Court Rules Alien Needs to Formally Abandon Status to Avoid Tax or The Green Card Mine Field

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 obtained in 1977.




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. http://ustaxcourt.gov/InOpHistoric/TopsnikDiv.Halpern.TC.WPD.pdf

Comment :

Mr. Topsnik was registered with the German tax authority as a taxpayer with limited liability and paid as a non resident only income tax on German source income  but he used his daughters BC,Canada address as his home address.  Mr. T. did not file the required tax returns for a limited liability taxpayer despite the German tax authority repeated requests that he do so. All of the monthly installment payments were reduced by California withholding taxes. Since he did not declare his installment sale gain either in the US nor Germany he committed tax evasion for the years 2006-09. Also keep in mind income taxes are 35% in the US and 45% in Germany .