T.C. Memo. 2016-151
UNITED STATES TAX COURT
ERIC STEPHEN GERENCSER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8381-14. Filed August 10, 2016.
Eric Stephen Gerencser, pro se.
Wesley J. Wong, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
BUCH, Judge: Eric Stephen Gerencser is a U.S. citizen who lived and
worked in Germany as a North Atlantic Treaty Organization (NATO) contractor
during 2010 and 2011, the years in issue. For his NATO wages, Mr. Gerencser
claimed both a section 911 foreign earned income exclusion and a foreign tax
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[*2] credit.1 The Commissioner allowed the foreign earned income exclusion but
disallowed the foreign tax credit because it would be an impermissible double
benefit to exclude income and then claim a credit with respect to that same
income.2 As to other non-NATO income, Mr. Gerencser argues that he is entitled
to a foreign tax credit, but his argument fails because he has not shown that he has
paid or accrued any foreign taxes with respect to that income.3 He also argues that
the Convention between the United States of America and the Federal Republic of
Germany for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion With Respect to Taxes on Income and Capital and to Certain Other
Taxes,4 as amended by the 2006 Protocol5 (Treaty), provide him relief because he
qualifies as a German resident. The Treaty’s saving clause reserves the right of
1
Unless otherwise indicated, all section references are to the Internal
Revenue Code (Code) in effect for the years in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure. All monetary amounts are
rounded to the nearest dollar.
2
See sec. 911(d)(6).
3
See secs. 901(a) and (b), 905(b), (c)(2).
4
Aug. 29, 1989, Tax Treaties (CCH) para. 3203.01.
5
See Protocol Amending the Convention for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income
and Capital and to Certain Other Taxes, U.S.-Ger., June 1, 2006, Tax Treaties
(CCH) para. 3209 (2006 Protocol).
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[*3] the United States to tax its citizens on their worldwide income, regardless of
their residence. Because Mr. Gerencser is a U.S. citizen, he is not entitled to treaty
relief. Further, he is liable for the section 6662(a) accuracy-related penalty
because he negligently took an impermissible double benefit when he claimed
both foreign earned income exclusions and foreign tax credits on his NATO
wages.
FINDINGS OF FACT
Mr. Gerencser, a U.S. citizen, worked as a NATO contractor in Heidelberg,
Germany, during 2010 and 2011. The parties stipulated that he was subject to the
Protocol on the Status of International Military Headquarters Set Up Pursuant to
the North Atlantic Treaty.6 Under article 7, paragraph 2 of this agreement,
amounts paid for service as personnel of an Allied Headquarters are exempt from
German tax.
To obtain an explanation of his tax situation, Mr. Gerencser wrote a letter
dated May 6, 2009, to the Commissioner; he did not receive a response. After
speaking with a colleague, Mr. Gerencser came to the understanding that he could
owe a retroactive German income tax once his contract with NATO expired
6
Protocol on the Status of International Military Headquarters Set Up
Pursuant to the North Atlantic Treaty, Feb. 25, 1953, 5 U.S.T. 870 (1954).
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[*4] because Germany would retroactively treat him as a German resident who
was subject to German tax.
Mr. Gerencser filed Forms 1040, U.S. Individual Income Tax Return, for
2010 and 2011. For 2010 he reported $120,530 in NATO wages and claimed a
foreign earned income and housing exclusion of $120,460 and a foreign tax credit
of $26,716. He also reported U.S. military pension income, taxable interest,
dividends, rental income, and a capital loss from securities transactions for that
year. Similarly, for 2011 he reported $119,673 in NATO wages and claimed a
foreign earned income and housing exclusion of $117,436 and a foreign tax credit
of $35,229. In addition, he reported U.S. military pension income, taxable
interest, dividends, rental income, and a capital gain from securities transactions.
