Attorney-at-Law

A SMALL TOWN IN GERMANY

In Uncategorized on 01/20/2016 at 17:07

I haven’t gone in for writing John LeCarre spy-counterspy stories. I take the title of Mr. Cornwell’s 1968 novel to discuss Gerd Topsnik, lead-off hitter in 146 T. C., and his peregrinations from Germany to the United States to the Philippines. In the meantime, IRS hits Gerd with a $139K deficiency when Gerd tried to bail on his US Green Card without jumping through the Section 877A hoops and disgorging appropriately.

There are actually three (count ‘em, three) towns in Germany (whether small or not I cannot tell) where Gerd claims his German passport, driver license and actual abode was situated, but the German Competent Authority couldn’t find hide nor hair of Gerd, so the tax treaty between US and Germany avails him not. Though Germany taxes its citizens on their world-wide income (I bet you didn’t know that either), Gerd never paid taxes there.

Gerd sold out of his CA gourmet food business after a feud with his partners, and got paid on the installment plan.

The issue was the value of the installment obligation in Gerd’s hand the day before he handed in his green card. That is, the day he filed Form I-407, the official notice to bail, and US Citizenship & Immigration Service accepted the form.

Gerd had a wee problem. “Since filing his Form I-407 petitioner has failed to file the required Form 8854, Initial and Annual Expatriation Statement, and has failed to certify, under penalties of perjury, that he has complied with all of his U.S. Federal tax obligations for the five taxable years preceding the taxable year that includes the expatriation date, including his obligations to file income tax returns and obligations to pay all relevant tax liabilities, interest, and penalties.” 146 T. C. 1, at p. 5.

Gerd couldn’t so certify, because he hadn’t.

You can see where this is going. IRS hit Gerd with a jeopardy assessment and levied on the monthly installment payments Gerd was getting from his former partners. Gerd sued in USDCCDCA, but got tossed because he claimed he resided in Germany, and had therefore to go to USCFC, which has jurisdiction over tax refund claims wherever the claimant may be. This Gerd did, while his appeal to Ninth Circuit over the District Court toss was pending. IRS objected, but Gerd’s case is still in USCFC.

Meanwhile, Gerd is fighting in Tax Court, and Judge Kerrigan gives IRS summary J.

Gerd claims he’s a German national and protected from the US tax regime by virtue of the tax treaty. But the magic language is in a protocol adopted after the treaty was signed, which reads as follows: “For the purposes of this Convention, the term ‘resident of a Contracting State’ means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation, or any other criterion of a similar nature, and also includes that State and any political subdivision or local authority thereof. The term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or of profits attributable to a permanent establishment in that State or capital situated therein.” 146 T. C. 1, at p. 12.

Now intangible property (like an installment note from a US partnership) is taxed in country of residence, per the treaty. And Gerd had his green card until he handed it over. The German Competent Authority couldn’t find Gerd in “the German township of Oerlenbach, Freiburg City, or Bruchsal.” 146 T. C. 1, at p. 17. Occasional stopovers in the odd wirtschaft don’t cut it.

Question remaining: is Gerd a “covered expatriate” per Section 877(a)? In that case all his property is marked-to-market as of the day before the day he bails, and he owes tax on the ganze geschäft.

Judge Kerrigan: “Section 877A(i) provides that the Secretary shall prescribe regulations as may be necessary and appropriate to carry out the purposes of the section. Such regulations have not been yet been provided. Instead, the IRS has promulgated guidance regarding this section in Notice 2009-85, 2009-45 I.R.B. 598.   We are not bound by Notice 2009-85, supra…, but it is an official statement of the Commissioner’s position and we may let it persuade us….” 146 T. C. 1, at p. 20 (citations omitted).

Judge Kerrigan lets it persuade her.

The test is whether the property would be included in Gerd’s estate for estate tax purposes if he had died, rather than bailed. Of course it would.

And Gerd’s claim that he made the sale before Section 877A was enacted is nothing to the point. He still held the installment note, it was worth a bundle, and payments were still due.

What remains to be litigated in USCFC is a good question.

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