Facts

The married couple A. and [B.A.] live in [V.] /SG. [A.A.] worked for the [X. AG] in [U.] /FL until the end of July 2009, where he was insured with the foundation "[Z.] ". After the termination of his employment with [X. AG] , [A.A.] worked for the [Y. GmbH] , which he founded on March 2, 2009, with its headquarters in [V.] . On August 1, 2009, he had the vested benefits of CHF 201,606.45 from the [Z.] foundation paid out and invested this amount in [Y. GmbH] .

In their 2009 tax return, A. and [B.A.] declared a taxable income of CHF 97,312.-- and mentioned the vested benefits under the heading "Capital benefits from pensions". On December 9, 2010, the cantonal tax office of St. Gallen issued a separate tax assessment for capital benefits and set the annual tax for direct federal tax at CHF 2,914.20. This ruling became final.

By ruling of August 30, 2011, the tax office assessed A. and [B.A.] for direct federal tax 2009 with a taxable income of CHF 286,000.--. The tax office stated that the amount of CHF 201,606.45 was a capital benefit without pension character and that there was no grounds for a lump-sum payment; the capital benefit was to be taxed at the ordinary rate together with the other income; after this assessment became final, the tax assessment of December 2010 regarding the separate annual tax would be repealed ex officio.

Considerations

The appeal in public law matters is admissible and the FTA is entitled to do so. The dispute is about whether the capital benefit is to be taxed with a special annual tax or together with the other income.

The lower court considered that the revision of a final assessment is also possible to the detriment of the taxpayer in exceptional cases, if an obvious error of the tax authority in the original assessment is present, so that the appeal to the finality of the ruling appears as an abuse of law. In the present case, the lump-sum payment would not have been permissible under Swiss law, as the taxpayer had not taken up self-employed gainful activity.

The FTA argues that it is not the task of the Swiss authorities to apply Liechtenstein law. The taxation of the capital benefit is governed by Swiss law, even if it comes from a foreign pension…