Opinion
Docket No. 55565.
1956-08-14
THE COSHOCTON SECURITIES COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Roger K. Powell, Esq., and Russell E. Lyons, Esq., for the petitioner. John C. Calhoun, Esq., for the respondent.
Roger K. Powell, Esq., and Russell E. Lyons, Esq., for the petitioner. John C. Calhoun, Esq., for the respondent.
Taxpayer, a corporation, had four stockholders in 1940, and two stockholders, in each of the years 1946 and 1950, that owned more than 50 per cent in value of its outstanding stock. In each of those years one of the stockholders was the A. & J. Frank Company which was benefically owned by one individual. Petitioner was not aware of this and had never inquired of A. & J. Frank Company as to how many stockholders it had or as to who was its beneficial owner. Had taxpayer made inquiry, A. & J. Frank Company would not have divulged this information. Taxpayer's entire income for each of the above years consisted of dividends and interest. Held, taxpayer is a personal holding company within the meaning of section 501 of the Internal Revenue Code of 1939 and is liable for personal holding company surtaxes; and held, further, that taxpayer did not show reasonable cause for failure to file personal holding company returns for the above years and therefore was liable for the addition to tax of 25 per cent.
The Commissioner determined deficiencies and additions to tax in petitioner's income tax as follows:
+--------------------------+ ¦ ¦ ¦Additions¦ +----+-----------+---------¦ ¦Year¦Deficiency ¦to tax ¦ +----+-----------+---------¦ ¦1940¦$7,396.36 ¦$1,849.09¦ +----+-----------+---------¦ ¦1946¦3,339.70 ¦834.93 ¦ +----+-----------+---------¦ ¦1950¦2,157.87 ¦439.47 ¦ +----+-----------+---------¦ ¦1951¦184.69 ¦ ¦ +--------------------------+
The petitioner concedes its liability for the deficiency determined for the year 1951. The deficiencies and additions to tax for the years 1940, 1946, and 1950 are in dispute; the question about the additions arises as a result of petitioner's failure to file personal holding company returns for those years. There are two issues to be decided: (1) Whether petitioner was a personal holding company during the years in question within the meaning of section 501 of the Internal Revenue Code of 1939; and (2) if it was a personal holding company, whether its failure to file personal holding company returns in those years was due to reasonable cause and not due to willful neglect. Petitioner filed its income tax returns for the periods here involved with the collector of internal revenue for the Columbus District of Ohio.
FINDINGS OF FACT.
Some of the facts are stipulated. They are so found and are incorporated herein by this reference.
The petitioner, a corporation, was incorporated under the laws of Delaware in the year 1929, with authorized shares of $40-par-value preferred stock and common stock without par value. Its entire assets, 650 shares of Indianapolis Glove Company common stock, were acquired from W. M. Himebaugh, who had purchased them for $250,000 to induce the Indianapolis Glove Company to take over the property and assume the liabilities of the Coshocton Glove Company which had become insolvent. Himebaugh contributed these assets to preserve what he considered an obligation to see that those who invested while he had an interest in the Coshocton Glove Company would receive at least something for their stock. The petitioner issued 2,816 preferred shares and 19,739 3/4 common shares on a basis of 1 share preferred and 1 share common of its stock for each share of Coshocton Glove Company preferred stock, and one-half share of its common stock for each share of Coshocton Glove Company common stock. These shares were issued and outstanding during the last half of the years 1940, 1946, and 1950.
In 1940 petitioner had 174 preferred stockholders and 248 common stockholders. During the last half of 1940 the owners of record of the largest holdings of petitioner's shares were as follows:
+--------------------------------------------+ ¦ ¦Preferred ¦Common ¦ +---------------------+-----------+----------¦ ¦A. & J. Frank Company¦992 ¦1,104 1/2 ¦ +---------------------+-----------+----------¦ ¦Irwin B. Klein ¦329 ¦3,159 1/8 ¦ +---------------------+-----------+----------¦ ¦William M. Himebaugh ¦134 ¦10,162 ¦ +---------------------+-----------+----------¦ ¦C. C. Enless ¦ ¦1,787 3/4 ¦ +---------------------+-----------+----------¦ ¦Total ¦1,455 ¦16,123 3/8¦ +--------------------------------------------+
The holdings of these four stockholders constituted 68 per cent of the value of petitioner's outstanding stock.
In 1946 petitioner had 148 preferred stockholders and 218 common stockholders. During the last half of 1946 the owners of record of the largest holdings of petitioner's shares were as follows:
+--------------------------------------------+ ¦ ¦Preferred ¦Common ¦ +---------------------+-----------+----------¦ ¦ ¦ ¦ ¦ +---------------------+-----------+----------¦ ¦A. & J. Frank Company¦1,476 ¦4,369 5/8 ¦ +---------------------+-----------+----------¦ ¦William M. Himebaugh ¦134 ¦10,162 ¦ +---------------------+-----------+----------¦ ¦Total ¦1,610 ¦14,531 5/8¦ +--------------------------------------------+
The holdings of these two stockholders constituted 66 per cent of the value of petitioner's outstanding stock.
In 1950 petitioner had 125 preferred stockholders and 190 common stockholders. During the last half of 1950 the owners of record of the largest holdings of petitioner's shares were as follows:
+--------------------------------------------+ ¦ ¦Preferred ¦Common ¦ +---------------------+-----------+----------¦ ¦ ¦ ¦ ¦ +---------------------+-----------+----------¦ ¦A. & J. Frank Company¦1,678 ¦4,618 7/8 ¦ +---------------------+-----------+----------¦ ¦William M. Himebaugh ¦134 ¦10,162 ¦ +---------------------+-----------+----------¦ ¦Total ¦1,812 ¦14,780 7/8¦ +--------------------------------------------+
The holdings of these two stockholders constituted 70 per cent of the value of petitioner's outstanding stock.
