[00:00:02] Speaker 05:
Case number 15-1251, Gerv Topsnik, Appellant versus Commissioner of Internal Revenue Service.

[00:00:09] Speaker 05:
Mr. Matheson for the Appellant, Mrs. Sheehan for the Appellate.

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May it please the court, Charles Megerson, appearing on behalf of the appellant, George Topsnik.

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The circumstances of this case, I submit, relate to a court ruling that Mr. Topsnik's being a German resident is undisputed.

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That the German Income Tax Treaty applies,

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that the government published instructions to be used by non-resident aliens for determining the applicability of a tax treaty, when in this case, our German.

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That the applicable instructions will be found in publication 519.

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Section 63 of the Internal Revenue Code states that the taxable income is meeting gross income minus either minus deductions or minus the standard deduction.

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Section 61 defines that gross income is meeting all income from whatever source derived.

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Section 871 provides that other than for capital gains, there may be a tax on non-resident alien.

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But as a consequence, the gross income provisions do not apply to a non-resident alien.

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In the instant case, Mr. Topsnick being a non-resident alien had no taxable income for the years 2004 through 2009.

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And as a consequence, there is no basis for reposition of penalties in this case.

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Mr. Topsnick undertook the burden of demonstrating that he was a resident alien during each of the years 2004 through 2009 through a through-pronged approach.

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Initially, Mr. Topsnick's status as a non-resident alien was resolved to be solved by a court.

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The court ruling came about due to governmental determination that's supported by the filing of a plethora of documentation.

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Mr. Topsick was an individual who for many years had been a resident of Germany where he had a permanent home available home.

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As it happened in a related case, the tax court confirmed that Mr. Topsick was a German

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national and a German resident.

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Secondly, Mr. Stock next meeting German German citizen and resident is not subject to the imposition of the United States source related income tax liability by virtue of the applicability of the German tax treaty.

[00:03:48] Speaker 01:
Did he report the income and file reports for the relevant years in Germany?

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Pardon me, Your Honor?

[00:03:54] Speaker 01:
Was there a reporting of the income for taxation purposes in Germany for the relevant years?

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He filed a tax return.

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The government took the position that that was not the type of return that he ought to have filed, but he did file a return in Germany.

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Reporting this income?

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He did not report this income.

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But I don't think that's a deciding factor.

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I'm submitting to the court.

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What part of the tax treaty do you rely on for the proposition that that's not a decisive factor?

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The basic proposition was that it was Article 13, Your Honor.

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Where do we have that?

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Article 13 says... This is the appendix to your brief.

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Yes, Your Honor.

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Page 13 of the appendix.

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Right.

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Okay.

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I'm at it.

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Gains derived by a resident of a contracted state from the alienation of immovable property, referred to in Article 6, income from

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immutable real property and situated in the other contracting state may be taxed in that other state.

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For the purpose of this article, the term immutable property situated in the other contracting shall include immutable property referred to in Article 6, income from removal of property, real property.

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came from the alienation of a movable property or a part of the business property of a permanent establishment that an enterprise of a contracting state has in the other contracting state or of a movable property pertaining to fixed space available to a resident of a contracting state in the other contracting state or permanent personal service, including alienation.

[00:06:04] Speaker 04:
Gains from the alienation

[00:06:10] Speaker 02:
So why don't you take us through that in terms of what's resident and what's the other state and the other contracting state to see how it applies to your client.

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Could you take us through that opening paragraph identifying how you read resident?

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And then when we come to situate in the other contracting state and then taxed in the other state, how does all that work out?

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So you're saying your client is a resident of Germany?

[00:06:56] Speaker 04:
Correct, Your Honor.

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Excuse me?

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Yes.

[00:07:01] Speaker 02:
OK.

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And so let's say if he is a resident of Germany in terms of the tax treaty, then income from the alienation of immovable property situated in the other contracting state, that's the U.S., may be taxed in that other state.

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Is that right?

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the state of residency.

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I'm sorry, so the other state is the state of residency?

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Yes.

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And his return

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did not reflect the game, right?

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Suggesting that he did not think of himself as a resident of Germany in the meeting of that clause.

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Right.

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So I'm at a loss to see how this helps you.

