Kuntz & Peroni: U.S. International Taxation (WG&L)

¶ B1.02 Definitions of U.S. Citizen, Resident Alien, and Domestic Corporation

¶ B1.02[1] U.S. Citizens

¶ B1.02[1][a] General Definition

A U.S. citizen generally is subject to tax on the citizen's worldwide income. 1 The Code does not define the term “citizen of the United States.” 2 However, the regulations provide that “every person born or naturalized in the United States and subject to its jurisdiction is a citizen.” 3 An alien who has filed a declaration of intention to become a U.S. citizen, but who has not yet been admitted to citizenship by a final order of a naturalization court, is an alien, not a citizen. 4

An individual normally has only one citizenship. However, if a foreign person becomes a U.S. citizen and also retains citizenship under the laws of a foreign country, that person will be the citizen of two countries at the same time. 5 A U.S. citizen who maintains dual citizenship is subject to U.S. tax on the citizen's worldwide income. 6¶ B1.02[1][b] Loss of Citizenship

A U.S. citizen generally loses U.S. citizenship only if the citizen voluntarily renounces U.S. citizenship and performs one of the acts of expatriation listed in Section 349 of the Immigration and Nationality Act. 7 The courts and the Service have held that living abroad for a long or indefinite period of time does not in and of itself constitute a renunciation of U.S. citizenship. 8

Individual who relinquishes citizenship for tax avoidance purpose (Section 877). Under certain conditions, Section 877(b) taxes a former U.S. citizen at regular rates on the former citizen's U.S.-source income less the deductions properly attributable to such income. 9 Those conditions include the facts that (1) the individual lost U.S. citizenship within the prior ten-year period and (2) one of the principal purposes for the loss of citizenship was tax avoidance. 10

Taxpayer who involuntarily renounces U.S. citizenship. If a taxpayer renounces U.S. citizenship but later claims that such renunciation was involuntary, and if an administrative agency or court holds the renunciation invalid, a court has held that the taxpayer is subject to U.S. income tax on the taxpayer's worldwide income as a U.S. citizen. 11 In effect, the court held that, since the renunciation had been declared invalid, the taxpayer had never ceased being a U.S. citizen and had thus retained that status for income tax purposes. 12

New tax-based rule for determining when an individual is no longer a U.S. citizen for U.S. tax purposes (former Section 7701(n)). In 2004, Congress enacted tax-based rules (in place of immigration-based rules) for determining when an individual is no longer a U.S. citizen for tax purposes. 12.1 Under former Section 7701(n), an individual who would otherwise have ceased being treated as a U.S. citizen continued to be treated as a U.S. citizen until the individual met two conditions. First, the individual had to give notice of an expatriating act (with the

requisite intent to relinquish U.S. citizenship) to the Secretary of State. 12.2 Second, the individual had to provide a statement in compliance with the rules in Section 6039G, if such a statement was otherwise required. 12.3

Former Section 7701(n) repealed in 2008 tax legislation and replaced with new provisions. In 2008, Congress repealed former Section 7701(n) 12.4 and replaced it with new Sections 877A(g)(4) and 7701(a)(50)(A) 12.5 and a new sentence in Section 7701(b)(6). 12.6 Under new Section 7701(a)(50)(A), an individual does not cease being treated as a U.S. citizen before the date on which the individual's citizenship is treated as relinquished under Section 877A(g)(4). 12.7 Section 877A(g)(4) treats a citizen as relinquishing his or her U.S. citizenship on the earliest of:

1. The date the individual renounces his or her U.S. nationality before a U.S. diplomatic or consular officer pursuant to a specified provision of the Immigration and Nationality Act (provided that the renunciation is later approved by the issuance to the individual of a certificate of loss of nationality by the U.S. Department of State); 12.82. The date the individual furnishes to the U.S. Department of State a signed statement of voluntary relinquishment of U.S. nationality confirming the performance of an act of expatriation specified in certain provisions of the Immigration and Nationality Act (provided that the voluntary relinquishment is later approved by the issuance to the individual of a certificate of loss of nationality by the U.S. Department of State); 12.93. The date the U.S. Department of State issues to the individual a certificate of loss of nationality; or4. The date that a U.S. court cancels a naturalized citizen's certificate of naturalization.Section 7701(a)(50)(B) provides that, under regulations to be issued by the Treasury and the Service, Section 7701(a)(50)(A) will not apply to an individual who became at birth both a U.S. citizen and a citizen of another country.Under a new sentence added to Section 7701(b)(6), an individual will be treated as ceasing to be lawful permanent resident of the United States if the individual starts to be treated as resident of a foreign country under the provisions of a tax treaty between the United States and that foreign country, does not waive the benefits of the treaty as applicable to residents of the foreign country, and notifies the Treasury of the start of such treatment. This new provision applies to any individual whose expatriation date is on or after June 17, 2008 (the date of enactment of the 2008 tax legislation). 12.10

Individual who loses U.S. citizenship under immigration law provision that is later declared unconstitutional. Suppose that an individual is treated as losing U.S. citizenship under a provision of immigration law that is later declared unconstitutional. What is the status of the individual for federal income tax purposes? The Service considered this issue in two rulings. 13

In Revenue Ruling 70-506, the Service examined the federal income tax treatment of naturalized citizens who had been mistakenly deemed to have lost their citizenship under a provision of the Immigration and Naturalization Act of 1952 declared unconstitutional by the Supreme Court in Schneider v. Rusk. 14 The

Service viewed the Supreme Court's decision as rendering the loss of citizenship under the unconstitutional provision of the immigration laws as void ab initio. Accordingly, the Service held that, for federal income tax purposes, such individuals had remained U.S. citizens continuously since naturalization in the absence of facts showing that such individuals were not U.S. citizens under other provisions of the immigration laws.

Similarly, in Revenue Ruling 75-357, the Service considered the federal income tax treatment of U.S. citizens who lost their U.S. citizenship under other provisions of the immigration laws that either had been declared unconstitutional by the Supreme Court in Afroyim v. Rusk 15 or would be unconstitutional under the rationale of that decision. 16 The Service viewed the Supreme Court's decision as voiding, both retroactively and prospectively, the loss of citizenship under several provisions of the immigration laws. 17 In the Service's view, individuals who lost U.S. citizenship under any of these unconstitutional provisions of the immigration laws had, for federal income tax purposes, remained U.S. citizens continuously since birth or naturalization in the absence of facts showing that such individuals were not U.S. citizens under other provisions of the immigration laws.

In both of these rulings, the Service ultimately concluded that since the individuals involved had never lost their U.S. citizenship for federal income tax purposes, they remained subject to U.S. income tax at all times on their worldwide incomes. Under the authority granted in Section 7805(b), however, the Service decided not to apply the rulings retroactively to taxable years starting before the date the rulings were issued unless an individual who lost citizenship under the unconstitutional provision of immigration law had, before that date, affirmatively exercised a specific right of citizenship. 18

The First Circuit Court of Appeals has used a similar approach in determining whether individuals who mistakenly thought themselves to have been validly expatriated should be treated as U.S. citizens for federal income tax purposes when a federal court declared unconstitutional the provision of immigration law under which the individuals were expatriated. 19 Thus, the First Circuit held that those expatriates who had affirmatively exercised a specific act of citizenship, thereby accepting the benefits of U.S. citizenship, would be treated as U.S. citizens for federal income tax purposes during the period that the expatriates received such benefits. 20 In other words, by accepting the benefits of U.S. citizenship, the wrongfully expatriated individual was estopped to decline the burdens of U.S. citizenship in the form of payment of U.S. taxes. 21

Taxation of unrealized gains of U.S. citizens who relinquish their U.S. citizenship and certain long-term U.S. residents who relinquish their U.S. residency. As part of his fiscal year 1996 budget proposals submitted in February 1995, President Clinton included a controversial proposal to impose U.S. income tax on the net unrealized gain of U.S. citizens who relinquish their U.S. citizenship and certain long-term U.S. residents who relinquish their U.S. residency. 21.1 Serious questions were raised concerning the constitutionality of this proposal and whether the proposal (if enacted into law) would conflict with U.S. obligations under various treaties and other international agreements. 21.2

In March 1995, the Senate approved a modified version of this proposal as part of a bill providing for the permanent extension of the deduction for health insurance costs of self-employed individuals. 21.3 The modified Senate proposal would have imposed U.S. income tax on the unrealized gains of individuals who renounce their U.S. citizenship, but only to the extent that those net unrealized gains exceeded $600,000. This modified proposal was not approved by the House of Representatives and was deleted in conference; hence, it was not enacted into law. However, in April 1995, the Senate adopted a nonbinding resolution stating that “Congress should act as quickly as possible to amend the Internal Revenue Code to eliminate the ability of persons to avoid taxes by relinquishing their United States citizenship” and that such changes should take effect as if enacted on February 6, 1995. 21.4

Furthermore, on April 11, 1995, President Clinton signed the Self-Employed Health Insurance Act of 1995 into law. 21.5 That legislation contained a provision directing the Joint Committee on Taxation Staff to conduct a study of these proposals to change the U.S. taxation of expatriation. 21.6 The Joint Committee Staff released its study on June 1, 1995, in which it suggested that the extent of expatriation for tax-avoidance purposes had been overstated. 21.7

On April 6, 1995, Senator Moynihan introduced an expatriation bill in the Senate and, on May 2, 1995, Representative Gibbons introduced an identical bill in the House. 21.8 This bill would have made further modifications to the original Clinton Administration proposal on the expatriation issue. 21.9

Representatives Archer and Johnson introduced yet another expatriation taxation bill, the proposed Expatriation Tax Act of 1995, in the House on June 9, 1995. 21.10 This bill would have dealt with the tax-avoidance expatriation issue by modifying Section 877 of the current Code to substantially expand its scope, but would not have treated expatriation as a realization event for federal tax purposes. 21.11

In 1996, as part of his fiscal year 1997 budget proposals, President Clinton included a modified version of his proposal to impose U.S. income tax on U.S. citizens who relinquish their U.S. citizenship and certain long-term U.S. residents who terminate their U.S. residency. This proposal, in modified form, was introduced once again by Senator Moynihan and approved by the Senate in 1996. 21.12 However, the House of Representatives approved a different bill, introduced once again by Representative Archer and others. 21.13 The House bill did not propose to treat expatriation as a realization event but instead proposed modifications to Section 877 to substantially expand its scope and new information reporting requirements for former U.S. citizens and certain former long-term permanent U.S. residents. The Conference Committee accepted the House bill, with certain changes, 21.14 and that bill was enacted into law as part of the Health Insurance Portability and Accountability Act of 1996. 21.15

In 2003, the Senate again proposed to establish a mark-to-market taxation regime for certain expatriates but such proposal was not part of the legislation that was finally enacted in 2004. 21.15a Instead, Congress made additional changes to Section 877 and the information reporting requirements in Section 6039G. 21.15b

Among other things, this legislation replaced the tax avoidance motive standard of prior law altogether with objective tests for triggering taxation of an expatriate under Section 877 and narrowed the exceptions to Section 877 treatment. 21.15c The 1996 and 2004 changes to Section 877 and the information reporting requirements under Section 6039G are discussed in Chapter C1. 21.16

Finally, in 2008, Congress replaced the rules in Section 877 with new Section 877A, which provides a mark-to-market taxation regime for expatriates and certain former long-term lawful permanent resident aliens that is triggered at the time of expatriation. 21.16a Section 877A applies to any individual whose expatriation date (as defined in Section 877A(g)(3)) is on or after the date of enactment of the 2008 legislation (June 17, 2008). 21.16b This new provision is discussed in detail in Chapter C1. 21.16c

Amendment of U.S. immigration laws to bar reentry into the United States by former U.S. citizens who renounced their citizenship for the purpose of U.S. tax avoidance. In September 1996, the U.S. immigration laws were amended to exclude from entry into the United States any alien who is a former U.S. citizen and who is determined by the Attorney General to have renounced U.S. citizenship for the purpose of avoiding U.S. taxation. 21.17 This provision applies to individuals who renounce U.S. citizenship on or after the date of enactment (September 30, 1996). 21.18 This legislation represents a highly questionable use of the immigration laws to correct what is perceived to be tax abuses involving former U.S. citizens. A more appropriate approach to remedying any tax abuses remaining after the 1996 changes to Section 877 would be for Congress either to adopt some version of the Clinton Administration's and Senator Moynihan's proposals to treat expatriation as a realization event for U.S. tax purposes (as Congress did in 2008) or to further modify Section 877 (as Congress did in 2004).¶ B1.02[2] U.S. Residents

¶ B1.02[2][a] Significance of Resident vs. Nonresident Alien Status

¶ B1.02[2][a][i] General taxation.

The issue of status as a resident alien or a nonresident alien is key in determining an individual's U.S. income tax liability. 21.19 A resident alien individual generally is subject to U.S. income tax on the individual's worldwide income (without regard to its source) in much the same manner as a U.S. citizen, with only a few limited exceptions. 22 By contrast, a nonresident alien individual is subject to U.S. income tax only on the following types of income:

1. U.S.-source, non-U.S. business fixed or determinable annual or periodical income—taxed on a gross basis, with no offsetting deductions, at a flat 30 percent rate; 232. Certain other items of U.S.-source, non-U.S. business income specified in Section 871(a)(1)—taxed at a flat rate of 30 percent, with no offsetting deductions; 243. Taxable income effectively connected with a trade or business conducted by the nonresident alien within the United States—taxed on a net basis (i.e., gross income effectively connected with the U.S. trade or business less deductions properly

allocable to such income), at the regular rates under Section 1 or Section 55(the minimum tax provisions), as the case may be; 254. Net gain from the sale or exchange of U.S. real property interests—treated as income effectively connected with a U.S. trade or business under Section 897 and taxed to the nonresident alien individual at the regular rates in Section 1 or at the 21 percent special minimum tax rate in Section 897; 26 and5. Net U.S.-source capital gains for the taxable year—taxed at a flat 30 percent rate if the nonresident alien individual is present in the United States for 183 days or more during the year in which such net gains are realized. 27Other types of income realized by a nonresident alien individual generally are not subject to U.S. income tax. Further, an applicable U.S. treaty provision may exempt the nonresident alien individual's income from U.S. tax or provide a rate of tax lower than the statutory rate. 28¶ B1.02[2][a][ii] Benefits of U.S. tax treaty.

A U.S. person generally may not qualify for exemption from U.S. income tax under provisions of a tax treaty entered into between the United States and a foreign country. First, under the saving clause of the tax treaty, the United States often reserves the power to tax U.S. citizens and resident aliens as if the treaty had never come into effect (subject to certain exceptions). 29 Second, many tax exemptions contained in the treaty are conditioned on the taxpayer's being a resident of the foreign treaty country, not of the United States. 30 Thus, determining whether an alien is a resident of the United States is a key element in applying U.S. tax treaties to a foreign person. 31¶ B1.02[2][a][iii] S corporation shareholders.

A resident alien individual is a permitted shareholder of an S corporation, but a nonresident alien individual is an ineligible shareholder. 32 Accordingly, a corporation with a nonresident alien shareholder cannot make a valid S election. 33 Further, a transfer of stock in an S corporation to a nonresident alien terminates the corporation's subchapter S election. 34

If a resident alien individual shareholder ceases to be a U.S. resident, an existing S election terminates as of the date that the shareholder's U.S. residency ceases. Thus, an electing corporation with one or more resident alien shareholders should consider having an agreement signed by all shareholders warranting that the shareholders will not change their status for U.S. tax purposes and that they will indemnify and hold harmless the remaining shareholders for any loss from a change in status. In addition, the parties may wish to enter into a stock purchase agreement in which each shareholder agrees to sell stock to the other shareholders in the event that the shareholder's U.S. residency ceases.¶ B1.02[2][a][iv] Controlled foreign corporation status.

A foreign corporation may be a controlled foreign corporation if certain U.S. persons own over half of its stock. 35 Thus, having nonresident alien individuals own a majority of stock may protect a corporation from controlled foreign corporation status. If one of the nonresident aliens becomes a U.S. resident, however, the corporation may instantly become a controlled foreign corporation.¶ B1.02[2][a][v] Return filing status.

Under Section 6013(a), a married couple generally may file a joint return and pay tax on the couple's combined taxable income at the rates provided in Section 1(a). If the couple is not eligible to file a joint return or does not elect to file a joint return, each spouse must file a separate return and pay tax at the rates provided in Section 1(d) for married taxpayers filing separately.

Section 6013(a)(1) provides that no joint return may be filed if either spouse is a nonresident alien at any time during a taxable year. Thus, before the enactment of Sections 6013(g) and 6013(h), a U.S. citizen or resident alien married to a nonresident alien, or two nonresident aliens married to each other, could not file a joint return under Section 6013(a). 36 One consequence of this rule was that a U.S. citizen or resident alien married to a nonresident alien could not obtain the benefit of various tax provisions that depended on the filing of a joint return for married taxpayers. 37 Accordingly, for taxable years before Sections 6013(g) and 6013(h) became effective, married alien taxpayers would sometimes argue that they were resident aliens, rather than nonresident aliens so that they could file joint returns with their spouses. 38

Sections 6013(g) and 6013(h), however, now allow a couple to file a joint return if both spouses elect to have the provisions of those Code sections apply. Those provisions require a nonresident alien to elect to be treated as a resident alien for federal income tax purposes in return for being allowed to file a joint return. Thus, under current law, nonresident aliens need not argue that they are resident aliens in order to file a joint return. 39¶ B1.02[2][a][vi] Dependency exemptions (Section 152(b)(3)).

Special restrictions apply to taxpayers claiming dependency exemption deductions under Sections 151 and 152 for persons who are nonresident aliens, but who otherwise qualify as dependents under those provisions. Section 152(b)(3) provides that the term “dependent” does not include any individual who is not a U.S. citizen, resident, or national unless such individual is a resident of a country contiguous to the United States (i.e., Canada or Mexico). 40 In other words, a taxpayer may not claim a dependency exemption with respect to a nonresident alien individual unless the individual is a resident of Canada or Mexico. 41 This rule does not apply, however, to any legally adopted child of a citizen or national of the United States, if, during the entire taxable year, (1) the child's principal place of abode is the taxpayer's home and (2) the child is a member of the taxpayer's household. 42

By contrast, the taxpayer may claim dependency exemptions for a dependent who is a U.S. citizen or a resident alien at some time during the calendar year in which the taxpayer's taxable year begins. 43 Thus, in some cases, taxpayers wishing to claim dependency exemptions for alien dependents residing in countries other than Canada or Mexico have argued that such dependents were resident aliens. 44

Section 152(b)(3) was first enacted in 1944 in response to a great increase in the number of taxpayers claiming dependency exemptions for Europeans whom they were helping to support. 45 Congress was concerned that these claims would place a severe burden on the Service to verify the existence of the dependents and

the level of support. 46

The definition of “dependent” in Section 152(b)(3) also affects the ability of a taxpayer to deduct medical expenses under Section 213 with respect to an individual other than his or her spouse. Under Section 213(a), a taxpayer may deduct expenses for the “medical care of the taxpayer, his spouse, or a dependent” (as defined in Section 152, determined without regard to Sections 152(b)(1), 152(b)(2), and 152(d)(1)(B), but determined with regard to the remainder of Section 152, including Section 152(b)(3)). Thus, expenses for the medical care of an individual other than the taxpayer or the taxpayer's spouse will qualify under Section 213(a) only if, among other things, that individual meets the requirement of Section 152(b)(3) that he or she be a U.S. citizen, U.S. national, U.S. resident, or resident of a country contiguous to the United States. 46.1¶ B1.02[2][a][vii] Head-of-household rate schedule.

Section 1(b) contains a special tax rate schedule that applies to a taxpayer who is a head of a household (within the meaning of Section 2(b)). To be the head of a household under Section 2(b), a taxpayer must not be married at the close of the taxable year, among other things. 47 Thus, a U.S. citizen or resident alien who is married at the close of the taxable year to another U.S. citizen or resident alien cannot use the head-of-household rate schedule.

Section 2(b)(2)(C), however, provides that a taxpayer is not considered married for purposes of Section 2(b) if, at any time during the taxable year, the taxpayer's spouse is a nonresident alien. Thus, a U.S. citizen or resident alien who is married to a nonresident alien may qualify for the head-of-household rate schedule if the other requirements of Section 2(b) are met. 48

A taxpayer generally may qualify for head-of-household rates if the taxpayer maintains a household that constitutes for more than one half of the taxable year the principal place of abode of the taxpayer's unmarried son, stepson, daughter, or stepdaughter. 49 Head-of-household rates may apply even if the son, stepson, daughter, or stepdaughter is a nonresident alien. 50¶ B1.02[2][a][viii] Withholding allowances with respect to wages.

U.S. citizens, resident aliens, and nonresident aliens generally are subject to withholding under Section 3402 with respect to “wages” (as defined in Section 3401). An alien's status as a nonresident alien or a resident alien affects whether compensation for services performed outside the United States are “wages” for Section 3402 purposes. 51 Further, a wage recipient's status as a U.S. citizen, resident alien, or nonresident alien affects the amount to be withheld. A resident alien is allowed the same withholding exemptions as if the wage recipient were a U.S. citizen. 52 A nonresident alien, however, is limited to just one withholding exemption unless the alien is a resident of Canada or Mexico or a bona fide resident of Puerto Rico during the entire taxable year. 53¶ B1.02[2][a][ix] Passive foreign investment company taxation.

Becoming a U.S. resident, and ceasing to be a U.S. resident, may dramatically affect the taxation of a foreign citizen that owns the stock of a foreign corporation. Becoming a U.S. resident subjects the foreign citizen to potential taxation under

Section 1291 if the citizen owns some of the stock of a passive foreign investment company. 53.1 Further, proposed regulations treat the end of U.S. residence as an automatic trigger of taxation under Section 1291 with respect to that stock. 53.2 A similar triggering event occurs if a foreign citizen's election under Section 6013(g) ends. 53.3¶ B1.02[2][b] Pre–1984 Act Definition of Residence

Before the enactment of Section 7701(b) as part of the Tax Reform Act of 1984, the Code contained no rules for determining whether an alien individual was a U.S. resident. The determination was made using a subjective, facts-and-circumstances test set forth in the regulations under Section 871. 54 The test for determining residence in the Section 871 regulations continues to apply in determining whether a U.S. citizen is a bona fide resident of one or more foreign countries for purposes of Section 911. 55 This test may also continue to apply for certain other purposes. 56

Basic test of residence. The Section 871 regulations defined the term “nonresident alien individual” to mean “an individual whose residence is not within the United States and who is not a citizen of the United States.” 57 Whether an alien was a U.S. resident under these regulations was determined under principles of U.S., not foreign, law. 58 Residence for purposes of Section 871 was not synonymous with the concept of domicile. Thus, an alien could be treated as a resident alien even if the alien's domicile remained in a foreign country. 59 In addition, the concept of residence under Section 871 was not the same as the concept of a taxpayer's “tax home” for purposes of Section 162(a)(2). 60

To be a U.S. resident under the Section 871 regulations, an alien had to meet two criteria: (1) Intent to make residence in the United States and (2) physical presence in the United States. 61 Both criteria were necessary to show U.S. residence under the Section 871 regulations; physical presence alone was not sufficient in and of itself. 62

The regulations treated an alien who was actually present in the United States as a U.S. resident alien if the alien was not a “mere transient or sojourner.” 63 Whether an alien was a transient or sojourner for this purpose was determined by the alien's intentions regarding the length and nature of the alien's stay in the United States. As stated by the Tax Court, “[s]ome permanence of living within borders is necessary to establish residence” in the United States. 64

A mere floating, indefinite intention to return to another country was not enough to make the alien a transient. 65 Thus, if an alien lived in the United States and had no definite intention as to length and nature of the stay, the alien was a resident alien. 66

An alien whose purpose in coming to the United States was of a temporary nature that could be promptly completed was a transient and, hence, a nonresident alien. 67 By contrast, if the alien's purpose was of a nature that necessitated an extended stay so that the alien's home was temporarily in the United States, the alien was a resident alien. 68 In the latter case, resident alien status resulted even if the alien intended at all times to return to a foreign domicile when the purpose had been

completed or abandoned. 69

An alien whose stay in the United States was limited to a definite period by the immigration laws (i.e., by a visa) was treated as a transient or sojourner “in the absence of extraordinary circumstances.” 70 Thus, such an alien was treated as a nonresident alien regardless of the number of days that the alien was present in the United States during the taxable year.

The longer the alien's stay in the United States, the more likely it was that a court or the Service would find the taxpayer to be a resident alien, despite claims that the taxpayer's intent was always to remain a nonresident. As stated by the Tax Court, a taxpayer's unexplained presence in the United States for a prolonged period was “strong evidence” of an intent to make the United States the taxpayer's residence. 71 In this regard, the Service, by ruling, established a rebuttable presumption that an alien who had been residing in the United States for as long as one year was a resident alien. 72 This presumption could be rebutted by any proper evidence showing that the alien was, in fact, a transient and, hence, a nonresident alien. 73

The determination of whether an alien was a U.S. resident under this test in the Section 871 regulations involved weighing all the surrounding facts and circumstances. 74 The court decisions analyzing this issue enunciated the principles defined in the following paragraphs.

