T.C. Memo. 2014-173
UNITED STATES TAX COURT
ZHENGNAN SHI, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7218-12. Filed August 26, 2014.
Zhengnan Shi, pro se.
George W. Bezold, for respondent.
MEMORANDUM OPINION
COHEN, Judge: Respondent determined a $567 deficiency in petitioner’s
Federal income tax for 2009. The issues for decision are whether petitioner is
liable for tax on unreported interest income and, if so, at what tax rate. Unless
otherwise indicated, all section references are to the Internal Revenue Code in
effect for the year in issue, and all Rule references are to the Tax Court Rules of
-2-
[*2] Practice and Procedure. Additionally, all article references are to the
Agreement Between the Government of the United States of America and the
Government of the People’s Republic of China for the Avoidance of Double
Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income,
Apr. 30, 1984, T.I.A.S. No. 12,065 (China treaty), unless otherwise stated.
Petitioner could not appear for trial in the United States. He initially
proposed that the parties submit the case under Rule 122, but respondent was not
willing to do so. At the Court’s urging, respondent prepared a stipulation that
could be the basis for submission without trial under Rule 122, but petitioner
declined to execute that stipulation. Each party submitted a pretrial memorandum
that was treated as an offer of proof for purposes of deciding the legal issues
presented. See Rule 1(a), (d).
Background
As no facts were stipulated, undisputed facts were discerned from the filings
of the parties, which included documents that were contemporary to the relevant
events of this case. Petitioner resided in Wisconsin at the time his petition was
filed.
Petitioner, a citizen of the People’s Republic of China (China), first entered
the United States on August 10, 1999, on an F-1 visa. The F-1 visa allowed
-3-
[*3] petitioner to attend U.S. universities where he obtained his master’s degree
and doctorate in computer science.
In 2005, petitioner worked as a professor at a New York State university
and earned wages of $62,711.49. Petitioner had his 2005 Federal tax return
prepared by H and R Block Eastern Enterprises. On his 2005 Form 1040, U.S.
Individual Income Tax Return, petitioner excluded $5,000 for personal services
performed while a student. In an attached treaty benefit statement, petitioner
stated: “BECAUSE TAXPAYER HAS BEEN IN THE U S SINCE AUGUST
1999 ON A VALID AND RENEWED F1 VISA FOR EDUCATION AND
TRAINING HE NOW MUST FILE ON FORM 1040, BUT IS STILL ALLOWED
A $5000 INCOME DEDUCTION UNDER U.S. - CHINA TAX TREATY
ARTICLE 20(c).” Petitioner signed the 2005 tax return, which reported a refund
due of $2,674. He received the refund in April 2006.
From August 24, 2008, through May 22, 2012, petitioner had an H-1B visa,
which permitted him to work as an assistant professor for the University of
Wisconsin-Whitewater (UW-Whitewater). During some or all of this period,
petitioner maintained an apartment and an office in Whitewater, Wisconsin.
On or around April 29, 2008, petitioner prepared Form 1040X, Amended
U.S. Individual Income Tax Return, for his 2005 tax year. On an attached Form
-4-
[*4] 8833, Treaty-Based Return Position Disclosure Under Section 6114 or
7701(b), petitioner explained his treaty-based return position, stating that “[u]nder
the residency rules of IRC 7701(b) the taxpayer passed the substantial presence
test in 2004 and his residency starting date was January 1, 2004. This means that
for 2005, the taxpayer is a resident alien for tax purposes and is filling [sic] form
1040 for 2005 as a resident alien.” Petitioner further stated that “even though the
taxpayer has become a resident alien under the substantial presence test of IRC
7701(b), he may still claim the benefit of article 19 of the USA-China income tax
treaty. The taxpayer has elected to do this, and is claiming an exclusion from
gross income for 2005 of $62,711.49 in professor wages”. Petitioner echoed these
statements in his self-made “Return Notes” under the title “TREATY BENEFIT
STATEMENT”, which he attached to his signed amended return. As a result,
petitioner excluded gross income of $62,711.49 and reported another refund due
for 2005.
On or around March 30, 2009, petitioner received a refund of $9,209 with
respect to the 2005 amended return. Petitioner also received from the Government
$2,098 of interest in relation to this refund.
