Article: Who is a U.S. Person for U.S. Tax and Immigration (4/15/14)

Henry P. Bubel, Jenny Longman, Lisa M. Koenig, Nikki Dryden,and Michelle Munoz-Machen, Who is a U.S.Person? Disparities between U.S. tax and immigration law, Tax Planning International Review (March 2014), here.  Highly recommended.

The introduction is (footnotes omitted):

I. The increased importance of defining a U.S. Person, for tax law purposes 

The question of who is a U.S. person has always been relevant for tax purposes because it  determines who is subject to (a) U.S. income, gift and estate tax, (b) filing Foreign Bank Account Reports (FBARs), and (c) the ‘‘exit tax’’ under what is now Section 877A of the Internal Revenue Code (the ‘‘Code’’ or ‘‘I.R.C.’’). The inquiry has become increasingly relevant, however, in the context of the Foreign Account Tax Compliance Act (‘‘FATCA’’), as foreign banks and other financial institutions must make determinations as to the identity of the beneficial owners of accounts. 

Under FATCA, foreign banks, brokerage firms, investment firms, and other ‘‘foreign financial institutions’’ must agree to report certain information on their U.S. account holders or else face withholding on certain payments made from U.S. sources beginning in July 2014. In many cases, the institutions’ own governments (through intergovernmental agreements signed with the United States that implement FATCA) may require the determination in order to report on U.S. accounts. 

In addition, the Department of Justice (‘‘DOJ’’) recently announced a new program under which Swiss banks that are not currently the subject of a DOJ investigation may request a ‘‘Non-Prosecution Agreement’’ or ‘‘Non-Target Letter.’’ In connection with this new program, the Swiss Financial Market Supervisory Authority intends to encourage all Swiss banks to send a letter to all U.S. individual and entity holders of accounts, further begging the question of who is a U.S. person for these purposes.  

As an individual’s immigration status may – but may not always – drive the determination of whether he or she is a U.S. person for tax purposes, this article summarises the various classifications comprising a ‘‘U.S. person’’ under U.S. immigration and tax law. It also provides several examples to illustrate some of the challenges posed by the disparate treatment of citizenship and residency under these different codes of law.