Adams v. Comm'r of Internal Revenue

• Decision Date: 14 June 1966
• Docket Number: Docket No. 6017-64.
• Parties: WILLIAM E. ADAMS AND HAZEL M. ADAMS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

46 T.C. 352

WILLIAM E. ADAMS AND HAZEL M. ADAMS, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 6017-64.

Tax Court of the United States.

Filed June 14, 1966.

Albert R. Mugel and Timothy C. Leixner, for the petitioners.

Stephen M. Miller and Julian I. Jacobs, for the respondent.

Petitioner William, a Canadian citizen, spent about 70 days of each of the years 1957 through 1959 in Florida in a furnished house purchased in 1953 and owned with his wife as a tenant by the entireties. Petitioner Hazel spent 9 to 10 months during each of the 3 years in the house with their children, who attended Florida schools. They spent the remainder of these years in a house in Canada occupied by them for many years, title to which was in Hazel's name. Both made sworn statements to United States and Florida officials that they intended to become United States residents. Held, William was a nonresident and Hazel was a resident of the United States during the 3 years; held, further, the exemption from tax under the tax treaty between Canada and the United States of U.S.-source capital gain realized by a Canadian resident applies only if such individual is not a U.S. resident; held, further, the failure of Hazel to file a return in 1957 was not due to reasonable cause.

TANNENWALD, Judge:

Respondent determined deficiencies in petitioners' Federal income taxes for 1957, 1958, and 1959 in the amounts of $4,431.84, $11,193.23, and $5,127.51, respectively, and asserted an addition to tax of $1,107.96 for 1957 on the ground of failure to file returns. In an amended answer, respondent determined increased deficiencies for these years, based on additional interest income from U.S. sources,¹ and an increased addition to tax for 1957. The deficiencies were grounded on the subjection of petitioners' Canadian source income during the 3 years and certain U.S.-source capital gains realized in 1958 and 1959 to U.S. tax. The issues are (a) whether either or both of the petitioners were residents of the United States during the years in question, (b) whether the U.S.-source capital gains were exempt from U.S. tax under the tax treaty between the United States and Canada, and (c) whether petitioners' failure to file returns in 1957 was due to reasonable cause.

FINDINGS OF FACT

Some facts are stipulated and are found accordingly.

Petitioners were husband and wife and citizens of Canada during the years involved herein. Petitioners filed a joint Federal nonresident alien income tax return² for 1958 with the district director of internal revenue, Jacksonville, Fla. Each of petitioners filed an individual Federal nonresident alien income tax return for 1959 with the director of international operations of the Internal Revenue Service, Washington, D.C. Neither filed a Federal income tax return for 1957.

Petitioner William E. Adams (hereinafter referred to as William) was born in Virginia in 1902 and moved to Canada in 1924. His application for Canadian citizenship in 1930 was granted in 1931. In 1936, he married petitioner Hazel May Paine (hereinafter referred to as Hazel), a Canadian citizen by birth, and they established a home in Simcoe in the province of Ontario, Canada. Petitioners' five children are Canadian citizens and were born in Canada during the period 1937-47.

William has been engaged in the construction business in Ontario since 1944.

During the years in question, he was the president, general manager, and owner of 92 percent of the stock of Hi-Way Construction Co., Ltd. (hereinafter referred to as Hi-Way), an Ontario corporation formed by William in 1947 and engaged in bridge and road building in Ontario with its headquarters at Simcoe, Ontario.

The company's construction season was April 15 to December 15, and William divided his time between the construction business and his other Canadian business interests (discussed infra), but most of his time was consumed by the construction business.

Hi-Way's business was highly competitive. While actual construction took place between April and December, the company was primarily engaged during February and March in preparing and securing bids on future construction.

During Hi-Way's construction activities William traveled constantly. Each visit to construction sites consumed 2 to 3 days, and he would then return to Simcoe before he visited another site. He spent at most 3 nights per week at the home in Simcoe, where he regularly employed domestic help.

In 1957 and 1958 William owned three farms in which he had invested over $180,000, and in 1959 he owned five farms in which he had invested over $240,000. During this same period Hazel owned three farms which had cost over $120,000. All of the farms were in Ontario and were engaged in tobacco and other general farming operations.