On November 15, 2013, the Commissioner issued to Mr. Gerencser a notice
of deficiency for taxable years 2010 and 2011. The Commissioner determined the
following deficiencies in tax and accuracy-related penalties:
Penalty
Year Deficiency sec. 6662(a)
2010 $31,823 $6,365
2011 33,787 6,757
Among other adjustments, the Commissioner determined that Mr. Gerencser was
not entitled to a foreign tax credit on his NATO wages because he had claimed
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[*5] those wages were exempt under the foreign earned income exclusion. The
Commissioner also determined that Mr. Gerencser had an additional capital gain
for 2010 of $15,351 and was not entitled to $1,460 in itemized deductions for
2010.
When Mr. Gerencser received this notice of deficiency, he had a case
pending before our Court involving his 2009 taxable year.7 On February 20, 2014,
the Court entered a stipulated decision pursuant to an agreement of the parties that
Mr. Gerencser did not owe any additional tax or penalties for 2009.
Mr. Gerencser timely filed his petition while residing in Germany, and trial
was held in Las Vegas, Nevada. The parties have agreed that he is not liable for
tax on the unreported capital gain for 2010 and that he is entitled to the disallowed
itemized deductions for 2010. The parties further stipulated that he “is not entitled
to claim a foreign tax credit with respect [to] his wages from NATO for taxable
years 2010 and 2011.” Mr. Gerencser has not paid any German income taxes for
the 2010 or 2011 taxable year as to either his NATO or his non-NATO income.
7
Docket No. 4959-13.
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[*6] OPINION
We must decide whether Mr. Gerencser is entitled to foreign tax credits or
treaty benefits related to his non-NATO income. To do so, we apply the foreign
tax credit rules under the Code and the Treaty.
I. Burden of Proof
The Commissioner’s determinations in the notice of deficiency are generally
presumed correct, and taxpayers bear the burden of proving otherwise.8 Allowing
foreign tax credits is an act of legislative grace, and taxpayers must prove that they
have met all the conditions to be entitled to any credit.9 In limited situations the
burden may shift to the Commissioner under section 7491(a), but there is
insufficient information in the record to conclude that the burden should shift
under section 7491(a), and Mr. Gerencser does not argue that the burden should
shift. Accordingly, the burden remains on him.
II. No Foreign Tax Credit Available to Mr. Gerencser
Section 901 allows taxpayers a foreign tax credit for foreign income, war
profits, and excess profits taxes they have paid or accrued during the taxable
8
Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
9
Wilcox v. Commissioner, T.C. Memo. 2008-222, slip op. at 27 (relying on
Irving Air Chute Co. v. Commissioner, 143 F.2d 256, 259 (2d Cir. 1944), aff’g 1
T.C. 880 (1943)).
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[*7] year.10 Taxpayers, including cash basis taxpayers, may elect to take foreign
tax credits for the year the taxes accrued.11 However, no credit is allowed for
accrued taxes that are not paid within two years after the close of the taxable year
to which they relate.12 If taxpayers subsequently pay foreign taxes,13 then they can
file a claim for a credit or refund within 10 years from the date prescribed by law
for filing the return for the year for which such taxes were actually paid.14
Section 911(a) allows qualified individuals, as defined in subsection (d), to
exclude from their gross income a portion of their foreign earned income and
housing costs.15 For any amount of foreign earned income that is excluded under
section 911(a), taxpayers cannot take a double benefit by claiming tax credits on
10
Sec. 901(a) and (b); sec. 1.901-1(a), Income Tax Regs.
11
Sec. 905(a); sec. 1.901-1(a), Income Tax Regs. Notably, once taxpayers
elect accrual they must follow this treatment for subsequent tax years.
12
Sec. 905(c)(2)(A).
13
Sec. 905(c)(2)(B).
14
Sec. 6511(d)(3).
15
See sec. 911(b) and (c); Adair v. Commissioner, T.C. Memo. 1995-493,
slip op. at 30 (NATO employees are not considered employees of the United
States and accordingly qualify for the section 911 foreign earned income
exclusion).
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[*8] the same income.16 If taxpayers elect the foreign earned income and housing
exclusion treatment for their foreign earned income, they likewise cannot take a
foreign tax credit for any tax paid on the foreign earned income that was
excluded.17
A. Mr. Gerencser Is Not Entitled to a Foreign Tax Credit on His NATO
Earnings.
