The Tax Court, in a division opinion, has concluded that a Finnish employee of the Finnish Mission to the United Nations waived her treaty right to exclude income from a foreign government from taxation, because she had become a permanent resident of the U.S.

Section 893 of the Tax Code excludes from gross income and exempts from taxation income received by an employee of a foreign government or international organization if certain conditions are met.

In the case (Abrahamsen v. Commissioner, 142 T.C. No. 22, June 9, 2014), Sole Abrahamsen entered the United States in 1983 to work for Finland’s Permanent Mission to the United Nations in New York. She left the Mission to work for a bank and, while employed there, obtained U.S. permanent resident status.

As a condition of obtaining that status she executed, in 1992, a waiver of rights, privileges, exemptions and immunities otherwise available to her by virtue of her occupation. In 1996 she once again was employed with the Mission and remained employed by the Mission throughout the years at issue.

Abrahamsen did not report as income the wages she was paid by the Mission during 2004-2009. She claimed that her wages were exempt from taxation pursuant to Section 893, the U.S.-Finland tax treaty, the Vienna Convention on Diplomatic Relations, the Vienna convention on Consular Relations, and the International Organizations Immunities Act.

The Tax Court granted summary judgment to the IRS on the issue of taxability of wages, but concluded that Abrahamsen’s ability to satisfy the Section 6664(c)(1) “reasonable cause” exception to the accuracy-related penalty presented a triable issue that precluded summary judgment on that issue.

The court concluded the waiver that Abrahamsen signed on becoming a permanent resident was valid, and that all the income she received after that date was taxable. 

Abrahamsen also contended her wages were tax exempt pursuant to Article 19 of the U.S.-Finland Treaty, which concerns remuneration received for “Government Service.” However, the Treaty’s saving clause provides that “notwithstanding any provision of the [Treaty] except paragraph 4, a Contracting State may tax a person who is treated as a resident under its taxation laws.”

The saving clause is operative, the court said, because during the years at issue Abrahamsen was a lawful permanent resident in the U.S. Therefore the exclusion does not apply, and the saving clause authorizes the U.S. to tax her.

Abrahamsen argued that her wages were exempt under other provisions of international law. Central to these arguments was the assertion that Abrahamsen held diplomatic status for the years at issue. 

She offered no support for this assertion other than describing her duties as “clearly diplomatic in nature.” The court found this assertion to be incorrect, at least for U.S. tax purposes, since during the relevant period she was employed by the Mission as either an adviser or an attaché. The U.N. did not notify the U.S. that she held a diplomatic title with regard to either position, and her name did not appear on the List of Officers Entitled to Diplomatic Privileges and Immunities.

Similarly, the Vienna Convention on Diplomatic Relations only applies to diplomatic agents, defined to mean heads of mission or staff members with diplomatic rank, neither of which applied to Abrahamsen. And under her final argument, that her wages are exempt from tax pursuant to the International Organizations Immunities Act, the court found that even if it applied to Abrahamsen, it does not confer the benefits she claims.