Collateral Mortg. & Inv. Co. v. Commissioner

COLLATERAL MORTGAGE AND INVESTMENT CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Collateral Mortg. & Inv. Co. v. Commissioner Docket No. 88991. United States Board of Tax Appeals 37 B.T.A. 630; 1938 BTA LEXIS 1007; April 12, 1938, Promulgated *1007 1. Petitioner was the owner of a parcel of real estate, subject to a first mortgage. The mortgagee notified the petitioner that it had entered into possession of the property due to default in certain payments and that it would take action unless the defaults were cured immediately. Petitioner through its nominee continued to hold title to the property and there was no foreclosure during the taxable year. Held, petitioner is not entitled to take a loss on the ground that it abandoned the real estate in the taxable year. Greenleaf Textile Corporation,26 B.T.A. 737; affd., 65 Fed.(2d) 1017. 2. The Commissioner determined that petitioner was a personal holding company subject to a surtax under the provisions of section 351, Revenue Act of 1934. Petitioner's sole stockholder did not return petitioner's "adjusted income" on his individual income tax return filed for 1934. Held, petitioner is not relieved from the surtax by section 351(d) because of the fact that petitioner's sole stockholder is now willing to make return on his individual income tax return of whatever "adjusted net income" the Board may find petitioner had. 3. Article*1008 351-8, Regulations 86, requires a personal holding company to file a separate return on form 1120 H for the surtax imposed under section 351. Petitioner did not file any such return, but did file return on form 1120, on which it reported its income and deductions and showed no tax due. The Commissioner, after making certain adjustments in the deductions taken by petitioner, determined a surtax under section 351 and added a penalty of 25 percent of the surtax for failure to file return on form 1120 H. Held, the filing of return on form 1120 H is mandatory and the Commissioner properly imposed the delinquency penalty under section 291, Revenue Act of 1934, made applicable to Title I-A of said act by section 351(c) thereof. Morris Drob, Esq., for the petitioner. T. F. Callahan, Esq., for the respondent. BLACK *631 This is a proceeding in which the petitioner contests the correctness of the Commissioner's determination of deficiency as follows: Taxable year 1934: Deficiency Income tax $194.76 Surtax, section 351 516.97 Penalty 129.24 Total 840.97 The deficiency results from the Commissioner's disallowance of a claimed*1009 deduction for bad debts of $1,550.85. Petitioner does not contest $68.60 of this adjustment. In the petition, petitioner abandons any claim for a bad debt deduction, but claims a loss of $1,482.25 as resulting from petitioner's abandoning in the taxable year its equity in a parcel of improved real estate which it alleges had a cost basis of $1,482.25. Petitioner contends that if it is allowed this deduction there will be no taxes or surtaxes due and therefore no penalties. Petitioner contends in the alternative that, even if the Board should hold that it is not entitled to the $1,482.25 loss deduction which it claims, nevertheless the Commissioner erred in imposing the surtax under the provisions of section 351 of the Revenue Act of 1934, for the reason that the stockholders of a personal holding corporation have the right to elect to report the income of the corporation on their individual income tax returns in pro rata shares and thus far petitioner's sole stockholder has had no right of election because the income tax return of petitioner showed no net income subject to tax and, if the Board should hold that the claimed deduction should be disallowed, then for the first time*1010 petitioner would *632 have a net income subject to tax and the sole stockholder of petitioner would have a right under section 351(d) to return it on his individual tax returns. Petitioner also contests the correctness of the imposition of the 25 percent penalty. Respondent in his answer denied all the errors claimed by petitioner and denied all the facts alleged by petitioner in support of its assignments of error. FINDINGS OF FACT. Petitioner is a corporation organized under the laws of the State of Pennsylvania, and for the calendar year 1934 filed its income and excess profits tax return on form 1120, with the collector of internal revenue for the first district of Pennsylvania. During the taxable year Morris Drob was petitioner's only stockholder, except for qualifying shares, and he owned the beneficial interest in the qualifying shares. During the taxable year petitioner held securities and mortgages on real estate, and also made advances as loans to individuals and corporations. To one of the questions on the income tax return which it filed on form 1120, petitioner answered that its business was that of a loan company. In 1932 petitioner had a claim against*1011 a building and loan association, known as the Quaker City Home Building & Loan Association, in the amount of $1,482.25. The building and loan association was in bad financial condition and offered to convey to petitioner a parcel of real estate situated in the city of Philadelphia. The conveyance was to be subject to a mortgage of $2,000. On January 31, 1932, this property was conveyed to Morris Drob, petitioner's sole stockholder, as the nominee of petitioner, subject to a mortgage of $2,000 owned and held by the Philadelphia co. for Guaranteeing Mortgages. The conveyance was made in consideration of the cancellation by petitioner of its claim for $1,482.25 against the Quarker City Home Building & Loan Association. In April 1934 petitioner's stockholder, Morris Drob, who as petitioner's nominee held title to the parcel of