1. One significant factor used in determining residency status for federal income tax purposes was the kind of visa an alien used to enter the United States. Thus, aliens who were admitted into the United States with visas permitting permanent residence status were normally considered resident aliens in the absence of special circumstances. 75 Similarly, aliens admitted to the United States under visas that were not limited to a definite period of time were more likely to be treated as resident aliens. 76 However, this factor was not conclusive, and if it could be shown that the alien's intentions concerning residency status did not coincide with the permanent residence characterization given the alien's stay by the visa, the alien could be treated as a nonresident alien for federal income tax purposes. 77 For example, in one ruling, the Service held that citizen-residents of Canada or Mexico who commuted to work in the United States on a daily or seasonal basis, even though treated as immigrants lawfully admitted to the United States for permanent residence under immigration law, were nonresident aliens for federal income tax purposes. 782. Abandonment or termination of an alien's residence in the alien's foreign country of origin was not a necessary prerequisite to a finding of U.S. residence. 793. If an alien spent the bulk of time during the years in issue outside the United States, a court was more likely to find that the alien was a nonresident alien, particularly if the alien's principal business activities were outside the United States. 80 However, this factor was not determinative. Courts would sometimes find that aliens who were present in the United States over only a small part of a year were, nevertheless, U.S. residents under the test in the regulations; aliens who were present for significant parts of a year were still nonresident aliens. 814. One significant factor focused on by the courts was the place in which an alien kept clothing and other personal belongings. 82 An alien whose personal belongings largely remained in the alien's foreign country of citizenship was more

likely to be treated as a nonresident alien than one who had moved those belongings to the United States. 835. Where an alien's spouse and children spent the bulk of their time was a significant, but not determinative, factor in determining the residence of the alien. 84 An alien and the alien's spouse could have different residences. 85 Thus, even if an alien's spouse had become a U.S. resident, the alien might still be a nonresident alien if the other surrounding facts and circumstances so dictated. 86 Further, the fact that an alien made trips to the United States to visit the alien's spouse and children did not necessarily require a finding that the alien had become a U.S. resident. 876. The facts that an alien had a house, bank accounts, safe-deposit boxes, investments and business activities, or a car registered in the United States were relevant to, but not determinative of, whether the alien was a U.S. resident. 88 In some cases, courts found that the location of such assets and activities in the United States could be consistent with either conclusion as to the alien's residence. 89 Similarly, in one case, the fact that an alien made contributions to U.S. charities was not viewed as determinative of the issue of U.S. residence. 907. An alien who had become assimilated into, and an integral part of, a community in the United States generally was found to be a U.S. resident. Thus, in several cases, aliens who owned homes, enrolled children in schools, opened bank accounts, and owned cars licensed in the United States were found to be U.S. residents. 91 In a celebrated case involving Tongsun Park, the famous Korean lobbyist, the court focused on the significant participation of the alien in social, political, and business activities of the Washington, D.C. community over an extended period of time and concluded that the alien was a resident alien. 92 By contrast, an alien whose central focus in life remained in the alien's foreign country of citizenship, and who made little or no attempt to become assimiliated into the culture of the United States, was likely to be found to be a nonresident alien. 938. Uncorroborated testimony by an alien concerning the alien's intentions regarding U.S. residence was not often given much weight by the courts even when the courts were convinced of the bona fide nature of the testimony. 94 However, an alien's failure to testify at all regarding the alien's intentions was sometimes treated by a court as a factor against the alien's claim of nonresidence in the United States. 959. Sworn statements by an alien to federal and state governmental authorities for purposes of obtaining a visa, driver's license, state property tax homestead exemption, or motor vehicle registration were often given considerable weight by the courts in finding that the alien had become a U.S. resident. 96 At the very least, the alien's execution of such documents to obtain some nontax benefit offered by the U.S. government or some state government made the alien's claim of nonresident status for federal income tax purposes an uphill struggle. However, if the alien could satisfactorily explain why the execution of such documents was not inconsistent with the alien's claim of nonresident alien status, a court might find that the alien was not a U.S. resident. 9710. If an alien claimed U.S. residence status with the taxing authorities of the alien's foreign country of origin, thereby avoiding payment of any taxes to such foreign country, a court would often place significant weight on such fact as evidence of the alien's intent to be treated as a U.S. resident. 98 Thus, an alien who obtained some foreign tax benefit by claiming to be a U.S. resident was likely to be treated as such for federal income tax purposes, at least in the absence of strong evidence showing that the alien was not a resident alien.

11. The courts and the Service held in some instances that foreign ambassadors and ministers and members of their families generally were nonresident aliens for federal income tax purposes. 99 As discussed later in this chapter, this principle has been carried forward under current law in Section 7701(b)(5)(B). 100Presumption of nonresident alien status. The Section 871 regulations contained so-called rules of evidence for determining whether an alien was a resident of the United States. 101 Under these rules, an alien (i.e., an individual who was not a U.S. citizen) was presumed to be a nonresident alien, 102 a factor that could tip the scales in favor of a finding of nonresident status in close cases. 103 This presumption of nonresidence applied to all aliens present in the United States, whether legally or illegally. 104

This presumption could be rebutted by proof that the alien had filed either a declaration of intent to become a U.S. citizen under the naturalization laws or a Form 1078 or its equivalent. 105 This presumption also could be rebutted by proof of acts and statements showing the alien's definite intent to acquire U.S. residence or showing that the alien's stay in the United States had been of such an extended nature as to make the alien a resident. 106

The exact legal effect of this presumption in the regulations was somewhat unclear. In one case, the Tax Court held that the effect was to require the Service “to bear the burden of insuring that sufficient evidence is in the record to produce the status of a ‘wash’ vis-à-vis the presumption,” although the burden of persuasion on the issue of U.S. residence remained with the taxpayer. 107

Loss of residence. An alien who had become a U.S. resident retained resident status until the alien abandoned U.S. residence and actually departed the United States. 108 In other words, U.S. residence, once acquired, was lost only when the alien physically departed the United States with an intent to abandon the U.S. residence. 109 That intention could be determined from the alien's declarations and acts. 110 However, an alien's intent to change residence alone (without physical departure) was not enough to change the alien's status as a resident alien to that of a nonresident alien, 111 although such intention carried “great weight.” 112 Thus, the regulations treated an alien who had become a U.S. resident as a resident alien for the duration of the alien's stay in the United States. 113 Further, an alien's temporary absences from the United States did not affect the alien's status as a U.S. resident unless the departures were coupled with an intent to abandon U.S. residence. 114

Alien sailors. The regulations contained special rules that applied to determining whether alien sailors were U.S. residents. These rules represented an adaptation of the general rules for determining residence discussed previously.

Under these special rules, to overcome the presumption of nonresidence in the Section 871 regulations, facts had to be shown that the alien sailor had established residence in the United States. 115 Residence could be established on a vessel regularly engaged in coastwise trade. 116 However, the mere fact that an alien sailor made the sailor's home on a vessel that was flying the U.S. flag and was engaged in foreign trade was not enough to show residence in the United States, even if the vessel touched at U.S. ports while engaged in foreign trade. 117 The

alien sailor's filing of Form 1078 or taking out first citizenship papers was proof of residence in the United States from the date the form was filed or the papers were taken out, unless rebutted by other evidence showing an intention to be a transient. 118

An alien sailor could become a U.S. resident even though the sailor was required to be absent for long periods from the place of established residence. 119 The regulations provided that an alien sailor could acquire residence at a sailors' boarding house or hotel, but warned that such claims of residence would be carefully scrutinized. 120¶ B1.02[2][c] Post–1984 Act Definition of Residence (Section 7701(b))

¶ B1.02[2][c][i] Introduction.

For taxable years starting after 1984, Section 7701(b) contains the standards for determining whether an alien individual (i.e., a citizen of a foreign country) is a resident or nonresident alien for U.S. tax purposes. 120.1 Congress enacted Section 7701(b) because it believed that the facts-and-circumstances test of the prior law did not provide adequate guidance concerning residence status. 121 The Section 7701(b) determination of residency applies for purposes of all the internal revenue provisions (including the employment taxes) except estate, gift, or generation-skipping transfer taxes. 122 The Service will not issue a private ruling concerning whether an alien individual is a U.S. resident or nonresident “including whether the individual has met the requirements of the substantial presence test or exceptions to the substantial presence test.” 122.1 In 2003, the Service clarified its no-rule policy in this area to make clear that it “may rule regarding the legal interpretation of a particular provision of § 7701(b) or the regulations thereunder.” 122.2

Section 7701(b) replaces the subjective, facts-and-circumstances standard of the pre-1984 case law and regulations with two largely objective tests for determining whether an alien individual is a U.S. resident alien: (1) a lawful permanent residence test that focuses on the alien's status under U.S. immigration laws and (2) a substantial presence test that focuses on the alien's number of days of presence in the United States during a year. If the alien meets either test, the alien is treated as a resident alien for federal tax purposes, regardless of the subjective intent concerning the nature and duration of the alien's stay in the United States. 123 By contrast, an alien who does not meet either residency test generally is treated as a nonresident alien for federal tax purposes. 124 However, in certain limited circumstances, an alien who does not otherwise qualify as a U.S. resident under one of the tests may elect to be treated as a U.S. resident. 125 These tests are applied on a calendar-year basis, regardless of the taxpayer's taxable year. 126

Applicability of Section 7701(b) for determining U.S. citizen's U.S. residency. By its terms, Section 7701(b) applies only in determining whether aliens are U.S. residents. The proposed regulations, however, take the position that the Section 7701(b) regulations apply for purposes of determining whether a U.S. citizen is a resident of the United States, unless the context indicates otherwise. 127 Although U.S. citizens are generally taxable on their worldwide incomes without regard to

their place of residence, 128 a U.S. citizen's residency status is sometimes relevant for federal income tax purposes. For example, the source of interest income depends generally on the residence of the payor of the interest. 129 Accordingly, under the Service's position in the Section 7701(b) proposed regulations, the Section 7701(b) tests would apply for purposes of determining whether a U.S. citizen payor of interest is a resident of the United States for interest sourcing purposes. 130

Several Code sections that depend on a U.S. citizen's residency do not use the Section 7701(b) residency tests. For purposes of Section 865, which sources gains or losses from personal property dispositions, 131 Section 865(g) contains its own rules regarding the residence of a U.S. citizen. The Section 7701(b) tests have no bearing on that determination. Further, Section 7701(b) does not apply for purposes of determining whether a U.S. citizen is a bona fide resident of a foreign country for purposes of the Section 911 foreign earned income exclusion. 132

Application of Section 7701(b) to U.S. possessions and territories. The proposed regulations provide that the tests in Section 7701(b) are used to determine whether an alien individual is a resident alien of a U.S. possession or territory if that possession or territory has a tax code that “mirrors” the U.S. income tax laws. 133 If, after application of Section 7701(b) and its regulations, an alien individual is a resident of both the United States and a U.S. possession or territory that has a mirror tax code, the proposed regulations provide that the principles of Section 7701(b)(3)(B), which concern an alien's closer connection to a foreign country, determine whether the individual is a resident alien of either the United States or a U.S. possession or territory, but not both. 134

The Tax Court held that the tests in Section 7701(b) did not apply for determining whether a U.S. citizen was a resident of the Northern Mariana Islands for purposes of former Section 935. Instead, the court held that facts and circumstances test in the Section 871 regulations applied for this purpose. 134.1

The 2004 Jobs Act added Section 937(a) to the Code. 134.2 This provision contains a uniform, statutory definition of bona fide residency in Puerto Rico and other specified U.S. possessions for purposes of Section 876 and other specified Code sections. 134.3¶ B1.02[2][c][ii] Lawful permanent residence test (“green card” test).

Under a test, often called the “green card” test, an alien is treated as a U.S. resident for any calendar year if the citizen is “a lawful permanent resident of the United States at any time during such calendar year.” 135 A foreign individual is a lawful permanent resident if the individual has been lawfully accorded the privilege of residing permanently in the United States as an immigrant under the U.S. immigration laws and if such status has not been either revoked or administratively or judicially determined to have been abandoned. 136 Under this test, a foreign individual who has become a permanent resident for immigration purposes is treated as a U.S. resident for tax purposes as well, without regard to the amount of time the individual spends in the United States during the year.

An alien who is a U.S. resident under this test continues to be a U.S. resident until

such status is revoked or administratively or judicially determined to have been abandoned. 137 The proposed regulations treat resident status as having been revoked if a final administrative or judicial order of exclusion or deportation is issued regarding the alien. 138

When resident status is treated as abandoned depends on whether the administrative or judicial determination of abandonment is initiated by the alien individual, the Immigration and Naturalization Service (INS), or a consular officer. If the alien initiates this determination, the regulations treat resident status as abandoned when the individual's application for abandonment (INS Form 1-407) or a letter stating the alien's intent to abandon resident status, with the Alien Registration Receipt Card (INS Form 1-151 or INS Form 1-551) enclosed, is filed with the INS or a consular officer. 139 By contrast, if the INS or a consular officer initiates this determination, the proposed regulations treat resident status as abandoned upon issuance of a final administrative order of abandonment (or, if the alien individual is granted an appeal to a federal court of competent jurisdiction, upon issuance of a final judicial order). 140¶ B1.02[2][c][iii] Substantial-presence test.

Under the substantial-presence test, a foreign citizen generally is treated as a resident alien if present in the United States (1) on at least thirty-one days during the calendar year and (2) on a total of 183 days during the current year and the two preceding calendar years. 141 For purposes of applying the 183-day requirement, each day of presence in the United States during the current year counts as a full day, each day in the first preceding year counts as one third of a day, and each day in the second preceding year counts as one sixth of a day. 142

Example 1

X, an alien individual, is present in the United States on 60 days during 1989, 150 days during 1990, and 130 days during 1991. X is not a lawful permanent resident of the United States during any of those years and was not present in the United States during any year before 1989.

Under the Section 7701(b)(3)(A) substantial-presence test, X is not a U.S. resident for 1989. X is present in the United States on only 60 days during that year and the preceding 2 years and, therefore, fails to meet the 183-day requirement.

X is also not a U.S. resident for 1990. X's total period of residence for 1989 and 1990 is 170 days (150 full days in 1990 and 20 days (60 × 1/3 ) in 1989). X, therefore, fails the 183-day requirement.

X is a U.S. resident for 1991. X is present in the United States on at least 31 days in 1991, and X's total period of residence for 1991 and the preceding 2 years is 190 days (130 full days in 1991, 50 days (150 × 1/3 ) in 1990, and 10 days (60 × 1/6 ) in 1989).

Example 2

143 Y, an alien individual, is present in the United States on 122 days during 1989,

122 days during 1990, and 122 days during 1991. Y is not a lawful permanent resident of the United States during any of those years and was not present in the United States during any year before 1989.

Under the substantial-presence test, Y is not a U.S. resident for 1989 because Y is present in the United States on only 122 days during that year and the preceding two years and, therefore, fails to meet the 183-day requirement. Y is not a U.S. resident for 1990 because Y's total period of residence for 1989 and 1990 is 162 2/3 days (122 full days in 1990 and 40 2/3 days (122 × 1/3 ) in 1989). Y, therefore, fails the 183-day requirement.

Y is a U.S. resident for 1991. Y is present in the United States on at least thirty-one days in 1991, and Y's total period of residence for 1991 and the preceding two years is 183 days (122 full days in 1991, 40 2/3 days (122 × 1/3 ) in 1990, and 20 1/3 days (122 × 1/6 ) in 1989).

The substantial-presence test does not apply to any calendar year of an alien individual in which the individual is not present in the United States for at least thirty-one days. 144 In other words, the 31-day requirement for the current year and the 183-day requirement for the current year and the two preceding years are separate requirements, both of which must be met for an alien to be treated as a U.S. resident under the substantial-presence test. However, in applying the 183-day requirement, it is irrelevant that the alien individual was not present for at least thirty-one days in the first or second year preceding the current year. 145

Example

146 Z, an alien individual, is present in the United States for 365 days during 1989, 365 days during 1990, and 25 days during 1991. Z is not a lawful permanent resident of the United States during any of those years.

Under the substantial-presence test, Z is not a U.S. resident for 1991 because Z is not present in the United States on at least thirty-one days during 1991. The fact that Z was present for 207 1/2 days during 1991 and the 2 preceding calendar years (25 full days in 1991, 121 2/3 days (365 × 1/3 ) in 1990, and 60% days (365 × 1/6 ) in 1989) for purposes of the 183-day requirement does not change that result for 1991. 147

Counting days. In applying the 31-day and 183-day requirements, an individual generally is treated as present in the United States on a given day if the individual is physically present in the United States at any time during that day, no matter how brief the time. 148 The statute, however, contains several exceptions to this broad definition of what constitutes a day of physical presence in the United States. 149 Further, it appears that fractional days that result from multiplying days of presence in the first or second preceding year by one third or one sixth are not rounded up to one. 150

Meaning of “United States.” To meet the substantial-presence test, an alien must be present “in the United States” for a specified number of days. 151 The proposed regulations provide that, for purposes of Section 7701(b), the term “United States,”

when used in its geographical sense, includes the fifty states and the District of Columbia. 152 Further, “United States” for this purpose also includes the U.S. territorial waters and seabed and subsoil of those submarine areas that are adjacent to the U.S. territorial waters and over which the United States has exclusive rights, in accordance with international law, to explore and exploit natural resources. 153 The term “United States” for purposes of Section 7701(b) does not include the U.S. possessions and territories or the air space over the United States. 154¶ B1.02[2][c][iv] Exception to substantial-presence test for aliens having closer connections to foreign countries.

An alien individual who otherwise would meet the substantial-presence test may nevertheless be treated as not meeting that test for a calendar year if three conditions are met. 155 First, the alien must be present in the United States for fewer than 183 days during the current calendar year. 156 Second, the alien must maintain a tax home in a foreign country during the current calendar year. 157 Third, the alien must have a closer connection during the current calendar year to a single foreign country (or, under a special rule described below, to no more than two foreign countries) in which the tax home is maintained than to the United States. 158

Further, under the authority of Section 7701(b)(8), the Treasury has issued regulations that require an alien individual who is relying on the closer connection exception to the substantial-presence test to file a statement explaining the basis of the individual's claim that he or she is able to meet the above conditions. 158.1 As discussed below, an individual who fails to file the required statement may be ineligible for the closer connection exception. 158.2

Closer connection to no more than two foreign countries (special rule). If certain conditions are met, an alien individual may qualify for the closer connection exception to the substantial-presence test by showing that in one year the alien has a closer connection to no more than two foreign countries (instead of a single foreign country). 158.3 To qualify for this special rule, the alien individual must meet all of the following five conditions:

1. The alien individual must maintain a tax home in one foreign country starting on the first day of the current calendar year;2. The alien individual must change his or her tax home during the current calendar year to a second foreign country;3. The alien individual must continue to maintain his or her tax home in the second foreign country for the remainder of the current calendar year;4. The alien individual must have a closer connection to each foreign country than to the United States for the period during which the individual maintains a tax home in that foreign country; and5. The alien individual must be subject to taxation as a resident under the laws of either foreign country for the entire year or must be subject to taxation as a resident in both foreign countries for the period during which the individual maintains a tax home in each foreign country. 158.4This closer connection exception is not available to an alien individual who has an application pending for adjustment of status during the current calendar year. 159

This exception also is not available to an alien individual who has personally applied or taken other affirmative steps to change to permanent resident status during the current calendar year. 160

“Tax home” requirement. As previously indicated, one of the conditions for qualifying for the closer connection exception is that the alien individual maintain a “tax home” in a foreign country. 161 The tax home must be maintained in the same foreign country with which the individual is claiming to have the closer connection. 162 Further, the proposed regulations require that the tax home be in existence for the entire calendar year for which the closer connection exception is claimed. 163

For this purpose, the statute provides that the term “tax home” has the same meaning it has for purposes of Section 911(d)(3), but without regard to the second sentence of Section 911(d)(3). 164 The regulations restate this definition by providing that for purposes of Section 7701(b), the term “tax home” has the same meaning it has for purposes of Section 162(a)(2) (the travel expense deduction provision). 164.1 Thus, the regulations treat an individual's tax home as located generally at the individual's regular or principal (if more than one regular) place of business. 165 If the individual has no regular or principal place of business either because of the nature of the business or because the individual is not engaged in carrying on any trade or business within the meaning of Section 162(a)(2), the regulations treat the individual's tax home as located at the individual's “regular place of abode in a real and substantial sense.” 166

Closer connection to a foreign country. An alien individual has a closer connection to a foreign country than the United States if the individual or the Service shows that the individual has maintained more significant contacts with the foreign country than with the United States. 167 In determining whether an individual has maintained more significant contacts with a foreign country than with the United States, the proposed regulations list the following facts and circumstances as among those to be considered:

1. The location of the individual's permanent home (whether a house, an apartment, or a furnished room);2. The location of the individual's family;3. The location of personal belongings owned by the individual and the individual's family, such as automobiles, furniture, clothing, and jewelry;4. The location of social, political, cultural, or religious organizations in which the individual has a current relationship;5. The place where the individual conducts his or her routine personal banking activities;6. The jurisdiction in which the individual holds a driver's license;7. The country of residence designated by the individual on forms and documents;8. The types of official forms and documents filed by the individual, such as IRS Form 1078, IRS Form W-8, or IRS Form W-9;9. The location of the jurisdiction in which the individual votes.10. The place where the individual conducts business activities (other than those that constitute the individual's tax home). 168These factors are similar to the factors developed by the Service and the courts under the pre-1984 Act facts-and-circumstances test for determining whether an

alien individual was a resident of the United States. 168.1 Thus, although a principal purpose for Congress's enactment of Section 7701(b) was to eliminate subjective tests for determining the residency of alien individuals, this closer connection exception requires the application of a subjective, facts-and-circumstances analysis and, thus, undercuts the effectiveness of Section 7701(b) in achieving that purpose.Meaning of “foreign country.” To qualify for the closer connection exception, an alien must maintain a tax home in, and have a closer connection to, a “foreign country.” For purposes of Section 7701(b), the term “foreign country” when used in its geographical sense includes any territory under the sovereignty of the United Nations or a government other than that of the United States. 169 The regulations provide that the term “foreign country” includes the foreign country's territorial waters (determined under U.S. laws) and the seabed and subsoil of those submarine areas that are adjacent to the foreign country's territorial waters and over which the foreign country has exclusive rights, in accordance with international law, to explore and exploit natural resources. 170 The term “foreign country” for purposes of Section 7701(b) also includes U.S. possessions and territories. 171¶ B1.02[2][c][v] Exclusion of certain days of presence for substantial-presence test.

Special rules exclude certain days of presence of an alien in the United States for purposes of applying the substantial-presence test. 172 The following days do not count as days of presence in the United States for purposes of the substantial-presence test:

1. Days on which an individual is present as an “exempt individual,” i.e., days on which the individual is either a (a) foreign government-related individual; (b) teacher or trainee; (c) student; or (d) professional athlete temporarily present in the United States to compete in a charitable sports event of a specified type; 1732. Days on which an individual is prevented from leaving the United States because of a medical condition that arose while in the United States; 1743. Days on which a regular commuter residing in Canada or Mexico commutes to and from employment (or self-employment) in the United States; 175 and4. Days on which an individual is in transit between two points outside the United States. 176Foreign government-related individual. An alien is not be treated as present in the United States on any day that such individual is a foreign government-related individual. 177 A foreign government-related individual is an individual temporarily present in the United States (1) by reason of diplomatic status; 178 (2) by reason of a visa representing full-time diplomatic or consular status; 179 or (3) as a full-time employee of an international organization. 180 Immediate family members of individuals qualifying as foreign government-related individuals who are temporarily present in the United States are also treated as foreign government-related individuals. 181 An individual who otherwise qualifies for this foreign government-related individual exception to the substantial-presence test will be treated as temporarily present in the United States for purposes of this provision if the individual is not a lawful permanent resident of the United States, regardless of the actual amount of time the individual is present in the United States. 181.1

Teachers, trainees, and students. An alien is not treated as present in the United

States on any day that such individual is temporarily present in the United States as a teacher, trainee, or student. 182 A teacher, trainee, or student for this purpose is an individual who is admitted temporarily in the United States as a nonimmigrant under specified sections of the Immigration and Naturalization Act and who substantially complies with the requirements for being so present. 183 The proposed regulations treat immediate family members of individuals qualifying as teachers, trainees, or students who are temporarily present in the United States as themselves teachers, trainees, or students even though the statute itself does not so provide. 184

The regulations treat an individual as substantially complying with visa requirements relevant to residence for tax purposes if the individual has not engaged in activities that are prohibited by the Immigration and Nationality Act and regulations thereunder and that could result in the loss of F, J, or M visa status. 185 However, merely showing that the individual's visa has not been revoked is not substantial compliance for this purpose. 186 Further, the proposed regulations take the position that the Service may make an independent determination as to whether there has been substantial compliance. 187 Thus, if the Service finds that an individual has accepted unauthorized employment or is not engaged in a course of study that the Service considers full-time, the individual will not be treated as substantially complying with the individual's visa requirements even though the immigration authorities have not sought to revoke the individual's visa. 188

Limits on the teacher, trainee, and student exclusions.