Mr. Gerencser is not entitled to a foreign tax credit on his NATO wages for
the years in issue because he has already excluded them from income using the
foreign earned income and housing cost exclusion of section 911(a). For 2010 the
Commissioner allowed Mr. Gerencser to exclude $120,460 total, which includes
$28,960 of housing costs and $91,500 of foreign earned income. For 2011 the
Commissioner allowed Mr. Gerencser to exclude $117,436 total, which includes
$24,536 of housing costs and $92,900 of foreign earned income. And even if Mr.
Gerencser had paid or accrued foreign tax on these wages, which he has not, he
would not be entitled to a foreign tax credit because it would violate the
16
Sec. 911(d)(6).
17
Sec. 911(d)(6), (e); sec. 1.911-6(a), (c), Income Tax Regs.; see also
Faltesek v. Commissioner, 92 T.C. 1204, 1207 (1989) (“[S]ection 911(d)(6) makes
clear that no such credit would be available to the extent that it is allocable to
amounts excluded from gross income under section 911(a).”); LeTourneau v.
Commissioner, T.C. Memo. 2012-45, slip op. at 16.
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[*9] impermissible double benefit rule of section 911(d)(6). The parties further
agreed that he is not entitled to a foreign tax credit for his NATO wages.
B. Mr. Gerencser Is Not Entitled to a Foreign Tax Credit on His Non-
NATO Income.
Mr. Gerencser is not entitled to a foreign tax credit relating to his non-
NATO income because he has not paid any foreign tax. For 2010 and 2011 he
reported U.S. military pension income, taxable interest, dividends, rental income,
and capital losses from securities transactions, but he has not paid any German
income taxes for 2010 or 2011. Even if Mr. Gerencser had elected a credit for
accrued foreign tax credits, he cannot receive the benefit of accrued foreign taxes
because he did not pay any taxes within two years after the close of the 2010 or
2011 tax year.18 Accordingly, he is not entitled to any foreign tax credits on his
other income streams at this time.
III. No Treaty Relief Available for Mr. Gerencser
Mr. Gerencser argues that because he is a resident of Germany, his income
should be exempt from U.S. tax under the Treaty.19 He is wrong. The United
18
See sec. 905(c)(2)(A).
19
See Convention for the Avoidance of Double Taxation and the Prevention
of Fiscal Evasion With Respect to Taxes on Income and Capital and to Certain
Other Taxes, U.S.-Ger., Aug. 29, 1989, Tax Treaties (CCH) para. 3203.01.
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[*10] States reserves the right to tax its citizens on their worldwide income,
regardless of their residence,20 and Mr. Gerencser is a U.S. citizen. The Treaty
reflects this approach in the saving clause: “Except to the extent provided in
paragraph 5, this Convention shall not affect the taxation by the United States of
its residents (as determined by Article 4 (Residence)) and its citizens.”21 We have
previously explained that the “United States insists on the inclusion of a ‘savings
clause’ in its tax treaties; the effect of this clause is to reserve the right of the
United States to tax its citizens and residents on the basis of the provisions of the
Internal Revenue Code without regard to the provisions of the treaty.”22 None of
20
See, e.g., Crow v. Commissioner, 85 T.C. 376, 380 (1985) (“The United
States was historically and continues to be virtually unique in taxing its citizens,
wherever resident, on their worldwide income, solely by reason of their
citizenship.”); Filler v. Commissioner, 74 T.C. 406, 410 (1980) (“Although many
foreign countries tax their residents on their worldwide income, the United States
taxes its citizens, as well as its residents, on their worldwide income.”).
21
2006 Protocol, art. I(4)(a).
22
Filler v. Commissioner, 74 T.C. at 410; see also Abrahamsen v.
Commissioner, 142 T.C. 405, 410-411 (2014); Duncan v. Commissioner, 86 T.C.
971, 974-975 (1986); cf. Crow v. Commissioner, 85 T.C. at 392-393 (holding that
the saving clause did not apply to an individual who had relinquished his U.S.
citizenship).
