Patino v. Commissioner

Cristina deBourbon Patino, Petitioner, v. Commissioner of Internal Revenue, Respondent Patino v. Commissioner Docket No. 16826 United States Tax Court 13 T.C. 816; 1949 U.S. Tax Ct. LEXIS 31; November 29, 1949, Promulgated *31 Decision will be entered under Rule 50. Petitioner, the wife of a Bolivian diplomat accredited to Great Britain, entered the United States, as did her husband and children, as war refugees, in 1940. She remained in the United States, except for short trips to Mexico and Italy, until at least the end of 1945, the last taxable year, living in a hotel in New York City. She twice brought action for divorce against her husband, her second petition, in 1943, alleging her residence in New York. From July 1, 1942, to July 10, 1944, she and her husband had a written agreement of separation, and in May 1945 he abandoned her. Held, on the facts, that during 1944 and 1945 she was a resident alien; held, further, that her failure to file an income tax return was with reasonable cause. Basis of stock determined from the evidence. Aloysius F. Schaeffner, Esq., and J. Harlin O'Connell, Esq., for the petitioner. William F. Evans, Esq., for the respondent. Disney, Judge. DISNEY *816 This proceeding involves deficiencies in income tax for the years 1944 and 1945 in the amounts of $ 3,479.97 and $ 12,972.57, respectively, *817 and a penalty for 1944 in the amount of $ 869.99. The primary issue is whether or not petitioner was a resident alien during the taxable years. Other questions relating to dividends, interest, capital gain, and the penalty asserted for failure to file a timely return depend, in part, upon the answer to that question. Petitioner claims that she is entitled to a refund of $ 1,573.15 for the year 1944. FINDINGS OF FACT. Petitioner, on April 8, 1931, while a resident of Madrid, Spain, and a national of that country, married Antenor Patino, hereinafter sometimes referred to as "Patino," who was a national of Bolivia, serving as second secretary of its legation in Spain. Thereafter, he was appointed*33 secretary to the legation in Paris, which post he retained until March 1938, when he was appointed minister to Great Britain. From 1936 until April 1938, when Patino went to London to assume his new duties, he and his wife and two young children occupied a house in Paris, which Patino had previously purchased and furnished. While in London, the family occupied quarters in a hotel and in a rented house. Patino continued as Bolivia's minister to Great Britain until May 1945, when he was appointed envoy extraordinary and minister plenipotentiary, without portfolio. In June 1940 Patino and his family went from France to Spain to escape from the German invasion. In September 1940 Patino and his two children, then 5 and 8 years of age, respectively, came to the United States. Petitioner joined them in the United States about October 25 or 26, 1940. Patino's father came to this country from Europe at about the same time, and left for Argentina in 1945. All of them came to the United States to avoid the war then going on in Europe. The Patino family lived in an apartment in the Hotel Plaza, New York City. Petitioner brought no personal belongings with her to this country other than*34 jewelry and clothes and had no other property of her own in the apartment. Petitioner entered the United States under a diplomatic passport issued to her as the wife of the minister of Bolivia to Great Britain, and a diplomatic visa issued by the American Embassy, at Madrid, Spain, on August 30, 1940. On March 6, 1941, the Department of State issued a notice that petitioner had notified it of her "status in the United States as wife of an official (or employee) of the Bolivian Government." Petitioner was in the United States at all times after October 1940 through 1945, except for a trip to Mexico in July 1941 to visit relatives and a trip to Italy in September 1941, from which she returned in December 1941. She reentered the United States from Mexico under a diplomatic visa granted under section 3 (2) of the Immigration Act of 1934. She was admitted by an immigrant inspector, under the *818 same provision, for one year. A diplomatic visa was used to reenter the United States on the return trip from Italy. Upon her return to the United States, petitioner joined her husband at the Hotel Plaza. At the time of trial in December 1948 she was staying at the Savoy Plaza Hotel. *35 She brought nothing back with her except the personal effects she had taken with her for the trip. In May 1942 petitioner instituted an action against Patino in the Supreme Court of the State of New York for a divorce. She and her children then moved out of the quarters they had been occupying with her husband and into a furnished apartment in the Savoy Plaza Hotel in New York City. They had no personal belongings in the new apartment other than clothing and jewelry. Except for a period of two months in 1942, when they were absent from New York City on a vacation, petitioner and her