An individual generally cannot exclude days of presence from the substantial-presence test as a teacher or trainee if the individual has been exempt as a teacher, trainee, or student for any part of two of the six prior calendar years. 189 Under the regulations, however, if (1) the teacher or trainee receives compensation in the current year and all of that compensation is described in Section 872(b)(3); (2) that individual was present in the United States as a teacher or trainee in any prior year within the last six years; and (3) during each prior year within the six-year period in which the individual was present as a teacher or trainee, the individual received compensation all of which was described in Section 872(b)(3), then that individual includes days of presence as a teacher or trainee in the current calendar year only if the individual has been exempt as a teacher, trainee, or student for any part of four of the six prior calendar years. 190

Example 1

191 X, a citizen of Country E, is temporarily present in the United States during the current calendar year as a teacher under a “J” visa. X does not receive compensation described in Section 872(b)(3) in the current year. X has been treated as an exempt student for the past three years.

Even though this is the first year that X is seeking to be exempt as a teacher, the special limit on the teacher/trainee exemption applies. X will not be considered to be a teacher for purposes of the substantial-presence test because X has been exempt as a student for at least two of the prior six years.

Example 2

191.1 Y, a citizen of Country F, is temporarily present in the United States during the current calendar year as a teacher and receives compensation described in Section 872(b)(3) in the current year. Y has been treated as an exempt teacher for the past two years, but Y's compensation for those years was not described in Section 872(b)(3). Y will not be treated as an exempt individual for the current year because Y has been exempt as a teacher for at least two of the past six years.

Example 3

191.2 The facts are the same as in Example 2, except that all of Y's compensation for the two prior years was described in Section 872(b)(3). Y will be treated as an exempt individual for the current year because Y has not been exempt as a student, teacher, or trainee for four of the six prior calendar years.

Example 4

191.3 Z, a citizen of Country G, is temporarily present in the United States during the current calendar year as a teacher under a “J” visa. Z does not receive compensation described in Section 872(b)(3) in the current year. Z entered the United States in December of the prior calendar year and intends to remain in the United States until June of the current year. Z will not be treated as an exempt individual for the current year because Z has been exempt as a teacher for at least two of the six prior calendar years.

In addition, an individual cannot exclude days of presence as a student if the individual has been exempt as a teacher, trainee, or student for any part of more than five calendar years, unless it is shown to the satisfaction of the district director that the individual does not intend to reside permanently in the United States and has substantially complied with the conditions of the student visa. 192 For this purpose, the proposed regulations provide that the facts and circumstances to be considered in determining whether the student intends to reside permanently in the United States include (1) whether the individual has maintained a closer connection with a foreign country and (2) whether the individual has taken affirmative steps to adjust the individual's status from nonimmigrant to lawful permanent resident. 193

Mexican or Canadian commuters. An alien is not treated as present in the United States on days that the alien regularly commutes to employment or self-employment in the United States from the alien's residence in Mexico or Canada. 194

Example

X, a citizen of Canada, owns a residence in Toronto. On January 1, 1989, X begins work in Niagara Falls, New York, commuting six days a week to Niagara Falls from the Toronto residence. During 1989, X takes five days of sick leave and two weeks of vacation (ten working days). Although X is physically present in the United States for almost 300 days during 1989, under Section 7701(b)(7)(B), none of X's work

days count in applying the 31-day and 183-day requirements, and X is not treated as a resident alien for U.S. income tax purposes.

The regulations treat an alien individual as regularly commuting for this purpose if the alien “commutes” to the location of employment or self- employment in the United States from the alien's residence in Canada or Mexico on more than 75 percent of the alien's “workdays” during the “working period.” 195

The regulations define the word “commute” for this purpose as meaning travel to and from employment or self-employment in the United States within a twenty-four-hour period. 196 “Workdays” for this purpose are defined as days on which the individual works in the United States or Canada or Mexico. 196.1 “Work period” for this purpose means the period starting with the first day in the current calendar year on which the individual is physically present in the United States for purposes of engaging in employment or self-employment and ending on the last day in the current calendar year on which the individual is physically present in the United States for purposes of engaging in that employment or self-employment. 196.2

Example 1

196.3 Y is a citizen of, and lives in, Mexico. Y is employed by Corporation E in its office in Mexico. Y is temporarily assigned to E's office in the United States. Y's employment in the U.S. office begins on February 1, 1988, and continues through June 1, 1988. On June 2, 1988, Y resumes employment in Mexico.

On fifty-nine days in the period starting February 1, 1988, and ending on June 1, 1988, Y travels each morning from Y's residence in Mexico to E's U.S. office for the purpose of engaging in employment with E. Y returns to the Mexico residence on each of those evenings. On seven days in the period from February 1, 1988, through June 1, 1988, Y works in E's Mexico office.

Y is not treated as having been present in the United States on any of the days that Y travels to E's U.S. office for the purpose of engaging in employment with E. Y may exclude these days of presence in applying the substantial-presence test because Y commutes to the place of employment within the United States on more than 75 percent of the workdays during the working period (fifty-nine workdays in the United States/sixty-six workdays in the working period = 89.4 percent).

Example 2

196.4 Z is a citizen of, and lives in, Canada. Z is the sole proprietor of a wholesale lumber business with offices in both the United States and Canada. Starting on January 4, 1988, and ending on February 12, 1988, Z commutes from the Canadian residence to work in the U.S. office on thirty days. Starting on February 15, 1988, and ending on March 25, 1988, Z commutes from the Canadian residence to work in the Canadian office on thirty days. Starting on March 28, 1988, and ending on May 27, 1988, Z commutes from the Canadian residence to work in the U.S. office on forty-five days. After May 27, Z does not commute to the United States on any other days in 1988.

Z is treated as having been present in the United States on each day that Z travels to the U.S. office. Z cannot exclude these days of presence under the commuter exception because Z does not commute from the Canadian residence to the U.S. office on more than 75 percent of the workdays during the working period starting on January 4, 1988, and ending on May 27, 1988 (seventy-five workdays in the United States/105 workdays in the working period = 71.4 percent).

If the nature of the alien's employment or self-employment requires the alien to be present in the United States only on a seasonal or cyclical basis, the regulations treat the working period as starting with the first day of the season or cycle on which the alien is present in the United States to engage in that employment or self-employment and as ending on the last day of the season or cycle on which the alien is present in the United States to engage in that employment or self-employment. 196.5 Thus, for purposes of this commuter exception, more than one working period may exist in a calendar year, and a working period may start in one calendar year and end in the next calendar year. 196.6

Transit between two foreign points. An alien individual is not treated as present in the United States during any day on which the individual is physically present in the United States for fewer than twenty-four hours and is in transit between two foreign points. 197 The proposed regulations provide that an individual is in transit for this purpose if the individual pursues activities that are substantially related to completing the travel to a foreign destination (e.g., traveling between U.S. airports to change planes). 198 If, however, the individual attends a business meeting while in the United States, regulations provide that the day counts as a day of U.S. presence even if the meeting or visit take place within the airport. 199 Visiting with friends or relatives may have the same effect, although the regulations are silent on this point.

Medical condition. An individual is treated as not present on any day that the individual intends to leave the United States but cannot leave because of a medical condition or medical problem that arose during the individual's presence in the United States. 200 The period of exclusion includes a reasonable period for making arrangements to leave the United States after the individual's medical condition no longer prevents the individual from leaving. 201

For purposes of this medical exception, determining whether an alien individual intended to leave the United States is based on all the facts and circumstances. 201.1 Thus, if at the time the alien's medical condition or medical problem arose the alien was present in the United States for a definite purpose that by its nature could be effected within the United States during a period of time that would not cause the alien to be a U.S. resident under the substantial-presence test, the alien may be able to show the requisite intent to leave the United States. 201.2 By contrast, if the alien's purpose for being in the United States was of such a nature that an extended period of time was needed for its accomplishment sufficient to cause the alien to be a U.S. resident under the substantial-presence test, the alien would not be able to show the necessary intent to leave the United States. 201.3 If the alien is present in the United States for no particular purpose or for a purpose that by its nature does not require a specific time period to accomplish, determining whether the alien had the requisite intent to leave the United States depends on all the

surrounding facts and circumstances. 201.4

If an alien is adjudicated mentally incompetent, the regulations determine proof of the incompetent's intent to leave the United States by focusing on the incompetent's pattern of behavior before the adjudication of incompetence. 201.5 Further, the regulations presume that an alien intended to leave the United States during a period of illness if the alien left the United States within a reasonable period of time after becoming physically able to leave. 201.6

Example

On June 7, 1989, X, a citizen of Country E, flies to the United States for a two-week vacation. On the seventh day of vacation, X is seriously injured and must stay in a U.S. hospital until February 15, 1990. X departs for Country E on February 17, 1990. During 1989, X is not treated as a U.S. resident, because X is treated as being present in the United States for fourteen days at most (X's intended period of stay). 202 During 1990, X has no days of presence in the United States assuming that the two-day hiatus before X's departure was a reasonable period to prepare to depart.

Example 1

202.1 Y, a citizen of Country F, is in a serious automobile accident in the United States on March 25. Y intended to leave the United States on March 31 (as evidenced by an airline ticket), but was unable to leave on that date because of the injuries suffered in the accident. Y recovered from the injuries and was able to leave and did leave the United States on May 31. Y's days of presence in the United States during the period from April 1 through May 31 are not counted as days of presence in the United States. Y's days of presence in the United States during the period from March 25 through March 31, however, do count as days of presence in the United States because although the medical condition prevented Y from leaving the United States, Y had not intended to leave the United States before that date anyway.

Example 2

202.2 The facts are the same as in Example 1, except that Y's return flight (as evidenced by an airline ticket) was scheduled for May 31. Because Y did not intend to leave the United States until May 31, Y may not exclude any days of presence in the United States.

A day of presence is not excluded if the individual who was initially prevented from leaving is able to leave, but decides to remain for more than a reasonable period to prepare for departure. 203 Further, the proposed regulations take the position that the exclusion does not apply when pre-existing medical conditions or problems are involved. 204 Thus, a medical condition or problem is not treated as arising in the United States if the condition or problem existed before the alien individual arrived in the United States and the individual was aware that it existed, even though the need for treatment did not arise until after the individual's arrival in the United States. 205 In addition, the exclusion does not apply to an alien who returns to the

United States for medical treatment for a problem that arose during a prior stay in the United States (regardless of whether days of presence during the prior stay were excluded). 206

One question left open by the wording of Section 7701(b)(3)(D) is: Does a taxpayer have to suffer personally from a medical condition or may the condition of a family member qualify? For example, if a child becomes sick in the United States, can the child's alien parent remain in the United States without being “present” for purposes of Section 7701(b)? The better policy answer seems clear enough (let the parent stay with the sick child without becoming a U.S. resident alien), but the wording of the regulations suggests (without clearly so stating) that the exception applies only to a medical condition or medical problem of the alien who is seeking to exclude days of presence under the medical exception. 206.1 The wording of the regulations is consistent with the wording of the statute whether or not consistent with sound tax policy. Thus, an alien who is forced to stay in the United States on account of a family member's condition may have to count the days of presence in the United States for purposes of the substantial-presence test, unless another exception applies (e.g., the closer connection test).

Professional athletes. An alien is not treated as present in the United States during any day on which the alien is temporarily present in the United States to compete in a charitable sports event described in Section 274(1)(1)(B). 207 However, the proposed regulations exclude only days on which the athlete actually competes in a charitable sports event described in Section 274(1)(1)(B). Thus, days on which the athlete is present to practice for the event, to perform promotional or other activities relating to the event, or to travel between events are not excluded. 208

Foreign crew members temporarily present. An alien who is temporarily present in the United States on any day as a regular member of the crew of a foreign vessel engaged in transportation between the United States and a foreign country or a U.S. possession is not treated as present in the United States on such day. 208.1 This exclusion does not apply if the alien otherwise engages in any trade or business in the United States on such day. 208.2¶ B1.02[2][c][vi] First-year election.

Basic requirements.

Under certain conditions, Section 7701(b)(4) allows an alien who does not meet the “green card” test or the substantial presence test for a calendar year to elect to be treated as a resident for at least part of the year. 209 To qualify for this election with respect to a calendar year, the alien must not have been a U.S. resident for the prior calendar year, 210 but must be a resident under the substantial-presence test for the following calendar year (without regard to whether or not the alien is also a U.S. resident under the green-card test). 211 Further, in the election year, the alien must meet two minimum-presence requirements:

1. The alien must be present in the United States for at least thirty-one consecutive days, 212 and2. The alien must be present in the United States for a period that includes at least 75 percent of the days starting with (and including) the first day of such thirty-one-

day period and ending with the last day of the election year. 212.1 For purposes of this second requirement only, an individual will be deemed to be present in the United States for up to five days on which the individual is absent from the United States. 212.2An individual generally is treated as present in the United States for purposes of these minimum-presence requirements on any day that the individual is physically present in the United States at any time during the day. 212.3 Days of presence otherwise excluded under Section 7701(b)(3)(D)(i) (exempt individual), Section 7701(b)(3)(D)(ii) (medical condition), Section 7701(b)(7)(B) (regular commuter from Canada or Mexico), and Section 7701(b)(7)(C) (in transit between two foreign points) are not counted as days of presence for purposes of either of the above two minimum-presence requirements. 212.4Example 1

212.5 Y, a citizen of foreign country M, is an alien who has never before been a U.S. resident for tax purposes. Y comes to the United States on November 1, 1991, and is present in the United States on thirty-one consecutive days (from November 1, 1991, through December 1, 1991). Y returns to country M on December 1 and does not return to the United States until December 17, 1991. Y remains in the United States for the rest of 1991. During 1992, Y is a U.S. resident under the substantial-presence test.

Y may elect to be treated as a U.S. resident for 1991 under the first-year election provisions because Y meets both minimum-presence requirements. First, Y is present in the United States in 1991 for a thirty-one-consecutive-day period of presence. Second, Y is present for at least 75 percent of the days following (and including) the first day of Y's thirty-one-consecutive-day period of presence through the end of the 1991 calendar year (forty-six total days of presence in the United States/sixty-one days in the period from November 1 through December 31 = 75.4 percent).

Example 2

212.6 Assume the same facts as in Example 1, except that Y is absent from the United States on December 24, 25, 29, 30, and 31 of 1991. Y may, nevertheless, make the election to be treated as a resident for 1991 because up to five days of absence are deemed to be days of presence in the United States for purposes of the continuous-presence requirement.

Example 3

Assume the same facts as in Example 1, except that Y is a U.S. resident for 1992 only under the green-card test and not the substantial-presence test. Y may not make the first-year election for 1991 despite meeting both minimum-presence requirements for 1991 because the first-year election may be made only by an alien who meets the substantial-presence test for the calendar year following the calendar year for which the alien seeks to make the election.

Election procedure. An alien individual makes this first-year election by attaching a statement to the individual's tax return (Form 1040) for the taxable year for which

the election is to be in effect. 212.7 The statement must contain certain information specified in the regulations and must contain a signed declaration that the election is being made. 212.8 The election may not be revoked without the Service's approval. 212.9

An alien individual may not make this election until the individual has met the substantial-presence test for the year following the election year. 212.10 If an alien individual has not met the substantial-presence test for the year following the election year as of the due date (without regard to any extensions) of the tax return for the election year, the alien individual may request an extension of time for filing the return until a reasonable period after the individual has met the test. 212.11 However, the alien individual must include with the extension application a payment of the tax amount that the individual expects to owe for the election year computed as if the individual were a nonresident alien throughout the election year. 212.12

Election on behalf of dependent child. The regulations allow an individual to make the first-year election on behalf of a dependent child (as defined in Section 152) if three conditions are met. 212.13 First, the individual must be qualified to make the election on the individual's own behalf. 212.14 Second, the child must qualify to make the first-year election by meeting the requirements discussed above. 212.15 Third, the child must not be required by Section 6012 to file a U.S. income tax return for the year for which the election is to be effective. 212.16

Failure to comply with election filing requirements. If an alien individual fails to comply with the election procedure in the regulations, the regulations penalize the individual by requiring the individual to file an income tax return for the current year as a nonresident alien. 212.17 However, this penalty will not apply if the individual can show “by clear and convincing evidence” that the individual “took reasonable actions to become aware of the filing requirements and significant affirmative steps to comply with regulations.” 212.18¶ B1.02[2][c][vii] Residency starting date.

An alien may meet the test to be a resident for a calendar year without having had a “green card” or without having been present in the United States for the entire year. If the alien was not a resident during the prior calendar year, Section 7701(b) may treat the alien as a resident for only a portion of the current calendar year. 213 Thus, Section 7701 may split the first year of residency.¶ B1.02[2][c][viii] Residency ending date.

As noted above, an alien may meet the test to be a resident for a calendar year without having had a “green card” or without having been present in the United States for the entire year. If the alien is not a resident during the following calendar year, Section 7701(b) may treat the alien as a resident for only a portion of the current calendar year. 214 Thus, Section 7701(b) may split the final year of residency.

New tax-based rule for determining when a long-term resident alien is no longer a resident alien for U.S. tax purposes (former Section 7701(n)). In 2004, Congress enacted tax-based rules (in place of immigration-based rules) for determining when

a long-term resident alien is no longer a U.S. resident for tax purposes. 214.1 Under former Section 7701(n), an individual who would otherwise have ceased being treated as a U.S. resident continued to be treated as a U.S. resident until the individual met two conditions. First, the individual had to give notice of termination of residency (with the requisite intent to terminate U.S. residency) to the Secretary of Homeland Security. 214.2 Second, the individual had to provide a statement in compliance with the rules in Section 6039G, if such a statement was otherwise required. 214.3

Finally, in 2008, Congress replaced the rules in Section 877 with new Section 877A, which provides a mark-to-market taxation regime for expatriates and certain former long-term lawful permanent resident aliens that is triggered at the time of expatriation. 214.4 Section 877A applies to any individual whose expatriation date (as defined in Section 877A(g)(3)) is on or after the date of enactment of the 2008 legislation (June 17, 2008). 214.5 This new provision is discussed in detail in Chapter C1. 214.6¶ B1.02[2][c][ix] Taxation of certain aliens in accordance with Section 877.

The general purpose of Section 7701(b) is to define when an alien is treated as a U.S. resident. Such a resident generally pays U.S. taxes on worldwide income. 215 In addition, Section 7701(b) contains a rule of taxation that may apply to an alien that is a resident, ceases to be a resident, and then becomes a resident again. That rule tends to prevent an individual from manipulating the residency rules to avoid U.S. taxes. Section 7701(b)(10) and the regulations provide that an alien individual will be taxed in the manner provided by Section 877 if the following four conditions are met: 216

1. The alien individual is a resident alien of the United States for at least three consecutive calendar years starting after 1984; 2172. The period of residence for each of the three consecutive calendar years includes at least 183 days; 217.13. The alien individual is once again taxed as a nonresident alien; 218 and4. The alien individual then becomes a resident of the United States before the close of the third calendar year starting after the individual's residency termination date in the initial residency period. 219If it applies, Section 7701(b)(10) subjects a nonresident alien to taxation under the principles of Section 877(b) for the period after the close of the initial residency period and before the start of subsequent residency. 220 However, this tax is imposed only if the amount of such tax would exceed the amount of tax that would be imposed under Section 871. 221

Example

222 X, a citizen of a foreign country, enters the United States on April 1, 1985, as a lawful permanent resident. On August 1, 1987, X surrenders X's green card and returns abroad. X meets the initial residency period requirement because X is a resident of the United States for at least 183 days in each of three consecutive years (1985, 1986, and 1987). 223

X returns to the United States on October 5, 1990, as a lawful permanent resident.

Because X became a U.S. resident again before the close of the third calendar year (1990) starting after the close of the initial residency period (August 1, 1987), X is subject to tax under Section 877(b) for the intervening period of nonresidency (i.e., August 2, 1987 through October 4, 1990). This provision, however, will apply only if the amount of tax exceeds the amount of tax that would be imposed under Section 871.

Legislation enacted in 1996 extended Section 877 to cover certain long-term lawful permanent resident aliens who terminated U.S. residency with a principal purpose of tax avoidance and added information reporting requirements in Section 6039G. 223.1 Congress made extensive changes to Section 877 in 2004, including replacement of the tax avoidance motive standard of prior law with objective tests. 223.2 In 2008, Congress replaced the rules in Section 877 with a new mark-to-market taxation regime in Section 877A for expatriates and certain former long-term lawful permanent resident aliens that is triggered at the time of expatriation. 223.2a The 1996 and 2004 legislative changes to Section 877 and the enactment of Section 877A in 2008 are discussed in Chapter C1. 223.3¶ B1.02[2][c][x] Coordination with income tax treaties.

If an alien individual is treated as a U.S. resident under Section 7701(b) and is also treated, pursuant to a U.S. treaty with a foreign country, as a resident of that foreign country, the rules on residency provided in the treaty apply for treaty purposes. 224 If an alien individual is determined to be a resident of the foreign country for treaty purposes, and the individual claims a treaty benefit (as a nonresident of the United States) so as to reduce U.S. income tax liability with respect to any income item covered by the treaty, the individual is treated as a nonresident alien of the United States for purposes of computing U.S. income tax liability under the Code and the regulations with respect to the taxable year. 225 This treatment applies, however, only to an alien individual who is treated as a resident of a treaty country pursuant to a provision of a treaty that provides for resolution of conflicting claims of residence by the United States and the foreign treaty country (a so-called tie-breaker provision). 226 Such an individual is treated as a U.S. resident for all purposes of the Code other than the computation of such individual's U.S. income tax liability. 227 The Service has proposed special rules under this provision relating to S corporations. 227.1

An alien individual who is a dual resident taxpayer under this provision, and who determines U.S. tax liability as if the individual were a nonresident alien, must file a return on Form 1040NR on or before the due date (including extensions) for filing such a return and must compute the tax liability as a nonresident alien. 228 The individual must attach a statement (in the form required by the regulations) to the Form 1040NR. 229 The individual must file the Form 1040NR with the Internal Revenue Service Center in Philadelphia, Pennsylvania. 230 The regulations state that the individual's filing of the Form 1040NR may affect the determination by the Immigration and Naturalization Service as to whether the individual qualifies to maintain a residency permit. 231

The statement required to be filed under these regulation provisions is treated as disclosure for purposes of Section 6114, but only if the statement is in the form required by the regulations. 232 If the taxpayer fails to file the required statement on

or before the due date in the regulations, the taxpayer will be subject to the penalties imposed by Section 6712. 233¶ B1.02[2][c][xi] Procedural requirements.

An alien may avoid being a U.S. resident because of various exceptions to the substantial-presence test in Section 7701(b). Although the alien does not have to file Form 1040 as a U.S. resident, the alien under certain conditions must report certain information to the Service. 234 Failure to comply may cause the alien to be treated as a U.S. resident. 235¶ B1.02[2][d] Effects of Tax Treaties

Some treaties allow student or apprentice nationals of the foreign treaty country to elect to be treated as U.S. residents for all federal income tax purposes. 236 This election generally may not be revoked without the consent of the U.S. competent authority.¶ B1.02[2][e] Election to Treat Nonresident Alien As Resident Alien (Sections 6013(g) and 6013(h))

A married couple generally may not file a joint return for a taxable year if either spouse is a nonresident alien at any time during the year. 237 However, Sections 6013(g) and 6013(h) allow a nonresident alien individual to file a joint return with a spouse that is a U.S. citizen, resident alien, or nonresident alien also making the Section 6013(g) or Section 6013(h) election if the nonresident alien individual elects to be treated as a resident of the United States. This election applies for purposes of Chapters 1, 5, and 24 of the Code 238 and for all the taxable years for which it is in effect. 239 Accordingly, a nonresident alien individual who elects under Section 6013(g) or Section 6013(h) is generally taxed in the same manner as a resident alien individual. 240¶ B1.02[2][f] Alien Residents of Puerto Rico, American Samoa, Guam, and the Northern Mariana Islands

Section 876 provides that an alien individual who is a bona fide resident of Puerto Rico during the entire taxable year is taxed in the same manner as a resident alien individual. Thus, such an individual generally is subject to U.S. income tax at regular rates on the individual's worldwide income. 241 However, Section 933 allows such a bona fide Puerto Rican resident to exclude from gross income derived from Puerto Rican sources. 242

Section 876 also provides that an alien individual who is a bona fide resident of American Samoa, Guam, or the Northern Mariana Islands for the entire taxable year is taxed in the same manner as a resident alien individual. However, Section 931, as revised by the Tax Reform Act of 1986, allows such a bona fide resident of American Samoa, Guam, or the Northern Mariana Islands to exclude from gross income either income that is derived from sources within the specified possession or income that is effectively connected with the conduct of a trade or business in the specified possession. 243 Section 876 and revised Section 931 apply to bona fide residents of American Samoa, Guam, and the Northern Mariana Islands only if, and as long as, an implementation agreement is in effect between such possession and the United States. 244¶ B1.02[2][g] Dual Status Taxpayers

Special rules apply to a taxpayer who is a nonresident alien at the start of a taxable year and a resident alien at the end of the taxable year, or vice versa. 245 Such a taxpayer is known as a “dual status taxpayer.” The regulations require dual status taxpayers to compute tax liability for the year of the change in status as if the year comprised two separate taxable periods - one consisting of the time during which the taxpayer was a resident alien and the other consisting of the time during which the taxpayer was a nonresident alien. 246 The tax rules applicable to nonresident aliens, discussed in Chapter C1, apply to a taxpayer's income and deductions for the part of the year during which the taxpayer was a nonresident alien individual, and the tax rules applicable to resident alien individuals, discussed in this chapter, apply to the part of the year during which the taxpayer was a resident alien individual. 247

Recognizing that both tax regimes apply to the same taxpayer for different parts of a taxable year, the regulations provide that a dual status taxpayer is entitled to one personal exemption deduction (as is the case of all nonresident alien individuals). In addition, the dual status taxpayer is allowed additional exemptions if the requirements of Sections 151 and 152 are met, but only to the extent that the amount of the additional exemptions does not exceed the taxpayer's taxable income for the period in the taxable year during which the individual was a U.S. resident. 248

Section 63(c)(6)(B) provides that a nonresident alien individual is not entitled to claim any standard deduction. The Service and some courts interpreted prior versions of this provision as disallowing any standard deduction (or zero bracket amount of pre-1986 Act law) for a dual status taxpayer even for the part of the taxable year during which the taxpayer was a U.S. resident. 249 Prior law versions of this provision had language that seemed to deem a nonresident alien individual who was not entitled to claim any standard deduction (or zero bracket amount of pre-1986 Act law) as having elected to itemize deductions. The Service read this deemed election as applying to the entire taxable year of the dual status taxpayer, thus preventing the taxpayer from obtaining any standard deduction. 250 In one case, however, the Second Circuit disagreed with the Service's analysis of the prior versions of Section 63(c)(6)(B) and allowed a dual status taxpayer to claim a full standard deduction against the taxpayer's taxable income for the period during which the taxpayer was a resident alien. 251

The current version of Section 63(c)(6) merely provides that a nonresident alien individual is not entitled to claim any standard deduction but does not state that an election to itemize deductions is deemed made. It is unclear, therefore, whether the Service will continue to disallow a dual status taxpayer's entire standard deduction or whether the Service will take the more reasonable approach of allowing the dual status taxpayer to take a partial standard deduction based on the portion of the taxable year during which the taxpayer was a resident alien individual.