Petitioner had his 2009 Federal tax return prepared by a certified public
accountant from Wellnitz Tax and Accounting in Whitewater, Wisconsin. On
-5-
[*5] Form 1040 and Schedule B, Interest and Ordinary Dividends, petitioner did
not report the $2,098 of refund interest as income received in 2009. Petitioner did
report his $72,225 of wages from UW-Whitewater but did not claim any treaty
exemptions on his 2009 tax return. Petitioner’s address shown on his return was
in Whitewater, Wisconsin.
The IRS sent to petitioner a notice of deficiency dated December 27, 2011,
explaining that he had failed to report the interest income. Petitioner timely filed a
petition with this Court.
After the spring 2012 semester, UW-Whitewater did not renew petitioner’s
employment contract. Without a job, petitioner applied for a B-2 visa as a
temporary visitor, but the visa was not granted. Petitioner voluntarily left the
United States in the latter part of 2012.
Petitioner filed the petition in this case on March 19, 2012. Petitioner’s
only address shown on the petition was in Whitewater, Wisconsin.
There is no record of petitioner’s having left the United States from his
arrival in August 1999 up to the latter part of 2012. Petitioner’s passport shows no
official markings other than a stamp displaying, in part, Chinese characters and
“[1999]”, a stamp from the American Embassy in Beijing with the date June 1999,
-6-
[*6] and a U.S. immigration stamp shown above petitioner’s U.S. visa indicating
that petitioner was admitted into the United States on August 10, 1999.
Discussion
Respondent argues that petitioner was required to report the $2,098 of
interest income that he received in 2009 on his Federal tax return for that year.
Over the course of these proceedings, petitioner has contended that: (1) if the IRS
had processed his 2005 tax return correctly, then he would have received any
interest due from the refund in 2006, a tax year that would have absorbed the
interest income with no taxable result; (2) the interest is exempt income because it
arose from exempt income; namely, the second 2005 tax refund, which derived
from a treaty exemption claimed on petitioner’s 2005 amended tax return; and (3)
in the alternative, petitioner reasons that if the interest income is required to be
reported, then article 10 of the China treaty limits the tax rate to 10%. Petitioner
asserts that this 10% treaty limitation applies whether or not he was a resident of
the United States and maintains that he was a resident of China in 2009.
Generally, the taxpayer bears the burden of proving that the Commissioner’s
determination is incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115
(1933). This Court has recognized an exception to these rules in cases involving
unreported income where the Commissioner introduces no substantive evidence
-7-
[*7] but relies solely on the presumption of correctness. Jackson v.
Commissioner, 73 T.C. 394, 401 (1979). Here, however, petitioner admits to
having received the interest income, and thus respondent’s burden is satisfied.
Nevertheless, petitioner has repeatedly asserted that the burden of proof lies
with respondent. The burden of proof with respect to a factual issue may be
placed on the Commissioner under section 7491(a) if the taxpayer introduces
credible evidence regarding that issue and establishes that the taxpayer complied
with the requirements to substantiate items, maintain records, and fully cooperate
with the Commissioner’s reasonable requests. Sec. 7491(a)(2)(A) and (B).
Petitioner, however, has failed to establish that he complied with the requirements
of section 7491(a). As a result, the burden of showing the interest to be
nontaxable, or to be taxable at a reduced rate, remains with petitioner. In any
event, this case is decided on the preponderance of the undisputed evidence.
Petitioner’s first contention, that if he had received the interest income in
2006 then there would be no issue, is groundless. The IRS processed his original
2005 return in accordance with his reporting. Petitioner did not claim the bulk of
the treaty exemptions until he filed a 2005 amended return in 2008. His
expectation that the IRS should have known what he meant to report, when even
-8-
[*8] he and his tax return preparation service apparently did not, is an untenable
position.