real estate in question, received a letter reading as follows: QUAKER CITY HOME B. & L. ASSO., c/o Morris Drob, Bankers Trust Building, Philadelphia, Pa. DEAR SIR: We have this day entered into possession of the above property due to default in payment of November 6, 1933 interest amounting to $60.00 and non-production of 1933 tax and water*1012 receipts. We shall be obliged to take action against your Association unless the defaults are cured immediately. Very truly yours, [Signed] THOMAS SHALLCROSS, Jr. JOHN ARTHUR BROWN. J. HOWARD REBER. By W. L. STOUGH NOLL. SN C *633 Thereafter the Philadelphia Co. for Guaranteeing Mortgages took possession of the property. Petitioner, the Collateral Mortgage & Investment Co., acquiesced in the action of the Philadelphia Co. for Guaranteeing Mortgages in taking possession of the property, but title to the property still remains in Morris Drob, nominee for petitioner, and there has been no foreclosure of the mortgage. On March 15, 1935, petitioner filed a tentative return for the year 1934 on form 1120 and asked for extension to file a complete return. Extension was granted to July 15, 1935, and on July 15, 1935, petitioner filed a completed return on form 1120 with the collector of internal revenue for the first district of Pennsylvania. Petitioner did not file a return as a personal holding company subject to surtax under section 351 of the Revenue Act of 1934 for the calendar year 1934 on Form 1120 H. The Commissioner prepared such a return for*1013 petitioner and filed it with the collector of internal revenue for the first district of Pennsylvania. OPINION. BLACK: Petitioner in its income tax return claimed the $1,482.25 deduction here involved as a bad debt deduction. However, in the petitioner which has been filed the petitioner claims a loss of that amount on real estate which it claims was surrendered to the mortgagee during the taxable year. Respondent in his answer denied not only the allegations of error but also the allegations of fact upon which petitioner relied. In this state of the pleadings the burden of proving all elements necessary to establish its loss is upon petitioner. We do not think petitioner has met that burden of proof. So far as the evidence shows there was no foreclosure of the first mortgage of $2,000 in 1934, and neither petitioner nor its nominee, Drob, deeded the property to the holder of the first mortgage. It is true that on April 19, 1934, Philadelphia Co. for Guaranteeing Mortgages, which was apparently the owner and holder of the first mortgage, notified Morris Drob, petitioner's nominee, that it was entering into possession of the property due to default in payment of November 6, 1933, interest*1014 amounting to $60 and nonproduction of 1933 tax and water receipts. The lettter notified the addressee that: "We shall be obliged to take action against your Association unless the defaults are cured immediately." (Italics supplied.) The evidence indicates that petitioner did not cure the defaults and has not since undertaken to have anything to do with the property, but what "action" the mortgagee has taken is not clear. As we have already stated, the record does not shown there has been any foreclosure, nor does it show that Morris Drob, the holder of the *634 legal title to the property as the nominee of petitioner, has deeded it back to the mortgagee. This being the state of the record, we do not think petitioner has proved such an identifiable event as would fix its loss. A taxpayer can not take a loss on real estate where he continues to hold title to the real estate and no identifiable event has occurred by which the claimed loss becomes a closed transaction. ; affd., . Cf. *1015 ; . On the strength of these authorities we sustain the Commissioner in disallowing petitioner's claimed loss of $1,482.25. We shall next take up petitioner's alternative contention, which is that the Commissioner erred in imposing upon petitioner a surtax of $516.97 under the provisions of section 351 of the Revenue Act of 1934. Petitioner does not contend that it is not a personal holding company as defined by section 351(b)(1) of the Revenue Act of 1934, but contends that, by reason of paragraph (d) of that section, 1 provision is made for the inclusion in the returns of the company's shareholders on a pro rata basis of the "adjusted net income" of the company and thus relieve the company from the payment of any surtax. *1016 As has already been stated, Morris Drob was petitioner's only stockholder during the taxable year, and no showing has been made that in his individual income tax return he reported as a part of his gross income the "adjusted net income" of petitioner for such year. His willingness now to do so would be immaterial. Under these circumstances, petitioner would not be entitled to be relieved from the payment of the surtax, if it is otherwise liable. Cf. . The next and final contention of petitioner is that the Commissioner erred in the imposition of a penalty of $129.24. Petitioner's assignment of error in this respect is as follows: (c) Petitioner contends that the penalty of $129.24 should be cancelled for the reason that there was no fraud with intent to evade tax, in fact petitioner avers there was no additional tax. It is plain that the Commissioner has not determined a fraud penalty against petitioner. What he has done is to impose a penalty of 25 percent of the surtax of $516.97 which he has determined under *635 the provisions of section 351, for failure to file a return on form 1120 H as required by article*1017 351-8, Regulations 86. 