Suppose an alien incurs moving expenses in connection with the move back to a foreign country for employment purposes and that the expenses are paid before the alien becomes a nonresident alien. In such a case, the Tax Court has held that the taxpayer's moving expenses were not deductible because they are allocable to

foreign-source income that would not be subject to U.S. tax under Sections 871 and 872 (the foreign-source income to be earned after the change in status to a nonresident alien individual). 252¶ B1.02[3] Domestic Corporations

¶ B1.02[3][a] “Domestic Corporation” Defined Under Section 7701

Section 7701 contains a two-part definition of the term “domestic corporation.” First, Section 7701(a)(3) defines the term “corporation.” 253 To constitute a “domestic corporation,” the organization must be classified as a corporation or an association taxable as a corporation for federal income tax purposes. 254 An organization that is a partnership for U.S. income tax purposes does not fall within the definition of a “domestic corporation.” 255

Second, Section 7701(a)(4) defines the term “domestic” as it applies to a corporation. Under Section 7701(a)(4), a corporation is “domestic” if it is created or organized in the United States or under the laws of the United States or of any state. 256 The term “state” for this purpose includes the District of Columbia. 257 A corporation formed in a possession of the United States is not a “domestic corporation” under this definition. 258¶ B1.02[3][b] Election Under Section 1504(d)

Under narrow conditions, Section 1504(d) allows a domestic corporation to treat a wholly owned foreign subsidiary as a “domestic corporation.” 259 That treatment applies “for the purpose of this subtitle” (subtitle A, the income tax provisions). 260 Thus, a foreign corporation subject to Section 1504(d) generally computes its U.S. taxes as a domestic corporation.¶ B1.02[3][c] Stapled Stock Rules (Section 269B)

If a foreign corporation and a domestic corporation are “stapled entities,” Section 269B(a)(1) may treat the foreign corporation as a “domestic corporation.” 261 That treatment applies “for purposes of this title” (i.e., all Code sections). 262 Thus, a foreign corporation subject to Section 269B generally computes its U.S. taxes as a domestic corporation.¶ B1.02[3][d] Election Under Section 897(i)

Section 897(i) allows a foreign corporation to elect to be a “domestic corporation” for purposes of Sections 897, 1445, and 6039C. 263 A foreign corporation that elects under Section 897(i) generally remains a foreign corporation for purposes of other Code sections. 264 Thus, such a corporation is not taxable by the United States on its worldwide income under Section 11, but is instead subject to the U.S. tax regime applicable to foreign corporations. 265¶ B1.02[3][e] Election Under Section 953

Certain foreign insurance companies may elect to be taxed as domestic corporations. 266 Such an election applies “for purposes of this title.” 267 Thus, such a corporation generally pays U.S. taxes on its worldwide income.

1 See infra ¶ B1.03.

2 Section 7701(b)(1)(B) uses the term “citizen” to define a nonresident alien.3 Treas. Reg. § 1.1-1(c). For a ruling under the 1939 Code regarding whether an individual born in a foreign country, with one parent who was a nonresident alien and the other who was a member of the U.S. Armed Forces, was a U.S. citizen for federal income tax purposes, see Rev. Rul. 55-413, 1955-1 CB 323.4 Treas. Reg. § 1.1-1(c).5 See, e.g., United States v. Matheson, 532 F2d 809, 814–817 (2d Cir.), cert. denied, 429 US 823 (1976) ; Jalbuena v. Dulles, 254 F2d 379, 381 (3d Cir. 1958) ; Estate of Efthimos D. Vriniotis, 79 TC 298, 305 (1982) ; Rueff v. Brownell, 116 F. Supp. 298, 306 (DNJ 1953) ; Atef. A. Gamal-Eldin, P-H TC Memo. ¶ 88,150 805 n.2 (1988) .6 Atef. A. Gamal-Eldin, TC Memo. ¶ 88,150 805 n.2 (1988) . Cf. Estate of Efthimos D. Vriniotis, 79 TC 298, 305 (1982) .7 8 USC § 1481 (1977). See Afroyim v. Rusk, 387 US 253, 262 (1967) ; United States v. D'Hotelle de Benitez Rexach, 558 F2d 37, 43 (1st Cir. 1977) ; United States v. Matheson, 532 F2d 809, 814–815 (2d Cir.), cert. denied, 429 US 823 (1976) ; Estate of Efthimos D. Vriniotis, 79 TC 298, 304 (1982) (estate tax case); Estate of Robert Harvey Lyons, 4 TC 1202, 1208–1209 (1945) (estate tax case). See also Treas. Reg. § 1.1-1(c). See Norman F. Dacey, RIA TC Memo. ¶ 92,187 (1992) (court treated taxpayer as having lost his U.S. citizenship only when taxpayer read statement of understanding in connection with his desire to expatriate and signed statement of understanding and oath of renunciation of U.S. citizenship). Cf. Rev. Rul. 92-109, 1992-2 CB 3 (Situation 3) (providing guidance concerning filing obligations of U.S. citizens who performed certain expatriating acts but did not lose their U.S. citizenship). For another example of U.S. citizens who remained U.S. persons taxable on their worldwide incomes because they had not properly terminated U.S. citizenship, see Estate of Angle, RIA TC Memo. ¶ 2009-227 (2009) .8 Schneider v. Rusk, 377 US 163, 168 (1964) ; Estate of Lyons, 4 TC 1202, 1208 (1945) ; Estate of Efthimos D. Vriniotis, 79 TC 298, 305 (1982) (estate tax case); Estate of Robert Harvey Lyons, 4 TC 1202, 1208 (1945) (estate tax case); Rev. Rul. 75-82, 1975-1 CB 5 (foreign-born individual, whose U.S. citizenship was conferred upon him as a minor when his parents became naturalized citizens, did not lose citizenship by returning to country of his birth after attaining majority and was not relieved of duty to file federal tax returns).9 Treas. Reg. §§ 1.1-1(b) and 1.1-1(c) both refer to Section 877.10 See ¶ C1.10. The American Jobs Creation Act of 2004, § 804, amended Section 877 to substitute objective rules as the trigger for taxation of a former U.S. citizen or long-time permanent resident under Section 877(b) in place of the prior law subjective determination of tax avoidance as a principal purpose for the relinquishment of citizenship or residency. This amendment was effective for

individuals who expatriated after June 3, 2004. American Jobs Creation Act of 2004, § 804(f). See ¶ C1.10.In 2008, Congress replaced the rules in Section 877 with new Section 877A, which provides a mark-to-market taxation regime for expatriates and certain former long-term lawful permanent resident aliens that is triggered at the time of expatriation. This provision is discussed in detail in Chapter C1. See ¶ C1.10[1B].

11 Rexach v. United States, 390 F2d 631 (1st Cir.), cert. denied, 393 US 833 (1968) . See also Rev. Rul. 92-109, 1992-2 CB 3 (Situations 1 and 2) (providing guidance concerning filing obligations of U.S. citizens who lost their U.S. citizenship and later had that citizenship retroactively restored and of former U.S. citizens who are eligible to have their U.S. citizenship retroactively restored (but have not applied to do so)).12 The court held that the taxpayer's status as a de jure citizen was sufficient basis for U.S. taxation even though the United States had not treated the taxpayer as a U.S. citizen before the renunciation had been declared invalid. Rexach v. United States, 390 F2d 631, 632 (1st Cir.), cert. denied,393 US 833 (1968) . See also Rev. Rul. 92-109, 1992-2 CB 3 (Situations 1 and 2) (providing guidance concerning filing obligations of U.S. citizens who lost their U.S. citizenship and later had that citizenship retroactively restored and of former U.S. citizens who are eligible to have their U.S. citizenship retroactively restored (but have not applied to do so)).12.1 American Jobs Creation Act of 2004, § 804(b). This provision was effective for individuals who expatriated after June 3, 2004. Id. at § 804(f). The Gulf Opportunity Zone Act of 2005, § 403(v)(2), amended former Section 7701(n). This amendment was effective as if it had been included in the 2004 Jobs Act provision to which it relates and, thus, applied to individuals who expatriate after June 3, 2004.12.2 Former IRC § 7701(n)(1)(A), as amended by the Gulf Opportunity Zone Act of 2005, § 403(v)(2). The amendment made by the 2005 legislation was effective as if it had been included in the 2004 Jobs Act provision to which it relates and, thus, applied to individuals who expatriate after June 3, 2004.12.3 Former IRC § 7701(n)(1)(B), as amended by the Gulf Opportunity Zone Act of 2005, § 403(v)(2). The amendment made by the 2005 legislation was effective as if it had been included in the 2004 Jobs Act provision to which it relates and, thus, applied to individuals who expatriate after June 3, 2004. Regarding the requirements of Section 6039G generally, see ¶ C1.10[1A].12.4 Heroes Earnings Assistance and Relief Tax Act of 2008, § 301(c)(2)(C). This repeal is effective for any individual whose expatriation date is on or after the date of enactment of the legislation (June 17, 2008). Heroes Earnings Assistance and Relief Tax Act of 2008, § 301(g)(1).12.5 Heroes Earnings Assistance and Relief Tax Act of 2008, §§ 301(a), 301(c)(1).12.6 Heroes Earnings Assistance and Relief Tax Act of 2008, § 301(c)(2)(B).12.7

Section 7701(a)(50)(A) applies to any individual whose expatriation date is on or after June 17, 2008 (the date of enactment of the 2008 tax legislation). Heroes Earnings Assistance and Relief Tax Act of 2008, § 301(g)(1).12.8 Section 877A(g)(4)(A) refers to paragraph (5) of section 349(a) of the Immigration and Nationality Act (8 USC § 1481(a)(5)).12.9 Section 877A(g)(4)(B) refers to paragraph (1), (2), (3), or (4) of Section 349(a) of the Immigration and Nationality Act (8 USC §§ 1481(a)(1)–1481(a)(4)).12.10 Heroes Earnings Assistance and Relief Tax Act of 2008, § 301(g)(1).13 Rev. Rul. 70-506, 1970-2 CB 1, Rev. Rul. 75-357, 1975-2 CB 5. Rev. Rul. 75-357 also considered the federal estate and gift tax treatment of decedents who had lost their citizenship under the unconstitutional immigration law provisions involved in the rulings.14 Schneider v. Rusk, 377 US 163 (1964) . The Supreme Court held that Section 352(a)(1) of the Immigration and Naturalization Act of 1952 was so unjustifiably discriminatory against naturalized citizens as opposed to native born citizens that the section violated the due process clause of the fifth amendment to the Constitution. The Service stated in Rev. Rul. 70-506, 1970-2 CB 1, that the Supreme Court's decision in Schneider v. Rusk had also been interpreted to apply to action taken by the State Department under Section 352(a)(2) of the Immigration and Naturalization Act of 1952.15 Afroyim v. Rusk, 387 US 253 (1967) . In the Afroyim decision, the Supreme Court held that Section 401(e) of the Nationality Act of 1940 was unconstitutional under the fourteenth amendment to the Constitution.16 Rev. Rul. 75-357 involved a taxpayer who had lost her U.S. citizenship under Section 3 of the Expatriation Act of 1907 as a result of her marriage to a British subject. The Supreme Court upheld the constitutionality of this 1907 Act in Mackenzie v. Hare, 239 US 299 (1915) . The 1907 Act was later repealed, but not retroactively. Rev. Rul. 75-357 cited the First Circuit's decision in Rocha v. Immigration & Naturalization Serv., 450 F2d 946 (1st Cir. 1971) , in support of its view that Section 3 of the 1907 Act was unconstitutional under current law. Rocha held that the Supreme Court's decision in Afroyim v. Rusk, 387 US 253 (1967) , refuted the rationale of the Court's earlier decision in Mackenzie and concluded that the Supreme Court would hold Section 3 of the 1907 Act unconstitutional under current law.17 The provisions in issue were Section 401(e) of the Nationality Act of 1940, Section 349(a)(5) of the Nationality Act of 1950, and Section 3 of the Expatriation Act of 1907.18 Rev. Rul. 70-506, 1970-2 CB 1, 2; Rev. Rul. 75-357, 1975-2 CB 5, 6. The Service also held that the mere fact that an individual affected by the court decisions declaring the provisions of immigration law invalid and by Rev. Rul. 70-506 or Rev. Rul. 75-357took affirmative steps to establish noncitizen status would not be

considered evidence of a tax avoidance motive for purposes of Section 877. Rev. Rul. 70-506; Rev. Rul. 75-357. Regarding Section 877 generally, see ¶ C1.10.19 United States v. D'Hotelle de Benitez Rexach, 558 F2d 37 (1st Cir. 1977) .20 Id. at 42–43 .21 See also United States v. Matheson, 532 F2d 809, 819 (2d Cir.), cert. denied, 429 US 823 (1976) (“Courts now routinely hold that one gaining governmental benefits on the basis of a representation or asserted position is thereafter estopped from taking a contrary position in an effort to escape taxes.”). Cf. Norman F. Dacey, RIA TC Memo. ¶ 92,187 (1992) (taxpayer who gained U.S. governmental benefits by applying for and receiving new U.S. passport upon representation that he was still a U.S. citizen was held estopped from taking contrary position to avoid federal income tax liability).21.1 This proposal was introduced in the House as HR 981, § 201, 104th Cong., 1st Sess. (1995) and in the Senate as S. 453, § 201 104th Cong., 1st Sess. (1995). For a Joint Committee Staff analysis of this proposal and other similar proposals, see Staff of Joint Comm. on Tax'n, 104th Cong., 1st Sess., Background and Issues Relating to Taxation of U.S. Citizens Who Relinquish Citizenship (JCX-14-95) (Mar. 20, 1995).For commentary on this and other proposals to modify the taxation of expatriation, see Abreu, “The Difference Between Expatriates and Mrs. Gregory: Citizenship Can Matter,” 67 Tax Notes 692 (1995); Abreu, “Taxing Exits,” 73 Tax Notes 359 (1996); Abreu, “Taxing Exits,” 29 UC Davis L. Rev. 1087 (1996); Bruce, “Clinton Administration's Proposals on Expatriating Citizens and Residents and the Taxation of Foreign Trusts,” 24 Tax Mgmt. Int'l J. 171 (1995); Langer, “Proposed U.S. Departure Tax on Expatriates: A Bad Move,” 66 Tax Notes 1721 (1995); Loube, “Expatriate Games: Politics Obscures Technical Issues,” 67 Tax Notes 158 (1995); Pearson, Midler, Mogenson & Rollinson, “An Overview of Pending Legislation to Tax Expatriating Citizens and Long-Term Residents,” 24 Tax Mgmt. Int'l J. 395 (1995); Sheppard, “Defining the Expatriate Tax Debate,” 67 Tax Notes 1566 (1995); Steuerle, “Alternatives to the Expatriate Tax,” 67 Tax Notes 567 (1995); Turro, “Administration Proposes Antiabuse Rules for Foreign Trusts, Expatriation,” 66 Tax Notes 915 (1995).For a report by the New York State Bar Association's Tax Section on the various legislative proposals to change the taxation of expatriates, see New York State Bar Ass'n, Tax Sec., “New York State Bar Association Tax Section Report on Proposed Legislation on Expatriation and Foreign Trusts” (1995), reprinted in Tax Analysts' Daily Tax Highlights & Documents 4325 (June 20, 1995).21.2 See, e.g., discussion in Staff of Joint Comm. on Tax'n, 104th Cong., 1st Sess., Background and Issues Relating to Taxation of U.S. Citizens Who Relinquish Citizenship (JCX-14-95) (Mar. 20, 1995).21.3 HR 832, § 5 (1995).21.4 See BNA Daily Tax Rep. G-9 (Apr. 7, 1995).21.5

Pub. L. No. 104-7, 104th Cong., 1st Sess. (1995).21.6 Pub. L. No. 104-7, § 6, 104th Cong., 1st Sess. (1995).21.7 Staff of Joint Comm. on Tax'n, 104th Cong., 1st Sess., Issues Presented by Proposals to Modify the Tax Treatment of Expatriation (Comm. Print; JCS-17-95) (June 1, 1995). This report concluded that “the level of individuals renouncing their U.S. citizenship generally is quite low” and “[n]otwithstanding certain anecdotal reports, the evidence gathered in the course of the study by the Joint Committee staff suggests that there is no significant level of expatriation for tax avoidance purposes….” Id. at 65.21.8 S. 700, 104th Cong., 1st Sess. (1995); HR 1535, 104th Cong., 1st Sess. (1995).21.9 See discussion in Staff of Joint Comm. on Tax'n, 104th Cong., 1st Sess., Issues Presented by Proposals to Modify the Tax Treatment of Expatriation 13–14 (Comm. Print; JCS-17-95) (June 1, 1995).21.10 HR 1812, 104th Cong., 1st Sess. (1995). See HR Rep. No. 145, 104th Cong., 1st Sess. (1995).21.11 See HR 1812, 104th Cong., 1st Sess. (1995). See also HR Rep. No. 145, 104th Cong., 1st Sess. (1995).21.12 S. 828, § 501, 104th Cong., 2d Sess. (1996). See the description of the Senate bill in HR Conf. Rep. No. 736, 104th Cong., 2d Sess. 331–337 (1996).21.13 HR 3103, §§ 421–423, 104th Cong., 2d Sess. (1996); see HR Rep. No. 496, pt. 1, 104th Cong., 2d Sess. 149–157 (1996).21.14 HR Conf. Rep. No. 736, 104th Cong., 2d Sess. 338 (1996).21.15 Health Insurance Portability and Accountability Act of 1996, §§ 511–513. The date of enactment of this legislation is August 21, 1996.21.15a See S. Rep. No. 192, 108th Cong., 1st Sess. 149–156 (2003).21.15b American Jobs Creation Act of 2004, § 804. These changes were effective for individuals who expatriated after June 3, 2004. Id. at § 804(f).21.15c See IRC §§ 877(a), 877(c), as revised by the 2004 Jobs Act.21.16 See ¶ C1.10.21.16a Heroes Earnings Assistance and Relief Tax Act of 2008, § 301(a).21.16b Heroes Earnings Assistance and Relief Tax Act of 2008, § 301(g)(1).21.16c See ¶ C1.10[1B].21.17

Illegal Immigration Reform and Immigrant Responsibility Act of 1996, § 352, Pub. L. No. 104-208, 104th Cong., 2d Sess. (1996) (adding new a new provision to the immigration laws at 8 USC § 1182(a)(10)(E)).For commentary, see Fragomen & Hejinian, “Immigration Consequences of Abandoning U.S. Citizenship for Tax Reasons,” 17 Tax Notes Int'l 1381 (1998); Liu, Note, “The Expatriate Exclusion Clause: An Inappropriate Response to Relinquishing Citizenship for Tax Avoidance Purposes,” 12 Geo. Immigr. LJ 689 (1998); Martin, “U.S. Law Targeting Tax-Dodging Expatriates May Have Loophole,” 14 Tax Notes Int'l 833 (1997); Tilevitz & Czapiewska, “Getting the Tax-Free Boot: Tax-Motivated Expatriation May Preclude U.S. Visa,” 74 Tax Notes 1715 (1997).21.18 Illegal Immigration Reform and Immigrant Responsibility Act of 1996, § 352(b).21.19 For planning-oriented commentary, see Larkins, “Individual Tax Planning: Resident vs. Nonresident May Be Critical,” 7 J. Int'l Tax'n 410 (1996); Larkins, “Resident vs. Nonresident Tax Planning Includes Elections, Timing,” 8 J. Int'l Tax'n 172 (1997) ; Russo & Rubino, “Bringing Talent to the United States: Tax Traps for the Unwary,” 23 Int'l Tax J. 5 (Spring 1997).22 See infra ¶ B1.03.23 See ¶ C1.03. For example, a nonresident alien individual is not entitled to claim the standard deduction or the zero bracket amount of prior law. See, e.g., Andrea Farina, TC Summary Op. 2009-23 (2009) (court held that Italian national who was a nonresident alien individual was not entitled to claim the standard deduction and that such tax treatment did not violate the nondiscrimination clause in Article 24 of the U.S. income tax treaty with Italy).24 See ¶ C1.03.25 See ¶ C1.04.26 See ¶ C1.06.27 See ¶ C1.03[15][6]. Under current law, however, a nonresident alien individual's presence in the United States for a period of 183 days or more will usually result in the alien's being treated as a resident alien for U.S. tax purposes. See IRC § 7701(b)(3), enacted in 1984 and discussed infra ¶ B1.02[2][c]. A resident alien generally is subject to U.S. income tax on the alien's worldwide income (including all capital gains, whether from U.S. or foreign sources and without regard to Section 871(a)(2)), subject to a few exceptions. See infra ¶ B1.03. Thus, Section 871(a)(2) rarely applies under current law.28 See generally Chapter C4.29 See infra ¶ B1.02[2][d] and ¶ C4.04[2].30 See ¶ C4.04[1].31 See, e.g., Ian W. Maclean, 73 TC 1045 (1980) (resident alien did not qualify for

exemption relating to dependent personal services in U.K. treaty); Douglas J. Lemery, 54 TC 480 (1970) (Canadian citizen's U.S.-source capital gains were not exempt from U.S. tax under Canadian treaty because taxpayer was resident alien). Regarding the definition of “residence” under U.S. tax treaties, see generally ¶ C4.04[1].32 IRC § 1361(b)(1)(C).33 IRC §§ 1361(a), 1361(b); see, e.g., Ward v. United States, 661 F2d 226 (Cl. Ct. 1981) (nonresident alien spouse treated as owning one-half interest in husband's stock in corporation under community property laws; accordingly, corporation held ineligible to make S election). Treas. Reg. § 1.1361-1(g)(1)(i), adopted in TD 8600, 1995-2 CB 135. Note that Treas. Reg. § 1.1361-1(g)(1)(i) warns that if a U.S. shareholder's spouse is a nonresident alien who has a current ownership interest (as opposed to a survivorship interest) in the corporation's stock by reason of an applicable foreign law or state community property law, the corporation will not qualify as an S corporation from the time that the nonresident alien spouse acquires the interest in the stock. See Treas. Reg. § 1.1361-1(g)(1)(ii), Ex. 1. For discussion of this issue, see TD 8600, 1995-2 CB 135, 136–137. However, if the nonresident alien spouse elects to be treated as a U.S. resident for federal income tax purposes under Section 6013(g) or Section 6013(h) before the S corporation election is made, then the spouse is an eligible shareholder for S corporation purposes and the corporation will qualify as an S corporation. See Treas. Reg. § 1.1361-1(g)(1)(ii), Ex. 2.34 IRC §§ 1362(c)(2), 1361(b); see, e.g., Rev. Rul. 73-525, 1973-2 CB 311 (sale of S corporation stock to alien resident of Puerto Rico terminated corporation's subchapter S election). See also Ltr. Rul. 9431009 (May 2, 1994) (shareholder gave shares of S corporation stock to a nonresident alien; corporation's accountant discovered this fact while preparing corporation's income tax return and notified shareholder that gift terminated the subchapters election; shareholder reacquired shares from the alien on accountant's advice; Service ruled that termination of corporation's subchapter S election was inadvertent termination under Section 1362(f)).35 IRC §§ 951(b), 957, discussed at ¶ B3.02.36 See, e.g., Shri K. Bhargava, P-H TC Memo. ¶ 78,197 (1978) (taxpayer could not file joint return with his alien spouse because spouse was nonresident alien; Section 6013(g) did not apply because tax year involved, 1972, was before effective date), aff'd without published opinion, 603 F2d 211 (2d Cir. 1979).37 See, e.g., Frank Peppiatt, 69 TC 848 (1978) (resident alien married to nonresident alien was not allowed to use maximum tax rate on earned income in former Section 1348 because resident alien did not file joint return; fact that taxpayer could not file joint return under then-existing law did not matter).38 Taxpayers met with mixed success in making this argument. Compare Carmen R. Escobar, 68 TC 304 (1977) (taxpayer and members of her family held to be resident aliens, despite Service's arguments to the contrary; hence, taxpayer was