two children occupied the apartment continuously until July 10, 1944. Petitioner did not live or have marital relations with Patino from May 1942 until July 10, 1944. Petitioner opened a bank account in New York City after she left her husband. The action for divorce was discontinued on July 1, 1942. On July 1, 1942, petitioner and her husband entered into a property settlement and separation agreement, in which the husband agreed, among other things, to pay to petitioner, so long as they continued to be married and not permanently separated or divorced, the amount of $ 24,000 per annum for her *36 sole and exclusive use, and $ 30,000 if they should become permanently separated or divorced and, in addition to the $ 30,000, the amount of $ 20,000 annually for the support of their two children. When a child married or attained her majority or if she died prior to the happening of either event, petitioner was to receive the amount payable for the support of such child. Petitioner was given the sole and exclusive custody of her children. It was agreed that the parties would continue to live separate and apart from one another and that each should be entitled to live free from the control, direct or indirect, of the other, in the same manner as if they were unmarried, and to engage in any occupation without the consent or approval of the other; also, that "Each party may reside in any place * * * without the consent or approval of the other party in all respects as if unmarried." The agreement recites that each of the parties thereto had been fully advised by counsel of his or her own selection of their legal rights and understood the entire agreement. The payments were secured by 21,763 shares of stock of the Patino Mines & Enterprises Consolidated, Inc., a Delaware corporation. *37 The payments required by the agreement were made until July 10, 1944. *819 In March 1943 petitioner filed a suit in the Supreme Court of the State of New York against Patino for an absolute divorce. The complaint alleged that petitioner and her husband had been residents of the State of New York since October 26, 1940. The answer denied that the parties had been residents of the State of New York since October 26, 1940, and alleged that he was not and never had been a resident of the State of New York. The pleadings were not signed or verified by petitioner or Patino. The action was never tried. By the terms of the agreement petitioner and Patino entered into on July 10, 1944, they agreed to resume their marital relations and Patino agreed to provide a home for and support petitioner and their two children, and to pay to petitioner for her exclusive use the sum of $ 500,000, payable $ 100,000 in cash on the signing of the agreement, a like amount by delivery to her of 5,000 shares of the stock of Patino Mines & Enterprises Consolidated, Inc., the receipt of which she acknowledged, and $ 300,000 on January 1, 1945, with interest thereon from the date of the agreement at the*38 rate of 6 per cent per annum, and a further amount of $ 500,000 on July 7, 1951, the latter amount to become immediately due and payable if he abandoned petitioner. Other provisions of the instrument canceled the agreement entered into on July 1, 1942, gave petitioner the custody of their two children in the event Patino abandoned petitioner, provided for the discontinuance of the action then pending for divorce, and recited that each party to the agreement had taken legal advice from independent counsel of their own selection, who had explained to them their full rights and obligations under the terms of the agreement, and that Patino and petitioner executed the document with a full understanding of its provisions. Interest in the amount of $ 5,243.83 was paid on the installment due January 1, 1945, and was reported by petitioner in her return for 1944. The petitioner and her two children continued to live in a furnished apartment in the Savoy Plaza Hotel, in New York City, through the year 1945. Except for a period of about six weeks, Patino lived with them until May 1945, when he abandoned petitioner and thereafter did not live with her. He left the United States in May 1945*39 and did not return to this country during the remainder of the year, or, with petitioner's knowledge, until 1948. He was in Canada from August to October 1945, and then left for a trip to South America. In 1945 Patino filed a suit against petitioner in Paris for a divorce. Papers involved in the action were served on petitioner through "the consulate." The proceeding has never been tried. Petitioner and her husband had no property in the apartment other than personal *820 effects. In May 1945 she instituted suit in the courts of New York State and in July 1945 obtained a judgment thereon by default against her husband for the amount payable to her under the reconciliation agreement in the event he abandoned her without cause. In 1941 Patino made two trips to his diplomatic post in London, one in March and the other in September, each lasting about