Lemery v. Comm'r of Internal Revenue, Docket No. 2306-67.
| Decision Date | 12 March 1970 |
| Docket Number | Docket No. 2306-67. |
| Citation | 54 T.C. 480 |
| Parties | DOUGLAS J. LEMERY, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Roger E. Lageschulte, for the petitioner.
Stephen E. Silver, for the respondent.
Petitioner, a Canadian citizen, realized a capital gain while living in the United States. In reliance upon O.D. 468, 2 C.B. 243 (1920), and article VIII of the Income Tax Convention and Protocol between the United States and Canada, 56 Stat. 1399, he did not report the gain on the Nonresident Alien Income Tax Return form which he filed for the short year of his departure. Respondent contends, inter alia, that the O.D. applies only to a jeopardy assessment procedure available to respondent. Held: Even assuming that petitioner is correct in contending that the O.D. applies generally to the treaty's terms, it has been in direct conflict with sec. 1.871-5, Income Tax Regs. (), at all relevant times. The regulation is a reasonable interpretation of the law and must prevail over the O.D. Held, further, under the circumstances of this case, petitioner is not liable for the additions to the tax under sec. 6653(a), I.R.C. 1954.
Respondent determined deficiencies in income tax and additions thereto as follows:
+----------------------------------+
¦Year ¦Deficiency ¦Sec. 6653(a) ¦
+------+------------+--------------¦
¦1964 ¦$34,985.52 ¦$1,749.28 ¦
+----------------------------------+
The issues to be decided herein are: (1) Whether petitioner's long-term capital gains from the sale of stock are exempt from income tax under article VIII of the Income Tax Convention and Protocol between the United States and Canada, Mar. 4, 1942, as amended;1 and (2) whether petitioner is liable for additions to the tax under section 6653(a).2
Some of the facts have been stipulated and are so found. The stipulation and exhibits attached thereto are incorporated herein by this reference.
Douglas J. Lemery (hereinafter sometimes referred to as Douglas) is the petitioner herein and at the time of the filing of his petition was both a citizen and resident of the Dominion of Canada.
On April 4, 1951, Douglas applied for and was granted an immigration visa at Vancouver, British Columbia, Canada. On Form 265a,3 ‘Application for Immigrant Visa and Alien Registration,‘ Douglas stated that his intention was to reside in the United States permanently and to join the McCulloch Motor's Corp. at Los Angeles, Calif., as a sales manager.
Douglas was classified as a nonquota immigrant and on the same date, April 4, 1951, entered the United States at Seattle, Wash. Douglas stayed in the United States for about 6 months and then returned to Canada.
On September 4, 1958, Douglas again entered the United States as a nonquota immigrant. On Form 256a, ‘Application for Immigrant Visa and Alien Registration,‘ Douglas stated that his purpose in entering the United States was to reside permanently. Douglas was issued a permanent-resident card at the time of entrance (Form I-151).
On September 26, 1958, Douglas and his wife, Marguerite, purchased a home at Bellevue, Wash. He and his wife lived at that address until June 1964, when they moved to Victoria, British Columbia, where they have since resided.
Douglas and his wife had three children, Thomas J., Sally, and Charles R. During the 1963-64 school year Charles was enrolled in elementary school in the Bellevue public school system. He was continuously enrolled from kindergarten in 1960 until the end of the 1963-64 school year on June 4, 1964. Sally was enrolled in high school in the Bellevue public school system during the 1963-64 school year. She was first enrolled in the Bellevue public school system on September 4, 1962, and was in continuous enrollment until June 4, 1964. Thomas was graduated from Bellevue high school on June 4, 1962. He was continuously enrolled in the Bellevue public school system from 1958 until his graduation in 1962. At the end of the 1963-64 school year Sally withdrew from the Bellevue public schools. A copy of her pupil record was sent to a high school in Victoria, British Columbia, Canada. Sally reentered the Bellevue public schools during the 1965-66 school year and was graduated therefrom at the end of the first semester.
It was the policy of the Bellevue public schools to enroll only those pupils whose responsible parent or guardian physically resided in a private home or apartment located within the boundaries of the school district. An exception was made to this policy when a special waiver was granted by the superintendent of schools or his designee. No such waiver was granted in connection with the enrollment of either Charles or Sally for the 1963-64 school year. Moreover, no such waiver was granted for Sally during the first semester of the 1965-66 school year.
