U.S. District Court: Green Card Holders May Be Able To Rely On Tax ”Treaty Escape Hatch” To Avoid Mr. FBAR

February 23, 2023 - Participants include:

 

Virginia La Torre Jeker - @VLJeker

John Richardson - @Expatriationlaw

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The Significance Of The Aroeste FBAR case:

This decision from the District Court provides support for the principle that individuals who are nonresidents under the terms of a U.S. tax treaty may NOT (in certain circumstances) be required to file an FBAR.

Factual background:

Mr. Aroeste was a Green Card holder who was assessed with approximately three million dollars in tax and information return penalties. The bulk of the three million was for the failure to file information returns (including Mr. FBAR).

One Of The Legal Issues:

On February 13, 2023 in the case of "Aroeste v. U.S., No. 22-cv-682-AJB-KSC", in the United States District Court for the Southern District Of California, the Hon. Karen Crawford addressed the following question:

 

1. How is Alberto Aroeste’s status under the United States – Mexico tax treaty germane to the issue of whether Mr. Aroeste was required to file the FBAR reports at issue in this case?

 

She concluded that:

"(5) Therefore, any person allowed to permanently reside in the United States by virtue of US immigration laws must file an FBAR unless that person is entitled to be treated as a resident of a foreign country under a tax treaty."

The complete chain of reasoning is as follows:

The upshot of this statutory and regulatory framework applicable to this action, in which tax treaties provide a potential escape hatch that excuses certain “United States persons” from filing FBARs, can be expressed as a 5-step process:

(1) Under 26 U.S.C. § 7701(b)(6), anyone allowed to permanently reside within the United States by virtue of US immigration laws is a “lawful permanent resident” for tax purposes unless an applicable tax treaty allows that person to be treated as a resident of a foreign country for tax purposes only;

(2) Under 26 U.S.C. § 7701(b)(1)(A)(i), any “lawful permanent resident” is a “resident alien”;

(3) Under 31 C.F.R. § 1010.350(b)(2), any “resident alien” is a “resident of the United States”;

(4) Under 31 C.F.R. § 1010.350(b), Any “resident of the United States” is a “United States person” required to file an FBAR;

(5) Therefore, any person allowed to permanently reside in the United States by virtue of US immigration laws must file an FBAR unless that person is entitled to be treated as a resident of a foreign country under a tax treaty

I will write a more extensive blog post about this in the next few days.