California’s New LLC Act Changes the Rules

Thursday, June 5th, 2014

INFORMATION LETTER 2014-0033

In an Information Letter, IRS has set out the application of various tax rules to “green card” holders—i.e., persons who are not U.S. citizens and are lawful permanent U.S. residents—including application of the Code’s residency tests and tax ramifications of termination of green card holder status.

Background. Code Sec. 7701(b) sets forth rules for determining whether an individual who is not a citizen of the U.S. is classified as a resident of the U.S. for purposes of the Code. Such an individual is classified as a resident of the U.S. with respect to any calendar year if he (i) is a lawful permanent resident of the U.S. at any time during such calendar year (commonly referred to as the “green card test”), (ii) meets the substantial presence test in Code Sec. 7701(b)(3), or (iii) makes the first-year election provided in Code Sec. 7701(b)(4). (Code Sec. 7701(b)(1)(A))

An individual who is neither a citizen of the U.S. nor a resident of the U.S. within the meaning of Code Sec. 7701(b)(1)(A) is classified as a nonresident alien. (Code Sec. 7701(b)(1)(B))

Code Sec. 7701(b)(6) provides that an individual is a lawful permanent resident of the U.S. if he is lawfully residing permanently in the U.S. as an immigrant and such status has not been revoked or administratively or judicially determined to have been abandoned). Lawful permanent residents are colloquially referred to as “green card” holders.

An alien who wasn’t a U.S. resident during the preceding calendar year, but becomes a U.S. resident during the current year, will be treated as a U.S. resident for that part of the current calendar year that begins on the “residency starting date.” (Code Sec. 7701(b)(2)(A))

Code Sec. 877 contains special rules that may apply to individuals who expatriated from the U.S. prior to June 17, 2008. The rules apply for a period of ten years following the year of expatriation. Code Sec. 877 applies to “long-term residents” in addition to U.S. citizens.

Code Sec. 877A imposes an “exit tax” on certain individuals who cease to be treated as U.S. citizens or long-term residents on or after June 17, 2008.

New Information Letter. The new Information Letter sets out the application of several Code provisions to green card holders.

Dual resident status. Many green card holders may also be treated as residents of a foreign country (under that foreign country’s domestic law) with which the U.S. has an income tax treaty in force. Such an individual is a “dual resident taxpayer.” (Reg. § 301.7701(b)-7(a)) Income tax treaties typically have tiebreaker rules that apply to determine the residence—for purposes of the treaty—of an individual who otherwise would be treated as a resident of both the U.S. and the other country. See, e.g., Paragraph 3, Article 4 of the U.S. Model Income Tax Convention (2006).

If a green card holder would be treated as a resident of another country under a tiebreaker rule in an applicable income tax treaty for a tax year, he may claim a treaty benefit as a nonresident alien for purposes of computing his U.S. income tax liability with respect to that portion of the tax year he was considered to be a dual resident taxpayer. A dual resident green card holder may compute his or her U.S. income tax liability as if he were a nonresident alien by filing a Form 1040NR with a Form 8833 attached. (Reg. § 301.7701(b)-7(b) and Reg. § 301.7701(b)-7(c))

If issues arise as to the proper interpretation or application of a treaty, the Competent Authorities may assist under the terms of the Mutual Agreement Procedure Article in the applicable treaty. (Rev Proc 2006-54, 2006-2 CB 1035)

First year of U.S. residence—residency starting date. For purposes of the rule of Code Sec. 7701(b)(2)(A), in the case of a green card holder, the residency starting date generally is the first day during the calendar year in which the individual is physically present in the U.S. as a green card holder. If the individual meets the green card test for the current year, but is not physically present in the U.S. during the current year, then the green card holder’s residency starting date will be the first day of the following calendar year. (Reg. § 301.7701(b)-4(e)(3))

There is an alternative rule, however, for a green card holder who, in the relevant year, also satisfies the substantial presence test described in Code Sec. 7701(b)(3). In that case, the residency starting date is the earlier of the first day the individual is physically present in the U.S. as a green card holder or the first day during the year that the individual is present for purposes of the substantial presence test. (Reg. § 301.7701(b)-4(a))

Tax ramifications of termination of green card holder status. As noted above, a green card holder continues to be a resident for tax purposes until his or her lawful permanent resident status is rescinded or administratively or judicially determined to have been abandoned. (Reg. § 301.7701(b)-1(b)(1))

Resident status is considered to be rescinded if a final administrative or judicial order of exclusion or deportation is issued regarding the alien individual. (Reg. § 301.7701(b)-1(b)(2)) An administrative or judicial determination of abandonment may be initiated by the green card holder, the immigration authorities, or a consular officer. (Reg. § 301.7701(b)-1(b)(3)) If the green card holder initiates the determination, there are specific procedures described in Reg. § 301.7701(b)-1(b)(3) that he must follow; merely leaving the U.S. with no intention to return is not sufficient.

An individual ceases to be treated as a green card holder if he commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the U.S. and the foreign country, does not waive the benefits of such treaty applicable to residents of the foreign country, and notifies IRS of the commencement of such treatment. (Code Sec. 7701(b)(6))

Application of Code Sec. 877 and Code Sec. 877A to green card holders. Code Sec. 877(e)(2) provides that a long-term resident is an individual who had a green card in at least eight tax years during the period of 15 tax years ending with the tax year during which the individual ceased to be a green card holder. An individual is not treated as a green card holder for any tax year if he is treated as a resident of a foreign country for the tax year under the provisions of a tax treaty between the U.S. and the foreign country and does not waive the benefits of such treaty applicable to residents of the foreign country.

An individual who ceased to be treated as a green card holder after Feb. 5, ’95 and before June 17, 2008, but was not a long-term resident, was not subject to Code Sec. 877.

Accordingly, IRS said, in order to determine whether Code Sec. 877 or Code Sec. 877A may apply to a former green card holder, it is essential to establish when the former green card holder ceased to be treated as such and whether he was a long-term resident at that time.

References: For who is a nonresident alien, see FTC 2d/FIN ¶ O-1086 ; United States Tax Reporter ¶ 8714 ; TaxDesk ¶ 630,110 ; TG ¶ 30028 . For expatriation before June 17, 2008, see Federal Tax Coordinator 2d ¶ O-11700 ; United States Tax Reporter ¶ 8774 ; TaxDesk ¶ 644,700 ; TG ¶ 30085 . For expatriation after June 16, 2008, see Federal Tax Coordinator 2d ¶ O-11650 ; United States Tax Reporter ¶ 877A4 ; TaxDesk ¶ 645,000 ; TG ¶ 30078 .