William's principal base of business activity during the years in question was Canada.

During the years in question, William owned a one-half interest valued at over $60,000 in a partnership operating a lumber company in Ontario. The company was originally established by William in 1945. He also owned a one-half interest in unimproved real estate near Simcoe.

During the years in question, petitioners held substantial mortgages on Canadian property and maintained several checking and savings accounts containing substantial sums in the Bank of Montreal, Simcoe, Ontario. Each owned Government of Canada bonds. William also owned life insurance policies with substantial face and cash value issued by Canadian companies.

William voted in Canada, both in Federal and municipal elections.

Prior to 1952, petitioners had made sporadic trips to the United States to visit William's relatives and had made, on the average, biennial trips to Florida for about a month during the winter for a vacation, often taking some of their children who were not in school. In early 1952 petitioners spent 1 1/2 months in Florida following a back injury suffered by William in late 1951.

William's back continued to trouble him and during a 3-week stay in Florida in March 1953 petitioners purchased for approximately $40,000 a furnished house in Daytona Beach, Volusia County, Fla., taking title as tenants by the entireties. William returned to Florida for about 3 days in April to close the transaction.

In September 1953, petitioners executed applications under oath for U.S. immigrant visas and alien registration numbers. William's application contained the following statements:

25. Purpose of going to the United States. To reside.

35. I intend to remain in the United States for the following period of time: Permanently.

Hazel's answer to question 25 was ‘to accompany my husband,‘ and her answer to question 35 was ‘permanently.‘

Petitioners were admitted to the United States on November 27, 1953, which process consumed less than 1 hour. William used his visa only at the time of original entry. Thereafter, he used his Canadian passport for purposes of identification when crossing the border. Petitioners returned to Canada immediately after their admission.

Petitioners and their children left Canada for Florida within a month after their admission and arrived in Daytona Beach on December 20, 1953. William left Daytona Beach for Canada by car on January 3, 1954, and on January 15 Hazel and the children moved into the house petitioners had purchased in Daytona Beach. William returned to Daytona Beach on January 31 for about 1 month before returning to Canada.

Petitioners' travels to and stays in Florida from 1954 through the years in question were as follows: William would go to Daytona Beach about the end of May and remain there for 10 days or 2 weeks before driving his family to Simcoe. Near the end of August he would drive the family to Daytona Beach and stay about a week before returning to Simcoe. He flew or drove to Daytona Beach for about a week during Thanksgiving and drove down around Christmas for a couple of weeks. His next trip would be at the end of January for 3 weeks or a month. He returned to Daytona Beach around Easter for 2 to 3 weeks. William's stays in Florida aggregated approximately 70 days in any year. Hazel and the children spent approximately 9 to 10 months of each of the years in question in Daytona Beach. In June 1960, Hazel and the children returned to live in Simcoe. Thereafter, petitioners have vacationed in Florida during each winter and the children have visited Florida during the summer months.

All of the furniture and furnishings at all times remained in the house in Simcoe, petitioners taking only bed linens and clothing to Daytona Beach. William did not move his personal clothing from Simcoe to Daytona Beach, keeping only a pair of pants, some shirts, a fishing rod, a gun, and golf clubs in Florida.

Petitioners considered that their children would benefit from being in Florida, especially since the Florida climate would be helpful to two of their daughters, who suffered from asthma and hay fever. Beginning in January 1954 and continuing through the years in issue, petitioners' children attended public schools in Daytona Beach.

On December 23, 1953, petitioners jointly executed ‘Manifestation of Domicile, State of Florida, County of Volusia.‘ The document reads as follows:

Before me, the undersigned authority, this day personally appeared William E. Adams and Hazel May Adams his wife— 628 N. Peninsula Drive.

Who being first duly sworn, under oath, deposes (sic) and says, that affiants resides in and maintains a place of abode in the City of Daytona Beach, County of Volusia and State of Florida, which they recognize and intends to maintain as their permanent home; affiants declare that they do not maintain a residence at any other place and that they formerly resided at Simcoe, Ontario, Canada and that their abode in Florida constitutes their predominant and principal home, and affiants intends to continue it permanently as such; affiants further declares that they are actual bona...