Abrahamsen v. Commissioner, 150 T. C. No. 4 (2018)

In Abrahamsen v. Commissioner, the U. S. Tax Court ruled that Ms. Abrahamsen’s wages from the Finnish Mission to the United Nations were taxable, rejecting her claim for exemption under section 893 and international treaties. The court emphasized the legal effect of her waiver of tax exemptions upon obtaining permanent resident status, which barred her from claiming any tax exemptions thereafter. This decision clarifies the enforceability of waivers for tax exemptions and the tax treatment of permanent residents employed by foreign missions, impacting how such individuals must report income.

Parties

Petitioners: Ms. Abrahamsen and her co-petitioner, residents of New York at the time of filing the petition. Respondent: Commissioner of Internal Revenue.

Facts

Ms. Abrahamsen, a Finnish citizen, arrived in the U. S. in 1983 to work for Finland’s Permanent Mission to the United Nations (Mission) under a G-1 visa. She later worked for Kansallis-Osake-Pankki (Kansallis), a Finnish bank, on an E-1 visa. In 1992, Ms. Abrahamsen obtained permanent resident status in the U. S. , signing Form I-508, waiving rights, privileges, exemptions, and immunities related to her occupational status. She resumed employment with the Mission in 1996, holding various positions including secretary, adviser, and attaché. During the tax years 2004-09, Ms. Abrahamsen and her co-petitioner did not report her Mission wages as income, leading to an IRS deficiency notice and subsequent litigation in the Tax Court.

Procedural History

The IRS issued notices of deficiency to petitioners for tax years 2004-09, asserting that Ms. Abrahamsen’s wages from the Mission were taxable and imposing accuracy-related penalties under section 6662. Petitioners filed a petition in the U. S. Tax Court seeking redetermination of the deficiencies and penalties. Both parties moved for summary judgment on the taxability of the wages and the penalties. The court granted the respondent’s motion for summary judgment on the taxability issue but denied both motions regarding the penalties, finding a genuine dispute of material fact on the reasonable cause exception.

Issue(s)

Whether Ms. Abrahamsen’s wages from the Finnish Mission to the United Nations for tax years 2004-09 are exempt from Federal income tax under section 893 of the Internal Revenue Code or provisions of international law, given her waiver of such exemptions upon obtaining permanent resident status in 1992?

Rule(s) of Law

Section 893 of the Internal Revenue Code excludes from gross income compensation received by employees of foreign governments or international organizations for official services, provided certain conditions are met. However, this exemption can be waived by a nonresident alien upon becoming a permanent resident of the U. S. by executing and filing Form I-508, as required by 8 C. F. R. sec. 245. 1(b)(9) and section 1. 893-1(b)(4), Income Tax Regs. Additionally, the U. S. -Finland Income Tax Treaty’s saving clause permits the U. S. to tax its residents, including permanent residents, notwithstanding any treaty provision to the contrary.

Holding

The Tax Court held that Ms. Abrahamsen’s wages from the Finnish Mission to the United Nations for tax years 2004-09 were subject to Federal income tax. The court found that Ms. Abrahamsen waived her right to the section 893 exemption upon obtaining permanent resident status in 1992, and the U. S. -Finland Income Tax Treaty’s saving clause allowed the U. S. to tax her as a resident alien.

Reasoning

The court’s reasoning centered on the enforceability of the waiver executed by Ms. Abrahamsen on Form I-508 in 1992. The court rejected petitioners’ arguments that the waiver should not be enforced due to the passage of time, language difficulties, and the complexity of the form, emphasizing the importance of maintaining the integrity of the waiver process. The court also analyzed the U. S. -Finland Income Tax Treaty, particularly its saving clause, which allows the U. S. to tax its residents regardless of other treaty provisions. The court dismissed petitioners’ claims under the Vienna Convention on Diplomatic Relations and the International Organizations Immunities Act, finding that Ms. Abrahamsen did not hold diplomatic status and that the IOIA did not exempt her wages from taxation. The court’s analysis was grounded in statutory interpretation, the application of legal tests for tax exemptions, and adherence to the principles of international tax law and treaties.

Disposition

The court granted the respondent’s motion for summary judgment regarding the taxability of Ms. Abrahamsen’s wages but denied both parties’ motions for summary judgment concerning the section 6662 accuracy-related penalties, finding a genuine dispute of material fact on the reasonable cause exception.

Significance/Impact

Abrahamsen v. Commissioner has significant implications for the taxation of income earned by permanent residents who previously held nonimmigrant status. It reinforces the enforceability of waivers of tax exemptions and clarifies that such waivers preclude claims for exemptions under section 893 and international treaties. The decision also underscores the importance of the saving clause in tax treaties, ensuring that the U. S. can tax its residents, including permanent residents, without regard to other treaty provisions. This case serves as a precedent for the treatment of income earned by employees of foreign missions who have become U. S. permanent residents, affecting their tax reporting obligations and potentially influencing future tax planning and compliance strategies.