Expert Opinion: On Legal Tax Question

2010 Court Case

This case tells me she doesn't qualify under the treaty

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Tax Court Denies Treaty-Based Exemption for Foreign Teachers' Wages

The Tax Court recently held in a group of related cases that nonresident alien teachers were not entitled to a treaty-based income exemption for their wages earned in the United States as participants in an exchange teacher program. In each case, the Tax Court concluded that the teachers did not qualify for the exemption provided under Article 21 of the of the U.S.-Philippines income tax convention (Convention With Respect to Taxes on Income, U.S.--Phil., art. 21, Oct. 1, 1976, 34 U.S.T. 1277, 1976 U.S.T. LEXIS 487) based upon the facts and circumstances. The initial case in the group was Santos v. Commissioner, 2010 U.S. Tax Ct. LEXIS 38 (T.C. Oct. 18, 2010). [See also Ucol-Cobaria v. Comm'r, 2010 Tax Ct. Summary LEXIS 179 (T.C. 2010); Pagarigan v. Comm'r, 2010 Tax Ct. Summary LEXIS 185 (T.C. 2010); Samaco v. Comm'r, 2010 Tax Ct. Summary LEXIS 184 (T.C. 2010); Abiog v. Comm'r, 2010 Tax Ct. Summary LEXIS 186 (T.C. 2010" target="_blank" rel="nofollow noreferrer">. In Santos and the other cases, the taxpayers came to the United States as part of an international teacher exchange program sponsored and regulated by the U.S. Department of State and operated by the Amity Institute, a non-profit organization. Santos, 2010 U.S. Tax Ct. LEXIS 38, * at 2. Teachers accepted into the program are expected by Amity to teach in the United States for a period of three years. Santos, 2010 U.S. Tax Ct. LEXIS 38, * at 2. The taxpayer in Santos was hired by a school district in California and signed a one-year contract for the 2004-2005 school year. After the expiration of that contract, the taxpayer signed a second one-year contract for the 2005-2006 school year, and prior to the expiration of the second contract, the taxpayer then signed a one-year contract for the 2006-2007 school year. Santos, 2010 U.S. Tax Ct. LEXIS 38, * at 9. During the period of her employment, the taxpayer worked under a J-1 visa sponsored by the Amity Institute. Santos, 2010 U.S. Tax Ct. LEXIS 38, * at 10. As part of her 2005 and 2006 Federal income tax returns, the taxpayer requested refunds claiming that her income during those years was exempt from taxation under article 21 of the convention. Santos, 2010 U.S. Tax Ct. LEXIS 38, * at 13, 14. The IRS issued the taxpayer notices of deficiency for the 2005 and 2006 tax years on the basis that she did not qualify for the exemption under the convention. Santos, 2010 U.S. Tax Ct. LEXIS 38, * at 14.

The Tax Court agreed, concluding that the taxpayer did not qualify for the exemption because she had failed to meet one of the five requirements for the exemption under the convention. The court stated that under article 21, the taxpayer had to meet the following requirements in order for the exemption to apply: "(1) She was a resident of the Philippines before coming to the United States; (2) she was invited by the Government or a recognized educational institution within the United States; (3) she was invited for a period not expected to exceed 2 years; (4) she was invited for the purpose of teaching or engaging in research at the recognized educational institution; and (5) she did in fact come to the United States primarily to carry out the purpose of the invitation." Santos, 2010 U.S. Tax Ct. LEXIS 38,* at 17. The court held that the taxpayer had established all of the requirements except the requirement that she was invited "for a period not expected to exceed 2 years". Santos, 2010 U.S. Tax Ct. LEXIS 38,* at 18. The court determined that the taxpayer was a nonresident alien individual under IRC Section 7701(b) [See Lexis TAFCR Explanation IRC § 7701(b); Lexis TAFT § 4B:1.07 (Substantial Presence Test" target="_blank" rel="nofollow noreferrer"> and that, generally, under IRC Section 871(b), a nonresident alien individual who is engaged in a trade or business within the United States will be taxed on the taxable income effectively connected with that trade or business. Santos, 2010 U.S. Tax Ct. LEXIS 38,* at 15. [See Lexis TAFCR Explanation IRC § 871(b); Lexis TAFT § 4B:2.02 (Taxation of Individuals and Partnerships" target="_blank" rel="nofollow noreferrer">.

