax purposes. The tax treaty provides that where an individual is a resident of both the United States and Mexico, his residence and where he pays income tax, is determined by (1) where he has a permanent home; (2) where his personal and economic relations are closer (center of vital interests); or (3) where he has a habitual abode.

The IRS argued that Federico was properly considered a U.S. resident for tax purposes as his center of vital interests and habitual abode was in the United States.

A district court held that genuine issues of material fact existed as to whether Federico's center of vital interests was in the United States for tax purposes. The court looked to the model treaty of the Organization of Economic Cooperation and Development (OECD), which stated that if an individual has a permanent home in both countries, preference will be given to the one where economic and personal relations of the individual are closer. Factors such as family and social relations, occupation, political and cultural activities, and place of business demonstrate where the individual has retained his centers of vital interest.

During the years in issue, Federico did not dispute that he lived with his partner and three children in the United States and that he owned several homes and other personal property in the United States. His children attended U.S. universities and he received medical services in the United States. However, the court observed that the consideration of personal relations was only one factor in the center of vital interests determination.

Federico was an investor and manager of several businesses in Mexico, which he oversaw and directed. The IRS presented no authority that Federico's oversight did not constitute economic activity regarding the center of vital interests determination. Thus, the court said that there were genuine of issues of material fact with respect to Federico's economic relations within the United States and rejected the IRS's request for summary judgment.

For a discussion of U.S. taxation of U.S. citizens and resident aliens, see Parker Tax ¶200,100.(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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