We welcome back guest blogger Robert G. Nassau. Professor Nassau teaches at Syracuse University College of Law and directs its low income taxpayer clinic. Today he discusses a little-known tax increase that the December 2017 tax law may cause for agricultural guest workers who pay taxes as non-US residents. As a former Vermont resident I take issue with Professor Nassau’s maple syrup supremacy claims, but on a professional level I had similar experiences working with Jamaican guest workers who pick Vermont’s apples and other crops, working long, hard hours far from home to support their families in Jamaica. Any tax increase will be sorely felt by these taxpayers. Christine
Until recently, I thought I had left International Tax in my side-view mirror (“rear-view mirror” is a cliché, and I was taught to avoid those). Back when dinosaurs roamed the Earth and I was a Big Law Tax Associate, three of my “specialties” were Eurodollar transactions, foreign tax credit maximization, and FIRPTA (don’t bother to look it up), none of which was relevant when I moved to Little Law, but all of which validated my bona fides when Syracuse University College of Law was looking for an adjunct to teach International Tax. Years later, SUCOL had sadly dropped International Tax, but happily added a Low Income Taxpayer Clinic, which I, as the devil they knew, got to direct. And, as they say, the rest is history. (So much for avoiding clichés.)
Last year, our Clinic formed a relationship with the Legal Aid Society of Mid-New York, through which LASMNY referred to us a number of foreign “temporary agricultural workers.” These gentlemen, mostly from Jamaica, validly reside in the United States and work in our agriculture industry. They receive H-2A Visas and have Social Security Numbers. Some come every year; some come for two or three months; and some come for as long as six or seven months. (For those readers whose notion of New York is Broadway and Wall Street, please note that the Empire State is #2 nationally in apple production, #2 in cabbage (think sauerkraut), #3 in pumpkins and grapes (we have over 400 wineries), and #4 in sweet corn, squash and snap beans. We are also #1 in the world, both quantitatively and qualitatively, in maple syrup. Take that Justin Trudeau!)
For tax purposes, these non-U.S. citizens are classified either as resident aliens, in which case their income tax treatment is nearly identical to that of a citizen, or nonresident aliens, in which case their income tax treatment is governed by special rules in Subchapter N of the Code (Section 861 et seq.). The definitions of resident alien and nonresident alien are set forth in Section 7701(b), which, for the holder of an H-2A Visa, looks to a formula based on days of physical presence within the United States. By way of simple example, someone in the U.S. for 90 days a year would always be a nonresident alien (“NRA”), whereas someone in the U.S. for 150 days a year would quickly become a resident alien.
Among the special rules governing the tax treatment of NRAs are Sections 873(a) and (b), which limit an NRA’s allowable deductions. For tax years prior to 2018, an NRA was not allowed a standard deduction, but was allowed a personal exemption, pursuant to Section 873(b)(3), which provided – and still provides:
The deduction for personal exemptions allowed by section 151, except that only one exemption shall be allowed under section 151 unless the taxpayer is a resident of a contiguous country or is a national of the United States.
Now comes TCJA 2018, which, as we all know, was not the poster child for precise statutory draftsmanship, but did, for tax years 2018 through 2025, eliminate personal and dependent exemptions, replacing them with a larger standard deduction and expanded child tax credit. Or at least it did this for U.S. citizens and resident aliens. But what about NRAs?
Congress’ method for eliminating personal exemptions was not to repeal Section 151, but rather, in Section 151(d)(5)(A), to make the “exemption amount” zero for 2018 through 2025. But that’s not all Congress did. Realizing that the concepts of “dependent” and “exemption amount” had repercussions throughout the Code, Congress also enacted Section 151(d)(5)(B), which provides:
For purposes of any other provision of this title, the reduction of the exemption amount to zero under subparagraph (A) shall not be taken into account in determining whether a deduction is allowed or allowable, or whether a taxpayer is entitled to a deduction, under this section.
During 2018, the Treasury Department released some guidance regarding Section 151(d)(5)(B). For example, in Notice 2018-70, it announced that the exemption amount should not be treated as zero for purposes of determining whether someone is one’s qualifying relative, which is relevant for the new partial child tax credit for taxpayers who do not have a qualifying child; and in Notice 2018-84, it announced similar principles for purposes of the premium tax credit and shared responsibility payment.
But crickets regarding Section 873(b)(3) . . . until the recent publication of the tax forms used by NRAs: Form 1040NR and Form 1040NR-EZ. In each of these Forms, the line once used for claiming personal exemptions is gone. The IRS has not yet released Instructions for Form 1040NR, but it has for Form 1040NR-EZ, and there, under “What’s New” is the sentence: “For 2018, you cannot claim a personal exemption.”
So, the IRS has clearly concluded that, notwithstanding Section 151(d)(5)(B), an NRA is no longer entitled to any personal exemptions. But is that right? The plain language of Section 151(d)(5)(B) states: “For purposes of any other provision of this title, the reduction of the exemption amount to zero under subparagraph (A) shall not be taken into account in determining whether a deduction is allowed or allowable or whether a taxpayer is entitled to a deduction, under this section” (emphasis added). Certainly, Section 873(b)(3) is an “other provision of this title.” Can’t one argue that the reduction of the exemption amount to zero is irrelevant for purposes of allowing an NRA to claim personal exemptions, because that reduction is “not to be taken into account in determining whether a deduction is allowed” for purposes of Section 873(b) (an “other provision”)?
The only relevant Legislative History for Section 151(b)(5)(B) is found in a footnote in the TCJA Conference Report, which states:
The provision also clarifies that, for purposes of taxable years in which the personal exemption is reduced to zero, this should not alter the operation of those provisions of the Code which refer to a taxpayer allowed a deduction (or an individual with respect to whom a taxpayer is allowed a deduction) under section 151.
Section 873(b)(3) does not “refer” to a taxpayer allowed a deduction under Section 151; it actually allows the deduction. But then, neither does the definition of qualifying relative in Section 152(d) refer to a taxpayer allowed a deduction under Section 151; rather, it refers to the exemption amount, and the Treasury Department has decided that is good enough for Section 151(d)(5)(B) purposes.
I do not know the answer to this question of statutory interpretation, though I feel there is enough in Section 151(d)(5)(B), and not enough contrary anywhere else, to take a valid reporting position that an NRA is still entitled to a personal exemption. But, I’m prepared to be proven wrong.
It would, of course, have been nice if Congress had spoken more clearly on this issue by, perhaps, explicitly suspending Section 873(b)(3) for 2018 through 2025. Or, in the alternative, Congress could have said it wanted NRAs to start paying tax from Dollar One. Because the bottom line, if the new Form 1040NR is correct, is that a temporary agricultural worker making $7,000 during his 100 days in America in 2018 will now owe $700 in tax, rather than $285. Is that really what Congress intended? Is that really fair?