During the last half of 1940, A. & J. Frank Company was owned by three stockholders, one of whom was Irwin B. Klein. During the last half of 1946 and 1950 A. & J. Frank Company was owned by two stockholders. The beneficial owner of the stock of petitioner recorded in the name of A. & J. Frank Company during 1940, 1946, and 1950 was B. Elsey.
The petitioner's entire income for each of the taxable years 1940, 1946, and 1950 consisted of dividends paid by the Indianapolis Glove Company and interest paid by banks on deposits of inactive surplus funds.
The net income, income tax paid, and dividends distributed by the petitioner for the years in question were as follows:
+---+ ¦¦¦¦¦ +---+
Income tax Dividends Year Net income paid distributed to stockholders 1940 $17,649.13 $323.60 $6,758.40 1946 4,433.33 2.80 1950 12,352.69 426.17 6,758.40
The petitioner never inquired of A. & J. Frank Company as to how many shareholders it had or as to the beneficial ownership of petitioner's stock recorded in its name. Had the petitioner sought this information, A. & J. Frank Company would not have divulged its voluntarily nor would it have felt obligated, legally or otherwise, to have divulged such information. Such information was not available to petitioner through any public record or any voluntary disclosure of any administrative or executive agency of the State of Ohio.
Petitioner's failure to file personal holding company returns in 1940, 1946, and 1950 was not due to reasonable cause.
OPINION.
TIETJENS, Judge:
The petitioner argues that it is not a personal holding company within the meaning of section 501(a) of the Internal Revenue Code of 1939, since it was not such a company within the intendment of the statute; that it is not an ‘incorporated pocketbook’ since in each of the years in question it always had more than 300 stockholders and it was never used to accumulate surplus so as to avoid surtax on its stockholders, though it was slow in paying dividends form its 1940, 1946, and 1950 income so that it could not qualify them as credits against the personal holding company income for those years, thus providing a basis for the deficiencies determined by the Commissioner. Petitioner further argues that a great hardship would result if this ‘penalty’ tax was imposed, since it was unable to determine that it was a personal holding company by virtue of the fact that only when the stock owned by the A. & J. Frank Company was included, did five or less stockholders own 50 per cent in value of petitioner's stock, and had petitioner inquired of A. & J. Frank Company, the latter would not have disclosed the number of shareholders it had nor the beneficial owners of its stock.
we cannot agree with petitioner's position. Petitioner concedes that its entire income for the years in question was personal holding company income and that B. Elsey was the beneficial owner of the shares held by A. & J. Frank Company which, along with three other shareholders in 1940 and with one other shareholder in 1946 and 1950, owned more than 50 per cent in value of petitioner's stock. Hence petitioner is a personal holding company as defined in the express language of the statute.
Further, there is no basis for petitioner's argument that it was not within the intendment of the statute. On the contrary, Congress indicated that it intended that corporations in petitioner's situation be liable for the personal holding company surtaxes. Senate Report No. 558, 73d Cong., 2d Sess. (1939-1 C.B. (Part 2) 586, 597), says:
SEC. 501. DEFINITION OF PERSONAL HOLDING COMPANY.(a) GENERAL RULE.— For the purposes of this subchapter and chapter 1, the term ‘personal holding company’ means any corporation if—(1) GROSS INCOME REQUIREMENT.— At least 80 per centum of its gross income for the taxable year is personal holding company income as defined in section 502; * * *(2) STOCK OWNERSHIP REQUIREMENT.— At any time during the last half of the taxable year more than 50 per centum in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals.
The effect of this system is to provide for a tax which will be automatically levied upon the holding company without any necessity for proving a purpose of avoiding surtaxes.
See O'Sullivan Rubber Co. v. Commissioner, 120 F.2d 845 (C.A. 2, 1941); American Package Corp. v. Commissioner, 125 F.2d 413 (C.A. 4, 1942).
Petitioner resists the imposition of an addition to the tax of 25 per cent for failure to file personal holding company returns in each of the years 1940, 1946, and 1950. This addition is proper unless petitioner shows that such failure to file is due to reasonable cause and is not due to willful neglect.
The Commissioner concedes that there was no willful neglect here in the sense of an intentional or designed failure to file personal holding company returns on the part of petitioner or its officers. However he contends that petitioner has not sustained the burden of establishing the existence of reasonable cause for failure to file personal holding company returns for the years in question. He argues that this is clearly shown by virtue of the fact that petitioner never attempted to ascertain its true status as to whether it was a personal holding company. Nor did petitioner ever seek expert advice on this matter or attempt to rely on an attorney or accountant. On cross-examination, W. H. Pomerene, one of petitioner's directors during 1940 and several years thereafter, was asked when the first time was that he as a member of the board of directors discussed the question of whether or not petitioner could have been a personal holding company. He replied, ‘I feel quite sure it was never discussed.’ On the other hand petitioner's reasons for not filing returns were that it was not aware of its status as a personal holding company and did not have the means of obtaining information in regard to its stockholders during those years. The Commissioner concedes that had petitioner inquired of A. & J. Frank Company as to the number of stockholders it had or as to who the beneficial owners of its stock were, it could not have found this out.
In view of the evidence, or lack of it, we conclude that petitioner has not shown reasonable cause for failure to file personal holding company returns for the years in question and therefore is liable for the addition to tax of 25 per cent. See Tarbox Corporation, 6 T.C. 35 (1946).
Decision will be entered for the respondent.