allowed to file joint return with her husband, also resident alien, and to claim dependency exemptions for dependent members of her family, also treated as resident aliens); Green v. United States, 62-1 USTC ¶ 9343 (1962) (nonresident alien spouse of taxpayer left England by ship in December 1957 to establish home with taxpayer in United States but did not arrive until January 2, 1958; court appeared to hold that spouse became a resident alien when ship left England, since spouse had the intent to become U.S. resident, accompanied by overt act of traveling to United States; accordingly, court held that spouse had not been a nonresident alien at any time during 1958 and could file a joint return with her husband for that year), with Joyce de la Begassiere, 31 TC 1031 (1959) (U.S. citizen could not file joint return with alien spouse because alien spouse was nonresident alien, not a resident alien), aff'd per curiam, 272 F2d 709 (5th Cir. 1959) ; Donald G. Baddock, P-H TC Memo. ¶ 68,055 (1968) (married taxpayer was a nonresident alien for part of the year and, hence, could not file joint return for that year).39 Sections 6013(g) and 6013(h) were enacted by the Tax Reform Act of 1976, § 1012(a).40 See Treas. Reg. § 1.152-2(a)(1)(issued under earlier version of Section 152(b)(3)41 See, e.g., Wexler v. Comm'r, 507 F2d 843 (6th Cir. 1974) (rejecting taxpayer's constitutional challenge to Section 152(b)(3) and upholding Tax Court's disallowance of taxpayer's dependency exemptions for alien dependents living in Romania or Israel), aff'g P-H TC Memo. ¶ 74,113 (1974); David B. Barr, 51 TC 693 (1969) (rejecting taxpayer's constitutional challenge to Section 152(b)(3) and upholding Tax Court's disallowance of taxpayer's dependency exemption for alien dependent living in Korea); Pedro Sarmiento, 20 TC 446 (1953) (disallowing taxpayer's dependency exemptions for alien minor children residing throughout the year in the Philippine Islands); Isak S. Gitter, 13 TC 520, 526–527 (1949) (disallowing taxpayer's dependency exemptions for five aliens who were either “citizens” or “subjects” of a foreign country); Yung-Shing Hsu, P-H TC Memo. ¶ 82,047 (1982) (upholding constitutionality of Section 152(b)(3) and disallowing naturalized citizen's dependency exemptions for dependents who were citizens and residents of Taiwan); Pir M. Toor, P-H TC Memo. ¶ 77,399 (1977) (denying taxpayer's dependency exemption for brother from Pakistan because court held that brother was nonresident alien); Ahmed F. Habeeb, P-H TC Memo. ¶ 76,259 (1976) (upholding constitutionality of Section 152(b)(3) and disallowing taxpayer's dependency deduction for nonresident alien mother residing in Egypt); Alan J. Truelove, P-H TC Memo. ¶ 71,261 (1971) (disallowing taxpayer's dependency exemption for British subject niece because court held that niece had not become resident alien despite her presence in United States); Angel De Lauzirika, RIA TC Memo. ¶ 71,180 (1971) (disallowing taxpayer's dependency deduction for alien niece); Robert Henry Hoyle, RIA TC Memo. ¶ 70,172 (1970) (disallowing resident alien's dependency exemptions for three children who were British subjects and residents of United Kingdom). See also Rev. Rul. 82-183, 1982-2 CB 54 (resident alien was not allowed to claim dependency exemption for child who was citizen and resident of a country contiguous to United States in a case in which basis for exemption was a multiple-support agreement under Section 152(c) between resident alien and two nonresident alien individuals who were not engaged in

conduct of U.S. trade or business; since Section 873 would prevent such nonresident alien individuals from claiming a dependency exemption, requirement in Section 152(c)(2) could not be met). Further, other deduction provisions depend on a person's being a “dependent” within the meaning of Section 152. See, e.g., IRC § 213(a); Mohamed Z. El-Sabban, P-H TC Memo. ¶ 71,105 (1971) (denying Section 213 deduction for medical expenses paid for care of taxpayers' alien mothers because the mothers were nonresident aliens). Tseng v. Comm'r, 79 F3d 1154, 96-1 USTC ¶ 50,199 (9th Cir. 1996), aff'g without published opinion, RIA TC Memo. ¶ 94,126 (1994) (courts disallowed, under Section 152(b)(3), taxpayer's dependency exemptions for his mother and nephew who were citizens and residents of China; courts rejected the taxpayer's argument that Section 152(b)(3) violates the equal protection clause of the U.S. Constitution by allowing dependency exemptions for residents of contiguous countries; courts reasoned that the Section 152(b)(3) limitation on the exemption facilitates the Service's ability to verify dependency exemptions and that investigation in non-contiguous countries involves significantly greater burdens than does investigation in the United States or in contiguous countries); Emilso Acuceda, RIA TC Memo. ¶ 95,193 (1995) (disallowed taxpayer's dependency exemptions for his Guatemalan parents, sister, and niece because he failed to prove that they resided in the United States during the taxable years in issue; but taxpayer allowed dependency exemption for his brother because brother's U.S. residency established with taxpayer's testimony and brother's social security card, driver's license, and employment authorization, and taxpayer showed that he provided over one-half of brother's support); Sassan Alisobhani, RIA TC Memo. ¶ 94,629 (1994) (taxpayer claimed dependency exemptions for his parents, who were Iranian emigres and resided in United States; court allowed taxpayer a dependency exemption for his mother, but not his father, because he could prove that he provided over one-half of mother's support but not could prove that he provided over one-half of father's support); Federico Camilo, RIA TC Memo. ¶ 93,249 (1993) (denying dependency exemptions to taxpayers for 1988 for taxpayer-wife's mother, father, and brother who lived with taxpayer and her husband while visiting in the United States on six-month visas from Poland; court held that claimed dependents were not U.S. residents under Treas. Reg. §§ 1.871-2(b) and 1.871-4; court did not discuss or even mention Section 7701(b) and it is unclear why the court did not use Section 7701(b) to determine whether these aliens were residents of the United States in a year governed by that provision); Emmanuel M. Nwankwo, TC Summary Op. 2006-187 (2006) (Tax Court, in a summary opinion, allowed a dependency exemption for the taxpayer-husband's mother because her intent to remain in the United States met the residency requirement, but disallowed a dependency exemption for the taxpayer-husband's father because he had left the United States); Richard J. Sarni, TC Summary Op. 2005-189 (2005) (disallowed taxpayers' dependency exemption for wife's son, a British citizen who resided in the Netherlands for the year in issue, because son failed to meet the test of Section 152(b)(3); court also disallowed taxpayers' child credit under Section 24 for wife's son because son was not a qualifying dependent as defined in Section 151). Cf. Cassman v. United States, 94-1 USTC ¶ 50,204 (Fed. Cl. 1994) (taxpayers not entitled to dependency exemption for child yet unborn as of end of taxable year; court held that unborn child was neither a U.S. citizen nor resident of United States or country contiguous to United States within the meaning of Section 152(b)(3)); Juan Vega, RIA TC Memo. ¶ 2001-214 (2001) (Tax Court disallowed taxpayer's dependency deductions for family members

residing in Mexico because he did not include proper identifying numbers for those individuals).42 See Treas. Reg. § 1.152-2(a)(2)(issued under earlier version of Section 152(b)(3), but should remain valid on point). See also Treas. Reg. § 1.152-2(c)(3), Ex.43 Treas. Reg. § 1.152-2(a)(1).44 See, e.g., Carmen R. Escobar, 68 TC 304 (1977) (taxpayer and family members were held to be resident aliens, despite Service's arguments to the contrary; hence, taxpayer was allowed to file joint return with her husband, a resident alien, and to claim dependency exemptions for dependent family members, also resident aliens).45 See Isak S. Gitter, 13 TC 520, 526–527 (1949) .46 See id.46.1 See Liaosheng Zhang, RIA TC Memo. ¶ 2011-118 (2011) (disallowed taxpayer's medical expense deduction under Section 213 with respect to the medical care expenses of taxpayer's mother because she did not meet the requirement of Section 152(b)(3) that she be a U.S. citizen, U.S. national, U.S. resident, or resident of a country contiguous to the United States).47 IRC § 2(b)(1).48 See, e.g., Rev. Rul. 79-23, 1979-1 CB 3. A nonresident alien individual taxpayer, however, may not use the head-of-household rate schedule. See IRC § 2(b)(3)(A).49 IRC § 2(b)(1)(A)(i).50 Rev. Rul. 55-711, 1955-2 CB 13, 14, amplified by Rev. Rul. 74-370, 1974-2 CB 7.51 See infra ¶ B1.04[7].52 See IRC § 3402(f). See also Rev. Rul. 67-159, 1967-1 CB 280, 282.53 See IRC § 3402(f)(6), discussed at ¶ C2.09.53.1 See ¶ B2.08.53.2 See ¶¶ B2.08[3][c], B2.08[10].53.3 See ¶¶ B2.08[3][c], B2.08[10].54 See Treas. Reg. §§ 1.871-2–1.871-5. The cases and revenue rulings applying this test remain important for taxable years starting before 1985 (the effective date of Section 7701(b)). Treas. Reg. § 1.871-2(c) provides that Treas. Reg. §§ 1.871-2 and 1.871-5 continue to apply to determine the residence of aliens for taxable years starting before 1985 “[u]nless the context indicates otherwise.” See also

Treas. Reg. § 301.7701(b)-9(a), which refers to Treas. Reg. §§ 1.871-2–1.871-5 for the rules applicable to taxable years starting before 1985.55 See infra ¶ B1.04[2].56 As discussed at ¶ A2.03[2], it is not clear what test is used to determine the place of residence of a U.S. citizen payor of interest for purposes of determining the source of such interest income to the recipient. Prop. Reg. § 301.7701(b)-1(a) takes the position that the rules for determining residence in Section 7701(b)“may be relevant” to the application of the interest source rule in Section 861(a)(1). Prop. Reg. § 301.7701(b)-1(a) is now Treas. Reg. § 301.7701(b)-1(a).Further, the Tax Court held that the facts-and-circumstances test in the Section 871 regulations (not the tests in Section 7701(b)) applied for determining whether a U.S. citizen was a resident of the Northern Mariana Islands for purposes of former Section 935. Debra F. Preece, 95 TC 594 (1990) .

57 Treas. Reg. § 1.871-2(a). The regulations provide that a “nonresident alien individual” includes a “nonresident alien fiduciary.” Id., which refers to Section 7701(a)(6) to define “fiduciary.”58 See, e.g., William E. Adams, 46 TC 352, 358 (1966) .59 See, e.g., Comm'r v. Nubar, 185 F2d 584 (4th Cir. 1950) (alien who entered United States in 1939 on vistor's visa and stayed continuously until August 1945 because of World War II was treated as resident alien even though he intended to return to Europe and his domicile may have remained in Europe); Bowring v. Bowers, 24 F2d 918 (2d Cir. 1928), cert. denied, 277 US 608 (1929) (alien who spent twenty-two and one half out of twenty-seven years in United States but who intended to return to England at some future time was held to be U.S. resident for federal income tax purposes); Tongsun Park, 79 TC 252 (1982) (alien was treated as resident alien even though his domicile remained in Korea), aff'd without published opinion, 755 F2d 181 (DC Cir. 1985); Ceska Cooper, 15 TC 757, 763 (1950) (taxpayer who intended to return to England at all times while residing in United States was treated as resident alien). See also JP Schumacher, 32 BTA 1242, 1248 (1935) (taxpayer argued for resident alien status; government argued that taxpayer was nonresident alien and, therefore, was not entitled to report income on community basis). Similarly, an alien could be treated as a nonresident alien even though the alien's domicile was in the United States by reason, for example, of being married to someone who was domiciled in a community property state. E.g., Rev. Rul. 72-546, 1972-2 CB 435; Rev. Rul. 56-269, 1956-1 CB 318.60 See, e.g., Josette JF Verrier Friedman, 37 TC 539, 557 (1961) ; Bruce A. Pappas, P-H TC Memo. ¶ 75,321, at 1367–1375 (1975) .61 See, e.g., William E. Adams, 46 TC 352, 358 (1966) .62 Compare the Section 7701(b) substantial presence test, which focuses primarily on presence, while providing an exception for a taxpayer who has a closer connection to a foreign country than to the United States.

63 Treas. Reg. § 1.871-2(b). See also Rev. Rul. 70-468, 1970-2 CB 171 (alien author who visited United States for six months retained status as nonresident alien because alien was mere sojourner in United States).64 Joyce de la Begassiere, 31 TC 1031, 1036 (1959), aff'd per curiam, 272 F2d 709 (5th Cir. 1959) .65 Treas. Reg. § 1.871-2(b).66 Id.; see, e.g., Comm'r v. Patino, 186 F2d 962 (4th Cir. 1950) (alien who entered United States in 1940 to escape German invasion and stayed continuously except for brief trips to Mexico and Italy, until 1945, living in hotel, with no definite intention as to her length of stay, was treated as resident alien); Ceska Cooper, 15 TC 757, 763–764 (1950) (taxpayer who resided in United States and at all times intended to return to England after World War II was held to be resident alien); Rev. Rul. 64-149, 1964-1 CB (Part 1) 233 (Cuban national who first entered United States in April 1960, and who took part in Bay of Pigs action in April 1961 and was imprisoned in Cuba for participating in that action, became resident alien when he first entered United States and retained status during imprisonment).67 Treas. Reg. § 1.871-2(b); see Rev. Rul. 58-144, 1958-1 CB 260 (alien individual serving in U.S. army who was present in United States for six months for military training was held to be nonresident alien for federal income tax purposes); Rev. Rul. 54-485, 1954-2 CB 244 (alien student studying for degree in United States who remained in United States only during school year was nonresident alien).One case held that an alien was a nonresident alien even though he always had an intention to return to the United States; the court found that the nature of the alien's visits to the United States were “sporadic” and, hence, the intention to return to the United States was only as a sojourner or transient. See William E. Adams, 46 TC 352, 361 (1966) (alien's occasional and limited stays of about seventy days each year to visit wife and children living in United States were not sufficient to make alien a U.S. resident).68 Treas. Reg. § 1.871-2(b); see Musheer H. Siddiqi, 70 TC 553 (1978) (Pakistan citizen who came to United States expecting to stay for four to five years to study architecture was held to be resident alien, not resident of Pakistan for purposes of Pakistan treaty); Amirali Budhwani, 70 TC 287 (1978) (Pakistan citizen who came to United States to study mechanical engineering was held to be resident alien; court concluded that course of study would require stay of two to five years); John Henry Chapman, 9 TC 619 (1947) (New Zealand citizen who was official of the League of Nations and who temporarily resided in United States during war years to perform certain duties in connection with the League was held to be resident alien); Rev. Rul. 54-87, 1954-1 CB 155 (foreign student studying in United States for degree that required temporary residence for minimum of two years was treated as resident alien), amplified by Rev. Rul. 67-159, 1967-1 CB 280 (same rule applied for withholding purposes under Section 3402). See also William E. Adams, 46 TC 352, 362 (1966) (alien was held to be U.S. resident despite her argument that she was nonresident alien because she had intent to remain in United States for a definite time, about forty weeks each year, while her children attended Florida

schools; Tax Court characterized argument as one that “strains credulity”); Court J. Beisinger, RIA TC Memo. ¶ 68,146 (1968) (aliens who came to United States for extended stay of indefinite duration for purpose of acquiring an operating company in United States were resident aliens). But see Rev. Rul. 54-485, 1954-2 CB 244 (alien student studying for degree in United States who remained in United States only during school year was nonresident alien; stated that Rev. Rul. 54-87 established only a rebuttable presumption).69 Treas. Reg. § 1.871-2(b).70 Treas. Reg. § 1.871-2(b). For authorities applying this provision, see, e.g., Tongsun Park, 79 TC 252 (1982) (alien was treated as resident alien even though he was present in United States under temporary visas; alien's extensive investments, numerous business ventures, elaborate living quarters, and integration into Washington, D.C. community were “exceptional circumstances” within meaning of the regulation), aff'd without published opinion, 755 F2d 181 (DC Cir. 1985) Carmen R. Escobar, 68 TC 304 (1977) (taxpayer and members of her family were held to be resident aliens, despite Service's arguments to the contrary; presence in United States for five years, together with other facts such as aliens' involvement in community, were “exceptional circumstances” that overcame fact that their stay was limited to a definite period under immigration laws; taxpayer was allowed to file joint return with her husband, also a resident alien, and to claim dependency exemptions for dependent family members, also treated as resident aliens); Robert M. Brittingham, 66 TC 373, 414–415 (1976) (alien's almost continuous presence of twenty years in United States caused alien to be treated as resident alien despite fact that immigration laws “nominally” limited alien's stay); William N. Dillin, 56 TC 228, 243 (1971) ; Joyce de la Begassiere, 31 TC 1031 (1959) (alien who first came to United States to marry U.S. citizen and left soon thereafter, not returning for almost two years except for three brief visits, was held to be nonresident alien; court pointed to fact that taxpayer had never made himself a resident of any community in United States), aff'd per curiam, 272 F2d 709 (5th Cir. 1959) (alien admitted to United States under temporary visas was held to be nonresident alien; court stated that alien's explanation that he never took the trouble to apply for permanent visa was not an “exceptional circumstance”); Florica Constantinescu, 11 TC 37 (1948) (alien who was present in United States under temporary visitor's visa that was extended had not become resident alien; facts did not constitute “exceptional circumstances” within meaning of regulations so as to cause her to be resident alien); Joe May, 39 BTA 946 (1939) ; Garzon v. United States, 605 F. Supp. 738 (SD Fla. 1985) ; Angel De Lauzirika, RIA TC Memo. ¶ 71,180 (1971) ; Mohamed Z. El-Sabban, P-H TC Memo. ¶ 71,105 (1971) .In one ruling, the Service held that the fact that an alien had entered the United States on a visitor's visa was not indicative of the alien's intention concerning U.S. residence because the alien had been unable to obtain any other type of visa. Rev. Rul. 64-149, 1964-1 CB (Part 1) 233, 235 (Cuban national was treated as resident alien upon his entry into the United States). Victor Bigio, RIA TC Memo. ¶ 91,319 (1991), aff'd per curiam without published opinion, 1992 U.S. App. LEXIS 32652 (11th Cir. 1992) (British subject was held to be resident alien for federal income tax purposes, despite fact that his time in United States was limited by visas; taxpayer maintained business interests in United States, maintained a condominium in United States where his family lived, had social ties in United States, and did not

maintain an abode in any country other than United States).71 Robert M. Brittingham, 66 TC 373, 413 (1976) .72 Rev. Rul. 69-611, 1969-2 CB 150. See also Rev. Rul. 64-285, 1964-2 CB 184 (nonresident alien of the class described in Section 101(a)(15)(E)(i) of the Immigration and Nationality Act, sometimes referred to as a “Treaty Trader,” was treated as resident alien for federal income tax purposes if alien had been present in United States for one full taxable year and, based on facts of case, if it could be shown that alien was not a mere transient; if such an alien had not been present in United States for one full taxable year, such alien was presumed to be nonresident alien).73 Rev. Rul. 69-611, 1969-2 CB 150.74 See, e.g., William E. Adams, 46 TC 352, 358 (1966) .75 Rev. Rul. 7682, 1976-1 CB 192 (stating this general rule). See also, e.g., Josette JF Verrier Friedman, 37 TC 539, 555–556 (1961) ; LEL Thomas, 33 BTA 725 (1935) ; Hechavarria v. United States, 374 F. Supp. 128 (SD Ga. 1974) (facts indicated that alien seaman was resident alien and, thus, presumption of nonresidence in regulations was overcome; court emphasized alien's repeated representations to U.S. immigration authorities concerning permanent residence over six-year period); James L. Tracy, P-H TC Memo. ¶ 73,028 (1973) ; Court J. Beisinger, P-H TC Memo. ¶ 68,146 (1968) (Canadians who were admitted to United States as quota immigrants and stated in their immigration applications that they intended to remain in United States permanently were held to be resident aliens). A similar conclusion of resident alien status occurred if the alien was admitted under a temporary visitor's visa, shortly thereafter requested political asylum, and was granted indefinite departure status with the right to work or as a “parolee” under Section 212(d)(5) of the Immigration and Nationality Act. See Rev. Rul. 61-118, 1961-1 CB 5 (involving Cuban refugees). But see Rudolf Jellinek, 36 TC 826, 835 (1961) (alien remained nonresident alien despite filing statement of intent to become U.S. citizen shortly after arrival in United States and despite obtaining reentry permits stating that alien entered United States for permanent residence), acq. 1964-1 CB (Part 1) 4.76 See, e.g., Ian W. Maclean, 73 TC 1045 (1980) (in holding that taxpayer, a British subject, was resident alien, court pointed to fact that taxpayer was admitted under L-1 visa for one year, which could be extended for additional one-year periods if taxpayer's temporary employment so required, as was the case; taxpayer's contemplated stay was at least two years, with possibility at the outset that stay would be extended).77 See, e.g., Rev. Rul. 76-82, 1976-1 CB 192; Rev. Rul. 72-297, 1972-1 CB 212; Rev. Rul. 72-140, 1972-1 CB 211.78 Rev. Rul. 76-82, 1976-1 CB 192. The principle of this ruling is reflected in the current substantial presence test for determining residence in Section 7701((b)(7)(B), which treats an individual who regularly commutes from a place of residence in

Canada or Mexico to employment (or self employment) in the United States as not being present in the United States on any day during which the individual so commutes. See IRC § 7701(b)(7)(B), discussed infra ¶ B1.02[2][c].79 See, e.g., Tongsun Park, 79 TC 252 (1982) (alien was treated as resident alien even though he may not have terminated Korean residence), aff'd without published opinion, 755 F2d 181 (DC Cir. 1985) ; William E. Adams, 46 TC 352, 358 (1966) ; Ceska Cooper, 15 TC 757, 762–764 (1950) .80 See, e.g., William E. Adams, 46 TC 352, 361 (1966) (alien was treated as nonresident alien because court found that Canadian city was “center of the gravity of his life”).81 See, e.g., Mary K. Sanford, RIA TC Memo. ¶ 68,050 (1968) (flight attendant who was admitted to U.S. under D-1 visa requiring that she leave United States within twenty-nine days after arrival was held to be nonresident alien during years in issue, even though she was present in United States for 179 days and 184 days, respectively, for years in issue).82 See, e.g., William E. Adams, 46 TC 352, 361 (1966) .83 See, e.g., id.84 See, e.g., id. at 359 . In Ian W. Maclean, 73 TC 1045 (1980) , the Tax Court held that an alien had become a resident alien of the United States upon entry into the United States even though his family did not come to the United States until about five months after the taxpayer's arrival.85 See, e.g., William E. Adams, 46 TC 352, 359 (1966) .86 See, e.g., id. at 352 (1966) (individual treated as nonresident alien under Section 871 regulations even though individual's spouse was U.S. resident under those regulations).87 See William E. Adams, 46 TC 352 (1966) .88 See, e.g., id., at 352, 359 .89 See, e.g., id. (alien treated as nonresident alien even though alien had a house, bank accounts, investments and business activities, and car registered in Florida; presumption of nonresidence in Treas. Reg. § 1.871-4(b), together with limited nature and extent of alien's stays in Florida (amounting to about seventy days each year), dictated finding of nonresident alien status).90 See William E. Adams, 46 TC 352, 359 (1966) (alien treated as nonresident alien even though alien had made contributions to Florida charities).91 See, e.g., Douglas J. Lemery, 54 TC 480, 487 (1970) ; William E. Adams, 46 TC 352, 362 (1966) .92

