In Li v. Commr., T.C. Summary Opinion 2016-49, the Tax Court held that a Canadian citizen who filed a Form 1040 for 2012 could not claim an education credit for that year because his residency starting date was February 22, 2012. The education credit could not be claimed if he was a nonresident alien for any portion of the taxable year.
Would you say that the taxpayer could have argued he should be able to be treated as a U.S. resident for the entire year under the nondiscrimination clause of the Canada-U.S. Income Tax Treaty?
http://ustaxcourt.gov/UstcInOp/OpinionV ... x?ID=10907
Was the Tax Court Wrong? (Li v. Commr.)
Moderator: Mark T Serbinski CA CPA
Yes, but the taxpayer (and his lawyer) neglected to offer this as an argument. The clause clearly states that a Cdn shall not be subject to more burdensome requirements than a US national "in the same circumstances".
Certainly, a US citizen, studying in Canada and then moving to US would be allowed to claim these education credits. He should have used this argument. But since the court doesn't even mention the treaty, and the burden was on the taxpayer, he obviously did not use it.
His loss.
Certainly, a US citizen, studying in Canada and then moving to US would be allowed to claim these education credits. He should have used this argument. But since the court doesn't even mention the treaty, and the burden was on the taxpayer, he obviously did not use it.
His loss.
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Thanks for the reply. I think we have discussed this in the past, and I have tentatively disagreed.
Today I took a closer look at this issue, and I continue to respectfully disagree that the taxpayer in Li’s circumstances would be successful in claiming to be a U.S. resident for the entire year under Article XXV (Nondiscrimination) of the Canada-U.S. Income Tax Treaty.
I think that the “same circumstances†in the Li case would be where a nonresident alien became a U.S. citizen on February 22, 2012. In this circumstance, the taxpayer would be a nonresident alien up through February 21, 2012. Since the taxpayer would be treated as a nonresident alien for a part of the year, he/she would not be able to claim the education credit. Therefore, I see no discrimination, and I do not see how the nondiscrimination clause of the treaty would apply.
I recognize that it would be unusual for an individual to be a nonresident alien before becoming a U.S. citizen. However, it can (and does) occur.
I respect your broad knowledge and experience in this area. It is just this one small item that you and I disagree on.
Today I took a closer look at this issue, and I continue to respectfully disagree that the taxpayer in Li’s circumstances would be successful in claiming to be a U.S. resident for the entire year under Article XXV (Nondiscrimination) of the Canada-U.S. Income Tax Treaty.
I think that the “same circumstances†in the Li case would be where a nonresident alien became a U.S. citizen on February 22, 2012. In this circumstance, the taxpayer would be a nonresident alien up through February 21, 2012. Since the taxpayer would be treated as a nonresident alien for a part of the year, he/she would not be able to claim the education credit. Therefore, I see no discrimination, and I do not see how the nondiscrimination clause of the treaty would apply.
I recognize that it would be unusual for an individual to be a nonresident alien before becoming a U.S. citizen. However, it can (and does) occur.
I respect your broad knowledge and experience in this area. It is just this one small item that you and I disagree on.
While the notion that a Cdn national (who is not a US national) is not taxable on world income is an important distinction when determining "circumstance" in this case, the taxpayer WAS taxable on world income, thus should have been afforded -- by treaty -- all the same advantages of a US citizen.
btw, your argument would mean that the taxpayer should not have been allowed to file a "straight" 1040, and he was. and no Cdn living in Canada with US children would be permitted to filer a 1040 to collect the child tax credit -- which they are.
But -- and I think this is the argument you are successfully making -- since 25A does specifically mention that these credits (ONLY these credits) are not available to a non-resident unless he make the specific election to file jointly with his US taxpayer spouse (which he did not), then I can see your argument that even a person who magically became a US citizen during the year would also be denied this SPECIFIC claim. so there would be no discrimination.
I would have liked the judge to actually express this, but alas the petitioned seems to have been poorly represented, in my opinion.
It really doesn't matter. The treaty was not even considered, and it should have been.
btw, your argument would mean that the taxpayer should not have been allowed to file a "straight" 1040, and he was. and no Cdn living in Canada with US children would be permitted to filer a 1040 to collect the child tax credit -- which they are.
But -- and I think this is the argument you are successfully making -- since 25A does specifically mention that these credits (ONLY these credits) are not available to a non-resident unless he make the specific election to file jointly with his US taxpayer spouse (which he did not), then I can see your argument that even a person who magically became a US citizen during the year would also be denied this SPECIFIC claim. so there would be no discrimination.
I would have liked the judge to actually express this, but alas the petitioned seems to have been poorly represented, in my opinion.
It really doesn't matter. The treaty was not even considered, and it should have been.
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"the taxpayer WAS taxable on world income"
I did not see anything in the case suggesting that the taxpayer was taxable on worldwide income prior to February 22nd, while he was a nonresident alien.
"your argument would mean that the taxpayer should not have been allowed to file a "straight" 1040, and he was."
