Mayflower Inv. Co. v. Commissioner , 24 T.C. 729 ( 1955 )

Mayflower Investment Company, Petitioner, v. Commissioner of Internal Revenue, Respondent

Mayflower Inv. Co. v. Commissioner

Docket No. 48006

United States Tax Court

24 T.C. 729; 1955 U.S. Tax Ct. LEXIS 136;

July 21, 1955, Filed

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Decision will be entered for the respondent.

1 Personal Holding Company Income -- Interest or Profit -- Sec. 502 (a). -- The face amount of a note in excess of the sum loaned thereon constituted interest within the meaning of section 502 (a) of the Internal Revenue Code of 1939 and was not a share of the profits on a transaction for which the loan was given.

2. Failure to File Returns -- Reasonable Cause v. Willful Neglect -- Persons Consulted. -- Failure of a corporation to file personal holding company tax returns for 6 years in reliance upon the advice and actions of its secretary-bookkeeper who discussed profit and loss with an attorney, neither of whom was expert in or experienced in Federal income tax matters, was due to willful neglect and not to reasonable cause.

S. G. Winstead, Esq., for the petitioner.

Paul M. Newton, Esq., for the respondent.

Murdock, Judge.

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MURDOCK

The Commissioner determined deficiencies in income tax and personal holding company surtax of the petitioner, as well as additions to the tax under section 291 (a) of the Internal Revenue Code of 1939, as follows:

		Personal
Year	Income tax	holding	Additions to
		company	the tax
		surtax
1946		$ 9,943.93	$ 2,485.98
1947		9,424.14	2,356.04
1948	$ 1,268.36	7,574.51	1,893.63
1949	27.76	892.48	223.12
1950	799.02	4,094.13	1,023.53

The parties have agreed upon the correctness of the Commissioner's determination of deficiencies except for one item affecting the 1950 personal holding company surtax and the additions to the tax under section 291 (a) of the Internal Revenue Code for all years. The only issues presented for decision herein are:

(1) Whether $ 12,300 of a note for $ 162,300 which was given for a loan of $ 150,000 constitutes interest to the petitioner so that it qualifies as personal holding company income within the meaning of section 502 (a) of the Internal Revenue Code, and

(2) Whether the petitioner's failure to file personal holding company returns for each of the years 1946 through 1950 was due to willful neglect and not due to reasonable cause so that it is liable for the additions to the tax for each of those years under section 291 (a).

FINDINGS OF FACT.

The petitioner is a Texas corporation. Its principal business is that of liquidating the assets of former corporations which were controlled by Carr P. Collins. Collins is and always has been president of the petitioner. Corporate income tax returns were timely filed by the petitioner with the collector of internal revenue for the second district of Texas, but no personal holding company returns were filed for any of the years 1946 through 1950.

The petitioner concedes that it was a personal holding company during the years 1946 through 1949.

The petitioner loaned $ 150,000 in 1950 to Southern Homes, Inc., a realty corporation, for which a note was executed payable to the petitioner in the principal amount of $ 162,300 due in 6 months with interest at 4 per cent per annum. This note was secured by a deed of trust for the benefit of the petitioner to 30 lots owned by Southern Homes on which houses were to be constructed with the money borrowed from the petitioner. The transaction by which the loan was made to Southern Homes by the petitioner was handled by Clem, president and chief stockholder of Southern Homes, and Collins on behalf of the petitioner. Clem and Collins had had business relationships for some years and the petitioner had previously sustained a loss of $ 12,300 in a deal with Clem. Clem was aware of this when he brought the building proposition to Collins, although the debt was subject to the defense of the statute of limitations. Southern Homes needed the money in order to undertake a real estate development project which involved the building of 30 houses. Clem sought to borrow from the petitioner as Southern Homes had exhausted its credit with its own banking facility. The $ 12,300 amount, included in the principal amount of the note, was not made conditional on the making of profits by Southern Homes in its real estate venture.

The petitioner recorded the $ 12,300 item on its books in 1950 as interest and also reported it as such for 1950.

The Commissioner determined that the $ 12,300 of the note constituted interest for 1950 within the meaning of section 502 (a) of the Internal Revenue Code of 1939 and found that the petitioner was a personal holding company under section 501 of the Internal Revenue Code.

Collins has been a successful business man in Dallas since 1913 and is presently associated in an executive capacity with several businesses in and around Dallas. His principal activity is now with the Fidelity Union Life Insurance Company, one of the largest in Texas, of which he has served as president in the past and is presently the chairman of the board of directors. The possibility that the petitioner might have qualified as a personal holding company never occurred to Collins during the years involved.