Tongsun Park, 79 TC 252 (1982) , aff'd without published opinion, 755 F2d 181 (DC Cir. 1985).93 See, e.g, William E. Adams, 46 TC 352, 361 (1966) (alien who had sole residence in Canada for some thirty years and who then began pattern of making “sporadic” visits to United States of about seventy days each year to be with his wife and children who were living in United States remained nonresident alien; court found that Canada remained the “center gravity of his life” and, concerning the alien's visits to the United States, stated: “It takes more than the use of a house as a closet for golfing and other sporting gear, or even sporadically to sleep and eat, to convert it into a home”); Joyce de la Begassiere, 31 TC 1031 (1959) (alien who first came to United States to marry U.S. citizen and left soon thereafter, not returning for almost two years except for three brief visits, was held to be nonresident alien; court pointed to the fact that taxpayer had never made himself a resident of any community in United States), aff'd per curiam, 272 F2d 709 (5th Cir. 1959) ; Rudolf Jellinek, 36 TC 826, 835 (1961) (alien remained nonresident alien because he took no part in any community activities in United States and made no effort to become part of any community), acq. 1964-1 CB (Part 1) 4 .94 See, e.g., William E. Adams, 46 TC 352, 360 (1966) .95 See id. at 362 n.11.96 See, e.g., Court J. Beisinger, RIA TC Memo. ¶ 68,146 (1968) (aliens made statements under oath to U.S. Immigration and Naturalization Service that aliens intended to remain in United States permanently; aliens were admitted as quota immigrants).97 See, e.g., William E. Adams, 46 TC 352, 360 (1966) (alien was nonresident alien despite execution of such documents).98 Court J. Beisinger, P-H TC Memo. ¶ 68,146 (1968) (aliens claimed to be U.S. residents for Canadian tax purposes and avoided paying any Canadian income tax by reason of treaty provision in former Canadian income tax treaty that applied only to U.S. citizens and residents; court held that aliens were resident aliens for federal income tax purposes).99 See, e.g., Van Der Elst v. Comm'r, 223 F2d 771, 772 (2d Cir. 1955) ; Rev. Rul. 69-517, 1969-2 CB 517, amplified and clarified by Rev. Rul. 71-565, 1971-2 CB 266. See also Rolf Jamvold, 11 TC 122 (1948) (alien citizen of Norway and officer in Norwegian Merchant Marine during World War II was held not to be resident alien during 1943 even though alien was present in United States during part of that year and was married to U.S. citizen).100 See infra ¶ B1.02[2][c][v].101 See Treas. Reg. § 1.871-4.102 Treas. Reg. § 1.871-4(b). As stated by the Tax Court in Douglas J. Lemery, 54 TC 480, 486 (1970) : “[T]he effect of the presumption is to relieve the petitioner at the

outset from establishing that he is a nonresident alien. The burden of proof, however, is not shifted; the petitioner must meet the respondent's counterproof and go forward to make good his total case.” See also Amirali Budhwani, 70 TC 287, 292 n.6 (1978) ; William E. Adams, 46 TC 352 (1966) .103 In several court decisions, the court pointed to this presumption of nonresidence as having an effect on the court's finding that the alien had not become a U.S. resident. See William E. Adams, 46 TC 352, 360–362 (1966) .104 Rev. Rul. 81-70, 1981-1 CB 389, 390 (illegal alien treated as resident alien for federal income tax purposes).105 Treas. Reg. § 1.871-4(c)(2). Although an alien's filing of such a declaration of intent to become a U.S. citizen was an important factor in determining residence, such filing was not conclusive of the issue and did not establish residence in and of itself. Rudolf Jellinek, 36 TC 826, 835 (1961) (alien remained nonresident alien despite filing such a statement of intent and despite other factors indicating that alien had become U.S. resident), acq. 1964-1 CB (Part 1) 4 . Filing such a statement merely overcomes the presumption in the regulations that an alien is a nonresident alien. Id.106 Treas. Reg. § 1.871-4(c)(2); see, e.g., Marsman v. Comm'r, 205 F2d 335, 338–339 (4th Cir. 1953), cert. denied, 348 US 943 (1955) (Philippine citizen who was admitted to United States in September 1940 for temporary stay of ten months, but who remained continuously until 1945 under extensions granted because of war, was treated as resident alien from September 1940 through end of December 1941); Rev. Rul. 81-70, 1981-1 CB 389, 390 (illegal alien's stay in United States for almost eight years, together with alien's service to and involvement in the community, rebuts presumption of nonresidence; alien's stay was more than temporary and was of such an extended nature as to make the alien a resident alien for federal income tax purposes). Presumption of nonresident alien status was rebutted by proof that at least six months before an alien sought determination of tax liability before departing the United States, the alien had filed either a declaration of intent to become a U.S. citizen under the naturalization laws or a Form 1078 or its equivalent. The presumption was also rebutted by proof of acts and statements showing the alien's definite intent to acquire U.S. residence or showing that the alien's stay in the United States had been of such an extended nature as to make the alien a resident. Treas. Reg. § 1.871-4(c)(1).If the internal revenue officer or employee who examined the alien was in doubt concerning the facts, the regulations permitted the officer or employee to require the alien to supply a certificate setting forth the facts relied upon by the alien to overcome the presumption. Treas. Reg. § 1.871-4(d). The certificate had to contain a declaration that it was made under penalties of perjury and had to be signed by “some credible person or persons, other than the alien and members of this family, who have known the alien at least six months before the date of execution of the certificate or certificates.” Id.107 William E. Adams, 46 TC 352, 361 n.8 (1966) .108 Treas. Reg. § 1.871-5.

109 E.g., Kazuko S. Marsh, 68 TC 68, 71–72 (1977) (alien remained resident alien even though she departed the United States and remained abroad for four years), aff'd without published opinion, 588 F2d 1350 (4th Cir. 1978); Josette JF Verrier Friedman, 37 TC 539 (1961) (resident alien, a French citizen, left United States for French Morocco in April 1952; before departure, alien applied for and received a reentry permit; in January 1953, alien applied for and received an extension of that permit to March 1954; alien filed petition for naturalization as U.S. citizen in June 1955; Tax Court held that alien was resident alien for 1952 and 1953 notwithstanding her absence from United States for a large part of that time); Walter J. Baer, 6 TC 1195 (1946) (resident alien, a Swiss citizen, and alien's family left United States for Zurich in July 1941; before departure, alien applied for and received a reentry permit; in March 1942, alien received an extension of permit; Tax Court held that alien was resident alien for entire 1941 taxable year notwithstanding absence from United States and fact that alien and his family had never returned to United States); LEL Thomas, 33 BTA 725 (1935) (resident alien who went to Russia for two years under contract to perform services there, and who thereafter returned to United States, was held to be resident alien); Thomas L. Hoskins, P-H TC Memo. ¶ 83,508 (1983) (resident alien remained U.S. resident even though she lived with her husband in England for three years and eight months); Sutton v. United States, 81-1 USTC ¶ 9145 (1980) (resident aliens retained their status as such while they lived in England; taxpayers retained home in United States and listed themselves as resident aliens on documents filed with U.S. immigration authorities); Rev. Rul. 70-461, 1970-2 CB 149 (expiration of reentry permit issued to resident alien who departed from United States with intention of returning did not automatically change alien's status to nonresident alien). In one case, a resident alien was found to have abandoned U.S. residence by departing the United States with an intent to abandon residence; John Ernest Goldring, 36 BTA 779 (1937) (alien treated as resident alien for part of taxable year and as nonresident alien for remainder of year).110 E.g., Rev. Rul. 70-461, 1970-2 CB 149 (expiration of reentry permit issued to resident alien who departed from United States with intent to return did not automatically change alien's status to nonresident alien).111 Treas. Reg. § 1.871-5.112 See, e.g., Kazuko S. Marsh, 68 TC 68, 71–72 (1977), aff'd without published opinion, 588 F2d 1350 (4th Cir. 1978) ; William E. Adams, 46 TC 352, 361 (1966) .113 Treas. Reg. § 1.871-5.114 E.g., Kazuko S. Marsh, 68 TC 68, 71–72 (1977), aff'd without published opinion, 588 F2d 1350 (4th Cir. 1978) (alien who established residence in United States in 1962, departed in 1966, and remained abroad for four years thereafter was resident alien for taxable years 1966-1969; court found alien had intent to remain a U.S. resident despite physical absence); Walter J. Baer, 6 TC 1195 (1946) ; Albert Ermogeni, P-H TC Memo. ¶ 76,202 (1976) ; Rev. Rul. 64-149, 1964-1 CB (Part 1) 233 (Cuban national who first entered United States in April 1960, and who took part in Bay of Pigs action in April 1961 and was imprisoned in Cuba for

participating in that action, became resident alien when he first entered United States and retained that status during imprisonment; temporary absences from United States not coupled with intent to abandon U.S. residence did not affect alien's resident alien status, nor did period of imprisonment).115 Treas. Reg. § 1.871-3, which refers to Treas. Reg. § 1.871-4. See also Hechavarria v. United States, 374 F. Supp. 128 (SD Ga. 1974) (facts indicated that alien sailor was resident alien and, thus, overcame presumption of nonresidence in regulations; court emphasized alien's repeated representations to U.S. immigration authorities concerning permanent residence over six-year period).116 Treas. Reg. § 1.871-3.117 Id.118 Treas. Reg. § 1.871-3; see, e.g., DL Philippe, 26 TC 984 (1956) (alien sailor sailed on U.S. ships from 1943 until 1949, at which time he returned to United States and applied for U.S. citizenship; sailor was held to be nonresident alien until 1949 when sailor became resident alien).119 Treas. Reg. § 1.871-3.120 Id.120.1 Treas. Reg. § 301.7701(b)-9(a). For certain transitional rules that apply to calendar years 1985 and 1986, see Treas. Reg. § 301.7701(b)-9(b). The procedural rules and filing requirements in Treas. Reg. §§ 301.7701(b)-7(b) and 301.7701(b)-8 apply to taxable years starting after 1991. Treas. Reg. § 301.7701(b)-9(b)(4).In Stephen D. Podd, RIA TC Memo. ¶ 98,231 (1998), supplemented by RIA TC Memo. ¶ 98,418 (1998) , the Tax Court held that the taxpayer, Victor Podd, was a U.S. resident for federal income tax purposes during 1990 under the “green card” test in Section 7701(b)(1)(A)(i). The court futher held that the “tie breaker” rules in the U.S. income tax treaty with Canada did not apply to the taxpayer, because the taxpayer had failed to show that he was a dual resident for the year in issue, i.e., the taxpayer had failed to show that he was a resident of Canada under Canadian law as well as a U.S. resident under Section 7701(b)(1)(A)(i). In a supplemental opinion in this case, Stephen D. Podd, RIA TC Memo. ¶ 98,418 (1998) , the Tax Court denied the taxpayers' motion for reconsideration and held that the taxpayers had not shown that the court had committed substantial error in deciding that the taxpayer, Victor Podd, was a U.S. resident for federal income tax purposes during 1990. Moreover, the court held that even if the “tie breaker” rules in the treaty with Canada were applied, the taxpayer would not have established that he was a Canadian, as opposed to a U.S., resident for tax purposes under those rules. For commentary on this decision, see Zink, “Canadian Taxpayer's Residency Questioned Based on ‘Center of Vital Interest,’” 31 Tax Adviser 87 (2000).In TD 8411, 1992-1 CB 254, the Service issued the final regulations under Section 7701(b). In Announcement 92-104, 1992-29 IRB 21, and Notice 93-24, 1993-1 CB 307, the Service made corrections to these regulations.For commentary on the final regulations under Section 7701(b), see Boidman, “A

Canadian Perspective on the U.S. Residency Regulations,” 21 Tax Mgmt. Int'l J. 442 (1992); Khokhar, “Definition of a Resident Alien—Final Regulations Under Section 7701(b) [Part One],” 21 Tax Mgmt. Int'l J. 647 (1992); Khokhar, “Definition of a Resident Alien—Final Regulations Under Section 7701(b) [Part Two],” 22 Tax Mgmt. Int'l J. 3 (1993); Lederman & Hirsh, “U.S. Tax Residency Rules Broadened in Final Regulations,” 77 J. Tax'n 152 (1992). For planning-oriented commentary relating to the Section 7701(b) definition of U.S. resident, see Karlin, “Coming to America—When Does Tax Residence Begin?” 13 J. Int'l Tax'n 18 (Dec. 2002); Larkins, “Individual Tax Planning: Resident vs. Nonresident May Be Critical,” 7 J. Int'l Tax'n 410 (1996); Larkins, “Resident vs. Nonresident Tax Planning Includes Elections, Timing,” 8 J. Int'l Tax'n 172 (1997). For commentary on dual resident issues, see Ruchelman, “Recent U.S. Cases Provide Guidance on Dual-Resident Tax Strategies,” 18 Tax Notes Int'l 1760 (1999). For other commentary, see AICPA Int'l Tax'n Tech. Resource Panel, “Tax Planning for Expatriates,” 32 Tax Adviser 244 (2001); Bernstein, “Traps for Canadian Holders of U.S. Green Cards,” 17 Tax Notes Int'l 1451 (1998); Moore, “Tax Issues for Recent U.S. Residents,” 32 Tax Adviser 696 (2001). For an article that discusses the resident versus nonresident alien classification issue and recommends expanding the exception for certain medical conditions and adding an exception for days spent in the United States by reason of certain natural disasters, see Rosenberg, “Expanding the Exceptions to the U.S. Income Tax Resident Alien Definition,” 9 Corp. Bus. Tax'n Monthly 9 (July 2008).121 HR Rep. No. 432, pt. 2, 98th Cong., 2d Sess. 1523 (1984); Staff of Joint Comm. on Tax'n, 98th Cong., 2d Sess., General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, at 463–464 (1984). Congress recognized that the “objective” tests of Section 7701(b) might impose resident status on some aliens who would not be residents under prior law and allow some residents who should be taxable as residents to avoid resident status, but concluded that the certainty provided by objective tests outweighed other considerations. HR Rep. No. 432, pt. 2, 98th Cong., 2d Sess. 1524 (1984); Staff of Joint Comm. on Tax'n, 98th Cong., 2d Sess., General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, at 464 (1984). Given the closer-connection exception to the substantial presence test and the exceptions for certain days of presence in Section 7701(b), however, it is unclear to what extent Congress has achieved its goal of certainty.The Technical and Miscellaneous Revenue Act of 1988, § 6138, required the Treasury to study the definition of “resident alien” in Section 7701(b). The required study was to examine the effect of the determination of whether a person is a U.S. resident on federal tax administration and investment flows between the United States and foreign countries. Further, the study was to examine (1) the coordination of the rules for determining whether a person is a U.S. resident with U.S. treaty obligations; (2) how the rules for making that determination under U.S. tax law compared with the rules for determining residence used by the United States' major trading partners; and (3) the estimated revenue impact of any change in the Section 7701(b) rules. The due date for the study was May 1, 1989. Id., § 6138(b). However, as of this writing, the Treasury had not issued the study.122 Section 7701(b)(1) starts with the words “For purposes of this title (other than subtitle B).” Subtitle B contains the federal estate, gift, and generation-skipping transfer tax provisions. See also Treas. Reg. §§ 1.871-2(c) and 301.7701(b)-1(a),

which refer to Treas. Reg. §§ 20.0-1(b)(1), 20.0-1(b)(2), and 25.2501-1(b) to determine whether an individual is a resident of the United States for estate and gift tax purposes.One court, however, has erroneously applied Treas. Reg. §§ 1.871-2(b) and 1.871-4 to determine whether certain alien individuals were residents of the United States in 1988 for purposes of Section 152(b)(3). See Federico Camilo, RIA TC Memo. ¶ 93,249 (1993) (denying dependency exemptions to taxpayers for 1988 for taxpayer-wife's mother, father, and brother who lived with taxpayer and her husband while visiting in the United States on six-month visas from Poland; court held that claimed dependents were not U.S. residents under Treas. Reg. §§ 1.871-2(b) and 1.871-4). Although it probably would not have changed the result in the case, the court should have used the tests in Section 7701(b) to determine whether these alien individuals were residents of the United States. See IRC § 7701(b); Treas. Reg. §§ 1.871-2(c), 301.7701(b)-1(a).122.1 Rev. Proc. 2012-7, § 3.01(6), 2012-1 IRB 232.122.2 Rev. Proc. 2012-7, § 3.01(6), 2012-1 IRB 232, superseding Rev. Proc. 2003-7, § 3.01(5), 2003-1 CB 233. The Service stated that it “will not rule on inherently factual residency determinations but may rule on related legal issues.” Rev. Proc. 2003-7, § 1.02(1), 2003-1 CB 233.123 IRC § 7701(b)(1)(A).124 IRC § 7701(b)(1)(B). See also IRC § 7701(b)(1)(A), which uses the phrase “if (and only if).”125 See IRC §§ 7701(b)(1)(A)(iii), 7701(b)(4).126 See IRC §§ 7701(b)(1)(A), 7701(b)(3), 7701(b)(4); Prop. Reg. §§ 301.7701(b)-1(b)(1), 301.7701(b& rpar;-1(c)(3). Prop. Reg. § 301.7701(b)-1(b)(1) is now Treas. Reg. § 301.7701(b)-1(b)(1); Prop. Reg. § 301.7701(b)-1(c)(3) is now Treas. Reg. § 301.7701(b)-1(c)(3).127 Prop. Reg. § 301.7701(b)-1(a). Prop. Reg. § 301.7701(b)-1(a) is now Treas. Reg. § 301.7701(b)-1(a).128 See infra ¶ B1.03.129 See ¶ A2.03[2].130 See Prop. Reg. § 301.7701(b)-1(a), discussed at ¶ A2.03[2][b]. Prop. Reg. § 301.7701(b)-1(a) is now Treas. Reg. § 301.7701(b)-1(a).131 See ¶ A2.03[9][c].132 Prop. Reg. § 301.7701(b)-1(a). Regarding Section 911, see infra ¶ B1.04[2]. Prop. Reg. § 301.7701(b)-1(a) is now Treas. Reg. § 301.7701(b)-1(a). See also Rev. Rul. 91-58, 1991-2 CB 340, 341 (stating that the rules in Section 7701(b) do not apply for purposes of determining whether a person is a bona fide resident of a foreign

country for Section 911 purposes).133 Prop. Reg. § 301.7701(b)-1(d). Regarding the “mirror” tax laws that are in effect in some U.S. possessions, see Chapter D1.Prop. Reg. § 301.7701(b)-1(d) became Treas. Reg. § 301.7701(b)-1(d)(1), before its amendment by TD 9391, 2008-1 CB 945. Former Treas. Reg. § 301.7701(b)-1(d)(1) referred to Treas. Reg. § 1.933-1(a) for determining whether an individual (including a U.S. citizen or national) was a bona fide resident of Puerto Rico. Former Treas. Reg. § 301.7701(b)-1(d)(1) referred to Section 931 and the regulations thereunder for determining whether an individual (including a U.S. citizen or national) was a bona fide resident of American Samoa. Further, former Treas. Reg. § 301.7701(b)-1(d)(2) provided that “Section 7701(b) did not provide the basis for determining whether a United States citizen or national was a bona fide resident of a United States possession or territory” and referred to “sections 931 through 933 and section 1.935-1 to the extent it remains effective after December 31, 1984” for determining whether a U.S. citizen or national was a bona fide resident of a U.S. possession or territory.

Treas. Reg. § 301.7701(b)-1(d)(1), as amended by TD 9391, 2008-1 CB 945, states that Section 7701(b) “provides the basis for determining whether an alien individual is a resident of a” U.S. possession or territory that uses a mirror system of taxation, i.e., “that administers income tax laws that are identical (except for the substitution of the name of the possession or territory for the term “United States” where appropriate) to” U.S. tax law “for purposes of applying such laws with respect to the income tax liability incurred to such possession or territory.” Treas. Reg. § 301.7701(b)-1(d)(2), as amended by TD 9391, 2008-1 CB 945, takes the same position as the prior version of this regulation provision that Section 7701(b) does not apply to determine whether an individual (including an alien individual) is a bona fide resident of a U.S. possession or territory for federal income tax purposes and that the applicable rules for making that determination are in Section 737, as added to the Code by the American Jobs Creation Act of 2004, and the regulations issued under that provision. The amendments to the Section 7701(b) regulations on this issue apply to taxable years ending after April 9, 2008. Treas. Reg. § 301.7701(b)-9(b)(5).

134 Treas. Reg. § 301.7701(b)-1(d)(1), which refers to Treas. Reg. § 301.7701(b)-2(d).134.1 Debra F. Preece, 95 TC 594 (1990) .134.2 American Jobs Creation Act of 2004, § 908(a).134.3 See ¶¶ D1.02[5], D1.04[2], D1.08[2][d].135 IRC § 7701(b)(1)(A)(i); see Treas. Reg. § 301.7701(b)-1(b)(1).In Stephen D. Podd, RIA TC Memo. ¶ 98,231 (1998), supplemented by RIA TC Memo. ¶ 98,418 (1998) , the Tax Court held that the taxpayer, Victor Podd, was a U.S. resident for federal income tax purposes during 1990 under the “green card” test in Section 7701(b)(1)(A)(i). The court futher held that the “tie breaker” rules in the U.S. income tax treaty with Canada did not apply to the taxpayer, because the

taxpayer had failed to show that he was a dual resident for the year in issue, i.e., the taxpayer had failed to show that he was a resident of Canada under Canadian law as well as a U.S. resident under Section 7701(b)(1)(A)(i). In a supplemental opinion in this case, Stephen D. Podd, RIA TC Memo. ¶ 98,418 (1998) , the Tax Court dened the taxpayers' motion for reconsideration and held that the taxpayers had not shown that the court had committed substantial error in deciding that the taxpayer, Victor Podd, was a U.S. resident for federal income tax purposes during 1990. Moreover, the court held that even if the “tie breaker” rules in the treaty with Canada were applied, the taxpayer would not have established that he was a Canadian, as opposed to a U.S., resident for tax purposes under those rules. For commentary on this decision, see Zink, “Canadian Taxpayer's Residency Questioned Based on ‘Center of Vital Interest,’” 31 Tax Adviser 87 (2000). Staff of Joint Comm. on Tax'n, 98th Cong., 2d Sess., General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, at 464 (1984), explains the theory for treating such aliens as U.S. residents for tax purposes as follows: “These persons have rights in the United States that are similar to those afforded U.S. citizens (including the right to enter the United States at will); equity demands that they contribute to the cost of running the government on the same basis as citizens.” See also HR Rep. No. 432, pt. 2, 98th Cong., 2d Sess. 1523 (1984).

136 IRC § 7701(b)(6); See Prop. Reg. § 301.7701(b)-1(b)(1). Prop. Reg. § 301.7701(b)-1(b)(1) is now Treas. Reg. § 301.7701(b)-1(b)(1).137 IRC § 7701(b)(6); See Prop. Reg. § 301.7701(b)-1(b)(1). Prop. Reg. § 301.7701(b)-1(b)(1) is now Treas. Reg. § 301.7701(b)-1(b)(1).138 Prop. Reg. § 301.7701(b)-1(b)(2). A judicial order is final for this purpose if it is no longer subject to appeal to a higher court of competent jurisdiction. Id. Prop. Reg. § 301.7701(b)-1(b)(2) is now Treas. Reg. § 301.7701(b)-1(b)(2).139 Treas. Reg. § 301.7701(b)-1(b)(3). If the INS replaces any of the form numbers referred to in this regulation provision, the regulation should be read as referring to the comparable INS replacement form number. Treas. Reg. § 301.7701(b)-1(b)(3).For purposes of this provision, the regulations treat an alien individual as having filed a letter stating the intent to abandon resident status with the INS or a consular office if the letter is sent by certified mail, return receipt requested (or a foreign country's equivalent thereof). Id. The regulations further provide that the alien individual should retain a copy of the letter, along with proof that the letter was mailed and received. Id.140 Id. A judicial order is final if it is no longer subject to appeal to a higher court of competent jurisdiction. Prop. Reg. § 301.7701(b)-1(b)(2). Prop. Reg. § 301.7701(b)-1(b)(3) is now Treas. Reg. § 301.7701(b)-1(b)(3); Prop. Reg. § 301.7701(b)-1(b)(2) is now Treas. Reg. § 301.7701(b)-1(b)(2).141 IRC § 7701(b)(3)(A); Prop. Reg. § 301.7701(b)-1(c)(1). The theory underlying this substantial presence test is Congress' belief that although “there is no single system that is perfect,…a regime that depends on length of stay meets the criteria of objectivity and establishing nexus to the United States and is appropriate.” HR Rep.

No. 432, pt. 2, 98th Cong., 2d Sess. 1524 (1984). See also Staff of Joint Comm. on Tax'n, 98th Cong., 2d Sess., General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, at 464 (1984). Congress bases this substantial-presence test on days of presence in three years, instead of focusing only on the days of presence in one year, because it “intended that individuals in circumstances like those of Tongun Park (described in 79 T.C. 252), who was here for substantial periods of time over a period of years, be residents…even though their days of presence in a particular year do not equal or exceed 183.” Staff of Joint Comm. on Tax'n, 98th Cong., 2d Sess., General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, at 464 (1984). See also HR Rep. No. 432, pt. 2, 98th Cong., 2d Sess. 1524 (1984).For applications of the substantial-presence test in Section 7701(b)(3)(A), see Edwin R. Anderson, P-H TC Memo. ¶ 89,381 (1989) (involving alien who had entered United States on a diplomatic passport to negotiate contracts on behalf of Liberian government; shortly after alien's arrival, Liberian government was overthrown by revolution; alien was treated as resident alien under substantial-presence test of Section 7701(b)(3)(A)). Prop. Reg. § 301.7701(b)-1(c)(1) is now Treas. Reg. § 301.7701(b)-1(c)(1).In Rilwan Adisa Salami, RIA TC Memo. ¶ 97,347 (1997) , the Tax Court held that the taxpayer was a resident alien for U.S. tax purposes under the substantial presence test in Section 7701(b)(3), even though he had not yet become a lawful permanent resident for U.S. immigration purposes.

