A recent Tax Court case found that a resident alien hadn’t formally abandoned their status as a lawful permanent resident of the U.S., and so was still liable for U.S. tax.
In Topsnik v. Commissioner, 143 T.C. No. 12, the court held that a German citizen who was also the holder of a U.S. green card (and therefore a lawful permanent resident) was liable for tax on the gain from the sale of his business since he had not formally abandoned his permanent resident status.
Gerd Topsnik, a German citizen, made an installment sale of his stock in Gourmet Foods Inc., a U.S. corporation he had formed, for $5,427,000. He received payments during the years 2004 through 2009 pursuant to a promissory note executed in connection with the sale. His 2005 and 2006 returns erroneously reported identical portions of the gain, and he failed to file returns for the years 2006-2009. The IRS challenged his installment sale reporting for 2004 and 2005, and filed substitutes for returns for 2006-2009 on which it included in income appropriate portions of Topsnik’s installment sale gain, alleging that Topsnik is liable for income tax deficiencies for 2004 and 2006-2009.
Topsnik did not formally abandon his resident alien (lawful permanent resident) status until 2010, when he filed a U.S. Citizenship and Immigration Services Form I-407, Abandonment of Lawful Permanent Resident Status. However, he claimed that he informally abandoned his U.S. resident status in 2003, and was a German resident at the time of the sale and therefore exempt from U.S. taxation under the U.S.-Germany.
The Tax Court disagreed, refusing to recognize an informal abandonment of U.S. residency. Under Code Section 7701(b)(6) “An individual shall cease to be treated as a lawful permanent resident of the United States if such individual commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country, does not waive the benefits of such treaty applicable to residents of the foreign country, and notifies the Secretary [of the Treasury] of the commencement of such treatment.”
Since Germany did not treat Topsnik as a German resident for tax purposes during the years at issue, he was not considered a German resident under the treaty, and therefore was not exempted by the treaty from U.S. taxation during those years.
