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Nonresident Alien Not Entitled to Withholding Tax Refund on Backgammon Payout

(Parker Tax Publishing March 2017)

The Federal Claims Court held that an individual's payment of Ireland's domicile levy did not make him a resident of Ireland for purposes of the tax treaty between the United States and Ireland. As a result, his claim that the U.S. - Ireland treaty entitled him to a refund of the U.S. withholding tax paid on $17 million won in a U.S. backgammon match was rejected. McManus v. U.S., 2017 PTC 96 (Fed. Cl. 2017).

John McManus won $17.4 million in a three-day backgammon match that took place in the United States in 2012. Withholding tax of $5,220,000 was taken out of his winnings. McManus reported the $17.4 million of gambling winnings as U.S.-source income and filed a refund claim for the $5,220,000 of tax withheld.

McManus, who claimed citizenship in Ireland but lived in Switzerland, argued that he was entitled to a refund under the tax treaty between the U.S. and Ireland. He cited the treaty provisions aimed at avoiding double taxation and the prevention of fiscal evasion regarding taxes on income and capital gains.

McManus made two arguments to support his refund claim. First, he argued that because he paid a domicile levy to Ireland in 2012, he was a resident of Ireland for purposes of the treaty. He claimed that, as a resident of Ireland, he did not owe taxes on his gambling winnings in the U.S. Second, he argued that the U.S. tax on gambling winnings violated the treaty's nondiscrimination provisions, which he said applied to nationals of the U.S. and Ireland regardless of status under the treaty. He maintained that his gambling winnings should not be subject to U.S. tax because treaty articles overruled or modified any Internal Revenue Code provisions.

The IRS requested assistance from Ireland Revenue. In response to IRS questions, Ireland Revenue stated that the payment of the domicile levy did not entitle McManus to receive treaty benefits.

At issue before the Federal Claims Court was Ireland's domicile levy. The levy applies to Irish-domiciled individuals who own property in Ireland valued at over five million euros, whose worldwide income exceeds one million euros, and whose liability for Irish income tax in the year is less than 200,000 euros.

Generally, an individual's residence status for Irish tax purposes is determined by the number of days he or she is present in Ireland during a tax year. McManus acknowledged that he was not a resident of Ireland in 2012 for purposes of Ireland's income tax, corporation tax, or capital gains tax. However, he contended that he was otherwise a resident of Ireland in 2012 because he paid Ireland's domicile levy for the year.

The Federal Claims Court held that McManus's payment of Ireland's domicile levy in 2012 did not make him a resident of Ireland for that year for purposes of the treaty. Thus, his gambling winnings were not exempt from U.S. withholding tax.

The court did not accept McManus's contention that, because he paid a levy based on his domicile in Ireland, he had met the criteria to be a resident under the plain language of the treaty. The court held that the treaty must be read in context and consistent with shared expectations and the intent of the treaty parties.

The treaty, the court noted, does not directly address the tax treatment of gambling winnings in either the United States or Ireland. The treaty provides that if income is not dealt with in the treaty, it is taxable only in the country of residence. Also, the court said, the treaty is similar in structure and substance to other tax conventions between the U.S. and foreign countries and the model tax conventions published by the U.S. Department of Treasury and the Organisation for Economic Co-operation and Development (OECD). OECD commentary for similar model treaties states that, to be liable for the tax, a person must be subject to comprehensive or full taxation, such as income tax on the full amount of the person's worldwide earnings.

The court observed that Ireland's domicile levy, which is capped at 200,000 euros regardless of an Irish property owner's worldwide income over one million euros, is not comprehensive or full taxation because it is not a comprehensive tax on a person's worldwide income. The court found that Ireland's domicile levy is not substantially similar to Ireland's income tax because the domicile levy is a wealth tax that applies to wealthy Irish individuals regardless of whether they are "tax residents" and subject to Ireland's income tax. The court concluded that the levy is distinct from, not substantially similar to, Ireland's income tax and thus McManus's payment of Ireland's domicile levy in 2012 did not qualify him as a resident of Ireland. In reaching its conclusion, the court noted that the IRS properly sought advice from Ireland Revenue to determine whether the Irish domicile levy could entitle McManus to the benefits of the treaty and Ireland Revenue properly responded that it did not.

For a discussion of withholding tax requirements on payments to nonresident aliens, see Parker Tax ¶202,100.

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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