Nonresident alien's deductions on return filed after "terminal date."

• Author: Burbach, Julie

The Tax Court, in Guillermo Baez Espinosa, 107 TC No. 9 (1996), held that a nonresident alien was not entitled to deductions under Sec. 874(a), because he filed his return only after the IRS had issued two filing requests and prepared a substitute return. The case illustrates the necessity for foreign nationals to file U.S. tax returns by the last chance deadline in order to claim deductions.

Guillermo Baez Espinosa, a nonresident alien, owned two rental properties located in Austin, Texas. During the years 1987 through 1991, the rental property had annual rental losses. Espinosa failed to file tax returns for those years. In November 1992, the Service notified him that it would prepare substitute returns for him if he did not file the returns in two weeks. Espinosa did not file the returns and the IRS sent a second request. Espinosa again did not file his returns and in February 1993 the Service notified Espinosa that it had prepared substitute returns (which were computed without the benefit of deductions).

Espinosa filed his 1987 through 1991 returns in October 1993, and elected to treat the rental income as effectively connected with a U.S. trade or business under Sec 871(d). Espinosa claimed deductions against his rental income and reported losses for each year. The IRS later issued a notice of deficiency, determining that, although Espinosa had made an election under Sec. 871(d), he was not entitled to the benefit of deductions because he had not timely filed his returns. The Service determined that Espinosa's gross rental income was subject to tax at graduated rates and that Espinosa was liable for additions to tax for failure to file tax returns pursuant to Sec. 6651(a)(1) and for failure to pay estimated tax pursuant to Sec. 6654.

If an election is made to treat rental income as effectively connected, the tax is computed pursuant to Sec. 871(b), on net rental income at graduated rates, provided the taxpayer has filed a return as required by Sec. 874(a). Sec. 874(a) provides that "a nonresident alien individual shall receive the benefit of the deductions and credits allowed to him in this subtitle only by filing or causing to be filed with the Secretary a true and accurate return, in the manner prescribed in subtitle F (section 6001 and following, relating to procedure and administration), including therein all the information which the Secretary may deem necessary for the calculation of such deductions and credits." Although...