In Jose Angel Lujan, RIA TC Memo. ¶ 2000-365 (2000) , the Tax Court held that the taxpayer, an Argentine citizen and international tax lawyer, was a resident alien for U.S. tax purposes for 1993 and 1994 under the substantial presence test in Section 7701(b)(3). Accordingly, the taxpayer was held taxable on his worldwide income, including compensation income for services performed in Argentina. The court also upheld estimated tax penalties against the taxpayer for both years because no exception to the penalty applied.

142 IRC § 7701(b)(3)(A)(ii); Prop. Reg. § 301.7701(b)-1(c)(1). Prop. Reg. § 301.7701(b)-1(c)(1) is now Treas. Reg. § 301.7701(b)-1(c)(1). For purposes of applying the substantial-presence test for calendar years 1985 and 1986, days of presence for 1984 are counted only for aliens who had been U.S. residents under prior law (Treas. Reg. §§ 1.871-2–1.871-5) at the end of calendar year 1984. Treas. Reg. § 301.7701(b)-9(b)(2). Days of presence in 1983 are counted only for aliens who had been residents under prior law at the end of both calendar year 1983 and calendar year 1984. Id.143 This example is based on Prop. Reg. § 301.7701(b)-1(e), Ex. 1. Prop. Reg. § 301.7701(b)-1(e), Ex. 1, is now Treas. Reg. § 301.7701(b)-1(e), Ex. 1.144 IRC § 7701(b)(3)(A)(i); Prop. Reg. § 301.7701(b)-1(c)(4). Prop. Reg. § 301.7701(b)-1(c)(4) is now Treas. Reg. § 301.7701(b)-1(c)(4).145 Prop. Reg. § 301.7701(b)-1(c)(4). Prop. Reg. § 301.7701(b)-1(c)(4) is now Treas. Reg. § 301.7701(b)-1(c)(4). Treas. Reg. § 301.7701(b)-1(e), Ex. 3, illustrates this point.

146 This example is based on Prop. Reg. § 301.7701(b)-1(e), Ex.2. Prop. Reg. § 301.7701(b)-1(e), Ex. 2, is now Treas. Reg. § 301.7701(b)-1(e), Ex. 2.147 Z, however, was a U.S. resident for 1989 and 1990 under the substantial-presence test because Z was present in the United States for 365 days in each of thoseyears.148 IRC § 7701(b)(7)(A); Prop. Reg. §§ 301.7701(b)-1(c)(1), 301.7701(b)-1(c)(2)(i). Prop. Reg. § 301.7701(b)-1(c)(1) is now Treas. Reg. § 301.7701(b)-1(c)(1); Prop. Reg. § 301.7701(b)-1(c)(2)(i) is now Treas. Reg. § 301.7701(b)-1(c)(2)(i).149 See IRC §§ 7701(b)(5), 7701(b)(7)(B), 7701(b)(7)(C), and Prop. Reg. § 301.7701(b)-3, discussed infra ¶ B1.02[2][c][v]. Prop. Reg. § 301.7701(b)-3 is now Treas. Reg. § 301.7701(b)-3.150 Treas. Reg. § 301.7701(b)-1(c)(1); see Treas. Reg. § 301.7701(b)-1(e), Ex. 1.151 IRC § 7701(b)(3)(A).152 Prop. Reg. § 301.7701(b)-1(c)(2)(ii). See also IRC § 7701(a)(9). Prop. Reg. § 301.7701(b)-1(c)(2)(ii) is now Treas. Reg. § 301.7701(b)-1(c)(2)(ii).153 Treas. Reg. § 301.7701(b)-1(c)(2)(ii). Compare Section 638(1), which defines the term “United States” for purposes of applying the provisions of chapter 1 of the Code (Sections 1–1399).154 Treas. Reg. § 301.7701(b)-1(c)(2)(ii).155 IRC § 7701(b)(3)(B); Prop. Reg. § 301.7701(b)-2. Prop. Reg. § 301.7701(b)-2 is now Treas. Reg. § 301.7701(b)-2.156 IRC § 7701(b)(3)(B)(i); Prop. Reg. § 301.7701(b)-2(a)(1). Prop. Reg. § 301.7701(b)-2(a)(1) is now Treas. Reg. § 301.7701(b)-2(a)(1).157 IRC § 7701(b)(3)(B)(ii); Prop. Reg. § 301.7701(b)-2(a)(2). Prop. Reg. § 301.7701(b)-2(a)(2) is now Treas. Reg. § 301.7701(b)-2(a)(2).158 IRC § 7701(b)(3)(B)(ii); Treas. Reg. § 301.7701(b)-2(a)(3), which refers to Treas. Reg. § 301.7701(b)-2(e) for the special rule.158.1 Treas. Reg. § 301.7701(b)-2(g) refers to Treas. Reg. § 301.7701(b)-8. The filing requirements of Treas. Reg. § 301.7701(b)-8 are discussed infra ¶ B1.02[2][c][xi]. These filing requirements apply to taxable years starting after 1991. Treas. Reg. § 301.7701(b)-9(b)(4).158.2 Treas. Reg. §§ 301.7701(b)-8(d), 301.7701(b)-8(e).158.3 Treas. Reg. § 301.7701(b)-2(e).158.4

Treas. Reg. § 301.7701(b)-2(e).159 IRC § 7701(b)(3)(C)(i); Prop. Reg. § 301.7701(b)-2(e). Prop. Reg. § 301.7701(b)-2(e) is now Treas. Reg. § 301.7701(b)-2(f).160 IRC § 7701(b)(3)(C)(ii); Treas. Reg. § 301.7701(b)-2(f). The regulations provide that affirmative steps for this purpose include (but are not limited to) the filing of (1) INS Form I-508 (Waiver of Immunities) by the alien; (2) INS Form I-485 (Application for Status As Permanent Resident) by the alien; (3) INS Form I-130 (Petition for Alien Relative) on the alien's behalf; (4) INS Form I-140 (Petition for Prospective Immigrant Employee) on the alien's behalf; (5) Department of Labor Form ETA-750 (Application for Alien Employment Certification) on the alien's behalf; or (6) Department of State Form OF-230 (Application for Immigrant Visa and Alien Registration) by the alien. Treas. Reg. § 301.7701(b)-2(f). If the INS replaces any of the forms referred to in this regulation, the regulation should be read as referring to the comparable INS replacement form number. Treas. Reg. § 301.7701(b)-1(b)(3).161 IRC § 7701(b)(3)(B)(ii); Prop. Reg. § 301.7701(b)-2(a)(2). Prop. Reg. § 301.7701(b)-2(a)(2) is now Treas. Reg. § 301.7701(b)-2(a)(2).162 IRC § 7701(b)(3)(B)(ii); Prop. Reg. §§ 301.7701(b)-2(a)(2), 301.7701(b)-2(c)(2). Prop. Reg. § 301.7701(b)-2(a)(2) is now Treas. Reg. § 301.7701(b)-2(a)(2); Prop. Reg. § 301.7701(b)-2(c)(2) is now Treas. Reg. § 301.7701(b)-2(c)(2).163 Prop. Reg. § 301.7701(b)-2(c)(2).164 IRC § 7701(b)(3)(B)(ii), which defines the term “tax home” by referring to the meaning of that term in Section 911(d)(3), excluding the second sentence in Section 911(d)(3). The second sentence of Section 911(d)(3) provides that an individual is not treated as having a tax home in a foreign country for any period for which the individual's abode is within the United States. The exclusion of this second sentence of Section 911(d)(3) in defining “tax home” for purposes of the closer connection exception means that an alien individual may be treated as maintaining a tax home within a foreign country under Section 7701(b)(3)(B)(ii) even if the individual's abode is in the United States.Regarding the meaning of the term “tax home” in Section 911(d)(3), see ¶ B1.04[2][b][iii].164.1 Treas. Reg. § 301.7701(b)-2(c)(1).165 Treas. Reg. § 301.7701(b)-2(c)(1). See also Treas. Reg. § 1.911-2(b) (defining “tax home” for purposes of Section 911), discussed ¶ B1.04[2][b][iii].166 Treas. Reg. § 301.7701(b)-2(c)(1). See also Treas. Reg. § 1.911-2(b) (defining “tax home” for purposes of Section 911), discussed ¶ B1.04[2][b][iii].167 Prop. Reg. § 301.7701(b)-2(d). Prop. Reg. § 301.7701(b)-2(d), with some changes, is now Treas. Reg. § 301.7701(b)-2(d).168 Treas. Reg. § 301.7701(b)-2(d)(1). A home may be a “permanent home” for

purposes of this closer connection test, regardless of whether the home is rented or owned by the alien individual and regardless of whether the home is a house, an apartment, or a furnished room. Treas. Reg. § 301.7701(b)-2(d)(2). To be a “permanent home” for this purpose, however, “[i]t is material…that the dwelling be available at all times, continuously, and not solely for stays of short duration.” Id. (last sentence).168.1 See ¶ B1.02[2][b].169 Prop. Reg. § 301.7701(b)-2(b). Prop. Reg. § 301.7701(b)-2(b) is now Treas. Reg. § 301.7701(b)-2(b).170 Treas. Reg. § 301.7701(b)-2(b). Compare IRC § 638(2), which defines the term “United States” for purposes of applying the provisions of chapter 1 of the Code (Sections 1–1399).171 Prop. Reg. § 301.7701(b)-2(b). Prop. Reg. § 301.7701(b)-2(b) is now Treas. Reg. § 301.7701(b)-2(b).172 Any day excluded under this rule is not taken into account in either the current year or the first or second preceding year. Prop. Reg. § 301.7701(b)-3(f). Prop. Reg. § 301.7701(b)-3(f) is now Treas. Reg. § 301.7701(b)-3(f).173 IRC §§ 7701(b)(3)(D)(i), 7701(b)(5)(A); Prop. Reg. §§ 301.7701(b)-3(a)(1), 301.7701(b)-3(b). Prop. Reg. § 301.7701(b)-3(a)(1) is now Treas. Reg. § 301.7701(b)-3(a)(1); Prop. Reg. § 301.7701(b)-3(b) is now Treas. Reg. § 301.7701(b)-3(b).In the following cases, the court held that the taxpayer was a nonresident alien under Section 7701(b) because the taxpayer was a teacher whose days of presence in the United States did not count for purposes of the substantial presence test: Norma A. Santos, 135 TC 447 (2010) ; Estrella A. Lumaban, TC Summary Op. 2010-169 (2010) ; Patrocinio Pobadora Malazarte, Jr., TC Summary Op. 2010-168 (2010) ; Edralin A. Pagarigan, TC Summary Op. 2010-167 (2010) ; Aida B. Abiog, TC Summary Op. 2010-166 (2010) ; Bernadette M. Samaco, TC Summary Op. 2010-165 (2010) ; Shirley Ucol-Cobaria, TC Summary Op. 2010-162 (2010) .

174 IRC § 7701(b)(3)(D)(ii); Prop. Reg. §§ 301.7701(b)-3(a)(2), 301.7701(b)-3(c). Prop. Reg. § 301.7701(b)-3(a)(2) is now Treas. Reg. § 301.7701(b)-3(a)(2); Prop. Reg. § 301.7701(b)-3(c) is now Treas. Reg. § 301.7701(b)-3(c).175 IRC § 7701(b)(7)(B); Prop. Reg. §§ 301.7701(b)-3(a)(4), 301.7701(b)-3(e). Prop. Reg. § 301.7701(b)-3(a)(4) is now Treas. Reg. § 301.7701(b)-3(a)(4); Prop. Reg. § 301.7701(b)-3(e) is now Treas. Reg. § 301.7701(b)-3(e).176 IRC § 7701(b)(7)(C); Prop. Reg. §§ 301.7701(b)-3(a)(3), . Prop. Reg. § 301.7701(b)-3(a)(3) is now Treas. Reg. § 301.7701(b)-3(a)(3); Prop. Reg. § 301.7701(b)-3(d) is now Treas. Reg. § 301.7701(b)-3(d).177

IRC §§ 7701(b)(3)(D)(i), 7701(b)(5)(A)(i); Prop. Reg. §§ 301.7701(b)-3(a)(1), 301.7701-3(b)(1)(i). Prop. Reg. § 301.7701(b)-3(a)(1) is now Treas. Reg. § 301.7701(b)-3(a)(1); Prop. Reg. § 301.7701(b)-3(b)(1)(i) is now Treas. Reg. § 301.7701(b)-3(b)(1)(i).178 IRC § 7701(b)(5)(B)(i); Prop. Reg. § 301.7701(b)-3(b)(2)(i). To fall within this exception, an alien must be temporarily present by reason of diplomatic status. It is not enough that the alien merely holds a diplomatic passport. See Edwin R. Anderson, P-H TC Memo. ¶ 89,381 (1989) (former governmental official of Liberian government was not exempt individual under Section 7705(b)(5)(B) even though alien held diplomatic passport). Prop. Reg. § 301.7701(b)-3(b)(2)(i) is now Treas. Reg. § 301.7701(b)-3(b)(2)(i).179 IRC § 7701(b)(5)(B)(i); Prop. Reg. § 301.7701(b)-3(b)(2)(i). Section 7701(b)(5)(B)(i) states that the full-time diplomatic or consular status of an individual is to be determined by the secretary of the treasury after consultation with the secretary of state. The proposed regulations treat an alien individual as having full-time diplomatic or consular status if the individual (1) has been accredited by a foreign government recognized de jure or de facto by the United States; (2) intends to engage primarily in official activities for such foreign government while in the United States; and (3) has been recognized by the president, the secretary of state, or a consular officer acting on behalf of the secretary of state as being entitled to such status. P rop. Reg. § 301.7701(b)-3(b)(2)(iii). Prop. Reg. § 301.7701(b)-3(b)(2)(i) is now Treas. Reg. § 301.7701(b)-3(b)(2)(i); Prop. Reg. § 301.7701(b)-3(b)(2)(iii) is now Treas. Reg. § 301.7701(b)-3(b)(2)(iii).180 IRC § 7701(b)(5)(B)(ii); Prop. Reg. § 301.7701(b)-3(b)(2)(i). For this purpose, the proposed regulations define “international organization” as any public international organization that the president has designated by executive order as being entitled to enjoy the privileges, exemptions, and immunities provided for in the International Organizations Act (22 USC § 288). Prop. Reg. § 301.7701(b)-3(b)(2)(ii). Prop. Reg. § 301.7701(b)-3(b)(2)(i) is now Treas. Reg. § 301.7701(b)-3(b)(2)(i); Prop. Reg. § 301.7701(b)-3(b)(2)(ii) is now Treas. Reg. § 301.7701(b)-3(b)(2)(ii). The regulations treat an individual as a full-time employee of an international organization if the individual's employment with the organization is consistent with an employment schedule of a person with a standard, full-time work schedule with the organization. Treas. Reg. § 301.7701(b)-3(b)(2)(ii) (last sentence).181 IRC § 7701(b)(5)(B)(iii); Treas. Reg. § 301.7701(b)-3(b)(2)(i). Under the regulations, the immediate family of an exempt individual includes the individual's spouse and unmarried children (whether by blood or adoption) but only if the spouse's or unmarried children's visa status is derived from and dependent on the visa classification of the exempt individual. Treas. Reg. § 301.7701(b)-3(b)(8). Further, an exempt individual's unmarried children under age 21 are treated as members of the individual's family only if they reside regularly in the individual's household and not in someone else's household. The regulations do not indicate when the age of the unmarried child should be examined. Attendants, servants, and personal employees of the exempt individual are not treated as members of the individual's immediate family. Treas. Reg. § 301.7701(b)-3(b)(8) (last sentence).

181.1 Treas. Reg. § 301.7701(b)-3(b)(1)(i) (last sentence), which refers to Treas. Reg. § 301.7701(b)-1(b)(1) to define “lawful permanent resident.”182 IRC §§ 7701(b)(3)(D)(i), 7701 (b)(5)(A)(ii), 7701 (b)(5)(A)(iii); Prop. Reg. §§ 301.7701(b)-3(a)(1), 301.7701(b)-3(b)(1)(ii), 301.7701(b)-3(b)(1)(iii). This provision should be viewed as a “tax expenditure” provision of sorts since the committee reports indicate that the non-revenue raising social policy reason for excluding such days of presence was to “allow the United States to maintain its paramount position in the field of education.” HR Rep. No. 432, pt. 2, 98th Cong., 2d Sess. 1524 (1984). See also Staff of Joint Comm. on Tax'n, 98th Cong., 2d Sess., General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, at 464 (1984). Prop. Reg. § 301.7701(b)-3(a)(1) is now Treas. Reg. § 301.7701(b)-3(a)(1); Prop. Reg. § 301.7701(b)-3(b)(1)(ii) is now Treas. Reg. § 301.7701(b)-3(b)(1)(ii); Prop. Reg. § 301.7701(b)-3(b)(1)(iii) is now Treas. Reg. § 301.7701(b)-3(b)(1)(iii).183 Regarding a teacher or trainee, see IRC § 7701(b)(5)(C) and Treas. Reg. § 301.7701(b)-3(b)(3), which refer to subparagraphs J or Q of Section 101(a)(15) of the Immigration and Nationality Act (8 USC §§ 1101(a)(15)(J), 1101(a)(15)(Q)). Regarding a student, see IRC § 7701(b)(5)(D) and Treas. Reg. § 301.7701(b)-3(b)(4), which refer to subparagraphs F, J, M, or Q of Section 101(a)(15) of the Immigration and Nationality Act (8 USC §§ 1101(a)(15)(F), 1101(a)(15)(J), 1101(a)(15)(M), 1101(a)(15)(Q)). See also Norma A. Santos, 135 TC 447 (2010) (taxpayer with a J-1 visa who participated in the exchange teacher program treated as a nonresident alien under Section 7701(b)(1)(B)); Estrella A. Lumaban, TC Summary Op. 2010-169 (2010) (same); Patrocinio Pobadora Malazarte, Jr., TC Summary Op. 2010-168 (2010) (same); Edralin A. Pagarigan, TC Summary Op. 2010-167 (2010) (same); Aida B. Abiog, TC Summary Op. 2010-166 (2010) (same); Bernadette M. Samaco, TC Summary Op. 2010-165 (2010) (same); Shirley Ucol-Cobaria, TC Summary Op. 2010-162 (2010) (same).184 Treas. Reg. §§ 301.7701(b)-3(b)(3) (teacher or trainee), 301.7701(b)-3(b)(4) (student), as revised by TD 8733, 1997-2 CB 254. Under the regulations, the immediate family of an exempt individual includes the individual's spouse and unmarried children (whether by blood or adoption) but only if the spouse's or unmarried children's visa status is derived from and dependent on the visa classification of the exempt individual. Treas. Reg. § 301.7701(b)-3(b)(8). Further, an exempt individual's unmarried children under age 21 are treated as members of the individual's family only if they reside regularly in the individual's household and not in someone else's household. Attendants, servants, and personal employees of the exempt individual are not treated as members of the individual's immediate family. Treas. Reg. § 301.7701(b)-3(b)(8) (last sentence).185 Treas. Reg. § 301.7701(b)-3(b)(6).186 Id. Prop. Reg. § 301.7701(b)-3(b)(6) is now Treas. Reg. § 301.7701(b)-3(b)(6).187 Id. Prop. Reg. § 301.7701(b)-3(b)(6) is now Treas. Reg. § 301.7701(b)-3(b)(6).188 Id. Prop. Reg. § 301.7701(b)-3(b)(6) is now Treas. Reg. § 301.7701(b)-3(b)(6).

189 IRC § 7701(b)(5)(E)(i); Treas. Reg. § 301.7701(b)-3(b)(7)(i). Under a transition rule in the regulations, the rules in this limit on the teacher/trainee exemption relating to stated periods of exempt status apply only for those stated periods that occur after 1984. Treas. Reg. § 301.7701(b)-3(b)(7)(iv).See also Andrea Farina, TC Summary Op. 2009-23 (2009) (court held that Italian national who was a nonresident alien individual was not entitled to claim the standard deduction and that such tax treatment did not violate the nondiscrimination clause in Article 24 of the U.S. income tax treaty with Italy; court further held that the taxpayer was a nonresident alien for the tax year in issue notwithstanding that she would be a resident alien under the substantial presence test in Section 7701(b)(3) for that year because she was a student, present in the United States on a J-1 visa, and she had not reached the limitation on students in Sections 7701(b)(5)(E)(i) and 7701(b)(5)(E)(ii), and, thus, her days of presence were exempt from counting under the substantial presence test by reason of Sections 7701(b)(3)(D) and 7701(b)(5)).190 Treas. Reg. § 301.7701(b)-3(b)(7)(ii), which interprets Section 7701(b)(5)(E)(i). Under a transition rule in the regulations, the rules in this limit on the teacher/trainee exemption relating to stated periods of exempt status apply only for those stated periods that occur after 1984. Treas. Reg. § 301.7701(b)-3(b)(7)(iv).Section 872(b)(3) exempts certain compensation paid by a foreign employer to a nonresident alien individual for the period that the alien individual is temporarily present in the United States as a nonimmigrant under subparagraph F, J, or Q of Section 101(a)(15) of the Immigration and Nationality Act.191 This example is based on Treas. Reg. § 301.7701(b)-3(b)(7)(v), Ex. 1.191.1 This example is based on Treas. Reg. § 301.7701(b)-3(b)(7)(v), Ex. 2.191.2 This example is based on Treas. Reg. § 301.7701(b)-3(b)(7)(v), Ex. 3.191.3 This example is based on Treas. Reg. § 301.7701(b)-3(b)(7)(v), Ex. 4.192 IRC § 7701(b)(5)(E)(ii); Treas. Reg. § 301.7701(b)-3(b)(7)(iii). Under a transition rule in the regulations, the rules in this limit on the student exemption relating to stated periods of exempt status apply only for those stated periods that occur after 1984. Treas. Reg. § 301.7701(b)-3(b)(7)(iv). Thus, the regulations provide, for example, that an alien individual who was present as a student during the calendar years 1982–1990 was not subject to the five-year limit on the student exemption until 1990. Id.See also Andrea Farina, TC Summary Op. 2009-23 (2009) (court held that Italian national who was a nonresident alien individual was not entitled to claim the standard deduction and that such tax treatment did not violate the nondiscrimination clause in Article 24 of the U.S. income tax treaty with Italy; court further held that the taxpayer was a nonresident alien for the tax year in issue notwithstanding that she would be a resident alien under the substantial presence test in Section 7701(b)(3) for that year because she was a student, present in the United States on a J-1 visa, and she had not reached the limitation on students in Sections 7701(b)(5)(E)(i) and 7701(b)(5)(E)(ii), and, thus, her days of presence

were exempt from counting under the substantial presence test by reason of Sections 7701(b)(3)(D) and 7701(b)(5)).193 Treas. Reg. § 301.7701(b)-3(b)(7)(iii). In defining “closer connection with a foreign country” and “affirmative steps” for this purpose, Treas. Reg. § 301.7701(b)-3(b)(7)(iii) refers to Treas. Reg. § 301.7701(b)-2.194 IRC § 7701(b)(7)(B); Treas. Reg. §§ 301.7701(b)-3(a)(4), 301.7701(b)-3(e).195 Treas. Reg. § 301.7701(b)-3(e)(1).196 Treas. Reg. § 301.7701(b)-3(e)(2)(i).196.1 Treas. Reg. § 301.7701(b)-3(e)(2)(ii).196.2 Treas. Reg. § 301.7701(b)-3(e)(2)(iii).196.3 This example is based on Treas. Reg. § 301.7701(b)-3(e)(3), Ex. 1.196.4 This example is based on Treas. Reg. § 301.7701(b)-3(e)(3), Ex. 3.196.5 Treas. Reg. § 301.7701(b)-3(e)(2)(iii).196.6 Treas. Reg. § 301.7701(b)-3(e)(2)(iii). For an example, see Treas. Reg. § 301.7701(b)-3(e)(3), Ex. 2.197 IRC § 7701(b)(7)(C); Treas. Reg. §§ 301.7701(b)-3(a)(3), 301.7701(b)-3(d). Treas. Reg. § 301.7701(b)-3(d) defines “foreign point” as any area that is not included within the definition of “United States” in Treas. Reg. § 301.7701(b)-1(c)(2)(ii).198 Prop. Reg. § 301.7701(b)-3(d). Prop. Reg. § 301.7701(b)-3(d) is now Treas. Reg. § 301.7701(b)-3(d).199 Id. Prop. Reg. § 301.7701(b)-3(d) is now Treas. Reg. § 301.7701(b)-3(d).200 IRC § 7701(b)(3)(D)(ii); Treas. Reg. §§ 301.7701(b)-3(a)(2), 301.7701(b)-3(c)(1). The regulations add the requirement, not found in the Code section, that the taxpayer must intend to leave the United States. Treas. Reg. § 301.7701(b)-3(c)(1). In TD 8411, 1992-1 CB 254, 255–256, the Service responded to commentators' criticism of inclusion of this “intent to leave” requirement for the medical condition exception and explained the rationale for this requirement as follows:The legislative history of section 7701(b) clearly states that Congress intended that the exclusion of days of presence under the medical exception would apply in very few cases. See H.R. Rep. No. 432, Part 2, 98th Cong., 2d Sess. 1527 (1984). The exception applies to persons who are unable to leave the United States. The exception hinges on the involuntariness of the stay; the individual would leave but is unable to do so because of the medical condition. If the individual did not intend to leave, there is no element of involuntariness; the individual would be in the United States regardless of the medical condition. Eliminating the requirement that the individual's stay be involuntary (“the intent test”) would significantly increase the

number of individuals who would qualify for this exception and contravene Congressional intent with respect to this particular provision. Thus, even though, in general, Congress intended to eliminate the “subjective” tests that existed under old law, the proper application of the medical exception requires an “intent test” in order to determine whether the individual's stay is voluntary or involuntary. Furthermore, the legislative history indicates by example that an individual may exclude a day of presence under this section only where the individual had intended to leave the United States prior to the day which the individual is seeking to exclude.