There was no issue before the court about "straight" or "dual status" tax returns. I don't think that the failure of the court to address an issue not presented to it is support that the treaty nondiscrimination provision allowed a "straight" 1040, especially when the tax may have been roughly the same under both returns, with the exception of the education credit.
"and no Cdn living in Canada with US children would be permitted to filer a 1040 to collect the child tax credit -- which they are."
I am not familiar with this rule. I know that a child tax credit can be claimed on a 1040NR (Line 49). Could you point me to the authority that says a Canadian living in Canada with US children can file a 1040 to collect the child tax credit?
I did not see anything in the case suggesting that the taxpayer was taxable on worldwide income prior to February 22nd, while he was a nonresident alien.
"your argument would mean that the taxpayer should not have been allowed to file a "straight" 1040, and he was."
There was no issue before the court about "straight" or "dual status" tax returns. I don't think that the failure of the court to address an issue not presented to it is support that the treaty nondiscrimination provision allowed a "straight" 1040, especially when the tax may have been roughly the same under both returns, with the exception of the education credit.
"and no Cdn living in Canada with US children would be permitted to filer a 1040 to collect the child tax credit -- which they are."
I am not familiar with this rule. I know that a child tax credit can be claimed on a 1040NR (Line 49). Could you point me to the authority that says a Canadian living in Canada with US children can file a 1040 to collect the child tax credit?
What I was saying is that by the argument the IRS made, they should not have accepyted a non-dual-status 1040, and all that goes along with it.
But bu both the IRA and the taxpayer consenting to filing and accepting a 1040 without dual-status stipulation, the taxpayer was indeed subject to world incme taxation on his ENTIRE income for the ENTIRE year, making his circumstances like any other US taxpayer.
He didn't properly argue this.
Unless the situation involves you , I'm not going to engage in finding "authority" for nay of this. I'm not paid enough for mental exercises.
But bu both the IRA and the taxpayer consenting to filing and accepting a 1040 without dual-status stipulation, the taxpayer was indeed subject to world incme taxation on his ENTIRE income for the ENTIRE year, making his circumstances like any other US taxpayer.
He didn't properly argue this.
Unless the situation involves you , I'm not going to engage in finding "authority" for nay of this. I'm not paid enough for mental exercises.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
The IRS clearly did not accept the "non-dual-status 1040, and all that goes along with it." The IRS argued, and the court held, that the individual was a nonresident alien for a portion of the year. The education credits with non-dual-status 1040 were not allowed.
NRAs are not subject to U.S. tax on their worldwide income, and there is nothing in the case to suggest that this NRA was subject to U.S. tax on his worldwide income while he was an NRA.
Virtually all U.S. income tax treaties have similar nondiscrimination provisions. Under your theory, anyone from any country that has an income tax treaty with the U.S. could file a 1040 any time they would like.
NRAs are not subject to U.S. tax on their worldwide income, and there is nothing in the case to suggest that this NRA was subject to U.S. tax on his worldwide income while he was an NRA.
Virtually all U.S. income tax treaties have similar nondiscrimination provisions. Under your theory, anyone from any country that has an income tax treaty with the U.S. could file a 1040 any time they would like.
Yes, that is the case.
The notes on the case are silent as to whether they accepted a standard deduction, for example (they should not have, if sticking to the regs).
As I said, I believe that the reason that SPECIFICALLY the education credits were denied is because of the SPECIFIC language in that section of the code -- and your argument that this applied to instant US citizens so did not discriminate on that basis was a sound one.
The notes on the case are silent as to whether they accepted a standard deduction, for example (they should not have, if sticking to the regs).
As I said, I believe that the reason that SPECIFICALLY the education credits were denied is because of the SPECIFIC language in that section of the code -- and your argument that this applied to instant US citizens so did not discriminate on that basis was a sound one.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Yes, that is the case.
The notes on the case are silent as to whether they accepted a standard deduction, for example (they should not have, if sticking to the regs).
As I said, I believe that the reason that SPECIFICALLY the education credits were denied is because of the SPECIFIC language in that section of the code -- and your argument that this applied to instant US citizens so did not discriminate on that basis was a sound one.
The issue is "taxing regime'. US is indeed allowed to apply a different taxing regime to non-US citizens living outside US (at least hose living in a third country, other than the 2 covered by the tax treaty), however this should be accomplished by the use of 1040NR. If they accept a 1040, then they are tacitly approving the same rules for both taxpayers.
The notes on the case are silent as to whether they accepted a standard deduction, for example (they should not have, if sticking to the regs).
As I said, I believe that the reason that SPECIFICALLY the education credits were denied is because of the SPECIFIC language in that section of the code -- and your argument that this applied to instant US citizens so did not discriminate on that basis was a sound one.
The issue is "taxing regime'. US is indeed allowed to apply a different taxing regime to non-US citizens living outside US (at least hose living in a third country, other than the 2 covered by the tax treaty), however this should be accomplished by the use of 1040NR. If they accept a 1040, then they are tacitly approving the same rules for both taxpayers.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing