FIRPTA_Non-Resident

							LENTZ & ASSOCIATES, INC.
________________________________________________________________________
Accounting and Tax Services
2509 Cedarwood, Suite #3                                                      P hone: (360) 734-2172
Bellingham, Washington 98225                                                   FAX: (360) 676-4355




       December 14, 2006


       Discussion of Income Tax Withholding under Section 1445 for sales of US Real Estate by Non-
       Resident Aliens.

       When withholding is not required – Person is a US Resident.

       I would like to clarify a situation that is becoming fairly common in our area. This involves a
       sale of property where the seller is most likely not a US Citizen and perhaps is here illegally
       under the US Immigration Laws.

       The IRS rules are all based on code sections, so I will make mention of the code sections but I
       will try to explain this so it is easily readable. In each case a determination has to be made based
       on the facts of that case.

       IRC Section 1445 basically says that withholding is required when the seller or transferor is “a
       foreign person”. A “foreign person” is defined in IRC Section 1.1445-2(b)(2) as “a nonresident
       alien individual, foreign corporation, foreign partnership, foreign trust, or foreign estate, but not
       a resident alien individual.”

       So we have to look at each situation and see if the seller qualifies as a “resident”. It is important
       to note that the rules do not say a person has to be a “legal resident”. In fact, there are cases
       where a person who is in the US illegally, has tried to file as a nonresident and the IRS has
       determined that they have to file as a resident instead. (See Revenue Ruling 81-70 shown below).
       The IRS rules work both ways. If a person is deemed to be a resident, they are taxed by the US
       on their worldwide income. Whether they are here legally or illegally. So the withholding rules
       would apply to them in the same manner. If they are determined to be a resident, then they are
       supposed to report their worldwide income to the US. Whether they in fact do this or not is not
       really your problem. We only need to look at their residency status for the FIRPTA withholding
       purposes.

       The two main rules that determine residency status when a person is not a citizen of the US are:

           1) Green Card Test – An alien is considered a resident if they have been granted the
              privileges of residing permanently in the US as an immigrant in accordance with
              immigration laws. This applies in cases where they have received a “Green Card” which
              is an actual card that says they received the authorization to live in the US. They also
              could be here under one of the VISA programs. If the seller is asserting one of these, then
              you would simply ask for a copy of their Green Card or their VISA as the case may be. In
              both of these instances, they should have a Social Security number.
   2) Substantial Presence Test – This is the most problematic test to apply. The IRS laws say
      that if a person is present in the US for more than a certain number of days, then they will
      be presumed to be a US resident. The IRS uses this to allow tax to be assessed even if
      they are here illegally. So this test also works to determine if they are in fact a resident
      for the FIRPTA withholding tax purposes. This test specifies that a person will be
      considered to be resident of the US if they reside in the US for at least 31 days in the
      current calendar year and for a total of 183 days by counting the number of days in the
      current calendar year, 1/3 of the days in the previous year and 2/3 of the days in the year
      before that. If they are not present in the US for at least 31 days in the current calendar
      year, then they do not qualify as a resident. If they are present in the US for at least 31
      days in the current calendar year, then the rest of the test applies.

So given a scenario where a person sells property and is not a “legal resident” of the US, they
would still qualify as a “Resident” if they meet the substantial presence test. My
recommendation is that if a person meets the substantial presence test, but does not have a green
card or VISA, and does not have proof of citizenship, then you should ask them to sign a
statement that they are a US resident under the substantial presence test. I am including a sample
statement below.

I also think it is important that they have a US social security number. If they do not have a
social security number, then they could have an ITIN, Individual Taxpayer Identification
Number. ITIN’s always start with a “9” but look just like a social security number. Such as 911-
11-1111. The IRS rules say that a person can qualify as a resident, even if they only have an
ITIN. But in this case, I think withholding should still apply unless they can provide a copy of
Form 1040 that they have filed showing proof that they do in fact file as a US Resident.

The exception to this would be if a husband and wife file US returns, the husband has a social
security number, but the wife has a nonresident number (starts with a 9, 911-11-1111). As long
as they file a Form 1040, Joint Income Tax Return, then she has basically made the election to be
treated as a resident. So we would treat both of them as residents and withholding would not
apply.

I have included below several IRS regulations and a revenue ruling discussing these rules. Please
read through these as they give examples and I think will help you learn to determine when
withholding does not apply based on the residency rules.

Please fell free to call to discuss specific cases where you are not sure. This is one of the services
we provide.

Sincerely,


Roy Lentz
Sample Certification:




Section 1445 of the Internal Revenue Code provides that a transferee (buyer) of a U.S. real
property interest must withhold tax if the transferor (seller) is a foreign person. To inform the
transferee (buyer) that withholding of tax is not required upon my disposition of a U.S. real
property interest, I [NAME OF TRANSFEROR], hereby certify the following:

   1. I am not a nonresident alien for purposes of U.S. income taxation;

   2. My U.S. taxpayer identifying number [Social Security Number] is
      ____________________ ; and


   3. My home address is:



I understand that this certification may be disclosed to the Internal Revenue Service by the
transferee and that any false statement I have made here could be punished by fine,
imprisonment, or both.

Under penalties of perjury I declare that I have examined this certification and to the best of my
knowledge and belief it is true, correct, and complete.



Signature


Date
Treasury Regulations

Regs. Sec. 1.871-2. Determining residence of alien individuals.

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 (a) GENERAL. The term "nonresident alien individual" means an individual
whose residence is not within the United States, and who is not a citizen
of the United States. The term includes a nonresident alien fiduciary. For
such purpose the term "fiduciary" shall have the meaning assigned to it by
section 7701(a)(6) and the regulations in part 301 of this chapter
(Regulations on Procedure and Administration). For presumption as to an
alien's nonresidence, see paragraph (b) of Section 1.871-4.


(b) RESIDENCE DEFINED. An alien actually present in the United States who
is not a mere transient or sojourner is a resident of the United States
for purposes of the income tax. Whether he is a transient is determined by
his intentions with regard to the length and nature of his stay. A mere
floating intention, indefinite as to time, to return to another country is
not sufficient to constitute him a transient. If he lives in the United
States and has no definite intention as to his stay, he is a resident. One
who comes to the United States for a definite purpose which in its nature
may be promptly accomplished is a transient; but, if his purpose is of
such a nature that an extended stay may be necessary for its
accomplishment, and to that end the alien makes his home temporarily in
the United States, he becomes a resident, though it may be his intention
at all times to return to his domicile abroad when the purpose for which
he came has been consummated or abandoned. An alien whose stay in the
United States is limited to a definite period by the immigration laws is
not a resident of the United States within the meaning of this section, in
the absence of exceptional circumstances.


(c) APPLICATION AND EFFECTIVE DATES. Unless the context indicates
otherwise, Sections 1.871-2 through 1.871-5 apply to determine the
residence of aliens for taxable years beginning before January 1, 1985. To
determine the residence of aliens for taxable years beginning after
December 31, 1984, see section 7701(b) and Sections 301.7701(b)-1 through
301.7701(b)-9 of this chapter. However, for purposes of determining
whether an individual is a qualified individual under section
911(d)(1)(A), the rules of Sections 1.871-2 and 1.871-5 shall continue to
apply for taxable years beginning after December 31, 1984. For purposes of
determining whether an individual is a resident of the United States for
estate and gift tax purposes, see Section 20.0-1(b) (1) and (2) and
Section 25.2501-1(b) of this chapter, respectively.


[TD 6500, 25 FR 11910, Nov. 26, 1960; 25 FR 14021, Dec. 31, 1960, as
amended by TD 8411, 57 FR 15241, Apr. 27, 1992]
IRS Revenue Rulings

Code Sec. 871
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26 CFR 1.871-2: Determining residence of alien individuals.

  Illegal alien; resident status. The presumption of nonresidence provided in section 1.871-4(b)
of the regulations may be rebutted in the case of an illegal alien who establishes strong
community ties over an extended period of time.

REV. RUL. 81-70

ISSUE

  Is the presumption of nonresidence provided in section 1.871-4(b) of the Income Tax
Regulations rebutted pursuant to section 1.871-4(c) in the case of an alien individual illegally
present in the United States under the circumstances described below?

FACTS

  A and A's family illegally entered the United States from country Z in January, 1972. A
obtained permanent employment in state X and enrolled A's children in local schools. After
several months, A enrolled as a part-time student in a local college. Over a period of years, A
earned an undergraduate degree and later earned a graduate degree in dentistry. Shortly
thereafter, A purchased a home and established a dental practice in the community. A is a
member of a national dental association and other service organizations and social clubs in the
community. A, however, has never applied for legal residence or immigrant status in the United
States. A inquires whether A is subject to tax as a resident or nonresident alien for A's taxable
year ending December 31, 1980.


LAW AND ANALYSIS

  Section 1.871-2(a) of the regulations provides that the term "nonresident alien individual"
means an individual whose residence is not within the United States and who is not a citizen of
the United States.

  Section 1.871-2(b) of the regulations provided that an alien actually present in the United
States who is not a mere transient or sojourner is a resident of the United States for purposes of
federal income taxation. Whether an alien is a transient is determined by the alien's intentions
with regard to the length and nature of the alien's stay.

  Section 1.871-4(b) of the regulations provides that an alien, by reason of his alienage, is
presumed to be a nonresident alien.

  Section 1.871-4(c)(2)(iii) of the regulations provides that the presumption as to an alien's
nonresidency may be overcome by proof of acts and statements of the alien showing a definite
intention to acquire residence in the United States or showing that the alien's stay in the United
States has been of such an extended nature as to constitute him a resident.

  The presumption of nonresidence in section 1.871-4(b) of the regulations is applicable to all
aliens present in the United States, whether legally or illegally. It is a rebuttable rather than
conclusive presumption, as indicated by section 1.871-4(c). Thus, the presumption can be
overcome by proof of acts and statements showing (1) a definite intention to reside in the United
States permanently or (2) a stay of an extended nature. See e.g., Marsman v. Commissioner, 205
F.2d 335 (4th Cir. 1953); Rev. Rul. 64-149, 1964-1 (Part I) C.B. 233, 235. Such is the case in the
factual situation presented here. A's acts show a definite intention to reside in the United States
on more than a temporary basis. In addition, A's stay of almost 8 years, accompanied by service
to and involvement in the community, show that A's stay is more than temporary, or that of a
transient, and is of such an extended nature as to constitute A a resident for federal income tax
purposes.


HOLDING

  The presumption of nonresidence provided in section 1.871-4(b) of the regulations is rebutted
pursuant to section 1.871-4(c) in the case of an alien illegally present in the United States under
the circumstances described above so as to constitute the alien a resident of the United States for
federal income tax purposes.
Treasury Regulations

Regs. Sec. 301.7701(b)-1. Resident alien.

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(a) SCOPE. Section 301.7701(b)-1(b) provides rules for determining whether
an alien individual is a lawful permanent resident of the United States.
Section 301.7701(b)-1(c) provides rules for determining if an alien
individual satisfies the substantial presence test. Section 301.7701(b)-2
provides rules for determining when an alien individual will be considered
to maintain a tax home in a foreign country and to have a closer
connection to that foreign country. Section 301.7701(b)-3 provides rules
for determining if an individual is an exempt individual because of his or
her status as a foreign government-related individual, teacher, trainee,
student, or professional athlete. Section 301.7701(b)-3 also provides
rules for determining whether an individual may exclude days of presence
in the United States because the individual was unable to leave the United
States because of a medical condition. Section 301.7701(b)-4 provides
rules for determining an individual's residency starting and termination
dates. Section 301.7701(b)-5 provides rules for applying section 877 to a
nonresident alien individual. Section 301.7701(b)-6 provides rules for
determining the taxable year of an alien. Section 301.7701(b)-7 provides
rules for determining the effect of these regulations on rules in tax
conventions to which the United States is a party. Section 301.7701(b)-8
provides procedural rules for establishing that an individual is a
nonresident alien. Section 301.7701(b)-9 provides the effective dates of
section 7701(b) and the regulations under that section. Unless the context
indicates otherwise, the regulations under Sections 301.7701(b)-1 through
301.7701(b)-9 apply for purposes of determining whether a United States
citizen is also a resident of the United States. (This determination may
be relevant, for example, to the application of section 861(a)(1) which
treats income from interest-bearing obligations of residents as income
from sources within the United States.) The regulations do not apply and
Sections 1.871-2 and 1.871-5 of this chapter continue to apply for
purposes of the bona fide residence test of section 911. See Section 1.911-
2(c) of this chapter. For purposes of determining whether an individual is
a resident of the United States for estate and gift tax purposes, see
Section 20.0-1(b)(1) and (2) and Section 25.2501-1(b) of this chapter,
respectively.

(b) LAWFUL PERMANENT RESIDENT--

   (1) GREEN CARD TEST. An alien is a resident alien with respect to a
   calendar year if the individual is a lawful permanent resident at any
   time during the calendar year. A lawful permanent resident is an
   individual who has been lawfully granted the privilege of residing
   permanently in the United States as an immigrant in accordance with
   the immigration laws. Resident status is deemed to continue unless it
   is rescinded or administratively or judicially determined to have
   been abandoned.
  (2) RESCISSION OF RESIDENT STATUS. Resident status is considered to
  be rescinded if a final administrative or judicial order of exclusion
  or deportation is issued regarding the alien individual. For purposes
  of this paragraph, the term "final judicial order" means an order
  that is no longer subject to appeal to a higher court of competent
  jurisdiction.

  (3) ADMINISTRATIVE OR JUDICIAL DETERMINATION OF ABANDONMENT OF
  RESIDENT STATUS. An administrative or judicial determination of
  abandonment of resident status may be initiated by the alien
  individual, the Immigration and Naturalization Service (INS), or a
  consular officer. If the alien initiates this determination, resident
  status is considered to be abandoned when the individual's
  application for abandonment (INS Form I-407) or a letter stating the
  alien's intent to abandon his or her resident status, with the Alien
  Registration Receipt Card (INS Form I-151 or Form I-551) enclosed, is
  filed with the INS or a consular officer. If INS replaces any of the
  form numbers referred to in this paragraph or Section 301.7701(b)-
  2(f), refer to the comparable INS replacement form number. For
  purposes of this paragraph, an alien individual shall be considered
  to have filed a letter stating the intent to abandon resident status
  with the INS or a consular office if such letter is sent by certified
  mail, return receipt requested (or a foreign country's equivalent
  thereof). A copy of the letter, along with proof that the letter was
  mailed and received, should be retained by the alien individual. If
  the INS or a consular officer initiates this determination, resident
  status will be considered to be abandoned upon the issuance of a
  final administrative order of abandonment. If an individual is
  granted an appeal to a federal court of competent jurisdiction, a
  final judicial order is required.

(c) SUBSTANTIAL PRESENCE TEST--

  (1) IN GENERAL. An alien individual is a resident alien if the
  individual meets the substantial presence test. An individual
  satisfies this test if he or she has been present in the United
  States on at least 183 days during a three year period that includes
  the current year. For purposes of this test, each day of presence in
  the current year is counted as a full day. Each day of presence in
  the first preceding year is counted as one-third of a day and each
  day of presence in the second preceding year is counted as one-sixth
  of a day. For purposes of this paragraph, any fractional days
  resulting from the above calculations will not be rounded to the
  nearest whole number. (See Section 301.7701(b)-9(b)(2) for
  transitional rules for calendar years 1985 and 1986.)

