SCOTUS Reports

Tag: Topsnik v. Commissioner

  • Topsnik v. Commissioner, 146 T.C. 1 (2016): Expatriation Tax and Mark-to-Market Regime under I.R.C. § 877A

    Topsnik v. Commissioner, 146 T. C. 1 (2016)

    In Topsnik v. Commissioner, the U. S. Tax Court ruled that Gerd Topsnik, a German citizen and former U. S. lawful permanent resident (LPR), was liable for U. S. taxes on gains from an installment sale of stock and on the deemed sale of his installment obligation under I. R. C. § 877A upon expatriation. The court determined that Topsnik expatriated on November 20, 2010, when he formally abandoned his LPR status, and was a “covered expatriate” due to non-compliance with U. S. tax obligations, thus subjecting him to the mark-to-market tax regime.

    Parties

    Petitioner: Gerd Topsnik, a German citizen who was a lawful permanent resident of the United States from February 3, 1977, until his expatriation on November 20, 2010. Respondent: Commissioner of Internal Revenue.

    Facts

    Gerd Topsnik, a German citizen, became a lawful permanent resident of the United States on February 3, 1977. In 2004, he sold his stock in Gourmet Foods, Inc. , a U. S. corporation, for $5,427,000 in an installment sale. The sale terms included an initial down payment and subsequent monthly payments of $42,500 until the full amount was paid. In 2010, Topsnik received $510,000 in monthly installment payments. On November 20, 2010, he formally abandoned his LPR status by filing a Form I-407 with the U. S. Citizenship and Immigration Services. Topsnik did not file a Form 8854 to certify compliance with U. S. tax obligations for the five preceding years nor did he file a U. S. income tax return for 2010 until August 2, 2011, when he filed a delinquent Form 1040NR claiming the installment payments were exempt under the U. S. -Germany Tax Treaty.

    Procedural History

    The Commissioner issued a notice of deficiency for the 2010 tax year, asserting a deficiency of $138,903, an accuracy-related penalty of $27,781, and an addition to tax for failure to timely file of $13,890. The deficiency included tax on the first 11 monthly installment payments received in 2010 and on the deemed sale of the installment obligation under I. R. C. § 877A. Topsnik moved for summary judgment, contending that he was a German resident in 2010 and that § 877A did not apply. The Commissioner cross-moved for partial summary judgment, asserting that Topsnik was not a German resident and was a “covered expatriate” subject to § 877A. The Tax Court granted the Commissioner’s motion for partial summary judgment and denied Topsnik’s motion.

    Issue(s)

    Whether Gerd Topsnik was a resident of Germany during 2010 under the U. S. -Germany Tax Treaty?
    Whether Gerd Topsnik was a “covered expatriate” under I. R. C. § 877A and thus subject to the mark-to-market regime upon his expatriation on November 20, 2010?
    Whether I. R. C. § 877A applies to the right to receive installment payments from the 2004 sale of stock and whether the Commissioner correctly applied § 877A to Topsnik’s transaction?

    Rule(s) of Law

    Article 4 of the U. S. -Germany Tax Treaty defines a “resident of a Contracting State” as any person liable to tax therein by reason of domicile, residence, place of management, place of incorporation, or any other similar criterion, excluding persons liable to tax only on income from sources within that state. I. R. C. § 877A imposes a mark-to-market regime on “covered expatriates,” treating all property as sold on the day before expatriation. A “covered expatriate” includes any long-term resident who ceases to be a lawful permanent resident of the United States and fails to certify compliance with U. S. tax obligations for the five preceding years. An installment obligation is treated as property for purposes of the Code and is subject to valuation.

    Holding

    The Tax Court held that Gerd Topsnik was not a resident of Germany during 2010 under the U. S. -Germany Tax Treaty. Topsnik expatriated on November 20, 2010, when he formally abandoned his LPR status. He was a “covered expatriate” under I. R. C. § 877A due to his failure to certify compliance with U. S. tax obligations for the five preceding years. Consequently, Topsnik was liable for tax on the gains from the first 11 monthly installment payments received in 2010 before his expatriation and on the deemed sale of his right to receive future installment payments under § 877A.

    Reasoning

    The court determined that Topsnik was not a German resident in 2010 because he was not subject to German taxation on his worldwide income, as required by Article 4 of the U. S. -Germany Tax Treaty. Topsnik’s German contacts, such as a driver’s license and passport, were insufficient to establish residency under the treaty’s definition. The court found that Topsnik’s expatriation date was November 20, 2010, when he filed a Form I-407 and surrendered his green card. As a long-term resident who failed to certify tax compliance for the five preceding years, Topsnik was a “covered expatriate” subject to the mark-to-market regime under § 877A. The court rejected Topsnik’s argument that § 877A could not be applied retroactively to his 2004 transaction, finding that the installment obligation was property subject to valuation on the day before expatriation. The court also upheld the Commissioner’s application of § 877A, finding that the fair market value of the installment obligation was correctly determined based on the unpaid principal and accrued interest as of November 19, 2010.

    Disposition

    The Tax Court granted the Commissioner’s motion for partial summary judgment and denied Topsnik’s motion for summary judgment. An appropriate order was issued.

    Significance/Impact

    The Topsnik decision clarifies the application of I. R. C. § 877A to long-term residents who expatriate and fail to certify compliance with U. S. tax obligations. It reinforces the importance of the mark-to-market regime in ensuring that expatriates are taxed on unrealized gains upon expatriation. The decision also underscores the stringent requirements for establishing residency under tax treaties, requiring liability for worldwide income taxation. Subsequent cases have cited Topsnik in interpreting the scope of § 877A and the definition of “covered expatriate. ” The ruling has practical implications for tax practitioners advising clients on expatriation and the potential tax consequences of failing to comply with certification requirements.

