Working Group Seeks Answers on ‘Medical Condition’ Exception

May 15, 2020

James Wang, Esq.
Office of the International Tax Counsel
Department of the Treasury
1500 Pennsylvania Avenue, NW, Room 3058
Washington, DC 20220
James.Wang2@treasury.gov

Sarah Stein, Esq. and Ryan M. Connery, Esq.
Associate Chief Counsel (International), Branch 1 (CC:INTL:B01)
Internal Revenue Service
1111 Constitution Avenue NW
Washington, D.C. 20224
sarah.e.stein@irscounsel.treas.gov
ryan.m.connery@irscounsel.treas.gov

Copies as indicated at the end of the letter

Re: Scope of the Medical Condition Exception

Dear Jim, Sarah and Ryan:

1. Summary of Recommendations

2. Introduction 

3. Does the Medical Condition Exception Apply to Persons Who Are Not Ill?

Appendix A: Details Concerning Members of the Group 

Appendix B: Medical Condition Exception — Regulations and Legislative History 

This letter is sent to you to follow up on a recent meeting of the members of the Tax Residence and Coronavirus Working Group. It supplements the group's comments in a letter dated May 14, 2020 on the April 21, 2020 guidance, consisting of Rev. Proc. 2020-20, Rev. Proc. 2020-27 and two related FAQs (the “April 21 Guidance”). This letter sets out additional comments on the issue of the interpretation of the medical condition exception of section 7701(b)(3)(D).¹

As previously noted, although many members of the group or their respective professional firms have clients whose tax position may potentially be affected by the subject matter of the April Guidance, no such member or firm or organization to which such member belongs has been engaged by a client to make a government submission with respect to, or otherwise to influence the development or outcome of, the specific subject matter of these comments.

These comments were principally drafted by Jay Rubinstein, Michael Karlin, and Megan Jones. Questions related to this letter can be addressed to Michael Karlin, whose contact information is as follows:

Michael J. A. Karlin
Karlin & Peebles, LLP
5900 Wilshire Boulevard, Suite 500
Los Angeles, CA 90036
323-852-0033
mkarlin@karlinpeebles.com

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1. Summary of Recommendations

We recommend that Treasury and the IRS confirm that the medical condition exception of section 7701(b)(3)(D) can apply to persons other than the person who suffers from the medical condition that prevents that person from leaving. In other words, an alien individual need not personally be suffering more generally from a medical condition to be eligible for the medical condition exception if that individual is prevented from leaving because of a medical condition affecting another person or persons.

We reiterate previous comments that we believe that Treasury and the IRS have the necessary authority to act based on a reading of the statute and the relevant related regulations and legislative history. We also describe a suggested legislative grant of regulatory authority to the Treasury and the IRS, if needed.

2. Introduction

The April 21 Guidance addresses various consequences of the coronavirus epidemic for non-immigrant aliens, including the determination of their residence for purposes of section 7701(b). Many such individuals were unable to leave the United States for a variety of reasons resulting from the COVID-19 emergency. As a result, such individuals have remained in the United States far longer than they expected. In some cases, the additional days of presence in the United States might have caused the individuals to become residents under the substantial presence test of section 7701(b)(3). In other cases, individuals whose departure was delayed may have been able to leave before satisfying the test but would then have limit their days of presence in the United States later in 2020 or, because of the three-year substantial presence test formula, in 2021 and 2022.

To provide relief to such individuals, the government chose in Rev. Proc. 2020-20 to make use of the medical condition exception of section 7701(b)(3)(D). Because the language of subparagraph (D) is critical to this comment, we set it out in full the statutory language of the requirement for an individual to meet the medical condition exception:

“(ii) [S]uch individual was unable to leave the United States on such day because of a medical condition which arose while such individual was present in the United States.”²

Treasury regulations expand on this requirement.³ For ease of reference, we also set out the relevant provision in full in Appendix B, as well as the relevant portions of the Explanation of Provisions in Treasury Decision 8411 which promulgated the regulations and the legislative history of the Tax Reform Act of 1984 which enacted section 7701(b).

3. Does the Medical Condition Exception Apply to Persons Who Are Not Ill? 3.1 The Nature of the Uncertainty

The language of the Code itself does not specifically state that the individual who was unable to leave is also the person with a medical condition. That is certainly a natural way to read the language; but it is plainly possible to read the language as referring to a medical condition that affects someone else individually or at a societal level.