a month. In 1942 he made one trip to the same place, lasting about three months, and another one in 1943, extending over a period of about four months. Petitioner belongs to a country club on Long Island. Her children were placed in a boarding school when they reached the proper age. The only stock petitioner ever owned of the*40 Patino Mines & Enterprises Consolidated, Inc., was the 5,000 shares she acquired by the agreement of July 10, 1944. She sold one-half of the stock in 1945 for $ 47,753.52. In 1944 and 1945 petitioner received dividends in the amounts of $ 7,500 and $ 11,250, respectively, on stock of Patino Mines & Enterprises Consolidated, Inc. In 1945 petitioner received $ 2,240 as interest on bonds of the Argentina Republic, $ 1,632 from dividends on stock of the International Nickel Co., Ltd., a Canadian corporation, and $ 1,909.64 as profit from the sale of various securities held for less than six months prior to sale. On advice of counsel that she was a nonresident alien, petitioner did not file a return for 1944 until September 2, 1947, on which date she filed a return for the year 1944 with the collector in Baltimore, Maryland, showing a tax liability of $ 1,573.15, and interest thereon of $ 212.38, which amounts were paid. The return was filed by a firm of attorneys which included the tax counsel appearing for her in this case, and it was this firm which advised her in the matter of her contract of reconciliation with her husband on July 10, 1944. A like return for 1945 was filed with*41 the same collector on March 15, 1946. In each of the returns petitioner made a statement that she was a citizen of Bolivia. She has never been in Bolivia. The failure to file a timely return for 1944 was due to reasonable cause and not to willful neglect. During 1944 and 1945 petitioner was a resident alien. OPINION. In asserting that she was not a resident alien, contrary to the finding made by the respondent in his determination of the deficiencies, petitioner contends that she and her husband were citizens and residents of Bolivia, domiciled in Paris, and that nothing occurred in 1944 and 1945, the taxable years, to alter their status. Respondent's view on brief is that she was a resident of New York *821 City from at least the beginning of 1942, and continuously thereafter through the taxable years. The issue here concerns the residence of petitioner and does not include that of Patino or his citizenship or domicile. The question presumes citizenship of petitioner in another country and domicile does not necessarily mean residence for income tax purposes. Bowring v. Bowers, 24 Fed. (2d) 918; Walter J. Baer, 6 T. C. 1195;*42 and Florica Constantinescu, 11 T. C. 36. Petitioner argues that, being the wife of a diplomat, she took the residence of her husband and, as he was at all times under orders from the Bolivian Government, he did not acquire a residence in the United States within the reasoning of Florica Constantinescu, supra, and Rolf Jamvold, 11 T. C. 122. No claim is made of diplomatic immunity. Patino and his family, in the fall of 1940, came to the United States as a place of refuge from the war then going on in Europe. Petitioner admits on brief that she and her two children were war refugees. Her concession could have included Patino, for it is apparent that he came to this country for the same purpose. As a member of his country's diplomatic corps, it may be assumed that Patino was subject to its orders. However, there is no evidence in the record opposed to the idea that Patino came to this country and, except for brief periods, remained here at all times important, with the permission of his government. With the exception of such short periods, any performance of his diplomatic duties in Great*43 Britain was for about four and one-half years, from a place of abode in the United States, from which fact it may be inferred that he was ordered or permitted to perform his official duties from the United States. The retention of his post as minister to Great Britain during such absence is inconsistent with anything but permission from his government so to remain in the United States. Therefore, there is nothing before us to prove that the residence of petitioner's husband was not in New York, where in fact he spent most of the time from 1940 until May 1945. Moreover, for a period of two years from July 1, 1942, petitioner was free to choose a place of residence independent of her husband, and during that time orders to Patino from the Bolivian Government could not have affected her rights in that respect. From July 1, 1942, to July 10, 1944, there was a separation agreement between petitioner and her husband. A separation agreement enables a wife to establish residence independent of her husband. Perrin v. Perrin, 250 N. Y. S. 588. In fact, the separation agreement particularly provided that "each party may reside in any place * * * without*44 the consent or approval of the other party in all respects as if unmarried." This, with the fact that petitioner