Prior to June 30, 1963, petitioner acquired 59,543 shares of common stock in Code-A-Phone Electronics, Inc. (hereinafter sometimes referred to as Code-A-Phone), a corporation organized under the laws of the State of Washington. At all times herein concerned, said shares were evidenced by stock certificate No. 191 for 31,666 shares and stock certificate No. 192 for 27,877 shares.
On February 24, 1964, Douglas granted to Jack E. Snodgrass (hereinafter sometimes referred to as Jack) two separate options to purchase the 59,543 shares of Code-A-Phone.
The first option provided that Jack could purchase on or before March 9, 1964, the 31,666 shares of Code-A-Phone represented by certificate No. 191 for. $134,580.50. Douglas was paid $500 as consideration for the option. If the option was exercised the $500 was to be applied to the purchase price.
The second option, which was also granted for $500, and which was subsequently amended on February 27, 1964, provided that Jack could purchase the 27,877 shares of Code-A-Phone represented by certificate No. 192 on or before March 9, 1964. If the second option was exercised, that $500 was also to be applied to the purchase price.
Escrow accounts were set up with a Seattle bank for both options.
The first option was exercised on March 3, 1964. On March 9, 1964, Douglas received $134,080.50 in full payment of the balance of the purchase price for the 31,666 shares of Code-A-Phone.
In accordance with the terms of the second option, as amended, Douglas received $500 on February 24, 1964, $5,000 on March 9, 1964, and $119,946.50 on February 25, 1965, and petitioner admits that he realized a long-term capital gain of $140,080.50 from his Code-A-Phone stock during February and March of 1964.
Douglas' residence at Bellevue was first listed for sale with a broker in April of 1964. On May 4, 1964, Douglas gave two real estate agents an exclusive real estate listing to sell the residence. The listing was renewed on June 10, 1964, and November 11, 1964. The residence was eventually sold in December 1965.
For the calendar years 1961 and 1962, Douglas and his wife filed a joint Federal income tax return on Form 1040 with the district director of internal revenue, Tacoma, Wash., in which their address was shown therein as Bellevue, Wash. For the calendar year 1963, Douglas filed an individual Federal income tax return on Form 1040 with the district director, Tacoma, Wash., in which he claimed an exemption for his wife and in which he listed his address as Bellevue, Wash. Douglas had obtained a social security number which was used on all of his U.S. income tax returns.
On his tax returns for the years 1961 through 1963, Douglas claimed deductions in each or some of the years for: (1) Contributions to a Bellevue church, American Cancer Society, Muscular Dystrophy, March of Dimes, and Red Cross; (2) real estate taxes and auto licenses; and (3) a safe-deposit box. During the years 1961 through 1963, Douglas reported interest income from a Seattle bank.
On June 12, 1964, Douglas surrendered to Canadian immigration officers his Form I-151, Permanent Residence Card. At that time petitioner was admitted to Canada for permanent residence. Douglas did not comply with the requirements of section 6851(d)(1) before department from the United States to Canada in June 1964, by filing a U.S. Department Alien Income Tax Return (Form 1040C), with the district director of internal revenue in the district in which he resided.
For the short period, January 1, 1964, to May 31, 1964, Douglas filed a U.S. Nonresident Alien Income Tax Return, Form 1040B, dated April 15, 1965, and mailed on April 20, 1965, with the Director of International Operations, Internal Revenue Service, Washington, D.C., showing his address as Victoria, British Columbia, Canada.
Before filing this return petitioner had been advised by his Canadian chartered accountant that he could probably establish that Canada was his residence in 1964 and consequently it would be all right not to report his Code-A-Phone profit on his U.S. return. On Douglas' Form 1040B there was reported interest income of $2,912 as his total income. Accompanying the return was the following letter:
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¦3215 Ripon Road, Victoria, B. C., Canada ¦
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¦ ¦12 April, 1965 ¦
+-----------------------------------------------+-----------------------------¦
¦DIRECTOR OF INTERNATIONAL OPERATIONS ¦ ¦
+-----------------------------------------------+-----------------------------¦
¦U.S. Treasury Department ¦ ¦
+-----------------------------------------------+-----------------------------¦
¦Internal Revenue Service ¦ ¦...To continue reading
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