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[*11] the income that Mr. Gerencser had during the years in issue is exempt from
the saving clause.23
Although the saving clause does not affect the treaty rules for relief from
double taxation found in article 23, this article provides that the United States will
allow a credit for income taxes paid to Germany.24 But Mr. Gerencser has not paid
any income taxes to Germany.
Mr. Gerencser further argues that the Treaty and the Code are in conflict
and that he should be entitled to treaty relief despite not filing treaty-based returns
for the years in issue. It is well established that neither a treaty nor a law takes
precedence merely by virtue of its status as a treaty or law.25 If there is a conflict
between a Code provision and a treaty provision, then the provision that was
enacted later in time controls.26 But there first must be an irreconcilable conflict,
because “when a treaty and a statute relate to the same subject, courts will always
23
Article I(5) of the 2006 Protocol provides the exceptions to the saving
clause found in article I(4)(a), and these exceptions do not include any of the
provisions that would otherwise cover Mr. Gerencser’s income.
24
2006 Protocol, art. XII (adding a new article 23).
25
See sec. 7852(d)(1).
26
Lindsey v. Commissioner, 98 T.C. 672, 676 (1992), aff’d without
published opinion, 15 F.3d 1160 (D.C. Cir. 1994).
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[*12] attempt to construe them so as to give effect to both”.27 Mr. Gerencser’s
conflict arguments fail because the saving clause of the Treaty bars him from
obtaining relief. There is no conflict between the Code and the Treaty.
IV. Section 6662(a) Accuracy-Related Penalties
Section 6662(a) and (b)(1) and (2) imposes a 20% accuracy-related penalty
on any portion of an underpayment of tax required to be shown on a return if the
underpayment is due to, among other reasons, negligence, disregard of rules or
regulations, or any substantial understatement of income tax. The Commissioner
bears the burden of production as to penalties.28 Penalties will not apply to any
portion of the underpayment for which a taxpayer establishes that he or she had
reasonable cause and acted in good faith.29
As defined in the Code, negligence includes any failure to make a
reasonable attempt to comply with the provisions of title 26, and the term
27
Estate of Burghardt v. Commissioner, 80 T.C. 705, 713 (1983), aff’d
without published opinion, 734 F.2d 3 (3d Cir. 1984); see also Nw. Life Assurance
Co. of Can. v. Commissioner, 107 T.C. 363, 378 (1996).
28
Sec. 7491(c).
29
Sec. 6664(c)(1).
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[*13] “disregard” includes any careless, reckless, or intentional disregard.30
Negligence has been further defined as a “lack of due care or failure to do what a
reasonable and ordinarily prudent person would do under the circumstances.”31
Additionally, a taxpayer is negligent if he fails to maintain sufficient records to
substantiate the items in question.32
The Commissioner satisfied his burden of production because he showed
that Mr. Gerencser negligently took foreign tax credits for his NATO wages that
he had also claimed were excluded from his gross income by the foreign earned
income and housing cost exclusion; a double benefit that is directly and expressly
prohibited by the Code.
If a taxpayer takes a return position that would seem “too good to be true”
to a reasonable person and fails to make further reasonable inquiries to verify that
the return position is correct, then this is a strong indication that the taxpayer is
30
Sec. 6662(c).
31
Neely v. Commissioner, 85 T.C. 934, 947 (1985) (quoting Marcello v.
Commissioner, 380 F.2d 499, 506 (5th Cir. 1967), aff’g in part, remanding in part
43 T.C. 168 (1964), and T.C. Memo. 1964-299).
32
Higbee v. Commissioner, 116 T.C. 438, 449 (2001); sec. 1.6662-3(b)(1),
Income Tax Regs.
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[*14] negligent.33 Taxpayers are “required to take reasonable steps to determine
the law and to comply with it”34 and must exercise due care when claiming a
deduction.35 Here, a reasonable person would have thought the double benefit of a
foreign tax credit and a foreign earned income exclusion on the same income
seemed too good to be true, and Mr. Gerencser had a duty to inquire further before
taking this position. After hearing about his colleague’s predicament, Mr.
