Opinion
Docket No. 20715.
1950-11-10
RELIANCE FACTORING CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Jacob Rabkin, Esq., and Mark H. Johnson, Esq., for the petitioner. Walt Mandry, Esq., for the respondent.
Since its organization in 1935 petitioner has been engaged in the business of dealing in job lots, closeouts, odd lots and surplus material which it purchased from cotton mills and government agencies for converting and jobbing. It also owned 100 per cent of the stock of a subsidiary corporation doing business in related lines in Cleveland, Ohio. During the taxable years ending March 31, 1944, and March 31, 1945, petitioner was unable to obtain any goods on account of the war and had no operating income. The principal part of petitioner's income during the taxable years was from dividends from its subsidiary. Petitioner relying upon the advice of a well experienced and competent C.P.A. who had audited petitioner's books and prepared its income tax returns for many years did not file any personal holding company returns. Held, that although petitioner was liable in each of the taxable years for a personal holding company surtax, a liability for penalties for failure to file personal holding company returns, because its failure to do so was not due to willful neglect but was due to reasonable cause. Jacob Rabkin, Esq., and Mark H. Johnson, Esq., for the petitioner. Walt Mandry, Esq., for the respondent.
The deficiency notice mailed to petitioner determined liabilities for personal holding company surtax and delinquency penalties as follows:
+--------------------------------------------+ ¦ ¦¦Personal holding¦ ¦ +---------------+----------------+-----------¦ ¦Year ended ¦company surtax ¦Delinquency¦ +---------------+----------------+-----------¦ ¦ ¦¦deficiencies ¦penalties ¦ +--------------++----------------+-----------¦ ¦March 31, 1944¦¦$12,265.17 ¦$3,066.29 ¦ +--------------++----------------+-----------¦ ¦March 31, 1945¦¦11,553.38 ¦2,888.34 ¦ +--------------------------------------------+
To the determination made by the Commissioner the petitioner assigns error as follows:
(a) The Commissioner erred in determining that the petitioner was a personal holding company for the taxable years ended March 31, 1944, and March 31, 1945, and that it is subject for those years to the surtax imposed by section 500 of the Internal Revenue Code.
(b) The Commissioner erred in determining that the failure of the petitioner to file personal holding company returns (Form 1120H) for the taxable years ended March 31, 1944, and March 31, 1945, was due to willful neglect and not to reasonable cause, and that the petitioner is subject to a 25% delinquency penalty, computed on the alleged personal holding company surtax for those years.
Subsequent to the issuance of the deficiency notice, and on September 20, 1948, the petitioner paid the deficiencies in personal holding company surtax for both years. At the hearing the petitioner withdrew the issue with respect to it's liability for the personal holding company surtax for both years. The only issue before the Court, therefore, is whether the petitioner is liable for the 25 per cent delinquency penalties for failure to file the personal holding company returns for these two taxable years.
FINDINGS OF FACT
The petitioner was incorporated in New York in 1935. Its principal place of business is in New York City, and it filed its income tax returns for the taxable years with the collector for the second district of New York.
The petitioner was organized for the purpose of dealing in job lots, closeouts, odd lots, and surplus material, which it purchased from cotton mills and government agencies for converting and jobbing. It was organized by a group of individuals whose principal business was buying, converting, and jobbing dry goods through normal channels. This principal business has been conducted since 1910 by a partnership, Alexander Lamport and Brothers, with separate places of business in New York City, Detroit, and Chicago, each in charge of a resident partner. Another branch of the business in Cleveland had been incorporated in Ohio as the Lamport Company because there was no partner in direct charge. This latter branch was made a subsidiary of the petitioner for the purpose of facilitating its bank credit. Alexander Lamport was and is the president and a principal stockholder of petitioner, and a principal partner of the partnership.
Petitioner has actively conducted its business continuously up to the present, except for a period of about two years during the war when it was impossible for it to obtain goods. Although the related Lamport companies had allotments from the mills because of their pre-war purchases, the petitioner had no such position and it was unable to obtain goods. It, therefore, did no business and had no operating income for the two taxable years involved in this proceeding. Its principal income consisted of dividends from the Lamport Company. In 1945, the petitioner was able to purchase goods and resumed its prior operations. Its gross income from its regular line of business for the fiscal year ending March 31, 1946, was about $200,000.
Since 1918, petitioner has had the same accountant for all of the Lamport companies, including petitioner, and for the individual partners and stockholders, and he has prepared or checked all their tax returns. This accountant has been a certified public accountant in New York since 1912. After his certification he spent several years as a senior accountant in the City of New York Bureau of Investigation and Statistics, and helped prepare a report for a committee appointed by the mayor to study new sources of tax revenue for the city. From 1916 until 1944, he taught in the College of the City of New York, lecturing on analysis of financial statements and other accounting courses. He has been a member of the Certified Public Accountants' Society since 1924. In 1918, he began private practice as a public accountant and has practiced continuously up to the present. During the taxable years he practiced with an associate and employed several senior accountants. He personally checked and signed all audit reports and tax returns. His clients included companies in the textile, marine transportation, graphic arts, and metal working industries. His office prepared about 100 Federal tax returns each year. He subscribed to tax services and purchased other tax literature. Petitioner was familiar with his activities and background, believed that he was a well qualified accountant and familiar with tax law, and knew that his reputation in the accounting field was good. The present proceeding is the only tax litigation in which the petitioner, or any of the related companies, have engaged.