in fact remained in New York, indicates *822 intent to make that state her residence. Her intent is a factor of importance. Zareh Nubar, 13 T. C. 566. Moreover, she had the right to choose her own residence after May 1945, when Patino abandoned her and their children and left the United States to take up a residence without petitioner. Town of Watertown v. Greaves, 112 Fed. 183; Gordon v. Yost, 140 Fed. 79; Bjornquist v. Boston & A. R. Co., 250 Fed. 929; Lie v. Lie, 159 N. Y. S. 748; Barber v. Barber, 62 U.S. 582; Williamson v. Osenton, 232 U.S. 619. That right, and her choosing to remain in New York, not only indicates her residence there during 1944 up to July 10, and in 1945 after her husband abandoned her in May -- a major part of the years here involved -- but also, particularly, with the exercise of that choice at least*45 through the taxable years, strongly suggests that she regarded New York as her residence. At the time of trial she was a member of a country club on Long Island and was staying at the Savoy Plaza Hotel. Whether she had been "staying" there since the end of 1945 does not appear in the record. The petitioner twice filed suit for divorce in New York. Under section 1147 of the New York Civil Practice Act, such a divorce action could be maintained by the petitioner only (except where the parties were married in the state, not applicable here since they were married in Spain) if the petitioner was resident of New York at the time of filing the action, or both were such residents when the offense (complained of) was committed. The record here does not contain the first petition for divorce. As to the second proceeding, in 1943, petitioner placed in evidence a copy, though not necessarily a complete copy, of the petition. It alleged that plaintiff and defendant had been residents of New York since October 26, 1940 -- the date of petitioner's arrival from Spain; also that plaintiff was a resident of New York when the acts of adultery complained of were committed and was a resident of*46 New York at the time of commencement of the action "and still is" such resident. The petitioner testified that she swore to the petition. The copy indicates only, in typewriting, the names of the attorneys at the end of the petition, but, since the copy is not shown to be complete, her signature or verification is not negatived. She also testified that she did not know whether she signed the document or not. In our opinion, whether she verified or signed the divorce petition or not, it well indicates her then view that she was a resident of New York. Attorneys may not be presumed to represent to a court jurisdictional facts contrary to the truth as represented to them by the client, their logical source of information in that regard. The fact, recited by the petition for divorce, that she had been resident in New York since October 26, 1940, could not reasonably have been obtained from anyone else. She, in fact, arrived in New York, under her testimony, *823 on October 25 or 26, 1940. This indicates clearly discussion between her and her attorneys as to the facts as to her residence. Petitioner never denied that she had represented to her divorce attorneys that she was*47 resident in New York. In the absence of denial by the petitioner that she represented to her divorce attorneys that she resided in New York, particularly after she had placed the divorce petition, with its allegations of New York residence, in evidence in this case, we are convinced that she did at that time represent herself to be resident in that state; and, as above seen, there being in effect in 1943 a separation agreement, she was free to take that view, regardless of where her husband resided. Though petitioner argues that under section 1166 of the New York Civil Practice Act a woman who "dwells" within a state when commencing a divorce action is deemed a resident thereof, this does not help her case. "Dwell" connotes no less permanency than "reside." Stevens v. Allen, 71 So. 936. Ordinarily the term "dwell" indicates abode and residence, with intent to remain, 28 C. J. S. 599. See also Harvard College v. Gore, 22 Mass. 370; Eatontown v. Shrewsbury, 6 Atl. 319; Allgood v. Williams, 8 So. 722; Kaplan v. Tod, 267 U.S. 228,*48 where an immigrant, though actually in New York for a considerable period because detained by war, was held not to be dwelling therein. We consider section 1166 as merely indicating that a married woman suing for divorce in New York is not bound, by her husband's residence elsewhere, to be considered a nonresident because he is -- which is petitioner's argument here. It does not indicate a requirement of less permanency in stay than is required for residence. It is to be noted that petitioner's claim here is merely that her residence follows that of her husband. Residence is not synonymous with domicile, though it is sometime so stated, and is an elastic term. The old idea that a husband's domicile is that of his wife has weakened in the more modern law, and where we find, as