For an article that discusses the resident versus nonresident alien classification issue and recommends expanding the exception for certain medical conditions and adding an exception for days spent in the United States by reason of certain natural disasters, see Rosenberg, “Expanding the Exceptions to the U.S. Income Tax Resident Alien Definition,” 9 Corp. Bus. Tax'n Monthly 9 (July 2008).201 Prop. Reg. § 301.7701(b)-3(c)(1). Prop. Reg. § 301.7701(b)-3(c)(1) is now Treas. Reg. § 301.7701(b)-3(c)(1).201.1 Treas. Reg. § 301.7701(b)-3(c)(2).201.2 Treas. Reg. § 301.7701(b)-3(c)(2).201.3 Treas. Reg. § 301.7701(b)-3(c)(2).201.4 Treas. Reg. § 301.7701(b)-3(c)(2).201.5 Treas. Reg. § 301.7701(b)-3(c)(2).201.6 Treas. Reg. § 301.7701(b)-3(c)(2).202 Reading Section 7701(b)(3)(D)(ii) probably leads to the conclusion that X was present in the United States for only seven days in 1989. On all the other days, X was unable to leave. The regulations, however, suggest that X was present in the United States for fourteen days in 1989. For seven days, X was unable to leave the United States but did not intend to do so anyway.202.1 This example is based on Treas. Reg. § 301.7701(b)-3(c)(4), Ex. 1.202.2 This example is based on Treas. Reg. § 301.7701(b)-3(c)(4), Ex. 2.203 Prop. Reg. § 301.7701(b)-3(c)(1). Prop. Reg. § 301.7701(b)-3(c)(1) is now Treas. Reg. § 301.7701(b)-3(c)(1).204 Prop. Reg. § 301.7701(b)-3(c)(2). Prop. Reg. § 301.7701(b)-3(c)(2) is now Treas. Reg. § 301.7701(b)-3(c)(3). In TD 8411, 1992-1 CB 254, 256, the Service rejected commentators' requests that the Service broaden the medical exception by excluding from the definition of “preexisting medical condition” a condition of which the alien was aware but as to which treatment was not required until after the alien entered the United States, stating that the narrower scope of the medical exception

was consistent with Congress' statement that the exception should not apply to those entering the United States to avail themselves of its medical facilities. See HR Rep. No. 432, pt. 2, 98th Cong., 2d Sess. 1525 (1984).205 Id. Prop. Reg. § 301.7701(b)-3(c)(2) is now Treas. Reg. § 301.7701(b)-3(c)(3). In TD 8411, 1992-1 CB 254, 256, the Service rejected commentators' requests that the Service broaden the medical exception by excluding from the definition of “preexisting medical condition” a condition of which the alien was aware but as to which treatment was not required until after the alien entered the United States, stating that the narrower scope of the medical exception was consistent with Congress' statement that the exception should not apply to those entering the United States to avail themselves of its medical facilities. See HR Rep. No. 432, pt. 2, 98th Cong., 2d Sess. 1525 (1984).206 Prop. Reg. § 301.7701(b)-3(c)(1). Prop. Reg. § 301.7701(b)-3(c)(1) is now Treas. Reg. § 301.7701(b)-3(c)(1).206.1 See Treas. Reg. § 301.7701(b)-3(c). Both examples in the regulations illustrating this exception involve medical problems suffered by the alien who is seeking to exclude the days of presence in the United States. See Treas. Reg. § 301.7701(b)-3(c)(4), Exs. 1, 2.207 IRC §§ 7701(b)(3)(D)(i), 7701(b)(5)(A)(iv); Treas. Reg. §§ 301.7701(b)-3(a)(1), 301.7701(b)-3(b)(1)(iv), 301.7701(b)-3(b)(5). For purposes of applying the substantial-presence test, however, only days of presence in the United States after October 22, 1986, will be excluded for professional athletes described in Treas. Reg. § 301.7701(b)-3(b)(5). Treas. Reg. § 301.7701(b)-9(b)(3).208 Treas. Reg. § 301.7701(b)-3(b)(5).208.1 IRC § 7701(b)(7)(D), added by the Taxpayer Relief Act of 1997, § 1174(b)(1), effective for taxable years starting after 1997.208.2 IRC § 7701(b)(7)(D). The implication is that the exclusion would apply if the alien engages in investment activities or personal activities in the United States not constituting trade or business activities.209 IRC §§ 7701(b)(1)(A)(iii), 7701(b)(4); Prop. Reg. § 301.7701(b)-4(c)(3). Prop. Reg. § 301.7701(b)-4(c)(3) is now Treas. Reg. § 301.7701(b)-4(c)(3).210 IRC § 7701(b)(4)(A)(ii); Treas. Reg. § 301.7701(b)-4(c)(3)(i)(A).211 IRC § 7701(b)(4)(A)(iii); Treas. Reg. § 301.7701(b)-4(c)(3)(i)(B).212 IRC § 7701(b)(4)(A)(iv)(I); Treas. Reg. § 301.7701(b)-4(c)(3)(i).212.1 IRC § 7701(b)(4)(A)(iv)(II); Treas. Reg. §§ 301.7701(b)-4(c)(3)(i), 301.7701(b)-4(c)(3)(iii), 301.7701(b)-4(c)(3)(iv).212.2 IRC § 7701(b)(4)(A)(iv)(II); Treas. Reg. §301.7701(b)-4(c)(3)(iv). These days will

not be deemed to be days of presence in the United States for purposes of the thirty-one-consecutive-day requirement. IRC § 7701(b)(4)(A)(iv)(II);Treas. Reg. §301.7701(b)-4(c)(3)(iv).212.3 IRC § 7701(b)(7)(A); Treas. Reg. § 301.7701(b)-4(c)(3)(ii).212.4 Treas. Reg. §§ 301.7701(b)-4(c)(3)(ii), 301.7701(b)-4(c)(3)(iv). The regulations seem to extend beyond the wording of the statute. Section 7701(b)(4)(D) states only that the exempt individual exception in Section 7701(b)(3)(D)(i) applies for purposes of this first-year election provision but says nothing about the other exceptions that the regulations say also apply for this purpose. Given the Treasury's broad regulatory authority under Section 7701(b), see, e.g., IRC § 7701(b)(11), and the courts' reluctance to invalidate Treasury regulations, however, these regulations would likely withstand legal challenge. Further, the regulations represent a very sensible interpretation of the statute.212.5 This example is based on Treas. Reg. § 301.7701(b)-4(d), Exs. 1, 2.212.6 This example is based on Treas. Reg. § 301.7701(b)-4(d), Ex. 6.212.7 Treas. Reg. § 301.7701(b)-4(c)(3)(v)(A).212.8 Treas. Reg. §§ 301.7701(b)-4(c)(3)(v)(A), 301.7701(b)-4(c)(3)(v)(C).212.9 Treas. Reg. § 301.7701(b)-4(c)(3)(v)(A) (last sentence).212.10 Treas. Reg. § 301.7701(b)-4(c)(3)(v)(A).212.11 Treas. Reg. § 301.7701(b)-4(c)(3)(v)(A).212.12 Treas. Reg. § 301.7701(b)-4(c)(3)(v)(A).212.13 Treas. Reg. § 301.7701(b)-4(c)(3)(v)(B). For this purpose, Treas. Reg. § 301.7701(b)-4(c)(3)(v)(B) defines “dependent child” with reference to Sections 152(a)(1) and 152(a)(2), without regard to Section 152(b)(3).212.14 Treas. Reg. § 301.7701(b)-4(c)(3)(v)(B).212.15 Treas. Reg. § 301.7701(b)-4(c)(3)(v)(B).212.16 Treas. Reg. § 301.7701(b)-4(c)(3)(v)(B).212.17 Treas. Reg. § 301.7701(b)-4(c)(3)(vi)(A).212.18 Treas. Reg. § 301.7701(b)-4(c)(3)(vi)(B). For example, the regulations treat an individual who requests an extension of time to file the individual's income tax return for the election year until a reasonable period after the individual has met the substantial-presence test for the following year as having taken significant affirmative steps to comply with the requirement that the individual pay tax determined as if the individual were a nonresident alien if the individual pays with

the extension application at least 90 percent of the tax the individual actually owed for the election year computed as if the individual were a nonresident alien throughout the election year. Id.213 IRC § 7701(b)(2)(A); Prop. Reg. § 301.7701(b)-4(a). Prop. Reg. § 301.7701(b)-4(a) is now Treas. Reg. § 301.7701(b)-4(a).214 IRC § 7701(b)(2)(B); Prop. Reg. § 301.7701(b)-4(b). Prop. Reg. § 301.7701(b)-4(b) is now Treas. Reg. § 301.7701(b)-4(b).214.1 American Jobs Creation Act of 2004, § 804(b). This provision was effective for individuals who expatriated after June 3, 2004. Id. at § 804(f). The Gulf Opportunity Zone Act of 2005, § 403(v)(2), amended former Section 7701(n). This amendment was effective as if it had been included in the 2004 Jobs Act provision to which it relates and, thus, applied to individuals who expatriate after June 3, 2004.214.2 IRC § 7701(n)(2)(A), as amended by the Gulf Opportunity Zone Act of 2005, § 403(v)(2). The amendment made by the 2005 legislation was effective as if it had been included in the 2004 Jobs Act provision to which it relates and, thus, applied to individuals who expatriate after June 3, 2004.214.3 IRC § 7701(n)(2)(B), as amended by the Gulf Opportunity Zone Act of 2005, § 403(v)(2). The amendment made by the 2005 legislation was effective as if it had been included in the 2004 Jobs Act provision to which it relates and, thus, applied to individuals who expatriate after June 3, 2004. Regarding the requirements of Section 6039G generally, see ¶ C1.10[1A].214.4 Heroes Earnings Assistance and Relief Tax Act of 2008, § 301(a).214.5 Heroes Earnings Assistance and Relief Tax Act of 2008, § 301(g)(1).214.6 See ¶ C1.10[1B].215 See infra ¶ B1.03.216 Section 877 alone may apply to a U.S. citizen that gives up U.S. citizenship. By contrast, Section 7701(b)(10) applies the principles of Section 877 to an alien that ceases to be a U.S. resident. Under a change made by the Health Insurance Portability and Accountability Act of 1996, Section 877 may apply to certain long-term permanent resident aliens whose U.S. residency is terminated. See IRC § 877(e). Regarding taxation of former U.S. citizens and long-term permanent aliens under Section 877 itself, see generally ¶ C1.10 and this supplement.Unlike Section 877, Section 7701(b)(10) does not depend on the taxpayer's having a tax avoidance purpose. Treas. Reg. § 301.7701(b)-5(a).217 Treas. Reg. § 301.7701(b)-5(a)(1); see IRC § 7701(b)(10)(A) (which does not contain any stated requirement that the three consecutive years start after 1984).217.1 Treas. Reg. § 301.7701(b)-5(a)(2). This requirement was added by the Treasury in the regulations since Section 7701(b)(10)(A) contains no such requirement.

218 IRC § 7701(b)(10)(B); Treas. Reg. § 301.7701(b)-5(a)(3). An alien taxed as a nonresident alien under Treas. Reg. § 301.7701(b)-7(a)(1) meets this requirement. Treas. Reg. § 301.7701(b)-5(a)(3).219 IRC § 7701(b)(10)(B); Treas. Reg. § 301.7701(b)-5(a)(4).220 IRC § 7701(b)(10).221 IRC § 7701(b)(10) (last sentence); Treas. Reg. § 301.7701(b)-5(b). Regarding the tax imposed on nonresident aliens in Section 871, see generally Chapter C1.222 This example is based on Treas. Reg. § 301.7701(b)-5(c), Ex.223 The words of Section 7701(b)(10) alone might lead to the conclusion that X does not meet the initial residency period requirement. The words “period which includes at least 3 consecutive calendar years” would seem to describe a period that includes three full calendar years. Treas. Reg. § 301.7701(b)-5(a), however, provides that part of a calendar year may suffice if it includes at least 183 days during the year.223.1 IRC § 877(e), added by the Health Insurance Portability and Accountability Act of 1996, § 511(f)(1). This provision was effective for long-term U.S. residents with respect to whom an event described in Section 877(e)(1)(A) or Section 877(e)(1)(B) occurred on or after February 6, 1995. Health Insurance Portability and Accountability Act of 1996, § 511(g)(1).223.2 American Jobs Creation Act of 2004, § 804. These changes were effective for individuals who expatriated after June 3, 2004. Id. at § 804(f).223.2a Heroes Earnings Assistance and Relief Tax Act of 2008, § 301(a). Section 877A applies to any individual whose expatriation date (as defined in Section 877A(g)(3)) is on or after the date of enactment of the 2008 legislation (June 17, 2008). Heroes Earnings Assistance and Relief Tax Act of 2008, § 301(g)(1).223.3 See ¶ C1.10.224 Treas. Reg. § 301.7701(b)-7(a)(2).225 Treas. Reg. § 301.7701(b)-7(a)(1). For examples, see Treas. Reg. § 301.7701(b)-7(e), Exs. 1–4; Prop. Reg. § 301.7701(b)-7(e), Ex. 5.226 Treas. Reg. § 301.7701(b)-7(a)(1).227 Treas. Reg. § 301.7701(b)-7(a)(3). For example, the individual is treated as a U.S. resident for purposes of determining whether a foreign corporation is a controlled foreign corporation under Section 957 or a foreign personal holding company under Section 552. Id. See also Treas. Reg. § 301.7701(b)-7(e), Ex. 1. Further, the application of the treaty residency rules for purposes of determining the dual resident taxpayer's residence for treaty purposes pursuant to Treas. Reg. §

301.7701(b)-7(a)(2) does not affect the taxpayer's residency time periods under Treas. Reg. § 301.7701(b)-4. Treas. Reg. § 301.7701(b)-7(a)(3).227.1 See INTL-121-90, 1992-1 CB 1198, 1201, containing Prop. Reg. § 301.7701(b)-7(a)(4), which, if adopted, would be generally effective for taxable years of S corporations starting on or after July 27, 1992, Prop. Reg. § 301.7701(b)-7(a)(4)(v).228 Treas. Reg. § 301.7701(b)-7(b). These filing requirements in the regulations apply to taxable years starting after 1991. Treas. Reg. § 301.7701(b)-9(b)(4).229 Treas. Reg. § 301.7701(b)-7(b). The required contents of the statement are described in Treas. Reg. § 301.7701(b)-7(c), as amended by TD 8733, 1997-2 CB 254. The Service has issued revised final regulations containing certain requirements for controlled foreign corporation shareholders. Treas. Reg. § 301.7701(b)-7(c)(2). The Service also has issued proposed regulations containing certain requirements for S corporation shareholders. See INTL-121-90, 1992-1 CB 1198, 1202, containing Prop. Reg. §§ 301.7701(b)-7(c)(3) and 301.7701(b)-7(e), Ex. 5.The Service has developed Form 8833 for use by taxpayers to make the disclosure required by Treas. Reg. § 301.7701(b)-7. See Announcement 93-63, 1993-16 IRB 11 (announcing availability of new Form 8833 for use by taxpayers in making treaty-based return position disclosures required by Section 6114 and for use by dual resident taxpayers to make the disclosure required by Treas. Reg. § 301.7701(b)-7).230 Treas. Reg. § 301.7701(b)-7(b).231 Treas. Reg. § 301.7701(b)-7(b).232 Treas. Reg. § 301.7701(b)-7(d). Regarding the disclosure requirements in Section 6114 generally, see ¶ C4.22.233 Treas. Reg. § 301.7701(b)-7(d). Regarding the penalties in Section 6712 generally, see ¶ C4.22[6].234 IRC § 7701(b)(8); Prop. Reg. § 301.7701(b)-8. Prop. Reg. § 301.7701(b)-8 is now Treas. Reg. § 301.7701(b)-8. These procedural requirements in the regulations apply to taxable years starting after 1991. Treas. Reg. § 301.7701(b)-9(b)(4). In TD 8733, 1997-2 CB 254, the Service made certain revisions to these regulations, effective for tax returns due after December 15, 1997.The Service has developed Form 8840 for use by alien individuals who claim they meet the closer connection exception to the substantial presence test. See Announcement 94-19, 1994-5 IRB 52. In Notice 2006-73, 2006-2 CB 339, the Service made interim revisions to Form 8840.

The Service also has developed Form 8843 for use by alien individuals who claim they may exclude days of presence in the United States for purposes of the substantial presence test because they (1) were a teacher, trainee, student, or professional athlete, or (2) had a medical condition or medical problem described

in Treas. Reg. § 301.7701(b)-3(c). See Announcement 94-19, 1994-5 IRB 52.

235 Prop. Reg. § 301.7701(b)-8(d). Prop. Reg. § 301.7701(b)-8(d) is now Treas. Reg. § 301.7701(b)-8(d).236 See, e.g., Barbados art. 20(2); Hungary art. 18(2); Jamaica art. 21(3); Malta art. 22(2).237 IRC § 6013(a); Treas. Reg. § 1.6013-1(b).238 IRC §§ 6013(g)(1), 6013(h)(1);Treas. Reg. §§ 1.871-1(a), 1.6013-6(a)(1), 1.6013-7(a)(1). Chapter 1 of the Code consists of Sections 1–1399. Chapter 5 of the Code consists of Sections 1491–1494. Chapter 24 of the Code consists of Sections 3401–3406. The regulations provide that the election also applies for purposes of Sections 6012, 6013, 6072, and 6091. Treas. Reg. §§ 1.6013-6(a)(1), 1.6013-7(a)(1). The Service has held, however, that a nonresident alien's election to file a joint return under Section 6013(g) is not a waiver of the privileges provided by Section 893(a) and by Section 247(b) of the Immigration and Nationality Act. Rev. Rul. 79-246, 1979-2 CB 392.239 IRC §§ 6013(g)(3), 6013(h)(1).240 See Treas. Reg. § 1.871-1(a) (last three sentences). See also Treas. Reg. § 1.6013-6(c)(1), Exs. 1–4; Rev. Rul. 80-170, 1980-1 CB 285 (nonresident alien electing to be treated as a U.S. resident under Section 6013(g) was eligible for exclusion under predecessors of current Section 911 if alien otherwise met requirements of Section 911).241 Treas. Reg. §§ 1.1(b), 1.876-1. Both of these regulations were issued before the Tax Reform Act of 1986 expanded Section 876 to cover bona fide residents of American Samoa, Guam, and the Northern Mariana Islands. Regarding Section 876 generally, see ¶¶ D1.02[2], D1.08[2].242 See ¶ D1.02[3]. The American Jobs Creation Act of 2004, § 908(a), added Section 937(a) to the Code, which provides a uniform, statutory definition of “bona fide residency” in Puerto Rico and other specified U.S. possessions for purposes of Section 876 and other specified Code sections. See ¶¶ D1.02[5], D1.04[2], D1.08[2][d].243 See ¶ D1.08[2][b]. The American Jobs Creation Act of 2004, § 908(a), added Section 937(a) to the Code, which provides a uniform, statutory definition of “bona fide residency” in Guam, American Samoa, and the Northern Mariana Islands (and Puerto Rico) for purposes of Section 876 and other specified Code sections. See ¶¶ D1.02[5], D1.04[2], D1.08[2][d], .244 See ¶ D1.08[1].245 Treas. Reg. § 1.871-13.246

Treas. Reg. § 1.871-13(a).247 Treas. Reg. § 1.871-13(a)(1).248 Treas. Reg. § 1.871-13(d)(2); see Rev. Rul. 73-62, 1973-1 CB 56.249 Rev. Rul. 83-90, 1983-1 CB 15 (involving zero bracket amount of pre-1986 Act law; Service stated that it would not follow Nico v. Comm'r, 565 F2d 1234 (2d Cir. 1977) ; Rev. Rul. 74-239, 1974-1 CB 372 (nondiscrimination clause of Canadian tax treaty did not prevent United States from denying Canadian citizen, who was dual status taxpayer, the benefits of using head of household tax rate schedule, optional tax tables, standard deduction, or joint return); Rev. Rul. 73-62, 1973-1 CB 56 (alien whose status changed during taxable year from nonresident alien engaged in U.S. trade or business to resident alien could claim additional exemptions limited to taxpayer's earnings while resident alien, but could not use optional tax table or claim any standard deduction); Rev. Rul. 64-60, 1964-1 CB (Part 1) 84 (disallowing any standard deduction for resident alien taxpayer who became nonresident alien before end of year); Donald G. Baddock, P-H TC Memo. ¶ 68,055 (1968) (disallowed dual status taxpayer's standard deduction). See also Treas. Reg. § 1.871-13(e), Exs. 1–3, which compute a dual status taxpayer's federal income tax liability without taking into account any standard deduction.250 Rev. Rul. 83-90, 1983-1 CB 15, 16 (involving zero bracket amount of pre-1986 Act law).251 Nico v. Comm'r, 565 F2d 1234 (2d Cir. 1977), rev'g on this issue 67 TC 647 .252 Jagdish Narain, P-H TC Memo. ¶ 83,701 (1983) (resident aliens' deduction for expenses of moving to India where taxpayers became nonresident aliens was disallowed because expenses were allocable to income that was not subject to U.S. tax by reason of Sections 862 and 872, i.e., foreign-source income earned in India after taxpayers became nonresident aliens).253 Treas. Reg. § 301.7701-2.254 For discussions of the partnership versus corporation classification issue, see B. Bittker & J. Eustice, Federal Income Taxation of Corporations and Shareholders ch. 2 (Warren, Gorham & Lamont, Inc., 7th ed. 2000); 1 W. McKee, W. Nelson & R. Whitmire, Federal Taxation of Partnerships and Partners ¶ 3.06 (Warren, Gorham & Lamont, Inc., 2d ed. 1990).255 However, the regulations under Section 1503(d)(3) may treat a partnership as a domestic corporation for purposes of the rules on dual consolidated losses. See Temp. Reg. § 1.1503-2T(d), discussed infra ¶ B1.05.256 See, e.g., Rev. Rul. 68-521, 1968-2 CB 600 (credit union established under U.S. Air Force regulations was organized under laws of United States and, hence, was domestic corporation within meaning of Section 7701(a)(4)).257 Section 7701(a)(10) provides that the term “state” includes the District of Columbia

when necessary to carry out the provisions of the Code. Treas. Reg. § 301.7701-5 mentions that a domestic corporation may be formed in the District of Columbia.258 See, e.g., Rev. Rul. 82-114, 1982-1 CB 104 (Guamanian corporations were “foreign corporations” for purposes of Sections 897 and 6039C). See generally ¶¶ D1.03, D1.06, D1.09 . By contrast, Treas. Reg. § 301.7701-5 provides that corporations formed in the Territories of Alaska and Hawaii before they became states were domestic corporations.259 See ¶ B2.05[2][a].260 IRC § 1504(d). Subtitle A consists of Sections 1–1564.261 See ¶ B2.09.262 IRC § 269B(a).263 See ¶ C3.06[3].264 Section 897(i)(1) provides that the effect of the Section 897(i) election is to treat the electing foreign corporation as a domestic corporation “for purposes of [Section 897], section 1445, and section 6039C.” Further, Treas. Reg. § 1.897-3(1) states: “A foreign corporation that makes an election under section 897(i) shall not be treated as a domestic corporation for purposes of any other provision of the Code or regulations, except to the extent that it is required to consent to such treatment as a condition to making the election.” See also Rev. Rul. 89-130, 1989-2 CB 117 (stating that Section 897(i) treats a foreign corporation as a domestic corporation only for the limited purpose of that section and not for purposes of Section 856(a)(3)). Regarding the Section 897(i) election generally, see ¶ C3.06[3].265 Regarding the general taxation of foreign corporations, see ¶¶ C1.03, C1.04, C1.05.266 See IRC § 953(d), discussed at ¶ B3.07[5].267 IRC § 953(d)(1).