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Final regulations define resident alien.

Final regulations under Sec. 77011b) determine whether alien individuals are U.S. residents for tax purposes. The final regulations largely follow those previously proposed on Sept. 10, 1987. However, some changes in the final version are more favorable to alien individuals, particularly in the year they establish or terminate U.S. residence, including cases in which treaty benefits are claimed. Particularly helpful are changes that permit an election of residence for dependent children to be made on the parent's return when the purpose of the election is to allow the parent to claim a personal exemption for the child.

The regulations are effective retroactively to enactment of Sec. 7701(b) (i.e., for tax years beginning after Dec. 31, 1984), except that requirements to attach certain statements to tax returns are effective for tax years beginning after Dec. 31, 1991. The main points of the regulations are:

* A lawful permanent resident (i.e., "greencard" holder) may terminate residency as of a date certain. This is accomplished by surrendering the "greencard" to the Immigration and Naturalization Service (INS) or a consular official, accompanied by a letter stating the individual's intent to abandon U.S. resident status (Regs. Sec. 301.7701(b)-1(b)(3)).

* Under the statute, persons who meet the "greencard" test or the substantial presence test are U.S. residents for tax purposes. In some cases, such persons are also tax residents of another country. If this other country is a U.S. treaty partner, it may be possible for that person to be taxed by the United States as a nonresident under the treaty. However, a sentence was added by the final regulations that may have a chilling effect on treaty-based claims of nonresidence by greencard holders living outside the United States. The final regulations state that the INS may consider the treaty-based claim of nonresidence in determining whether the individuals can maintain their status as lawful permanent residents of the United States (Regs. Sec. 301.7701(b)-7(b)).

* Under the proposed rules, individuals claiming U.S. nonresidence pursuant to a treaty would' have been required to attach to their Form 1040NR a completed Form 1040 for informational purposes. Now, only Form 1040NR need be filed with a Sec. 6114 disclosure statement attached, Disclosure of Treaty Based Return Positions. The legend "Sec. 6114" must appear at the top of the Form 1040NR (Regs. Sec. 301.7701(b)-7(c)(1)).

* The final regulations specifically contemplate that a treaty-based determination of residency can apply to part of the year. In the case of a person who moves to or from the United States during the year, this allows a treaty-based residency determination for any portion of the year during which dual residency exists (Regs. Sec. 301.7701(b)-7(a)(1)).

* Under certain circumstances, persons who are statutory nonresidents for the year of arrival in the United States may elect to be taxed as residents for part of that year. Such individuals are required to attach a supporting statement to their tax returns, or else be taxed as a nonresident for the year. However, if such statement is not filed, but the individual can show clear and convincing evidence of steps taken to comply with the rules, the election will be allowed (Regs. Sec. 301.7701(b)-4(c)(3)(vi)(B)).

* If an individual electing residence in the year of arrival is accompanied by dependent children, a return electing residency had been required of the children. Otherwise, the parent was unable to claim a personal exemption for the children. The final regulations allow such election of residence for the dependent children to be made on the parent's return (Regs. Sec. 301.7701(b)-4(c)(3)(v)(B)).

* The "closer connection" test was also liberalized and clarified. Now, the location where the individual conducts business activities (other than at his "tax home") can be considered in determining whether the individual has a closer connection to another country (Regs. Sec. 301.7701(b)2(d)).

* An individual may change the country to which he has a closer connection and where his tax home is located once within the year. While statements are still required of persons who claim a "closer connection" exception, the Government may ignore the failure of the individual to include the statement if it is in the "best interest of the government" to do so (Regs. Sec. 301.7701(b)-2(e))

* Another liberalization lets an individual who commutes to work in the United States from a home in Canada or Mexico to exclude days in determining U.S. residency if the commuting occurs on more than 75% of the workdays in the working period. The proposed regulations had required commuting on 80% of the working days in the entire year. This will benefit seasonal or cyclical employees, or persons who begin or end their U.S. jobs during the year (Regs. Sec. 301.7701(b)-3(e)(1)).

* Persons who had adopted a fiscal year for tax purposes while living in a foreign country before establishing U.S. residence may now automatically use such year, if desired, for U.S. tax reporting. Previously, filing a request for change in accounting period was required (Regs. Sec. 301.7701(b)-6(a)).

Other changes of more limited applicability 'were made, including:

* A person who has no trade or business has a tax home at his regular place of abode.

* U.S. airspace is excluded from "U.S. territory," such that flying over the United States does not constitute U.S. presence.

* Clarification of rules defining "exempt individuals" and "persons with a medical condition."

* Liberalization of rules that would cause Sec. 877 to apply to certain persons with two periods of U.S. residency. From Marion Galek, CPA, Chicago, Ill.
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Author:Gajek, Marion
Publication:The Tax Adviser
Date:Nov 1, 1992
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