US Residency status and Source of Income Rules - Case Study Example

number Publish US Residency Status & Source of Income Rules Is the a resident alienor non-resident alien for the 2011 tax year? Please provide your analysis and statutory support. Hint: there could be more than one reason why this individual is not a resident in 2011. Facts The individual concerned is the daughter of the French President of Flick’s subsidiary. She began school in US in September 2011 at Bentley and she intends to return to France when school ends. A student visa was issued to the individual and the individual was involved in unauthorised employment which is noncompliant with her visa. Interpretation For the concerned individual there are two residency tests: the days test and the domicile test. Constitutionally a state cannot tax non-residents except for income sourced to state of non-residents e.g. Shaffer v. Carter. Non-residents are taxed only on their income derived from sources within the state’s jurisdiction. The concerned individual has been working in the state and so her income has been derived from sources within the state’s jurisdiction. Additionally, the concerned individual’s income does not fall into any exempted categories such as income from certain intangibles, income excluded due to treaty etc. This indicates that the concerned individual’s income is taxable. Under MGL Ch. 62, 1(f), CGS 12-701 and NYTL 605, a person cannot be domiciled in a state unless the person maintains a permanent place of abode in the state for more than 183 aggregate days in a year unless the person is in the service of the United States military. The concerned individual has been in the state for 120 days (between 1st September, 2011 and 31st December, 2011) which does not provide her with the required 183 aggregate days for resident status although she has a permanent place of abode in the state. Moreover, under Section 7701(b) (5), being a student the concerned individual’s presence inside the United States is exempt from consideration for any permanent residence test. The concerned individual’s income from sources within the state indicates that she would be taxed as a non-resident alien within the state since the income has been derived from within the state. Individual 2: Is the individual a resident alien or non-resident alien for the 2011 tax year? Please provide your analysis and statutory support. Facts Individual 2 moved to the United States from France on 15th September, 2011 and was given an alien registration card on 1st November, 2011 which he kept up till 31st December, 2011. Interpretation The concerned individual must be considered as a resident of the United States since he has acquired a green card. Under Section 7701(b), an individual from a foreign nation is considered to be a resident if he has either a green card or if he meets the substantial presence test. In the case of the concerned individual, Individual 2 has a green card though he does not meet the substantial presence test of 183 aggregate days. Also, as per Section 7701(b) (6), a green card holder is considered a lawful permanent resident without any consideration for the time spent in the United States. The acquisition of a green card tends to make Individual 2 a resident alien for the 2011 tax year. On what day in 2011 did Individual 2 become a resident alien? Please provide your analysis and statutory support. If you need to make an assumption to reach your conclusion as to residency starting date, please do so. As per Section 7701(b) (2) (A), if a green card resident does not meet the substantial presence test, then such an individual’s residence is started from the first day of their physical presence as a lawful permanent resident. The day that a green card is issued, is considered to be the day when an individual becomes a lawful permanent resident under Section 7701(b) (6). If Individual 2 had met the substantial presence test and the green card test, then his first date of presence in the United States would have been considered i.e. 15th September. However, under the given circumstances, Individual 2 became a resident alien on the 1st of November when his green card was issued. Individual 3: Is the individual a resident alien or non-resident alien for the 2011 tax year? Please provide your analysis and statutory support including your count of the days and any exception you might find applicable. Facts Individual 3 regularly visits the United States and has a green card application pending. Originally the individual in question is a resident of the United Kingdom and has pervasive social contact and means of income in England. Interpretation The individual in question can be a resident alien if he passes the green card test, the substantial presence test or both. In the case of Individual 3, under Section 7701(b) (6), the individual is not a lawful permanent resident since he does not have a green card but has only applied for one. This indicates that the individual fails the green card test outright. In terms of the substantial presence test, the individual in question has to be present inside the United States for 183 days or more during a calendar year as per Section 7701(b) (3). Given