                             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
                                           -2-

[*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).
                                         -3-

[*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).
                                         -4-

[*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
                                         -5-

[*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.
                                          -6-

[*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)).
                                          -7-

[*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).
                                        -8-

[*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.
                                         -9-

[*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.
                                           - 10 -

[*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).
                                          - 11 -

[*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).
                                       - 12 -

[*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).
                                         - 13 -

[*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.
                                        - 14 -

[*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.
                                         - 15 -

[*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...)
                                          - 16 -

[*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.”).
                                  - 17 -

[*17] To reflect the foregoing,


                                           Decision will be entered

                                  under Rule 155.
