Lawrence Block Co. v. Commissioner

Lawrence Block Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent Lawrence Block Co. v. Commissioner Docket No. 13228 United States Tax Court 12 T.C. 366; 1949 U.S. Tax Ct. LEXIS 252; March 17, 1949, Promulgated *252 Decision will be entered for the respondent. Petitioner filed no excess profits tax returns until March 1946, when its secretary-treasurer was informed that a return was due for 1945. Returns for 1943 and 1944 were filed in May 1946, upon legal advice after an internal revenue agent examined the books. Held, on the evidence, reasonable cause did not exist for petitioner's failure to file timely excess profits tax returns for 1943 and 1944. Dana Latham, Esq., and Austin H. Peck, Jr., Esq., for the petitioner. A. J. Hurley, Esq., for the respondent. Arnold, Judge. ARNOLD *366 The sole issue is whether respondent erred in determining penalties for failure to file timely excess profits tax returns for the calendar years 1943 and 1944. The amounts so determined were $ 4,969.30 for 1943 and $ 6,975.80 for 1944. The respondent*253 also determined deficiencies, which are not contested, in excess profits tax for 1944 in the amount of $ 812.58 and in declared value excess profits tax for 1943 of $ 1,209.60 and for 1944 of $ 925.04. FINDINGS OF FACT. Petitioner is a California corporation, engaged in the real estate brokerage business. Its principal place of business is Beverly Hills, California. It was incorporated in 1934. All its outstanding stock is, and at all times has been, owned by Lawrence Block, who is its president. It filed its income tax and excess profits tax returns with the collector of internal revenue at Los Angeles, California. Lawrence Block has been engaged in the real estate business in California since 1911. He was employed by the Realty Syndicate Co. of *367 Oakland from 1911 to 1923, becoming its sales manager, and was associated with a real estate subdivider in Los Angeles from 1923 to 1934. He formed the petitioner in 1934. At all times his activities were in the field of sales and at no time did he engage in accounting work or prepare tax returns in connection with real estate enterprises. In 1935, T. H. Hancock was employed by petitioner as secretary and treasurer. As such*254 he was in charge of all accounting for the petitioner and the preparation of its tax returns. He had been employed for many years by Realty Syndicate Co. as assistant auditor and auditor. From 1920 to 1930 he had charge of preparing tax returns for that company. Petitioner filed timely income and declared value excess profits tax returns, Form 1120, for the years 1940 to 1944, inclusive. Each was prepared personally by Hancock and signed by Block and Hancock. No excess profits tax returns were filed by petitioner for any of these years until May 28, 1946. On that date petitioner filed excess profits tax returns for 1943 and 1944. The question on page 4 of Form 1120, as to whether an excess profits tax return was being filed, was answered in the negative for the years 1940, 1941, and 1942, was not answered as to 1943, and was answered "yes" as to 1944. On Form 1120 for 1944 the question calling for the excess profits net income (for purpose of determining necessity for filing return) was answered "$ 44,126.03." Hancock did not consult counsel or accountants on tax matters until May 21, 1946. At various times after 1920 he consulted the local office of the collector of internal*255 revenue on questions arising in the preparation of returns. In March 1941 Hancock made inquiry at the office of the collector of internal revenue in the Federal Building in Los Angeles. He talked to a man at a counter, explained that petitioner was in the real estate business, selling properties for owners on a commission basis, and asked whether petitioner was subject to excess profits tax. He was informed that a corporation such as petitioner was not required to file an excess profits tax return. Relying on that advice, Hancock did not prepare or file excess profits tax returns for petitioner for 1940, 1941, 1942, 1943, and 1944. In the preparation of petitioner's return, Form 1120, for 1945 Hancock sought advice in March 1946 at the office of the collector of internal revenue at Los Angeles. After receiving advice from one Ward of that office and preparing the return in accordance therewith, Hancock submitted the return to Ward, who then inquired about the petitioner's excess profits tax return for 1945 and informed Hancock *368 that such return was required. Hancock did not tell Ward that such returns had not been filed for prior years and did not mention the advice *256 previously received to the effect that petitioner was not