that Individual 3 has been present in the United States for three consecutive years at various times, so a carryover of days must be undertaken. This is shown below: Year Days Minimum Met (at least 31 days) Multiplier Total 2009 120 Yes 1/6 20 2010 112 Yes 1/3 37.3 2011 122 Yes 1 122 Total 179.3 It has been related that Individual 3 was in the United States in 2011 on a 6 day extra stay due to surgical causes. Moreover, the individual in question considered a 2 hour stopover from Toronto to Detroit as a day in his final day count for 2011. In both instances, the reasons for a stay in the United States are considered invalid and hence 7 days are to be taken out of the reported 129 days for Individual 3. Overall, the total number of days for Individual 3 in the United States comes out to be 179.3 which is less than 183 days required for substantial presence. Hence, Individual 3 will be considered as a non-resident alien for tax purposes. Individual 4: Is this 121 day rule just “cocktail party nonsense” or is this statement correct? If it is correct, please explain why. No statutory support necessary for this response, just explain why you agree or disagree with the 121 day rule assertion. Facts The new CEO at Flick wants to know if a cocktail party rumour regarding residence in the United States is true or false. Interpretation The statement related by Individual 4 is correct when considering the carryover test used in order to determine if a person is a resident alien or a non-resident alien. For a carryover, an individual has to be in the United States for three consecutive years for maximum day count in case of a substantial presence test. Individual 4’s presumption is a stay of 121 days every year at the most. Considering the years 2009, 2010 and 2011, the final count of days comes out to be: Year Days Minimum Met (at least 31 days) Multiplier Total 2009 121 Yes 1/6 20.17 2010 121 Yes 1/3 40.33 2011 121 Yes 1 121 Total 181.5 As shown above, the final day count becomes 181.5 days which is still 1.5 days short of the 183 days required to be classed as a resident alien based on the substantial presence test. Hence, Individual 4’s ideas about tax are not merely “cocktail party nonsense” but are grounded in fact. The manipulation of mathematics in order to gain tax based advantage is an unethical practice. There are no legal implications for such an act but it does defeat the purpose of placing taxes by the government. The criteria used for judging non-resident and resident aliens should be expanded in order to ensure that tax laws are not circumvented due to technicalities alone. In the current case for example, individuals should be classified as resident aliens for tax purposes citing their continued presence inside the United States in consecutive years. Judicious application of tax laws are the only means to ensure that tax frauds do not occur due to mere technicalities. Is the income received US source income? What statute did you rely on for your conclusion(s)? Facts Joe T. is invested in IBM at less than 1% of the company’s overall stock value. IBM is registered in the United States (Delaware) and does most of its business in the United States too. Previously Joe T. was classed as a non-resident alien. Interpretation Under Section 861(a) (2) and Section 862(a) (2), any dividends released by United States corporations are to be considered as United States income sources. Given the fact that IBM is registered in the United States and does most of its business in the United States, IBM is going to be considered as a United States corporation. This indicates that any proceeds from IBM whether as dividends are to be taxed. Joe T. is a non-resident alien as per residency categorisation. In this case, even if Joe T. is a non-resident alien, he has to pay tax on any income that has been sourced from within the United States as per federal taxation laws. Since IBM’s dividends are not part of any exception to taxation, so Joe T. has to pay tax on his income sourced as dividends from IBM Corporation. Is the income received US source income? If so, how much? What statute did you rely on for your conclusion(s)? Facts Amy G. worked in the United States for 100 days as a management consultant out of her 240 days work year to earn a total of $250,000 for the taxable year. Previously, Amy G. was considered a non-resident alien. Interpretation As Amy G. was present in the United States for 100 days, under Section 861(a) (3), she has exceeded the 90 days limit for a non-resident alien to be present in a working capacity in the United States without being taxed. Moreover, as her compensation was greater than $3,000 so she does not gain any exception to getting taxed on this account either. All of Amy G.’s income given to her while working in the United States for the 100 day period is to be considered as income received from a United States income source. Any income source from within the United States that a non-resident alien has utilised is subject to taxation under United States taxation laws. Therefore, the money earned by Amy G. for her 100 days service period in the United States is all subject to tax under a non-resident alien category. Read More