Genesee Valley Gas Co. v. Commissioner

Genesee Valley Gas Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent Genesee Valley Gas Co. v. Commissioner Docket No. 12874 United States Tax Court 11 T.C. 184; 1948 U.S. Tax Ct. LEXIS 104; August 19, 1948, Promulgated *104 Decision will be entered under Rule 50. Petitioner, a personal holding company within the meaning of section 501, Internal Revenue Code, failed to file a surtax return as such. 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 return. John J. Geraghty, Esq., and David B. Landis, Esq., for the petitioner. William A. Schmitt, Esq., for the respondent. Hill, Judge. HILL *184 Respondent determined deficiencies for the calendar years 1941 and 1942 in income tax, personal holding company surtax liability, and penalties for failure to file*105 personal holding company surtax returns, as follows: INCOME TAX Year Liability Assessed Deficiency Overassessment Penalty [1941] None $ 349.76 $ 349.76 [1942] $ 634.37 607.18 $ 27.19 Total 634.37 956.94 27.19 349.76 PERSONAL HOLDING COMPANY SURTAX [1941] $ 8,940.40 None $ 8,940.40 $ 2,235.10 [1942] 13,103.92 None 13,103.92 3,275.98 Total 22,044.32 None 22,044.32 5,511.08 Petitioner's income tax returns for the years involved were filed in a collector's district in the State of New York. A written stipulation was filed herein which disposes of all the issues raised by the notice of deficiencies, petition, and answer in this proceeding except the issue of whether petitioner is liable for the statutory penalties for failure to file personal holding company surtax returns for the taxable years 1941 and 1942. Effect will be given to the stipulation in the recomputation under Rule 50. FINDINGS OF FACT. A part of the facts are stipulated, and they are accordingly found. Petitioner is a New York corporation, organized in 1926, and it was a holding company prior to its reorganization effectuated in 1939. Since the effective*106 date of its reorganization in 1939 it has been, and it was during the taxable years 1941 and 1942, a personal holding company. *185 Petitioner was not a personal holding company prior to such reorganization. Its reorganization was effected under the provisions of section 77-B of the Bankruptcy Act in the United States District Court for the Southern District of New York and was consummated in September 1939. One of the results of such reorganization was the cancellation of all of petitioner's capital stock outstanding prior thereto and the authorization and issuance of new capital common stock to the unsecured creditors of petitioner in proportion to and in satisfaction of their claims. A prior existing bonded indebtedness in the principal amount of $ 733,000 was unaffected by the reorganization. The total number of authorized shares of the new capital stock was 23,650. The number of shares of the new capital stock issued in 1939 pursuant to the reorganization was 18,864. The same number of such shares was outstanding in the taxable years 1941 and 1942. E. L. White was the president and a director of petitioner continuously from 1931 through the years 1941 and 1942. Of*107 the outstanding shares of the new capital stock from the date of its issuance through the taxable years here involved, White held more than one-third, and during that period of time the five shareholders owning the greatest number of shares of such new stock held a total of 13,356 shares. During all of such period of time White and petitioner's secretary knew that more than 50 per cent of petitioner's outstanding stock was held by not more than five shareholders. They also knew throughout such period that not more than four of such shareholders held 11,950 shares, or more than 50 per cent of the number of either the outstanding or the authorized shares. Petitioner did not file a personal holding company surtax return for any of the tax years here involved or for any of the years 1939, 1940, 1943, and 1944. Petitioner, through its own officers, prepared and filed its income tax returns for each of the years 1939 to 1944, inclusive, and in each of such returns it was stated that petitioner was not a personal holding company. Petitioner had its income tax return for 1939 examined and checked by a member of a law firm, as a result of which certain corrections pertinent to its income*108 tax liability were made in the prepared draft of the return. Petitioner did not seek or receive advice from tax counsel during the years above mentioned respecting its income tax returns, except as above set forth. Petitioner did not seek or receive advice from tax counsel as to whether it was a personal holding company or should file a personal holding company surtax return for any of the years 1939 to 1944, inclusive. Petitioner's failure to file personal holding company surtax returns for the years 1941 and 1942 was due to willful neglect and not to reasonable cause. *186 OPINION. It is stipulated that "petitioner was a personal holding company in each of the taxable years 1941 and 1942 within the meaning of section 501 of the Internal Revenue Code and is liable for the personal holding company surtax on its undistributed sub-Chapter A net income for each of said years as provided by section 500 of the Internal Revenue Code." The only issue we have to decide is whether petitioner is liable for the statutory penalties for failure to file personal holding company surtax returns for the years here involved. Petitioner contends that such failure was due to reasonable cause and*109 not to willful neglect. Respondent contends contra. Petitioner's president testified that he did not know that petitioner was a personal holding company within the meaning of the statute; that it did not occur to him that as a result of the reorganization of petitioner its character had been changed from that of a holding company to a personal holding company. He further testified, in effect, that his conception of