  • Topsnik v. Commissioner, 143 T.C. 240 (2014): Taxation of Nonresident Aliens and Application of Tax Treaties

    Topsnik v. Commissioner, 143 T. C. 240 (2014)

    In Topsnik v. Commissioner, the U. S. Tax Court ruled that a German citizen, Gerd Topsnik, remained a U. S. resident for tax purposes during 2004-2009 despite his claim of German residency. The decision hinged on Topsnik’s failure to formally abandon his U. S. lawful permanent resident status until 2010. As a result, he was subject to U. S. taxation on his worldwide income, including gains from an installment sale of U. S. stock. The court also upheld penalties for late filing and payment, emphasizing the significance of formal procedures in determining tax residency status under U. S. law and treaties.

    Parties

    Gerd Topsnik, the Petitioner, was the plaintiff in this case before the U. S. Tax Court. The Respondent was the Commissioner of Internal Revenue, representing the U. S. government. Topsnik was a German citizen who had been a lawful permanent resident of the United States since 1977. The Commissioner challenged Topsnik’s tax filings and sought to impose income tax deficiencies and penalties for the years 2004 through 2009.

    Facts

    Gerd Topsnik, a German citizen, became a lawful permanent resident (LPR) of the United States in 1977. In 2004, he sold his shares in Gourmet Foods, Inc. (GFI), a U. S. corporation, for $5,427,000, with payments made in installments over several years. Topsnik received a down payment of $1. 6 million in 2004 and monthly payments of $42,500 from 2004 to 2009. He filed U. S. tax returns for 2004 and 2005, reporting identical portions of the gain from the stock sale, but did not file returns for 2006-2009. Topsnik claimed he had informally abandoned his LPR status in 2003 and resided in Germany during the years in issue, thus asserting he was exempt from U. S. taxation under the U. S. -Germany Income Tax Treaty. The Commissioner argued that Topsnik remained a U. S. LPR until 2010 and was not a German resident for tax purposes.

    Procedural History

    The Commissioner issued a notice of deficiency to Topsnik for tax years 2004-2009, asserting deficiencies and additions to tax under IRC sections 6651(a)(1), 6651(a)(2), and 6654. Topsnik challenged these determinations in the U. S. Tax Court. Prior to the Tax Court case, Topsnik had filed a complaint in the U. S. District Court for the Central District of California to review the Commissioner’s jeopardy assessments and levies, but the case was dismissed for lack of venue due to Topsnik’s residence in Germany. The Tax Court considered the case de novo, focusing on Topsnik’s residency status and tax liability.

    Issue(s)

    1. Whether Gerd Topsnik was subject to U. S. taxation as a resident alien during the years 2004-2009?

    2. If Topsnik was a U. S. resident alien, whether he is liable for additions to tax under IRC sections 6651(a)(1), 6651(a)(2), and 6654?

    Rule(s) of Law

    Under IRC section 7701(b)(1)(A)(i), a lawful permanent resident is considered a resident alien subject to U. S. taxation on worldwide income unless that status is formally revoked or administratively or judicially determined to have been abandoned. The U. S. -Germany Income Tax Treaty defines a resident as an individual liable to tax in a contracting state by reason of domicile or residence, excluding those liable to tax only on income from sources within that state. The treaty also includes provisions on the taxation of gains from the alienation of property.

    Holding

    The Tax Court held that Gerd Topsnik was a U. S. resident alien during the years in issue (2004-2009) because he did not formally abandon his lawful permanent resident status until 2010. As a result, he remained subject to U. S. taxation on his worldwide income, including the gain from the installment sale of his GFI stock. The court further held that Topsnik was not a German resident under the U. S. -Germany Treaty during those years because he was not subject to German taxation on his worldwide income. The court sustained the Commissioner’s additions to tax under IRC sections 6651(a)(1) and 6654, but required recalculation of the section 6651(a)(2) addition for 2004.

    Reasoning

    The court reasoned that Topsnik’s U. S. LPR status continued until his formal abandonment in 2010, as required by IRC section 7701(b)(6) and related regulations. The court rejected Topsnik’s claim of informal abandonment, citing the statutory requirement for formal procedures to abandon LPR status. Regarding German residency, the court found that Topsnik was not liable to German taxation on his worldwide income during the years in issue, as confirmed by the German tax authority. Therefore, he did not qualify as a German resident under the U. S. -Germany Treaty, which requires liability to tax on worldwide income. The court also dismissed Topsnik’s estoppel arguments, finding that the prior District Court litigation concerned only his residency status in 2011, not the years at issue. The court upheld the penalties for late filing and payment, rejecting Topsnik’s arguments of reasonable cause and reliance on counsel.

    Disposition

    The Tax Court ruled in favor of the Commissioner, affirming Topsnik’s status as a U. S. resident alien subject to U. S. taxation on his worldwide income for the years 2004-2009. The court sustained the additions to tax under IRC sections 6651(a)(1) and 6654 but directed a recalculation of the section 6651(a)(2) addition for 2004 based on the late payment of the tax shown on Topsnik’s 2004 return. The decision was to be entered under Rule 155 for computation of the tax liabilities.

    Significance/Impact

    The Topsnik case underscores the importance of formal procedures in determining tax residency status under U. S. tax law. It clarifies that an individual’s lawful permanent resident status for tax purposes continues until formally abandoned, regardless of informal actions or intentions to the contrary. The decision also highlights the significance of the tax treaty residency definition, which requires liability to tax on worldwide income, not merely physical presence or informal ties to a country. The case has implications for nonresident aliens seeking to claim treaty benefits and underscores the need for clear documentation and formal abandonment of U. S. residency to avoid U. S. taxation on worldwide income.