Gerencser sent a letter to the Commissioner to further inquire but never received a
response. Instead of seeking out competent advice from a tax professional, he
prepared his returns and explained that he “had to come up with my own way to
file those taxes that would cover, so to speak, the waterfront and capture my
33
Sec. 1.6662-3(b)(1)(ii), Income Tax Regs.; see, e.g., Viralam v.
Commissioner, 136 T.C. 151, 174-175 (2011) (explaining further inquiry was
required because “[a] reasonable or prudent person would have perceived as ‘too
good to be true’ a deduction for a supposed charitable contribution where the
amounts deducted could be used to fund student loans for his own children”);
Hansen v. Commissioner, T.C. Memo. 2004-269, 2004 WL 2677035, at *10
(“When an investment has such obviously suspect tax claims as to put a reasonable
taxpayer under a duty of inquiry, a good faith investigation of the underlying
viability, financial structure, and economics of the investment is required.”), aff’d
471 F.3d 1021 (9th Cir. 2006).
34
Niedringhaus v. Commissioner, 99 T.C. 202, 222 (1992).
35
Sacks v. Commissioner, 82 F.3d 918, 920 (9th Cir. 1996), aff’g T.C.
Memo. 1994-217.
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[*15] situation.” Because he did not make a reasonable inquiry to determine
whether his return position was correct, he was negligent.
Mr. Gerencser did not prove he acted with reasonable cause and in good
faith. Although Mr. Gerencser wrote to the Commissioner to ask for guidance, he
never received a response. Instead, he believed that he would be taxed at some
time in the future by Germany because of the conversations he had with his
colleague, who was not a tax professional. He then reported both the foreign
income and housing cost exclusion and foreign tax credit for his NATO wages.
His position is not reasonable because it would provide him a double benefit.
Further, Mr. Gerencser did not show that he had paid or accrued any foreign taxes
to entitle him to offset his U.S. tax with foreign tax credits.
Mr. Gerencser appears to argue that the stipulated decision entered in 2014
for his 2009 taxable year should affect the outcome of this proceeding or at least
should prove that his position was reasonable. To the extent that he is making a
collateral estoppel argument, this argument fails because the previous stipulated
decision entered for 2009 was not a conclusive determination on the merits by our
Court.36 Moreover, we look at whether the position taken by Mr. Gerencser on his
36
See O’Sullivan v. Commissioner, T.C. Memo. 1994-395 (holding that a
stipulated decision for another taxable year does not have preclusive affect under
(continued...)
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[*16] return was negligent. Mr. Gerencser filed his returns for 2010 and 2011
before he commenced his 2009 case and years before he entered into a stipulated
decision.
Mr. Gerencser’s underpayment of tax was due to his negligence, and he is
liable for the section 6662(a) accuracy-related penalties for both years.
V. Conclusion
Mr. Gerencser is not entitled to any foreign tax credits because he has not
paid or accrued any foreign tax. Accordingly, we sustain the Commissioner’s
disallowance of the foreign tax credits Mr. Gerencser claimed for 2010 and 2011
and find him liable for the section 6662(a) accuracy-related penalties for those
years.
36
(...continued)
the doctrine of collateral estoppel because there has been no determination by the
Court), aff’d, 95 F.3d 1158 (9th Cir. 1996); see also United States v. Stauffer
Chem. Co., 464 U.S. 165, 170-171 (1984) (“As commonly explained, the doctrine
of collateral estoppel can apply to preclude relitigation of both issues of law and
issues of fact if those issues were conclusively determined in a prior action.”);
Commissioner v. Sunnen, 333 U.S. 591, 598 (1948) (“But if the later proceeding is
concerned with a similar or unlike claim relating to a different tax year, the prior
judgment acts as a collateral estoppel only as to those matters in the second
proceeding which were actually presented and determined in the first suit.”).
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[*17] To reflect the foregoing,
Decision will be entered
under Rule 155.