The court further determined that the performance of personal services within the United States at any time during the taxable year was generally included under the phrase "trade or business within the United States" under IRC Section 864(b). Santos, 2010 U.S. Tax Ct. LEXIS 38,* at 15. [See Lexis TAFCR Explanation IRC § 864(b); Lexis TAFT § 4B:6.03 ("Trade or Business" Defined" target="_blank" rel="nofollow noreferrer"> and that under Section 1.864-4(c)(6)(ii) "[c]ompensation paid to a nonresident alien in exchange for the performance of services in the United States constitutes income that is effectively connected to the conduct of a trade or business of the United States." Santos, 2010 U.S. Tax Ct. LEXIS 38,* at 15. [See Lexis TAFT § 4B:6.02 (The Concept of "Effectively Connected"" target="_blank" rel="nofollow noreferrer">. The court concluded that based on these provisions, the taxpayer's wages would typically be considered taxable income but that under IRC Section 894(a), "the provisions of the Code will be applied to any taxpayer with due regard to any treaty obligations of the United States that apply" and that, therefore, the taxpayer's income could be "altered by treaty provisions". Santos, 2010 U.S. Tax Ct. LEXIS 38,* at 15, 16. [See Lexis TAFT § 4B:6.02]. The court considered the IRS's contention that the taxpayer had failed to establish that she was invited to come to the United States "for a period not expected to exceed 2 years" and that relevant to deciding this issue was the expectation of the invitor, and the court considered the taxpayer's contention that the only relevant expectation was that of the invitee, the taxpayer, which could be demonstrated through her testimony and the circumstances of her situation. See Santos, 2010 U.S. Tax Ct. LEXIS 38,* at 18, 19. The court concluded that the language of the convention was ambiguous with respect to the issue of whose expectation was relevant and proceeded to look at the facts and circumstances of the case in order to "make an objective determination" as to whether the taxpayer was invited to come to the United States "for a period not expected to exceed 2 years". See Santos, 2010 U.S. Tax Ct. LEXIS 38,* at 19.

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My thinking is the woman at H&R block was wrong and my girlfriend should have never fallen under the treaty because of requirement 3. (Over 200 Teachers in Baton Rouge were told to file this way) Still, she goes to a tax professional for expert advice and they were wrong. I don't believe the 8833 form was ever properly filled out right or even filled out. I believe she never fell under the treaty anyway. She is one of 4-5 Filipinos going through this mess.

The lady at H&R who signed off on the tax forms in '09 told us to call the IRS and find out what documents were missing. We can't get a call back from the IRS to save our life. We ended up going to a woman (not H&R) that services many Filipinos in Baton Rouge. She tells me that all her returns need to be amended and that she didn't fall under Article 21 because she always intended to stay more than 2 years.

This crap is wearing me out.

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I would have taken issue with this. The fact that the invitor executed a one year teaching contract effectively limited their expectation to the lenghth of the contract as an act of law. There was no guarantee of renewal. Any subsequent contract would have been an alteration of expectation.

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Listen to this, my girlfriend had a 1 year school contract and 1 year visa. The visa was from July 13, 2008 to June 30, 2009 and she was denied when she refiled for her H1 visa extension. She hired a lawyer to appeal the denial and had to go back to the Philipines in January 31, 2010 (20 days) where she recieved a 6 month extension starting February 20, 2010 until July 30, 2010.

She found out that summer that the school board would offer another year of teaching. To her amazement she hired an attorney and received a 3 year extension on her visa. I mean, she honestly believed the gig was up on July 31, 2010 which made just 2 years.

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And for the record, tax court decisions are not always authority for other taxpayers. The IRS ignores them all the time.

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I had no idea but should have figured the IRS gives no fricks about the law

(no message)

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Ive prepared these tax returns before....usually these exemptions last a maximum of five years. Her only hope may be if she paid foreign taxes.

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She never paid taxes in the Philipines since arriving in America.

ETA: Im thinking of going talk to a tax attorney on Monday

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Make sure they're familiar with nonresidents before you spend your time/money

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Talked to a tax attorney that was is not familiar with foreign/ nonresident cases apparently. I use to have a CPA that actually worked at the IRS. That's my next play I guess.

frick me