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incorrect return that does not mean he did not file a return.

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That's all I'm trying to tell you.

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In other words it does reflect on what state he viewed himself as a citizen of.

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Well he had returned, repaired, filed

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of Germany.

[00:09:00] Speaker 01:
Right.

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I guess the point is, based on the return that he did file, which, yes, he filed in return, but he didn't file a return that reported this income as taxable in Germany, if you take that return at face value, then his stance would have been that the gains from this aren't taxable in either country.

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Well, I submit, Your Honor, that that is a deciding factor.

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I'm sorry.

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What he filed in Germany is not a deciding factor.

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I mean, it could have been.

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Because in your view it was mistaken.

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Just like he did file a non-resident alien return in this country.

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You agree that if he was a resident of the United States, an alien resident.

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Yes, your honor.

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That the income that's in question

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should have been reported.

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Well, on his US tax, if he was a US resident, right?

[00:10:02] Speaker 03:
Yes, indeed.

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Okay, so what do you do with Section 7701 B one capital A small I on page 7374 of the addendum?

[00:10:17] Speaker 04:
Yes, well, I have attached, uh,

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that publication 519 to the brief.

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And that 7701 speaks to the green card or substantial presence in the United States.

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And while those two standards may be used

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for treating him as a United States resident.

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He, in fact, was not the United States resident.

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Moreover, he was lawfully admitted as a permanent resident during the tax years.

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He had a green card, Your Honor.

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The answer is yes.

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Yes.

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He was allowed to come in.

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But as pointed out by 519, in that schematic on page

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On page 5 of the publication of 519, the footnote 2 says that despite having a green card, a tax treaty may apply.

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And moreover, on page 2's page

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of the... I think everyone agrees that the tax treaty applies.

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For, uh, for, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh

[00:12:29] Speaker 02:
I think then we're back to the question, what is it in the treaty that you rely on for making him not a resident of the U.S.?

[00:12:39] Speaker 04:
Well, then we go back to the treaty and we go to Article 4, which appears at page 12 of the

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And... Where is that?

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It's on page 12, Your Honor, of the... Of the appendix to your brief?

[00:13:12] Speaker 01:
Appendix.

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Yeah.

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And... Article 4, residents.

[00:13:18] Speaker 02:
So again, take us through how this works to turn Mr. Topsnick into a resident of Germany.

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I'm just not seeing words that help you.

[00:13:41] Speaker 04:
Paul says, for the purpose of the convention, the term resident of a contracted state means any person who under the laws of that state is liable to pass through it by reason of his domicile, residence, place of management, place of incorporation, or any other criterion of similar nature.

[00:13:57] Speaker 02:
OK, just stop there.

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For those first three lines, they don't help you, right?

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Am I right on that?

[00:14:10] Speaker 04:
Well, I think then you have to go continue on.

[00:14:14] Speaker 02:
OK, sure.

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Now, but I just want to make sure that I haven't missed something on those first three lines.

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And then it goes down to paragraph two, that an individual is a resident, even if an individual is a resident of both contract and state, his status shall be determined by if he has a permanent home available to him.

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He shall be a resident state, which is personal and economic relations.

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I'm sorry, but paragraph section two comes in after we've decided that he's a resident of both.

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So we have to get there first.

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So even if he is a resident of both.

[00:14:59] Speaker 02:
Well, no.

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I think that may be the beginning of your problem.

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Is he a resident of both?

[00:15:06] Speaker 02:
Well, he's not.

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Within the meaning of the treaty.

[00:15:09] Speaker 04:
not okay so they are the government back to the question what is it what is it that takes an hour of residence in the United States and they argued he's a resident of the United States because of the applicability of the differentiation test and the and the green card but as we spoke earlier 519 says that the green card and the substantial presence test does not apply where a treaty applies

[00:15:39] Speaker 04:
So even if he were looked upon as a resident of Boat, it's where he has a home as a decided factor.

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But then it goes on further, and there's a time record that even if all of the factors are the same for Boat, as the company in which he is a national as a defined

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was a national-born resident of Germany, citizen of Germany.

[00:16:20] Speaker 01:
Okay, thank you.

[00:16:24] Speaker 01:
We'll hear from the government.

[00:16:39] Speaker 00:
Good morning.

