A German citizen who expatriated to Germany in 2010 was found to owe taxes on stock installment sale payments, after he formally abandoned his lawful permanent resident status for immigration purposes. (Topsnik v. Commissioner, 146 T.C. No. 1 (2016))
In 2010, he received installment payments from his 2004 sale of his stock in Gourmet Foods Inc. a business he started in the 1980s. Topsnik argued that his date of expatriation was Dec. 31, 2009 and that he did not owe taxes in 2010, but the court found that the actual date of his expatriation was Nov. 20, 2010, the day he gave up his green card.
“We find that petitioner was not a ‘resident’ of Germany in 2010 as defined by article 4, paragraph 1, of the U.S.-Germany tax treaty,” Judge Kathleen Kerrigan said in the court’s opinion. “Accordingly, petitioner’s monthly installment payments were taxable by the United States.”
Topsnik had argued that he was a German resident in 2010 because he owned a hotel there and had access to one of its rooms, but he presented no proof of ownership, the court said.
The German Competent Authority also had no record that Topsnik had a registered residence or habitual abode in Germany that year. Furthermore, he was registered as a nonresident for tax purposes in Germany in 2010, so he cannot claim to be a German resident under the U.S.-Germany tax treaty, the court said, granting summary judgment to the Internal Revenue Service.
The taxpayer also did not file a Form 8854 when he surrendered his green card and he had not fully complied with required filings for the preceding five years. Such failure to certify effectively makes him a covered expatriate (Code Section 877(a)(2)(C), which is part of the definition of a covered expatriate under Code Section 877A(g)(1)). So it appears that failing to certify was enough to be a covered expatriate.
This case also demonstrates that the deemed sale of assets rule of Code Section 877A, which applies to expatriates, triggers the deferred gain on an installment sale obligation held by the expatriate under Code Section 453B; with the deemed selling of the price of the obligation being its face amount.
This decision triggered an information letter
from the Office of the Chief Counsel on the taxation of green card holders. The court decision went against the taxpayer when the court held that a resident alien who is lawfully present in the US can not just informally abandon their residency. The information letter covers the tax rules applicable to green card holders including first-year residency, no lapse residence rules, dual residency, application of tax treaties, terminating residency and expatriation.
You are a “Covered Expatriate” if you are a Long-Term Resident, as defined in IRC 7701(b)(6),and you cease to be a lawful permanent resident because:
The individual’s status of having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with immigration laws has been revoked or has been administratively or judicially determined to have been abandoned, or
(1) 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,
(2) Does not waive the benefits of the treaty applicable to residents of the foreign country, and(3) Notifies the IRS of such treatment on Forms 8833 and 8854.
Form 8854, Initial and Annual Expatriation Information Statement and its Instructions have been revised to permit individuals to meet the new notification and information reporting requirements.
The revised Form 8854 and its instructions also address how individuals should certify (in accordance with the new law) that they have met their federal tax obligations for the five preceding taxable years and what constitutes notification to the Department of State or the Department of Homeland Security.
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