Petitioner’s second contention is that the interest is exempt income because
it arose from exempt income, i.e., the tax refund that derived from the treaty
exemption claimed on the 2005 amended return. In the case of an overpayment of
tax, the Government may credit the amount of such overpayment, including any
interest allowed thereon, and refund any balance. Sec. 6402. It is well-established
law that interest is generally taxable as income to the recipient, including interest
resulting from a tax refund. See secs. 61(a)(4), 861(a)(1), 871(a)(1)(A); sec. 1.61-
7(a), Income Tax Regs.; see also, e.g., Muir v. Commissioner, B.T.A.M. (P-H)
para. 32, 328, at 32-35 (1932) (“[T]he interest upon the over-payment for 1919 did
constitute taxable income * * * [and] such interest which was received by the
petitioner should be included in the amount of his gross income.” (Citation
omitted.)). Exclusions from income are to be narrowly construed. Commissioner
v. Schleier, 515 U.S. 323, 328 (1995).
Petitioner failed to cite any authority for his contention that interest takes on
the character of exempt income if it is tangentially based upon exempt income.
Because petitioner failed to show an exclusion for interest income deriving from a
tax refund, the interest is includable in income.
-9-
[*9] Petitioner’s alternative argument is that the interest income is taxable but
only at a 10% rate pursuant to article 10. While declaring himself to have been a
resident solely of China in 2009, petitioner nevertheless argues that the 10% tax
rate of article 10 applies whether he is a resident of the United States, China, or
both.
When a treaty is interpreted, its words are construed according to their
ordinary meaning. Amaral v. Commissioner, 90 T.C. 802, 812 (1988); see
Sumitomo Shoji Am., Inc. v. Avagliano, 457 U.S. 176, 180 (1982). Where the
Internal Revenue Code provides for the taxation of income, ‘‘[w]hatever basis
there may be * * * for relieving * * * [such] tax must be found in the words or
implications of the * * * [treaty].” Maximov v. United States, 373 U.S. 49, 51
(1963). While neither a treaty nor U.S. revenue laws have preferential status,
Internal Revenue Code provisions nonetheless are to be applied with due regard to
germane tax treaty provisions. Secs. 894, 7852(d)(1); see Amaral v.
Commissioner, 90 T.C. at 812.
The China treaty contains the following provisions. Article 1 provides that
“[t]his Agreement shall apply to persons who are residents of one or both of the
Contracting States.” Article 3.1.c. defines “Contracting State” as meaning either
China or the United States, as the context requires. Article 4.1 provides that “the
- 10 -
[*10] term ‘resident of a Contracting State’ means any person who, under the laws
of that Contracting State, is liable to tax therein by reason of his domicile,
residence, place of head office, place of incorporation or any other criterion of a
similar nature.” Article 10.1 essentially provides that interest arising in a
Contracting State (in this case, the United States) and paid to a resident of the
other Contracting State (China) may be taxed in the other Contracting State
(China). However, the interest may also be taxed in the Contracting State (United
States) according to its laws--but if the recipient is the beneficial owner of the
interest, the tax shall not exceed 10% of the gross amount of the interest. Article
10.2. Thus for petitioner to benefit from the China treaty, he must be considered a
resident of China as defined by the China treaty.
Petitioner argues that article 4 residency is determined primarily by where
an individual has his permanent home. Petitioner states that his permanent home
in 2009 was in Beijing, China, and provides as offers of proof his “unsworn
foreign declaration” and various exhibits. Conversely, petitioner implies that he
could not have been a resident of the United States in 2009 because he never
owned a permanent home there. He concludes that he was a resident of China in
2009 as determined by the text of the China treaty.
- 11 -
[*11] Article 4 indicates that to be a resident of China for purposes of the China
treaty, petitioner must show that under Chinese tax statutes and laws he was liable
for taxation in 2009 because he resided (or was domiciled or something to that
effect) in China. “Resident”, “domicile”, and other such terms as used in law have
“various degrees of meaning from temporary physical presence to permanent
abode, and the meaning of these words in a statute depends upon the context and
the purpose of the statute in which they occur.” Simenon v. Commissioner, 44
T.C. 820, 834 (1965). The Court there explained:
The rule relating to establishing a matter of foreign law is that judicial
notice by a court cannot be taken of foreign law, as opposed to local
law, the laws of the United States and general matters of domestic
law, to which the concept of judicial notice extends. Under article
VI, clause 2, of the Constitution, treaties are laws of the United
States, * * * so that we may take judicial notice of the tax treaty * * *;
but where, in the context of a treaty, the meaning of a treaty term
depends upon a law of the foreign country, we may not ascertain the
question of foreign law by resorting to judicial notice. A question of
foreign law is a question of fact to be proved by the party having the
burden of proof * * *
Id. at 835 (citation omitted).
