by Erin Stockwell, CPA, Senior Manager
One common misconception of people who are U.S. lawful permanent residents (commonly known as green card holders) is that tax law and immigration law follow suit. Unfortunately this is not necessarily true, as demonstrated by the 2014 Tax Court case Gerd Topsnik v. Commissioner, 143 T.C. No. 12. The issue involved was whether Mr. Topsnik was a U.S. permanent resident; he claimed he informally abandoned his status in 2003 while the IRS claimed that he remained a permanent resident until he officially abandoned his status in 2010.
Mr. Topsnik was a German citizen and received his U.S. green card in 1977. He started a business in California and owned a residence in Hawaii. In 2003, he sold his house in Hawaii and moved back to Germany. In 2004, he sold his business for over $5 million. He claimed that he informally abandoned his green card in 2003 and so he was no longer a U.S. resident. As such, he was a nonresident under the U.S. – Germany Tax Treaty, and the gain on the sale of his business was not taxable by the U.S. IRS claimed that he was still a permanent resident because he had not officially abandoned his status at the time of the sale. As a permanent resident, the gain was taxable by the U.S. no matter where he lived in the world. The courts sided with the IRS and Mr. Topsnik was considered a U.S. resident until 2010, and as such had to pay U.S. income tax on the sale of his business.
The U.S. Internal Revenue Code Section 7701 sets the requirements for abandoning permanent resident status for tax purposes. In order to formally abandon permanent resident status, a green card holder must file either an application for abandonment (INS Form I-407) or a letter stating his or her intent to abandon his or her resident status. The application or letter must be filed with the Immigration and Naturalization Service (INS) or a consular officer. Enclosed with the application, the green card holder must also send in the Alien Registration Receipt Card (INS Form I-151 or Form I-551). The green card holder should keep a copy of all documentation sent to the INS or consular officer. Resident status is considered to be formally abandoned once the authorities issue a final administrative order of abandonment.
Until someone has officially abandoned his or her residency status, not only could he or she be held liable for U.S. tax, but could also be required to file annual U.S. income tax returns and foreign bank account reporting forms (FinCEN 114). If the person dies without officially abandoning residency status, then his or her estate is considered a U.S. estate and must report worldwide assets if over the U.S. estate exemption amount. This is the case even if INS no longer recognizes the green card and the person can no longer enter the U.S. as a resident. Not an ideal situation, for sure.
If you find yourself in this situation, don’t let it overwhelm you. We can help. Erin Stockwell, CPA, Senior Manager, can be reached by email or at 406. 727.0888.