Final regulations define resident alien.

• Author: Gajek, Marion

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

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

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

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

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

* The final...