Opinion
Docket No. 15921.
1949-05-11
HAYWOOD LUMBER AND MINING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
C. Addison Keeler, Esq., for the petitioner. Henry C. Clark, Esq., for the respondent.
Petitioner failed to file a personal holding company surtax return in 1941 and 1942, though it was a personal holding company within the meaning of section 501 during those years. Held, that such failure was due to willful neglect and not to reasonable cause and that accordingly petitioner is liable for the statutory penalty for failing to file such returns. C. Addison Keeler, Esq., for the petitioner. Henry C. Clark, Esq., for the respondent.
For the calendar years 1941 and 1942 the Commissioner determined deficiencies in petitioner's income tax, declared value excess profits tax, and personal holding company surtax and imposed penalties for failure to file personal holding company surtax returns, as follows:
+--+ ¦¦¦¦ +--+
Deficiency
Tax
1941 1942 Income tax $499.68 $854.22 Declared value excess profits tax 26.87 45.77 Personal holding company surtax 2,271.07 3,695.33 Penalty for failure to file personal holding company surtax 567.77 923.83 return
At the hearing petitioner conceded all issues raised in the petition except the issue of whether petitioner is liable for the statutory penalty for failure to file personal holding company surtax returns for the taxable years 1941 and 1942. Accordingly, the determination of respondent as to such conceded issues is approved.
Petitioner filed its income tax and declared value excess profits tax returns for the taxable years 1941 and 1942 with the collector of internal revenue for the fifteenth district of New York.
FINDINGS OF FACT.
Petitioner was incorporated under the laws of the State of North Carolina in 1902. Originally it held extensive timber lands located in Haywood County, North Carolina, but by 1926 it had disposed of all its property except 400 acres upon which the company operated a mica mine. Originally the corporation had 12 stockholders, 10 of them holding 100 shares each and 2 holding 1 qualifying share apiece. The only significant changes in the stock ownership of petitioner down to the taxable years in question were that 2 of the principal shareholders sold out to the others and the heirs of the remaining 8 principal stockholders, approximately 22 in number, inherited the corporation's stock. The Davidge and Crary families were the largest stockholders of the corporation for many years. In 1941 and 1942 the five largest stockholders held more than 50 per cent of the outstanding stock.
Since 1926 petitioner's main source of income was its mica mine. More than 80 per cent of petitioner's income in 1941 and 1942 consisted of royalties from this mine.
Petitioner was a personal holding company in the years 1941 and 1942.
Kenneth Sprague, secretary-treasurer of petitioner, performed most of his executive duties in Roscoe, New York, a town of 1,200 population located 70 miles from Binghamton, New York. In 1941 and 1942 he was primarily occupied in operating his own retail dry goods store in Roscoe. During these years he was also an executive officer of 2 small timber companies in whose management he played an active role. In addition to these activities, Sprague was a director of the First National Trust Co. of Roscoe and the Livingstone Manor National Bank, and he attended their monthly directors' meetings regularly.
Sprague has been secretary-treasurer of petitioner since 1913, but he did not take active charge of the corporation's books until 1937, at which time he became responsible for the corporate tax returns. In 1941 and 1942 he was aware of the personal holding company surtax statute, although he never studied its application. During these years he knew that more than 50 per cent of petitioner's outstanding stock was in the hands of not more than five shareholders and that more than 80 per cent of the corporate income consisted of royalties from its mica mine, but it did not occur to him that petitioner was a personal holding company.
Sprague engaged Wolcott of the accounting firm of Greene & Wolcott to prepare petitioner's tax returns for both 1941 and 1942 and relied upon him completely for their accuracy. Greene & Wolcott was the largest accounting firm in Binghamton and had been doing extensive tax work since its formation in 1922. Wolcott, admitted to practice as a certified public accountant in New York and Indiana, had been doing business in Binghamton and New York City since 1922 and was experienced in tax matters. He had been consulted as far back as 1926 concerning the corporation's tax affairs and was familiar with the stock ownership in petitioner and with the character and source of its income since prior to 1941.