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May it please the Court?

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I'm Anthony Sheehan.

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I represent the Commissioner of Internal Revenue.

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We've been talking this morning about Publication 519.

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It is our position that the Tax Court applied the correct set of tests in determining that Mr. Topsnick, for purposes of taxation on his gourmet foods income, was a resident of the United States and not a resident of Germany.

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The first question would be whether Mr. Topsnick was taxable by the United States on this income.

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The answer to that is yes.

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He had a green card.

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He was a lawful permanent resident of the United States.

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He passed that independent test under Section 7701.

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The three tests for residents are independent.

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And he maintained this green card throughout

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the entire time at issue, did not surrender it until afterwards the next year in 2010.

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The next question to be asked is whether Mr. Topsnick was a resident of Germany.

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That's where the treaty comes in to determine whether he was a resident of Germany.

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As part of this

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The Internal Revenue Service, through the competent authority, made official inquiries of the German government and received a response from the German government that he was registered in Germany as a limited liability taxpayer taxable only on his German source income, that at the time of the

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At the time of the response, he had not yet even filed the returns for that status.

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They had no record of filing a return at the time the German government made his response.

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Apparently, he filed a return later but did not report this income.

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And that the German government did not consider Mr. Thompson taxable on the gourmet foods income.

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At that point, he was a resident of the United States for tax purposes of this income.

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He was not a resident of Germany.

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The tiebreaker rules do not come into play, and the case would end right there.

[00:18:34] Speaker 00:
I'd like to make a brief comment about Article 13.

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Article 13 deals with immovable real property.

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The parties in this case agreed that this was a sale of stock and it's intangible property.

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based on taxable, based on the country of residence, which I just covered.

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But if we were to consider this to be real property, and if we were to consider our Uendo, Mr. Topsnick, to be a resident of Germany, this was a California corporation.

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This property would have been situated in the United States.

[00:19:06] Speaker 00:
So even if, if we're going under Article 13, and even if

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Mr. Topstick, we're a German resident, and again, we maintain he's not.

[00:19:15] Speaker 00:
Since it's the property situated in the United States, it would be taxable by the United States.

[00:19:20] Speaker 00:
Other than that, that pretty much covers the case, and if there are no questions, the government's willing to rest on its brief.

[00:19:34] Speaker 01:
Thank you, Counsel.

[00:19:34] Speaker 01:
Thank you.

[00:19:36] Speaker 01:
Did Mr. Magnuson have any time left?

[00:19:40] Speaker 01:
Well, why don't we give you one minute, just if you have anything to add.

[00:19:46] Speaker 04:
The district court made the determination that Mr Topps.

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It was, uh, it was, uh, on on on disputed that Mr Topps was a resident

[00:20:10] Speaker 04:
Well, your honor, the court said undisputed and it based its ruling upon a motion to dismiss that contained over 100 pages of documents.

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Those documents went back to the years 1994.

[00:20:33] Speaker 02:
There was a pivotal thing that happened in 2010, the extinction of his green card rights.

[00:20:44] Speaker 04:
Well, no, we're talking about residency.

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Residency was based on a total set of circumstances.

[00:20:53] Speaker 04:
You can't just look at, you know, it's like more in talking about relevancy, when you're dealing with a wall, a brick wall, you just can't look at one brick.

[00:21:04] Speaker 04:
You have to look all of the bricks in their entirety to determine whether there is a wall.

[00:21:10] Speaker 03:
Section 7701B6.

[00:21:14] Speaker 03:
Pardon me, your honor.

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Is is the brick set section 7701 B?

[00:21:19] Speaker 03:
6 is is the brick.

[00:21:25] Speaker 03:
Well, I disagree, your honor, because what a how you.

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What residents?

[00:21:32] Speaker 04:
No, your honor, the the.

[00:21:36] Speaker 04:
Publication 519.

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Explains that 7701 does not apply.

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where the tree is involved.

[00:21:45] Speaker 04:
And the treaty does not deal.

[00:21:50] Speaker 01:
Okay.

[00:21:50] Speaker 01:
Thank you.

[00:21:51] Speaker 01:
Thank you, counsel.

[00:21:52] Speaker 01:
The case is submitted.