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Recent reporting and disclosure requirements may apply to certain nonresidents after 1991.

Many Canadians and other individuals spend several months each year vacationing in the United States. Because they spend so much time here, they may be considered U.S. residents and may even be required to file tax returns. Under recently adopted regulations, many of these individuals must file disclosure statements for tax years beginning after 1991; see Regs. Sec. 301.7701(b)-9(b)(4).

If the individuals are U.S. residents, they are taxed in the United States on their worldwide income. If not, they are taxed at graduated rates on their income effectively connected with a U.S. trade or business and subject to 30% withholding on certain U.S.- source fixed or determinable income (such as interest and dividends), unless a tax treaty provides otherwise.

To be a U.S. resident, an individual must determine his status under U.S. law. The individual must hold a green card, meet the substantial presence test or make a first-year election to be a U.S. resident. However, even if he is considered to be a U.S. resident under U.S. tax law, the "tie-breaker" provision contained in many income tax treaties may override U.S. law.

Substantial presence test

Under this test, an individual is a U.S. resident if he is present in the United States at least 31 days during the current tax year and a total of 183 days during the current year and two preceding years, based on the following formula: The number of days spent in the United States ("days") in the current year is weighted by 1, days in the first preceding year by 1/3 and days in the second preceding year by 1/6. Days as a teacher, trainee or student generally are not counted.

According to this formula, if an individual is never present in the United States for more than 121 days a year, he cannot be a U.S. resident under the substantial presence test. See the example above.

Closer connection exception

If an individual currently is present in the United States for 122 to 182 days, has a tax home in a foreign country, and can prove a closer connection to that foreign country, he will not be deemed to be a U.S. resident. Facts to be considered include the location of his permanent home, family and personal belongings, the site of his social and religious organizations, the location where he conducts his routine personal banking and business activities (other than those that constitute his tax home), the jurisdiction in which he votes and holds a driver's license, the residence he designates on forms and documents, and the types of official forms and documents that he files (such as Forms 1078, W-8 or W-9).

If this individual can prove a closer connection to a foreign country, he is not considered to be a U.S. resident and need not file a U.S. tax return. However, he may be required to file a U.S. return under some other provision, such as if he has income effectively connected with a U.S. trade or business. He also must file a disclosure statement with the IRS in Philadelphia. If this statement is not filed, the individual is not eligible for the closer connection exception and is treated as a dual resident of both the United States and the foreign country. The disclosure statement, which must be dated and signed under penalty of perjury, must contain the following information.

* The individual's name, address, U.S. taxpayer identification number, if any, and U.S. visa number, if any.

* The country that issued his passport and its number.

* The tax year for which the statement is to apply.

* The number of days present in the United States during the current year, the first preceding calendar year and the second preceding calendar year.

* Whether he has applied for permanent resident status or has an application pending for adjustment of status to that of a permanent resident during the current year.

* Sufficient facts to determine if he has maintained a closer connection to a foreign country and a tax home in that country during the current year.

* Sufficient facts to determine that he filed tax returns and was subject to taxation as a resident of the foreign country for the entire year.

Dual residents

If the individual is present in the United States for 183 days or more, he is a U.S. resident - unless he is a resident of a foreign country that has an income tax treaty with the United States, the treaty has a tie-breaker provision concerning a residence and the individual is considered to be a resident of the foreign country under the tie-breaker provision. In this event, he is a dual resident of both the United States and the foreign country. However, for income tax purposes, he is considered a resident only of the foreign country.

The following countries have income tax treaties with the United States that contain tie-breaker provisions: Australia, Barbados, Belgium, Canada, Cyprus, Egypt, Finland, France, Germany, Hungary, Iceland, India, Indonesia, Italy, Jamaica, Korea, Malta, Morocco, New Zealand, Norway, Philippines, Poland, Romania, Russian Federation, Spain, Tunisia and the United Kingdom.

Each treaty is unique and must be consulted to determine whether an individual is a U.S. resident.

A dual resident who avails himself of treaty benefits must determine his tax liability as if he were a nonresident alien. Pursuant to Regs. Secs. 301.7701(b)-7 and -8, he must file Form 1040NR and attach a statement captioned, "Treaty-Based Return Position Disclosure Under $S 301.7701(b)-7(b) and Section 6114." This statement must disclose that the individual is claiming a treaty benefit as a U.S. nonresident, the facts relied on to support the position taken, the nature and approximate amount of income, and the specific provision for which the taxpayer is claiming a treaty benefit. If an individual fails to disclose a treaty-based return position, he is subject to a $1,000 penalty for each separate payment of income item - in addition to any other penalties imposed by law (Regs. Sec. 301.6712-1).

Example: Determining U.S. Residence Status

P, a Canadian citizen, spends the majority of his winters in Florida. He was present in the United State as follows:
Year Period in United States Number of days
1990 Jan. 1 - Apr. 30 120
1991 Jan. 1 - Apr. 30 120
1992 Jan. 1 - Apr. 29 120

P's residence test is calculated as follows:
Year Multiplier Days present Total
1990 1/6 120 20
1991 1/3 120 40
1992 1 120 120

P is not a U.S. resident in 1992 under the substantial presence test.
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Article Details
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Author:Bee, Charles W., Jr.
Publication:The Tax Adviser
Date:May 1, 1993
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