Petitioner introduced no Chinese tax law as an offer of proof or otherwise
and therefore did not meet this burden of proof. The provisions of article 10 do
not apply to him because he has not shown that he was subject to tax in China,
whether or not he was considered a resident of the United States in 2009.
- 12 -
[*12] Petitioner’s status as a resident of the United States in 2009, however,
affects the applicable rate of tax.
An alien individual officially residing within the United States, i.e., a
resident alien, is generally subject to Federal taxation in the same manner as a U.S.
citizen and thus would file Form 1040, U.S. Individual Income Tax Return. See,
e.g., Crow v. Commissioner, 85 T.C. 376, 380-381 (1985) (explaining that the
United States taxes its citizens, and ergo its residents, on their worldwide income);
Sec. 1.1-1(a) and (b), Income Tax Regs.; see Amaral v. Commissioner, 90 T.C. at
812. A nonresident alien individual, on the other hand, is usually subject to
taxation only on U.S. source income and would report such income on Form
1040NR, U.S. Nonresident Alien Income Tax Return. Sec. 871(a); see, e.g.,
Abdel-Fattah v. Commissioner, 134 T.C. 190, 192 n.3 (2010) (discussing how a
nonresident alien should use Form 1040NR because, among other reasons,
nonresident aliens are usually ineligible for certain deductions and credits
available through Form 1040). Generally, the tax rate imposed on nonresident
alien individuals receiving U.S. interest income is 30%. Sec. 871(a)(1). Thus, for
tax purposes the distinction between resident alien and nonresident alien could be
significant.
- 13 -
[*13] An alien individual is deemed a nonresident alien if she or he is neither a
citizen of the United States nor considered a resident of the United States. Sec.
7701(b)(1)(B). An alien individual is treated as a resident of the United States
with respect to any calendar year if such individual: (1) is a lawful permanent
resident of the United States at any time during the calendar year, (2) meets a
substantial presence test, or (3) makes a first-year election to be treated as a
resident of the United States. Sec. 7701(b)(1)(A). There is no evidence that
petitioner was lawfully admitted for permanent residence in the United States at
any time in 2009 or that he made an election to be treated as a U.S. resident.
Accordingly, petitioner will be treated as a resident alien only if he meets the
substantial presence test provided in section 7701(b)(3).
The substantial presence test is an objective test: “[A]n individual meets the
substantial presence test * * * if * * * such individual was present in the United
States on at least 31 days during the calendar year”, and for at least 183 days
during the calendar year and the two preceding calendar years, calculated pursuant
to a weighted formula. Sec. 7701(b)(3)(A); see Luján v. Commissioner, T.C.
Memo. 2000-365, slip op. at 9; sec. 301.7701(b)-1(c)(1), Proced. & Admin. Regs.
An individual is treated as present in the United States on any day that the
individual is physically present in the United States at any time during the day.
- 14 -
[*14] Sec. 7701(b)(7)(A). While an individual may be treated as “not” being in
the United States for any day where the individual is considered exempt, such as a
teacher who is temporarily present in the United States pursuant to a J or Q visa,
such an exception does not apply here, where petitioner held an H-1B visa in
2009. See sec. 7701(b)(3)(D)(i), (5)(A)(ii), (C).
Respondent argues that petitioner was physically present in the United
States during all of the 2008-09 and 2009-10 academic years because he was
employed as a professor at UW-Whitewater. Respondent asserts, therefore, that
petitioner was in the United States for more than 183 days in 2009 alone and met
the substantial presence test.
Rather than directly deny respondent’s allegations, petitioner hypothetically
poses that
professors at the University of Wisconsin frequently take posts in
international exchanges. Being employed as a professor at the
University of Wisconsin-Whitewater is no proof and does not imply
that Shi was physically present in the United States. That is, even if
Shi was employed as a professor at the University of Wisconsin-
Whitewater during all of the 2008-2009 and 2009-2010 academic
years, it does not guarantee that Shi was physically present in the
United States, at all, during all of the 2008-2009 and 2009-2010
academic years.