In both 1941 and 1942 Sprague furnished Wolcott all information requested by him for making out the corporate tax returns, including the corporation's stock lists and financial statements. Petitioner's secretary-treasurer did not specifically request information from Wolcott concerning petitioner's personal holding company status or the necessity for filing a personal holding company surtax return in either 1941 or 1942. Though aware of the fact that petitioner was a personal holding company in 1941 and 1942, Wolcott, through inadvertence, did not discuss the possibility of such a status with Sprague or submit the necessary returns incident thereto at anytime. Petitioner's secretary-treasurer, or other officer, did not seek or receive advice from Wolcott or anyone else as to whether the corporation was a personal holding company and should file a personal holding company surtax return for 1941 or 1942. Since Wolcott testified that the facts constituting petitioner a personal holding company were known to him since prior to 1941, it is apparent that had he been asked regarding such status of petitioner he would have advised petitioner that it was a personal holding company in 1941 and 1942 and consequently was required to file a return as such.
In his notice of deficiencies for 1941 and 1942 respondent stated in part:
Inasmuch as you failed to file a return of personal holding company within the time prescribed by law, 25 per centum of the tax (personal holding company surtax) has been added thereto in accordance with the provisions of section 3612(d)(1) of the Internal Revenue Code.
The failure of petitioner to file personal holding company surtax returns for 1941 and 1942 was not due to reasonable cause.
OPINION.
HILL, Judge:
Petitioner was a personal holding company within the definition of section 501 of the Internal Revenue Code during the years 1941 and 1942. Respondent imposed a 25 per cent delinquency penalty on petitioner for failure to file personal holding company surtax returns for those years under authority of section 3612(d)(1) of the Internal Revenue Code.
The sole question for our determination is whether petitioner's failure ‘was due to a reasonable cause and not to willful neglect.‘ The burden of proof rests upon petitioner to show there was reasonable cause for its delinquency in 1941 and 1942. ‘Reasonable cause‘ has been interpreted by the courts to mean the exercise of ordinary business care and prudence. Southeastern Finance Co. v. Commissioner, 153 Fed.(2d) 205, affirming 4 T.C. 1069. Thus the question can be restated: ‘Did petitioner exercise ordinary business care and prudence in failing to file a personal holding company surtax return in 1941 and 1942?‘
SEC. 3612. RETURNS EXECUTED BY COMMISSIONER OR COLLECTOR.(d) ADDITIONS TO TAX.—(1) FAILURE TO FILE RETURN.— In case of any failure to make and file a return or list within the time prescribed by law, or prescribed by the Commissioner or the collector in pursuance of law, the Commissioner shall add to the tax 25 per centum of its amount, except that when a return is filed after such time and it is shown that the failure to file it was due to a reasonable cause and not to willful neglect, no such addition shall be made to the tax: Provided, That in the case of a failure to make and file a return required by law, within the time prescribed by law or prescribed by the Commissioner in pursuance of law, if the last date so prescribed for filing the return is after August 30, 1935, then there shall be added to the tax, in lieu of such 25 per centum: 5 per centum if the failure is for not more than 30 days, with an additional 5 per centum for each additional 30 days or fraction thereof during which failure continues, not to exceed 25 per centum in the aggregate.
Petitioner's principal contention is that ordinary business care and prudence was exercised in failing to file the returns requisite for a personal holding company. The evidence reveals that petitioner's secretary-treasurer, Sprague in both 1941 and 1942 relied solely on a certified public accountant, Wolcott, who was qualified on tax matters, to prepare the proper tax returns for petitioner and fully disclosed to him all information concerning the petitioner corporation which established it as a personal holding company, but Sprague did not ask Wolcott whether it was such, and Wolcott failed to advise him that it was necessary to file a personal holding company surtax return. Petitioner contends similar facts were high-lighted by the court in Hatfried, Inc. v. Commissioner, 162 Fed.(2d) 628, which held that the taxpayer had shown reasonable cause for its failure to file a personal holding company surtax return. Petitioner claims it is further buttressed by the fact that the Hatfried case decided the taxpayer there was not held accountable for the mistaken advice given by the tax adviser in that case.