a personal holding company was a corporation whose stock was owned by one person or by a family group. He testified, also, that two different firms of attorneys and petitioner's accountant were familiar with the business of petitioner and of the proceedings of its reorganization and that none of them advised petitioner that it was a personal holding company as a result of its reorganization or that it should file, from and after that event, personal holding company surtax returns. Petitioner's accountant testified that he made an annual audit of petitioner's books and made a report of each such audit. He also testified that in making such audit he checked the petitioner's income tax returns with the books and that he had access to and examined the stock certificate *110 book and the stock certificate stubs. He testified that he did not prepare the income tax returns for petitioner and gave no consideration to the question as to whether it was a personal holding company. He testified that he had advised other clients in regard to tax matters, but that such advice was not requested of him by petitioner. It does not appear from the evidence that the accountant knew that more than 50 per cent of the capital stock of petitioner was held by not more than five shareholders. It affirmatively appears from the accountant's testimony that he gave no consideration to that question, since he was not requested or employed to do so. The testimony shows that petitioner engaged a firm of attorneys to conduct its reorganization proceedings and that such attorneys were familiar with the character of business and stock structure of petitioner, both before and subsequent to the reorganization, but that *187 petitioner was not advised by such attorneys that as a result of the reorganization it became a personal holding company. The evidence does not disclose that this firm of attorneys, or any member of it, knew that more than 50 per cent of the outstanding new*111 capital stock of petitioner was held by not more than five shareholders. The testimony also shows that another firm of attorneys had been previously employed in a special case involving tax questions, but it was not so employed in connection with petitioner's reorganization proceedings. However, a member of such firm of attorneys was employed by petitioner to check and revise its draft of income tax return for the year 1939, which draft so submitted for examination contained the answer "No" to the question whether petitioner was a personal holding company. It does not appear from the evidence that the draft of the income tax return in question contained data which would advise the examining attorney that petitioner was a personal holding company. The evidence affirmatively shows that neither of the firms of attorneys, nor petitioner's accountant, nor any one else, was asked for advice as to whether petitioner was a personal holding company. Petitioner seeks to support its contention that reasonable cause existed and that there was not willful neglect on its part for its failure to file personal holding company surtax returns for the years 1941 and 1942, because (1) of the misconception*112 of its officers as to the meaning of personal holding company, and (2) of the fact that neither its accountant nor the attorneys above mentioned advised it that it was a personal holding company and should file a personal holding company surtax return. It claims that the same condition obtained with respect to its stock structure in 1941 and 1942 as existed in 1939 and that the failure of the accountant and the attorneys in question to advise it in respect of its character as a personal holding company in 1939 was equally applicable to the years 1941 and 1942. In support of its contention that its failure to file the returns in question was due to reasonable cause and not to willful neglect, petitioner cites a number of cases, among which are Hatfried, Inc. v. Commissioner, 162 Fed. (2d) 628, and cases cited therein, and Orient Investment & Finance Co. Inc. v. Commissioner, 166 Fed. (2d) 601. The cases so cited by petitioner are each distinguishable on the facts from the instant case. The controlling distinction is that in the cases so cited the failure of the taxpayer to file a tax return was due to tax counsel*113 advice, on which it was held that the taxpayer was justified in relying, that no return was required to be filed. Also, in many of the cited cases the taxpayer furnished its accountant or other tax counsel all information necessary for a determination of its Federal tax liability and relied on such counsel to prepare such returns as *188 were legally required. That is not the situation here and hence the cases cited are not applicable to the facts in the instant case. In our view, petitioner has not sustained its burden of showing reasonable cause or lack of willful neglect in respect of its failure to file personal holding company surtax returns for the years here involved. The facts which make petitioner a personal holding company under the applicable statute were well known to petitioner's responsible officers. The fact that they were ignorant of the law can not be accepted as a sufficient excuse for failure to file a personal holding company return. The failure of petitioner to investigate the question of its tax liability as a personal holding company in the face of the facts established by the evidence and by the stipulation of the parties constitutes willful neglect. *114 By the same token, reasonable cause is not shown for the failure to file such returns. See Ardbern Co., Ltd., 41 B. T. A. 910, 928; Samuel Goldwyn, Inc., Ltd., 43 B. T. A. 1086; Home Guaranty Abstract Co., 8 T. C. 617, 622; P. Dougherty Co. v. Commissioner, 159 Fed. (2d) 269, affirming 5 T. C. 791; and West Side Tennis Club v. Commissioner, 111 Fed. (2d) 6. We sustain the respondent on the penalty issue. Decision will be entered under Rule 50.