This lack of a clear definition of who must be suffering from the “medical condition” has created long standing uncertainty regarding the application of the medical condition exception to persons who are not ill but who remain in the United States because a spouse, child, parent or dependent (or person for whom an individual is professionally responsible caregiver) is ill or is otherwise unable to leave. Additionally, we are now seeing a global medical condition, a pandemic, in which travel is not possible due to a widespread communicable disease (as recognized by the IRS and Treasury in Rev. Proc. 2020-20). The issue of who is covered by the exception is not expressly addressed in the Code or related regulations. This creates practical problems for nonresident aliens who don't want to run afoul of the US tax system, but also do not want to abandon ill family members, or who cannot travel due to logistics or danger caused by a medical condition that they do not themselves personally have, but which does directly restrict their ability to (safely) leave the United States.

The stakes are high: An individual who becomes a resident because of the application of the substantial presence test becomes subject to taxation of worldwide income and extensive U.S. tax reporting requirements (as well as the obligation to file FBARs), with little or no chance to prepare. Even those who are able to claim the benefit from the residence provision of an income tax treaty may still have to comply with some of the reporting requirements, which come with ferocious penalties which the government is enforcing with increasing rigor.

While this issue has been practically problematic for years, it has taken on new importance in light of COVID-19 and its related government mandated travel restrictions, quarantines and extensive travel disruptions. Individuals face impossible questions as to whether families must split to avoid the healthy member of the family becoming a resident or whether instead at risk or even seriously ill individuals must travel to avoid their family members or caregivers becoming resident. In the case of the pandemic, these issues are compounded by the reality that travel may simply be impossible or impractical, but the fundamental problem remains: The practical effect of the uncertainty is to inject tax considerations into management of a family member's illness or one's own risk of medical danger in travelling during a pandemic. We think this is unacceptable and inhumane. It also undermines the public policy reasons driving the government shutdowns of aiming to control the spread of COVID-19, which would also apply should we be faced with a likewise highly communicable disease at another time in the future.

The government partially sidestepped the issue in Rev. Proc. 2020-20 by essentially deeming all individuals to be suffering from a medical condition during their chosen COVID-19 Emergency Period. (We note that relief will expire no later than May 31.) We believe that the government should address this issue now, while it is considering the issue of the residence of aliens caught up in the coronavirus pandemic.

We recommend that Treasury and the IRS confirm that the medical condition exception of section 7701(b)(3)(D) can apply to persons other than the person who suffer from the medical condition that prevents that person from leaving. In other words, an alien individual need not personally be suffering more generally from a medical condition to be eligible for the medical condition exception if that individual is prevented from leaving because of a medical condition affecting another person, or because a medical pandemic makes travelling impossible or would threaten the health of the person or a family member.

The government can provide relief for those restricted from travel because a dependent, caregiver or immediate family member is sick, quarantined or of the person is otherwise unable to travel due to the other personal medical condition related reasons. Indeed, now as we address the realities of COVID-19, longer term improvements to the medical condition exception should be undertaken, including extending it, certainly to pandemics, but also to take into account a natural disaster or after a Presidential declaration of a national emergency. This need is immediate as related to the coronavirus and thus should at least be addressed on an urgent basis to the present situation, but a broader change is not beyond the scope of the IRS and Treasury's present focus.

Interpreting the medical condition exception more broadly is good public policy. We should avoid prompting communicable or at-risk individuals to travel earlier than is advisable due to the risk that they perpetuate the spread of COVID-19 or other illness, potentially endangering us all (as COVID-19 has demonstrated). The determination of such risk should be made at the highest government level, as evidenced by mandatory quarantines and travel bans, and not be compromised by requiring individuals to consider tax implications.

More generally, we should not place tax obstacles in the way of individuals with sick dependents. We should in fact encourage them to stay so that they can participate in the care of the person who is ill. In some cases, their presence may be necessary to provide consents for treatment of children or others who lack physical or mental capacity. Forcing nonresident aliens to choose between becoming tax residents and abandoning dependents in the United States is neither sensible nor humane. Similarly, such obstacles should not be placed upon persons for whom travel during a pandemic would be impossible or dangerous.

3.2 Authority

We appreciate that the IRS and Treasury may be concerned about their authority in this area without further statutory guidance.

