Docket No. 15347.

11 T.C. 442 (1948)


United States Tax Court.

Promulgated September 28, 1948.

Attorney(s) appearing for the Case

Murray M. Weinstein, Esq., for the petitioner.

John E. Mahoney, Esq., for the respondent.

Respondent determined deficiences in petitioner's personal holding company surtax for the years 1943, 1944, and 1945 in the total amount of $5,052.31 and additions to such taxes of 25 per cent thereof, pursuant to section 291 (a) of the Internal Revenue Code, for the reason that petitioner did not file timely personal holding company returns for such years. Petitioner alleges error only as to the additional taxes or penalties imposed in the total amount of $1,263.08. It now concedes that its status was that of a personal holding company during the taxable years.


Petitioner is a corporation, with its principal office in Newark, New Jersey. It filed its corporation income and declared value excess profits tax returns for the taxable years with the collector of internal revenue for the fifth district of New Jersey. Delinquent personal holding company returns for the taxable years were filed in January 1947.

Petitioner was incorporated in April 1943. At that time its capital stock, which consisted of 100 shares, was held by the following persons in the following amounts:

Herman Ringel --------------------------------------------   49 shares
Lucile Ringel (Herman's daughter) ------------------------    1 share
Max Ringel -----------------------------------------------   50 shares

In May 1944 the certificate of Max Ringel for 50 shares was surrendered and canceled and two new certificates were issued, one to Max Ringel for 40 shares and one to Minna Handleman for 10 shares. Minna Handleman is the sister of Herman Ringel.

Petitioner was organized for the purpose of acquiring, holding, and managing certain real estate which the Ringels had decided to purchase and hold in the name of the corporation. The petitioner's income tax returns for the taxable years show that its gross income consisted entirely of rents. The returns do not disclose the source or payors of such rents.1 The returns for one year (1943) discloses the amount of stock held by the stockholders, but in those for 1944 and 1945 (during which years no one stockholder owned 50 per cent of petitioner's stock) the amount of stock held by petitioner's stockholders was not shown.

One Imhoff, a public accountant, had been employed for many years by the Ringels to prepare and keep their books of account and, as an incident to his employment, to prepare and file their tax returns. He graduated in 1916 from the University of Wisconsin in a course in commerce, and later he took a night course in accounting from the Newark Institute of Arts and Sciences. Since 1918 he has worked as an accountant. In 1935 he obtained a "United States Treasury card" as a result of passing an examination. Petitioner's president left the preparation of petitioner's tax returns entirely to Imhoff and relied upon his advice.

Shortly prior to petitioner's incorporation, Imhoff met with Herman Ringel and attorneys for the Ringels. He was asked whether there was any tax reason why the corporation should not be formed. He answered that there was not. He was not asked at that time, or later, whether petitioner would be or was a personal holding company within the meaning of the Internal Revenue Code. This question was never discussed by him and the officers of petitioner. Petitioner's president was not familiar with tax law. At or about the time petitioner was incorporated, Imhoff consulted with one Swick, who is described by Imhoff as "the tax man" of his accounting partnership, as to whether petitioner would be or was a personal holding company. It was concluded that it was not, but no mention of this question or conclusion was made to petitioner's officers. Imhoff and Swick, in reaching their conclusion upon this question, relied entirely upon a reading of section 502 (g) of the Internal Revenue Code, and did not give any consideration to section 502 (f). Imhoff did not consult with any one else on this question, and did not seek or obtain advice of counsel.

Petitioner's income tax returns for the taxable years were signed by its president. In answer to the question contained therein asking whether petitioner was a personal holding company, the answer given was "No." Petitioner's president never consulted any one as to whether this answer was correct.

In 1944 the income tax return of petitioner for 1943 was examined by a revenue agent, who made no suggestion that petitioner was a personal holding company.

Petitioner's failure to file personal holding company returns for the taxable years was not due to reasonable cause.


KERN, Judge:

The good faith of petitioner and its officers is not in question. The sole question presented for our decision is whether petitioner's failure to file returns within the time prescribed by law was, in the words of the appropriate statute, "due to reasonable cause." In the case most strongly relied upon by petitioner, Orient Investment & Finance Co. v. Commissioner, 166 Fed. (2d) 601, the question was indicated to be whether the taxpayer exercised, in connection with his tax returns, "ordinary business care and prudence." Stated either way, our answer to the question is that petitioner has not shown that it acted with ordinary business care and judgment, and that reasonable cause did not exist for its failure to file personal holding company returns within the time prescribed by law.