Petitioner states that he was unable to discover documents held by UW-
Whitewater that would have shown direct evidence supporting his position.
- 15 -
[*15] Petitioner concludes that, without convincing evidence, the supposition that
he met the substantial presence test is no more than an arbitrary statement.
The preponderance of evidence offered is that petitioner was present in the
United States from August 1999 to sometime in 2012. Petitioner’s speculations to
the contrary are weak and suspect. In addition, petitioner had previously attested
in his tax returns that he met the substantial presence test in an earlier year, and his
actions reflect that he considered himself a resident alien in 2009.
On his 2005 Federal tax return, petitioner included a note stating that
because he had been in the United States since August 1999, he had to file Form
1040. A similar but more exact statement was made on his 2005 Form 1040X:
“Under the residency rules of IRC 7701(b) the taxpayer passed the substantial
presence test in 2004 and his residency starting date was January 1, 2004. This
means that for 2005, the taxpayer is a resident alien and is filling form 1040 for
2005 as a resident alien.” Thus petitioner, a well-educated man, determined
through the substantial presence test that he was a resident alien in 2004 and, as a
result, remained a resident alien in 2005. On both his 2005 tax return and 2005
amended return, petitioner signed the jurat declaring to the best of his knowledge
that the statements made within the returns were true, correct, and complete.
- 16 -
[*16] Section 1.871-5, Income Tax Regs., provides:
Loss of residence by an alien.--An alien who has acquired residence
in the United States retains his status as a resident until he abandons
the same and actually departs from the United States. An intention to
change his residence does not change his status as a resident alien to
that of a nonresident alien. Thus, an alien who has acquired a
residence in the United States is taxable as a resident for the
remainder of his stay in the United States.
See also sec. 7701(b)(2)(B).
The significance of his declarations in his 2005 tax returns with respect to
the 2009 tax year in issue is that once petitioner became a resident of the United
States, he remained a resident until he actually departed from the United States in
2012. Petitioner’s actions--having filed Form 1040 instead of Form 1040NR for
his 2005 and 2009 tax years--showed his understanding that he retained his
resident status established in 2004.
Here, where the facts regarding petitioner’s actual presence in the United
States in 2009 are less direct, reliance, in part, on section 1.871-5, Income Tax
Regs., is warranted. Cf. Park v. Commissioner, 79 T.C. 252, 288 (1982) (finding
that it was unnecessary to decide whether the taxpayer acquired residence in the
United States at some time before the year in issue because the facts were
sufficient to determine whether the taxpayer was a resident during the year in
issue), aff’d without published opinion, 755 F.2d 181 (D.C. Cir. 1985).
- 17 -
[*17] There is an exception that permits individuals to avoid resident status even
if they meet the substantial presence test. Section 7701(b)(3)(B) provides for this
exception in cases where an individual: (1) was present in the United States less
than one-half of the year in issue, (2) maintains a tax home in a foreign country,
and (3) has a closer connection to the foreign country than to the United States.
Petitioner failed to show that this exception applied to him in 2009.
Because petitioner apparently never left the United States from August 1999
to late 2012 and had previously determined himself to be a resident alien under the
substantial presence test, we conclude that he was a resident alien for 2009.
Accordingly, the interest income was ordinary income in 2009 and taxable under
the appropriate graduated tax rate.
We now briefly address petitioner’s concern as to not being able to perform
discovery on UW-Whitewater and others. The Rules of this Court do not allow for
third-party discovery except for depositions through subpoena. Rule 74. See
generally Rules 70-73. Such depositions are extraordinary and would not have
been feasible in petitioner’s absence nor appropriate in this case. Respondent
made informal requests to various parties, and those requests were honored.
Petitioner requested information from sources with which he had disputes and
followed with angry accusations that discouraged cooperation. The Court has no
- 18 -
[*18] authority to order the remedies that petitioner sought by his various,
repetitious motions.
We have considered the other arguments of the parties, but they are
irrelevant, unsupported by the record or by authority, or without merit.
To reflect the foregoing,
Decision will be entered
for respondent.