  (2) DETERMINATION OF PRESENCE--

     (i) PHYSICAL PRESENCE. For purposes of the substantial presence
     test, an individual shall be treated as present in the United
     States on any day that he or she is physically present in the
     United States at any time during the day. (But see Section
      301.7701(b)-3 relating to days of presence that may be
      excluded.)

      (ii) UNITED STATES. For purposes of section 7701(b) and the
      regulations thereunder, the term UNITED STATES when used in a
      geographical sense includes the states and the District of
      Columbia. It also includes the territorial waters of the United
      States and the seabed and subsoil of those submarine areas which
      are adjacent to the territorial waters of the United States and
      over which the United States has exclusive rights, in accordance
      with international law, with respect to the exploration and
      exploitation of natural resources. It does not include the
      possessions and territories of the United States or the air
      space over the United States.

   (3) CURRENT YEAR. The term CURRENT YEAR means any calendar year for
   which an alien individual is determining his or her resident status.

   (4) THIRTY-ONE DAY MINIMUM. If an individual is not physically
   present for more than 30 days during the current year, the
   substantial presence test will not be applied for that year even if
   the three-year total is 183 or more days. For purposes of the
   substantial presence test, it is irrelevant that an individual was
   not present for more than 30 days in the first or second year
   preceding the current year.

(d) [Reserved]. For further guidance, see section 301.7701(b)-1T(d).

(e) EXAMPLES. This section may be illustrated by the following examples:

   EXAMPLE 1. B, an alien individual, is present in the United States
   for 122 days in the current year. He was present in the United States
   for 122 days in the first preceding calendar year and for 122 days in
   the second preceding calendar year. In determining his status for the
   current year, B counts all 122 days in the United States in the
   current year plus 1/3 of the 122 days in the United States in the
   first preceding calendar year (40 2/3 days) and 1/6 of the 122 days
   in the United States during the second preceding calendar year (20
   1/3 days). The total of 122 + 40 2/3 + 20 1/3 equals 183 days. B
   meets the substantial presence test and is a resident alien for the
   current year.

   EXAMPLE 2. C, an alien individual, is present in the United States
   for 25 days during the current year. She was present in the United
   States for 365 days during the first preceding year and 365 days
   during the second preceding year. The substantial presence test does
   not apply because C is present in the United States for fewer than 31
   days during the current year.

   EXAMPLE 3. D, an alien individual, is present in the United States
   for 170 days during the current year. He was present in the United
   States for 30 days during the first preceding year and 30 days during
  the second preceding year. In determining his status for the current
  year, D counts all 170 days in the United States in the current year
  plus 1/3 of the 30 days in the United States in the first preceding
  calendar year (10 days) and 1/6 of the 30 days in the United States
  during the second preceding calendar year (5 days). The total of 170
  + 10 + 5 equals 185 days. D meets the substantial presence test and
  is a resident alien for the current year notwithstanding the fact
  that he was present in the United States for fewer than 31 days in
  each of the two preceding years.


[TD 8411, 57 FR 15242, April 27, 1992; 57 FR 28612, June 26, 1992; 57 FR
37190, August 18, 1992; revised by TD 9194, 70 FR 18919, April 11, 2005]
IRS Letter Rulings and TAMs

200317021 3/01/2003

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Code Section 7701

  * Section 7701: Definitions


Chief Counsel Memorandum

Subject: Conversion of a 1040 Return with an ITIN to a 1040NR Return

This responds to your request for Significant Service Center Advice in
connection with a series of questions concerning the conversion of a Form
1040 Return with an ITIN to a Form 1040NR Return.


ISSUES

1. Whether a Form 1040, "U.S. Individual Income Tax Return," shall be
converted to a Form 1040NR, "U.S. Nonresident Alien Income Tax Return," if
the taxpayer fails to meet the green card or substantial presence test.