The petitioner and its related companies relied solely upon this accountant for all accounting and tax advice and trusted his judgment. The partners and business associates generally met about eight times a year in New York to discuss business policies and their accountant attended these meetings. All facts relating to the business were disclosed to him because the principals had complete confidence in him. The petitioner's corporate seal, minute book, stock book, contracts, and other business papers were regularly kept in his office. His office made regular audits and prepared the Federal, state, and city tax returns. He had the sole responsibility for these returns because none of the principals or employees of any of the companies felt qualified to prepare tax returns. The Federal tax returns for the taxable years were prepared in handwritten form by an associate of petitioner's accountant on the basis of audits prepared by him and checked by the accountant. During the taxable years both the accountant and his associate knew that the petitioner had no operating income and they knew the status of stock ownership in the petitioner.
The Federal income tax returns for the taxable years (Form 1120) stated that the petitioner was not a personal holding company, and no personal holding company returns were filed. The statement that it was not a personal holding company was made at the accountant's direction and the decision not to file personal holding company returns was made by him. He did not believe at the time the returns were filed that petitioner was a personal holding company. Alexander Lamport was petitioner's president. He signed the returns on behalf of petitioner. His only knowledge of personal holding companies was a vague idea that they were used to manipulate stocks; he had no knowledge that the petitioner's cessation of business during the taxable years necessitated a special type of tax return. In reliance upon the accountant, he believed that all necessary returns had been filed and that all obligations required by the law had been complied with.
The accountant was familiar with the general definition of a personal holding company and with the surtax imposed upon the Federal tax law. He believed that a personal holding company was an ‘incorporated pocketbook, designed to help relieve people from paying taxes.‘ He believed that the surtax was intended as a penalty and that it was not intended to reach an ordinary trading corporation which had operated for many years and which had temporarily suspended operations during the war period due to circumstances beyond its control. Although he knew that the income and stock ownership requirements of the personal holding company definition were technically satisfied by the petitioner for the taxable years, he was convinced that the statute was not applicable because he thought it had never been intended to apply to the situation of the petitioner. He did not discuss the question with Lamport, petitioner's president, because he knew that Lamport would leave the decision to him.
In the examination of the petitioner's return for the year ended March 31, 1944, the internal revenue agent in charge issued a report which correctly set forth the stock ownership in the petitioner and the nature of the petitioner's income. The report proposed a deficiency of $526.60 under section 102 of the Internal Revenue Code but made no finding that the petitioner was a personal holding company or that it was liable for personal holding company surtax. The petitioner protested the proposed deficiency. The personal holding company issue was first raised in conference on the protest and the respondent then determined that the petitioner was liable for the surtax. Petitioner's accountant, on whom it relied, subsequently became convinced that the surtax deficiency was proper and advised petitioner to pay the amounts due, which was done. He nevertheless caused the petitioner to contest the determined penalties for failure to file personal holding company returns.
The petitioner on September 20, 1948, paid to the collector of internal revenue, second district of New York, $12,265.17 and $11,553.38, representing the deficiencies in personal holding company surtaxes, exclusive of penalties, determined by the respondent in the notice of deficiency for the taxable years ended March 31, 1944, and March 31, 1945, respectively.
The petitioner was a personal holding company during the taxable years and is liable for the surtax as determined by the respondent. The failure to file personal holding company returns for the taxable years was not due to reasonable cause and was not due to willful neglect. The petitioner is not liable for the delinquency penalties determined by the respondent.
OPINION.
BLACK, Judge:
The only question we have to decide in this proceeding is this: Is petitioner liable for the 25 per cent penalty for failure to file personal holding company tax returns for the taxable years ended March 31, 1944, and March 31, 1945? The applicable statute is printed in the margin.
INTERNAL REVENUE CODE.SEC. 291. FAILURE TO FILE RETURN.(a) In case of any failure to make and file return required by this chapter, within the time prescribed by law or prescribed by the Commissioner in pursuance of law, unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the tax: 5 per centum if the failure is for not more than thirty days with an additional 5 per centum for each additional thirty days or fraction thereof during which such failure continues, not exceeding 25 per centum in the aggregate. * * *
We think this question under the facts and applicable law must be decided in favor of petitioner. It seems perfectly clear to us that petitioner's failure to file personal holding company tax returns in each of the years here involved was not due to any willful neglect on its part. It employed a competent and experienced certified public accountant to file its tax returns for each of the years in question and furnished that accountant with all necessary records to enable him to prepare properly its returns. In our findings of fact we have found upon the strength of undisputed evidence that:
* * * All facts relating to the business were disclosed to him because the principals had complete confidence in him. The petitioner's corporate seal, minute book, stock book, contracts, and other business papers were regularly kept in his office. His office made regular audits and prepared the (petitioner's) Federal, state, and city tax returns. * * *
We do not see how under such facts as these it could be held that petitioner's failure to file personal holding company returns in the tax years here in question was due to ‘willful neglect.‘ We hold it was not. We are also convinced that petitioner's failure to file a personal holding company tax return was due to reasonable cause and we so hold. The facts upon which we base this conclusion are fully stated in our findings of fact and need not be repeated here. Respondent's imposition of delinquency penalties is reversed.
Reviewed by the Court.
Decision will be entered under Rule 50.