here, first separation by agreement and later abandonment by the husband, not only is it clear that the wife may choose her residence, but there is a minimum of reason or law in any idea that she has a right to claim his domicile. Town of Watertown v. Greaves, supra, says that after desertion she "must, to avoid condonation" choose her domicile, also that "she gains * * *49 * for purposes of jurisdiction a domicile of her own"; and Perkins v. Perkins, 113 N. E. 841 (Mass.), holds that after abandonment by the husband without cause, the wife's residence "did not follow that of the husband * * *." In our opinion, as a matter of law, it did not do so here, after the abandonment in May 1945, and during the separation by agreement. Again, we note that both parties rely upon section 29.211-2 of Regulations 111, which reads, in part, as follows: *824 An alien actually present in the United States who is not a mere transient or sojourner is a resident of the United States for purposes of the income tax. Whether he is a transient is determined by his intentions with regard to the length and nature of his stay. A mere floating intention, indefinite as to time, to return to another country is not sufficient to constitute him a transient. If he lives in the United States and has no definite intention as to his stay, he is a resident. One who comes to the United States for a definite purpose which in its nature may be promptly accomplished is a transient; but if his purpose is of such a nature that an extended stay may *50 be necessary for its accomplishment, and to that end the alien makes his home temporarily in the United States, he becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he came has been consummated or abandoned. An alien whose stay in the United States is limited to a definite period by the immigration laws is not a resident of the United States within the meaning of this section, in the absence of exceptional circumstances. It is quite apparent that petitioner was not a mere transient or sojourner in the United States. She followed her husband and children to this country in October 1940 to avoid war conditions then prevailing in Europe, and, except for a short visit to Mexico and Italy in 1941, remained in this country at least until the end of the taxable years. She admits, on brief, that she and her children came to this country as war refugees. She makes no claim that she had at that time, or at any material time thereafter, any knowledge of when she would cease to be a war refugee. Neither does the evidence contain any indication of intention on her part to leave the United States at any specified time. *51 She remained here in her own choice of residence during the period the separation agreement was effective and after May 1945, when Patino abandoned her and hostilities ceased in Europe. Nothing in the record discloses that she has not lived in New York City at all times since the close of 1945. As above seen, at the time of trial she was staying at a New York hotel and was a member of a country club on Long Island. Such membership is to be considered. Webster v. Kellogg Co., 153 N. Y. S. 800. Petitioner testified that Patino came here in 1940 because of the war in Europe; that she and Patino followed his father over here; and that her stay in the United States depended upon her father-in-law. The father-in-law came to this country in the fall of 1940 and we know nothing from the record about his intentions at that time with respect to the length of his stay. The evidence does show that he went to Argentina at some undisclosed time in 1945 and contains nothing to establish that he was not here continuously after his arrival in 1940. The fact that she did not accompany him to Argentina discloses independence on her part in the selection of *52 a place of residence. Petitioner was admitted to the United States on her return trip from Mexico in 1941 under the provisions of section 3 (2) of the Immigration Act of 1934. The provision is one of the definitions of *825 the term "immigrant" as used in the act, and reads as follows: "* * * an alien visiting the United States temporarily as a tourist or temporarily for business or pleasure." She testified that she reentered the United States later from Italy under a diplomatic visa. The visa is not in the evidence unless she used the one issued to her for the trip from Mexico. The circumstances under which petitioner entered this country in 1941 are not relied upon or discussed by her on brief. Her stay in the United States under the visa expired in 1942 and we are not informed of the authority she had for remaining here thereafter. We are not bound to assume that she was here illegally and, therefore, was subject to deportation on detection. The argument of petitioner is based upon the theory that her stay here at all times was authorized by statute. Under the above regulations, the petitioner was in 1944-1945 a resident of New York, for she made her home at least temporarily*53 there, and the purpose, refuge