2. Whether the Internal Revenue Service ("Service") may convert a Form
1040 to a Form 1040NR which would include the elimination of certain tax
advantages; and, whether the filing of a Form 1040 return by a non-
resident alien with an Individual Taxpayer Identification Number ("ITIN")
constitutes the filing of an income tax return and is considered a valid
return.


OVERVIEW

The Internal Revenue Code ("Code") requires all individuals to file U.S.
tax returns if they have gross income subject to U.S. tax that equals or
exceeds the exemption amount as determined by section 6012 of the Code. A
nonresident alien's liability for U.S. taxes is generally limited to U.S.
source income and is often subject to tax treaty provisions that further
define their liability for tax and withholding. Typically, these taxpayers
use an ITIN to file Form 1040NR with the Service and/or Forms W-8,
"Certificate of Foreign Status," with financial institutions to claim tax
treaty withholding benefits. Resident aliens for U.S. tax purposes include
those who are lawful permanent residents and eligible to obtain a Social
Security Number ("SSN") and work in the U.S.

Resident aliens also include any foreign nationals physically present in
the U.S. for a set number of days computed under a formula (generally 31
days in the current year and 183 days counting the current and prior two
years). This rule does not apply to regular commuters from Mexico or
Canada who remain non-resident aliens. Resident aliens must file Form 1040
series tax returns and report worldwide income in the same manner as U.S.
citizens. If they are not eligible for an SSN, they must obtain and use an
ITIN. However, the Service continues to consider illegal aliens as U.S.
residents for tax purposes, which permits aliens to file individual income
tax returns on Forms 1040. As a result, illegal aliens are receiving tax
benefits which exceed those received by nonresident alien taxpayers (Form
1040NR filers) that are in compliance with U.S. Immigration Laws.

As a general rule, resident aliens are taxed in the same manner as U.S.
citizens. Nonresident aliens are taxed pursuant to section 7701(b) of the
Code, which articulates the tax residency rules. Under the tax residency
rules of section 7701(b) generally, any alien who is not a resident alien
must be a nonresident alien. An alien can become a resident alien in one
of three ways: (1) by being lawfully admitted to the United States for
permanent residence under the immigration laws (the Green Card test); (2)
by meeting the Substantial Presence Test (a numerical formula which
measures days of presence in the United States); or (3) by making the
"First Year Election" (a numerical formula under which an alien may pass
the substantial presence test one year earlier than under normal rules).
See, section 7701(b)(1)(A).


LAW AND ANALYSIS

 ISSUE 1

Section 7701(b)(1)(A) provides that an alien individual is treated as a
resident alien if he (i) is a lawful permanent resident of the United
States (green card holder), (ii) meets the substantial presence test of
section 7701(b)(3), or (iii) makes the first year election provided in
section 7701(b)(4).

Section 7701(b)(1)(B) provides that a individual is a nonresident alien if
he is neither a citizen of the United States nor a resident alien under
section 7701(b)(1)(A).

Section 6012(a)(1)(A) provides, with certain exceptions, that returns with
respect to income taxes under subtitle A must be made by every individual
having for the taxable year gross income that equals or exceeds the
exemption amount. Section 6012(a) also provides that subject to such
conditions, limitations, and exceptions and under such regulations as may
be prescribed, nonresident alien individuals subject to the tax imposed by
section 871 may be exempted from the requirement of making returns.

Section 1.6012-1(a) of the Income Tax Regulations ("regulations") sets
forth rules for income tax returns to be filed by U.S. citizens and
resident aliens (including nonresident alien spouses who make an election
under section 6013(g) to be treated as a resident).

Section 1.6012-1(b) of the regulations sets forth rules for income tax
returns to be filed by nonresident alien individuals. It expressly refers
to Form 1040NR.

If an alien individual fails to be classified as a resident alien under
one of the three tests specified in section 7701(b)(1)(A), and if he has
not made an election under section 6013(g) to be treated as a resident,
then he is covered by section 1.6012-1(b), rather than section 1.6012-
1(a), and he should file Form 1040NR, not Form 1040.