Introduction
Much of the current litigation between taxpayers and the United States has centered on the definition of willfulness or whether the non-willful FBAR penalty should apply on a per year or per account basis. Accordingly, there have been very few cases covering other requirements the United States must show to meet its burden of proof to impose FBAR penalties.

Tax professionals should expect that to change in the future. Indeed, a recent Order from the Southern District of California serves as a reminder that the United States must show various other requirements outside the willful context.[i] In Aroeste, the dispute between the taxpayer and the United States was an ostensibly simple one: whether a tax treaty between the United States and Mexico could serve to abrogate the definition of a “United States person” under the FBAR-reporting rules.

The Meaning of “United States Person”
Only “United States persons” have obligations to file FBARs. Of course, this includes those born in the United States who have not taken effective actions to expatriate. This also includes, however, “a resident of the United States,” which is defined further in the Title 31 regulations as “an individual who is a resident alien under 26 U.S.C. § 7701(b) and the regulations thereunder but using the definition of ‘United States’ provided in 31 C.F.R. § 1010.100(hhh) rather than the definition of ‘United States’ in 26 C.F.R. § 301.7701(b)-1(c)(2)((ii).”[ii]

The interplay between section 7701(b) (located in Title 26 of the Code) and 31 C.F.R. § 1010.350(b) (located in Title 31 of the Code) is somewhat complex. Under section 7701(b), a non-U.S. citizen is treated as a “resident alien” if he or she is a “lawful permanent resident of the United States at any time” during a calendar year.[iii] Moreover, an individual is a “lawful permanent resident” if he or she has been “lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with immigration laws” and if “such status has not been revoked (and has not been administratively or judicially determined to have been abandoned).”[iv] In common parlance, a “lawful permanent resident” is often referred to as having a “green card.”

However, section 7701 confirms that so-called “green card” status can terminate—at least for federal tax purposes—if an individual “commences to be treated as a resident of a foreign country under provisions of a tax treaty between the United States and the foreign country, the individual does not waive the benefits of such treaty applicable to residents of the foreign country, and the individual notifies the Secretary of the commencement of such treatment.[v]

The Discovery Dispute in Aroeste
Factual Background
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