2 *1018 As shown in our findings of fact, petitioner first filed a tentative return on form 1120, March 15, 1935, and secured an extension of time until July 15, 1935, to file a completed return. On July 15, 1935, a completed return on form 1120 was filed by petitioner. Form 1120 is the one customarily filed by corporations in reporting their income and deductions for income tax and excess profits tax purposes. This return filed by petitioner showed income from profits, interest, rents, capital gains, and dividends aggregating $7,059.48 and deductions aggregating $7,193.92, showing a loss of $134.44 on the return and no tax due. As has already been stated, petitioner filed no return on form 1120 H, required of personal holding companies, and this return was filed for petitioner by the Commissioner of Internal Revenue, in which he reported that petitioner had an adjusted not income for 1934 of $2,154.02. The question is whether petitioner's failure to file a return on form 1120 H justified the Commissioner in imposing the 25 percent penalty. Section 291 of the Revenue Act of 1934 3 provides a 25 percent penalty for failure to make and file a return required by Title I. *636 *1019 Section 351(c) 4 provides that all laws applicable to Title I shall also be applicable to Title I-A, including imposition of penalties. *1020 In the case of corporations coming under the classification of personal holding companies under section 351 of the Revenue Act of 1934, the regulations seem to require two returns. One on form 1120, for imposition of the tax under Title I, and the other on form 1120 H, for the surtax imposed under Title I-A. Petitioner filed a return on form 1120, and the Commissioner in determining a deficiency of $194.76 under Title I did not add any penalty. However, the Commissioner determined a surtax of $516.97 under Title I-A added a penalty of 25 percent of the surtax. Since article 351-8 of Regulations 86 requires that a separate return be filed for the surtax imposed under section 351 and that such return be made on form 1120 H, and since petitioner has not filed any such separate return for the surtax imposed by section 351, the imposition of the 25 percent penalty imposed by section 291, made applicable by 351(c), would seem mandatory. Cf. ; ; *1021 . Decision will be entered for respondent. Footnotes 1. (d) PAYMENT OF SURTAX ON PRO RATA SHARES. - The tax imposed by this section shall not apply if all the shareholders of the corporation include (at the time of filing their returns) in their gross income their entire pro rata shares, whether distributed or not, of the "adjusted net income" of the corporation for such year. Any amount so included in the gross income of a shareholder shall be treated as a dividend received. Any subsequent distribution made by the corporation out of earnings or profits for such taxable year shall, if distributed to any shareholder who has so included in his gross income his pro rata share, be exempt from tax in the amount of the share so included. ↩ 2. ART. 351-8. Return and Payment of Tax.↩ - A separate return is required for the surtax imposed under section 351. Such return shall be made on Form 1120H. In the case of a personal holding company which is a domestic corporation, the return is required to be made within the time prescribed in section 53 and in the case of a foreign corporation within the time prescribed in section 235. The tax shown by the corporation on its return must be paid in the case of a domestic corporation within the time prescribed in section 56 and in the case of a foreign corporation within the time prescribed in section 236. The same provisions of law relating the period of limitation for assessment and collection which govern the taxes imposed by Title I also apply to the surtax imposed under Title IA. However, since the surtax imposed under Title IA is a distinct and separate tax from those imposed under Title I, the making of a return under Title I will not start the period of limitation for assessment of the surtax imposed under Title IA. If the corporation subject to section 351 fails to make a return, the tax may be assessed at any time. If the Commissioner finds a deficiency in respect of the tax imposed by section 351, he is required to follow the same procedure which applies to deficiencies in income tax under Title I. The penalties applicable to the income taxes imposed under Title I, as well as the provisions of Title I relating to interest and additions to the tax, also apply to the surtax imposed by section 351. The administrative provisions applicable to the surtax imposed by section 351 are not confined to those contained in Title I but embrace all administrative provisions of law which have any application to income taxes. 3. SEC. 291. FAILURE TO FILE RETURN. In case of any failure to make and file a return required by this title, within the time prescribed by law or prescribed by the Commissioner in pursuance of law, 25 per centum of the tax shall be added to the tax, except that when a return is filed after such time and it is shown that the failure to file it was due to reasonable cause and not due to willful neglect no such addition shall be made to the tax. The amount so added to any tax shall he collected at the same time and in the same manner and as a part of the tax unless the tax has been paid before the discovery of the neglect, in which case the amount so added shall be collected in the same manner as the tax. The amount added to the tax under this section shall be in lieu of the 25 per centum addition to the tax provided in section 3176 of the Revised Statutes, as amended. ↩ 4. (c) ADMINISTRATIVE PROVISIONS. - All provisions of law (including penalties) applicable in respect of the taxes imposed by Title I of this Act, shall insofar as not inconsistent with this section, be applicable in respect of the tax imposed by this section, except that the provisions of section 131 of that title shall not be applicable. ↩