from war, was such that "extended stay may be necessary for its accomplishment." The facts here are distinguishable from those in Zareh Nubar, supra. For all of the reasons above discussed, we hold that petitioner was a resident alien during the taxable years. On brief, petitioner concedes that, if it is held that she was a resident alien, the only issues raised by her remaining for consideration are questions relating to the cost basis of 2,500 shares of stock of the Patino Mines & Enterprises Consolidated, Inc., which were sold in 1945, and the penalty for failure to file a timely return for 1944. In computing the deficiency for 1945, respondent held that petitioner had acquired the stock by gift from Patino and, accordingly, used the donor's basis, which he determined to be $ 8 a share. Petitioner contends that the stock was acquired from her husband under the agreement of July 10, 1944, at a cost of $ 20 a share. Respondent argues that the agreement was not entered into for an adequate and full consideration in money or money's worth, being no more than evidence of a gift, and that the evidence does not overcome the*54 presumption of correctness of his finding of basis for the stock. Petitioner left her husband and filed suit against him for divorce in May 1942. In July of the same year they entered into a property settlement and separation agreement under the terms of which she acquired, among other things, a right to receive from him annually for life, for her own exclusive use, the amount of $ 24,000, with a further right to have the amount increased to $ 50,000 upon the happening of certain specified events. All of these valuable rights were surrendered by her as part of the consideration for the agreement of July 10, 1944, under the terms of which she not only received from Patino the stock in question, but a like amount of the same stock and $ 100,000 in *826 cash, and a right to a total $ 800,000 on designated dates in the future, none later than July 1951. The valuable rights surrendered by petitioner inured to the benefit of Patino, by relieving him of liabilities under the canceled contract. The agreement of July 10, 1944, provided for the payment of $ 100,000 by the "* * * Husband delivering to the Wife, upon the signing of this agreement, certificates for 5,000 shares of the *55 common capital stock of Patino Mines & Enterprises Consolidated, Inc., receipt whereof is hereby acknowledged." The provision definitely shows that the stock was delivered in satisfaction of a liability incurred for $ 100,000 as part of the agreement. Thus, instead of a gift, as the respondent asserts, we find that consideration was paid for the stock. The respondent's determination was on the cost basis of the stock in the hands of Patino, the alleged donor, not the cost to petitioner independent of a gift from her husband. Under our finding that there was no gift, petitioner was not burdened with any presumption in favor of the correctness of a finding of the respondent on the cost basis to her. As above seen, the parties, each with the benefit of independent counsel, dealt in the stock on the basis of a value of $ 20 a share. Nothing in the record indicates any other value. Accordingly, we hold that petitioner is entitled to have gain or loss computed on a cost basis of $ 20 a share. The last question is whether petitioner is subject to a penalty of 25 per cent for failing to file a timely income tax return. Section 291 of the Internal Revenue Code imposes a penalty for failure*56 to file a timely income tax return "unless it is shown that such failure is due to reasonable cause and not due to willful neglect * * *." Advice of counsel that the filing of a return is not necessary, accompanied by a showing of good faith by the taxpayer, has been said to constitute reasonable cause for failure to file a return on time. C. R. Lindback Foundation, 4 T. C. 652; Safety Tube Corporation, 8 T. C. 757; Brooklyn & Richmond Ferry Co., 9 T. C. 865; affirmed on another issue, 171 Fed. (2d) 616. Here, petitioner was advised by counsel that in view of the fact that she was a nonresident alien it was not necessary for her to file a return. A return was actually filed after the expiration of the time prescribed by law within which to file it. Petitioner's return, when it was filed, was filed by a firm which included her present tax counsel and which was advising her in July 1944 in connection with her contract of reconciliation with her husband. We think this reasonably indicates that the petitioner sought and obtained competent advice on the subject of*57 her tax, and that they were informed of the basis of her contention as to nonresidence. It can not soundly be said that there is bad faith in contention that a *827 wife's residence follows that of husband, even though the contention is not upheld. Under the circumstances, the failure to file a timely return was due to reasonable cause and not to willful neglect. On this issue we sustain the petitioner. Decision will be entered under Rule 50.