subject to excess profits taxes. Hancock then prepared an excess profits tax return, Form 1121, for petitioner for the year 1945, and it was filed concurrently with petitioner's income tax return for that year. In May 1946 a revenue agent called at petitioner's office to examine its books, advised Hancock that excess profits tax returns should have been filed for 1943 and 1944, and prepared a statement of petitioner's excess profits tax liability for those years. Hancock and Block consulted counsel on May 21, 1946, who prepared excess profits tax returns for 1943 and 1944 which were filed on May 28, 1946. Petitioner's failure to file timely excess profits tax returns for 1943 and 1944 was not due to reasonable cause. OPINION. Petitioner filed delinquent excess profits tax returns for 1943 and 1944. Respondent determined a 25 per cent penalty under section 291, Internal Revenue Code, as to each year for failure to file timely returns. Petitioner contends that its failure was "due to reasonable cause and not due to willful neglect" within the meaning of section 291. The burden of establishing reasonable cause is on the taxpayer. *257 Girard Investment Co. v. Commissioner, 122 Fed. (2d) 843. That a taxpayer believes no return is required is itself insufficent to show that the failure to file was due to reasonable cause. P. Dougherty & Co., 5 T. C. 791; affd., 159 Fed. (2d) 269; Genesee Valley Gas Co., 11 T. C. 184 (on appeal, App. D. C.). In Fairfax Mutual Wood Products Co., 5 T. C. 1279, acquiescence 1946-1 C. B. 2, the officers of a corporation refrained from filing an excess profits tax return on the advice of the local collector's office. The president of the taxpayer fully discussed the matter with the local collector and his subordinates and, on their advice, attached to the return a statement explaining the absence of an excess profits tax return on the ground that the corporation was considered a personal service corporation. We concluded that the corporation did not willfully neglect to file the return and the imposition of the penalty was not justified. In Tarbox Corporation, 6 T. C. 35, *258 we sustained the imposition of the penalty for failure to file a personal holding company return for 1941 where it appeared that the tax returns were prepared by an *369 accountant who was only briefly informed of the corporate structure and did not discuss the matter with the sole stockholder and his attorney. Also in Hermax Co., 11 T. C. 442, we sustained the penalty where the accountant was not shown to be familiar with Federal tax law. In the present case the president and sole stockholder left the petitioner's tax matters entirely to Hancock, who kept the books and prepared the returns. The record does not show that in his inquiry at the office of the collector in March 1941 Hancock gave such information to the person from whom the inquiry was made as would enable that person properly to advise him with respect to the necessity for filing excess profits tax returns, or that such person was there for the purpose of advising taxpayers or had such knowledge of petitioner's business as would enable him to give reliable advice. So far as the record shows, he may have talked to a file clerk or some subordinate employee of the collector's office*259 whose duties were in no way connected with advising taxpayers. He did not get the name of the person with whom he talked and did not discuss with Block the result of the interview. Furthermore, the inquiry was with respect to the year 1940, while the taxable years are 1943 and 1944. The taxpayer's income tax return for 1944 stated that an excess profits tax return was being filed for such year and showed the amount of excess profits net income for the purpose of determining the necessity for filing an excess profits tax return. Hancock had no explanation for these entries. This is not a case in which the taxpayer's officers, after consideration of all the circumstances and in reliance upon competent advice based upon a complete disclosure of the facts, came to the conclusion that the corporation was not subject to excess profits tax for 1943 and 1944. Taxpayers deliberately omitting to file returns must use reasonable care to ascertain that no return is necessary. We think the petitioner did not use such care. A convincing illustration of this is the failure of petitioner's officers in March 1946, when they learned that an excess profits tax return was required for 1945, to*260 take warning that the requirement might also apply as to 1943 and 1944 and to make inquiry then as to petitioner's liability for those years. Respondent did not err in determining the penalties. Decision will be entered for the respondent.