(a) Regulatory Authority.

As noted in an earlier letter to the IRS and Treasury dated March 22, 2020, we argued that Treasury has the authority to apply the medical exemption definition.

As discussed in our earlier letter, the Explanation of Provisions in T.D. 8411 refers to Congressional intent that the exception apply in very few cases. The Explanation of Provisions is however not wholly accurate in this regard. The House Report cited in the Explanation of Provisions does not refer to an intent to apply the exception in very few cases. Rather, it says that the “The Committee [on Ways and Means] anticipates that few individuals will be physically unable to leave the United States.” It is reasonable to assume that the Committee did not anticipate an event such as the coronavirus pandemic or its multifarious effects, including quarantines, travel restrictions, lockdowns, and the virtual shutdown of the airline industry, and intended (or at least would not have opposed) the use of Treasury's regulatory authority in extraordinary situations.

We note also that the statute does not explicitly state that the medical condition must be one from which the individual in question is suffering. It could be read to apply to an individual unable to leave because of a medical condition affecting someone else. Most obviously, such an individual might be a dependent or a caregiver. For example, assume an alien cannot leave because his or her child or elderly parent or spouse is suffering from a medical condition, or other travel restrictions or dangers related to pandemic or epidemic medical conditions (even if the taxpayer is not then ill with the relevant disease, but would be at special risk of contracting it, for example because of age, should they travel).

We have carefully read through the regulations and the Explanation of Provisions and nowhere does it explicitly state that it is the individual whose residence is to be determined must be the person suffering from the medical condition; even if that was what the drafters had in mind, it is perfectly possible to read all of the relevant materials without finding a statement that only the person suffering from the medical condition could take advantage of the exception. If the government feels it must abide by the statute, legislative history, the regulations and the Explanation of Provisions, it is not precluded by the literal language of any of these from expanding the application to persons affected or potentially effected by someone else's illness, during the COVID-19 Emergency period or generally. The COVID-19 Emergency has highlighted that the ambiguity in the Code related to this inclusion of family members and other close relatives, caregivers and providers, and inability or unadvisability (from a medical standpoint) to travel during an epidemic or pandemic) creates an impossible situation in too many situations.

(b) Statutory Change.

While we believe the language of the existing statute is sufficient, legislative action is also possible if felt necessary and would be consistent with Congressional intent. Congress could amend section 7701(b)(3)(D) to clarify that the Secretary of the Treasury shall apply the exception to any person who (a) is the spouse or dependent of an individual who qualifies for the medical exception, (b) is a primary caregiver for such an individual, or (c) is a person for whom such an individual is a primary caregiver. or (d) in any case where a pandemic or Presidential declaration of a national emergency has caused travel to become impossible or dangerous, either generally or taking account of the individual's personal situation. The Secretary could be given authority to make rules designed to prevent improper use of the exception.

Congress could also confirm the approach taken by Treasury and the IRS in Rev. Proc. 2020-20 with respect to the coronavirus pandemic by confirming or extending its authority to apply this approach in the case of pandemics, natural disasters and other health emergencies.

* * * * *

Members of our group are at your disposal if you would like to discuss any of these matters or to elaborate further on our suggested alternatives.

Sincerely,

Michael J. A. Karlin
Karlin & Peebles, LLP
Attorneys At Law
Los Angeles, CA

Copies to:
Charles P. Rettig, Commissioner, Internal Revenue Service, commissioner@irs.gov Michael J. Desmond, Chief Counsel, Internal Revenue Service, michael.j.desmond@irscounsel.treas.gov

Peter Blessing, Associate Chief Counsel Peter Blessing, Associate Chief Counsel (International), Internal Revenue Service, peter.blessing@irscounsel.treas.gov

Daniel McCall, Deputy Associate Chief Counsel (International), Internal Revenue Service, daniel.m.mccall@irscounsel.treas.gov

Lara Banjanin, Senior Counsel, Associate Chief Counsel (International), Branch 1 Douglas Poms, International Tax Counsel, U.S. Department of the Treasury, douglas.poms@treasury.gov

Elizabeth Bell, Tax Counsel, U.S. House of Representatives, beth.bell@mail.house.gov Karen McAfee, Staff Director and General Counsel, U.S. House of Representatives, Ways and

Means Committee, Subcommittee on Oversight and Investigations, karen.mcafee@mail.house.gov