Each case involving the question presented here and in the Hatfried case must be determined on its particular facts. Accordingly, the Hatfried case is not a precedent here unless the facts in the two cases are indistinguishable.
In the Hatfried case Form 1120 was filed and it was stated by the Circuit Court that it disclosed facts which established that Hatfried was a personal holding company. Its return was prepared by the accountant on whom Hatfried relied for advice and guidance as to its tax liability. In that return, on the advice of such accountant, Hatfried answered ‘no‘ to the question as to whether it was a personal holding company. Thus it appears that in that case the taxpayer relied on advice of its tax adviser and that such advice was affirmatively given. However, in the instant case none of petitioner's tax returns is in evidence. It does not appear from the record here whether any answer was made, under advice of petitioner's tax adviser or otherwise, as to whether petitioner was a personal holding company. On the other hand, it affirmatively appears that petitioner here neither sought nor received advice as to whether it was a personal holding company. Petitioner here made no effort to advise itself as to the requirement to file a personal holding company return. It merely awaited passively for such tax advice as Wolcott might volunteer to give.
In view of the dissimilarity as above indicated between the factual situation here and that in the Hatfried case, it is apparent that the instant case is distinguishable from Hatfried.
It appears to us that petitioner has failed to sustain its burden of proving that ordinary business care and prudence were exercised in failing to file the personal holding company surtax returns.
Sprague, the executive officer of petitioner, was aware of the existence of a personal holding company surtax statute in 1941 and 1942. Furthermore, as secretary-treasurer of petitioner for many years, he knew that in 1941 and 1942 more than 50 per cent of its stock was owned by not more than five shareholders. During these same years he was also familiar with the fact that more than 80 per cent of the corporation's income in these years consisted of royalties from its mica mine. His claim that, notwithstanding his knowledge of the foregoing facts, he was, nevertheless, unaware that petitioner was required to file a personal holding company return, is merely a confession of ignorance of the law. It is well established that ignorance of the necessity for filing a tax return will not of itself relieve a taxpayer of the 25 per cent penalty. Girard Investment Co. v. Commissioner, supra; Tarbox Corporation, 6 T.C. 35; and Hermax Co., 11 T.C. 442.
We hold that all the circumstances of which Sprague was aware in 1941 and 1942 put him on notice that petitioner might come within the definition of a personal holding company as defined by section 501 of the code. The exercise of ordinary business care and prudence dictated that Sprague investigate on his own account, or, at least, specifically inquire of a qualified tax adviser concerning the personal holding company status of petitioner and the tax consequences arising therefrom. Under the facts here mere submission of the corporate records to an accountant experienced in tax affairs plus passive reliance on his volunteering appropriate tax advice does not equal the proper standard of care on Sprague's part to avert a delinquency penalty. There is no evidence that Sprague, himself, investigated petitioner's tax liability as a personal holding company or consulted anyone on this matter, either before or after the corporate returns were prepared. It might have been a different matter if Sprague had asked Wolcott whether petitioner was liable for the personal holding company surtax and should file the Form 1120-H return, and had been advised that such filing was not required. But such is not the situation here.
We hold that such inaction on the part of petitioner's secretary-treasurer was not due to reasonable cause. Cf. Genessee Valley Gas Co., 11 T.C. 184, and Hermax Co., supra. Therefore, we uphold the 25 per cent delinquency penalty imposed by respondent for 1941 and 1942.
Reviewed by the Court.
Decision will be entered for respondent.