The tax returns of the petitioner for the years in controversy were prepared by its secretary and bookkeeper, L. L. Waller, who was also an employee of Fidelity Union Life Insurance Company and who had been associated with Collins in various businesses since 1924. Waller was not a certified public accountant and did not profess to be an expert on Federal tax matters. Waller inserted the word "No" on the corporate income tax returns for each of the years in controversy in answer to the question "Is the corporation a personal holding company within the meaning of section 501 of the Internal Revenue Code?" Waller believed that to constitute a personal holding company all of the corporation's stock had to be vested in five people. Collins, as president, executed the income tax returns for the petitioner.

Waller discussed the profit and loss statements of the petitioner with Charles S. Sharp, pursuant to instructions from Collins as to Sharp's normal duties in his employment with Fidelity Union Life Insurance Company before completing the returns for 1947 through 1950. Sharp was 31 years old when first employed by Fidelity Union Life Insurance Company in June 1947 shortly after marrying Collins' daughter. He served as general counsel for the insurance company. Sharp also performed duties for the petitioner during the period 1947 through 1950 in accordance with Collins' instructions, although he did not receive any compensation for those services.

Sharp became a lawyer in July 1940. He worked as assistant to the general counsel of the Federal Reserve Bank of Dallas from August 1, 1940, until February 1, 1942, when he joined the Navy for 4 years. His experience in tax matters was limited to the preparation of individual income tax returns and one course in Federal taxation taken while at Harvard Business School in 1947, and did not extend to corporate income tax study. He had not advised clients in regard to corporation income taxes and had never held himself out to be an expert on any tax matters.

Sharp was aware of the provisions of the Internal Revenue Code of 1939 pertaining to personal holding companies and also of all of the facts concerning the petitioner which qualified it as a personal holding company within the provisions of the Code, but at no time during the years in controversy did he recognize that the petitioner actually did qualify as such.

The failure of the petitioner to file personal holding company returns for the years 1946 through 1950 was not due to reasonable cause but was due to willful neglect.

All stipulated facts are incorporated herein by this reference.

OPINION.

The first question is whether the $ 12,300 received in 1950, reported by the petitioner and held by the Commissioner to be interest, was interest and, therefore, personal holding company income within the meaning of section 502 (a), Internal Revenue Code. The petitioner has changed its position since filing its return and now contends that the amount represents, not the price received for the use of its money on a unit of time basis, Elverson Corporation, 40 B. T. A. 615, but its share of the profits of the business deal engaged in by the borrower. The petitioner's right to the payment of the $ 162,300 was not dependent upon the success of the venture in which the borrower engaged, the parties in no way indicated that the $ 12,300 portion thereof was anything other than interest, it was recognized as interest by the petitioner, and it was interest. Kena, Inc., 44 B. T. A. 217.

The petitioner filed no personal holding company returns for any of the 5 taxable years but now concedes, after consulting competent counsel, that it was required to file such returns. It seeks to avoid the additions to the tax for its failure to file the returns by showing that its failure was due to reasonable cause and not to willful neglect. Sec. 291 (a). The excuse offered for 1946 is that the petitioner relied upon its secretary, Waller, who knew all of the facts. But that does not suffice, since he had no special knowledge or training in tax law, he never gave any particular consideration to section 501 and ignorance of the law on the part of the taxpayer through its officers is no excuse. Genesee Valley Gas Co., 184">11 T. C. 184, affd. 180 F. 2d 41; Hermax Co., 11 T. C. 442, affirmed per curiam 175 F. 2d 776; Tarbox Corporation, 6 T.C. 35">6 T. C. 35. The petitioner did not consult its present counsel about filing the returns. The only difference in the evidence on this point as it relates to the 4 later years is that during those years an attorney, the son-in-law of Collins, discussed with Waller the profit and loss statements before Waller made up the returns. This attorney was not employed by the petitioner, was not tax counsel for the petitioner and never was given any responsibility for filing its returns. Thus the evidence does not show that the failure to file the personal holding company returns for the 5 taxable years was due to reasonable cause and not to willful neglect. Charles E. Pearsall & Son, 29 B. T. A. 747; Nirosta Corporation, 8 T. C. 987; Wm. J. Lemp Brewing Co., 18 T. C. 586; Southeastern Finance Co., 4 T.C. 1069">4 T. C. 1069, affd. 153 F. 2d 205; R. Simpson & Co., 44 B. T. A. 498, affirmed per curiam 128 F. 2d 742, writ dismissed 321 U.S. 225">321 U.S. 225; West End Co., 23 T.C. 815">23 T. C. 815.

Decision will be entered for the respondent.