Only one officer of petitioner testified at the hearing herein. While he testified that he was not familiar with tax law, he impressed us as being an intelligent business man, of whom it could not be said, as was said in the Orient Investment & Finance Co. case of the officers of the taxpayer there, that he was incapable "of receiving any knowledge on the subject of the form of income tax returns to be filed." As to the intelligence and capabilities of the other officers, directors, and stockholders of petitioner, we are not informed.

Petitioner apparently turned over its tax matters, along with the keeping of its books of account, to a public accountant. The record does not show that he had any "expert knowledge" of Federal tax laws. Indeed his own testimony indicates that he had not. He testified that he consulted with Swick, who was "the tax man" in his accounting firm, thus indicating that he, Imhoff, was not a "tax man." There is no evidence as to why Imhoff considered Swick to be a "tax man." The fact that they read only section 502 (g) in considering the question of whether petitioner might be a personal holding company indicates that neither was a "tax man" if that term is taken as meaning a person qualified to give advice to others on questions of law involving the provisions of the Internal Revenue Code. In passing, it may be questioned whether it was proper for them to give such advice. See In re Bernard Bercu, New York Supreme Court, Appellate Division, First Department, No. 631, April 12, 1948. Certainly it can not be said of them, as it was said of the certified public accountants in the Orient Investment & Finance Co. case, that their "expert knowledge was universally considered sufficient to fit them to do all that petitioners were required to do to comply with the tax laws."

The only testimony which would indicate that Imhoff had any knowledge of Federal tax laws was to the effect that he held "a United States Treasury card." This tribunal is completely independent from the Treasury Department. We have no knowledge, judicial or otherwise, as to the prerequisites for holding such a card, nor as to the nature of the examination which Imhoff passed. The bare fact that he had such a card can not be taken as compelling evidence, in the face of the record, that he had "expert knowledge" in the field of Federal tax law.

Furthermore, the fact that he held this card is not shown to have been known by petitioner or its officers. While petitioner's president testified that he relied upon Imhoff in tax matters, he testified as to no reason, good or otherwise, why he relied upon Imhoff.

The fact that an internal revenue agent examined the income tax return of petitioner for 1943 and did not suggest that it was a personal holding company, is not material. Unlike the case of Hugh Smith, Inc., 8 T.C. 660, there is no showing here that the internal revenue agent had before him a complete disclosure of all pertinent facts. Certainly the pertinent facts were not disclosed in the return itself.

This is also the distinction between this case and Hatfried, Inc. v. Commissioner, 162 Fed. (2d) 628, in which the court pointed out several times in the course of its opinion that the facts disclosed in the income tax returns filed by the taxpayer corporation operated to establish its status as a personal holding company.

In the instant case, the president of petitioner corporation, although an intelligent business man, turned over the tax affairs of the corporation, including the preparation of its Federal tax returns, to a public accountant who had been primarily employed to set up and keep the books of petitioner's stockholders and who was not an expert in Federal tax laws. No officer of petitioner had any reason to believe that the accountant was such an expert. In the tax returns prepared by him for the petitioner, the question was directly asked, "Is the corporation a personal holding company within the meaning of Section 501 of the Internal Revenue Code?" The answer given in the returns was "No." These returns were signed by petitioner's president. No officer of petitioner ever considered this question, or consulted in regard to it, either with the accountant or with any one else. The accountant, without consulting any officer of the corporation or any trained counsel, decided that petitioner was not a personal holding company and prepared no personal holding company returns for filing within the time prescribed by law. In the Federal tax returns filed by petitioner, facts were not disclosed by which the personal holding company status of petitioner could be established. Under such circumstances, we are unable to conclude that the failure to file such a return is due to reasonable cause. Nor are we able to conclude that petitioner's officers, under the circumstances above described, acted with "ordinary business care and prudence."

A recent case which, in our opinion, is similar to the instant case, and should be controlling as to its disposition, is Tarbox Corporation, 6 T.C. 35. In that case, under comparable facts, we held that ignorance of the law can not of itself be an excuse or constitute reasonable cause for failing to comply with it. We are unwilling to believe that the cases of Hatfried, Inc., and Orient Investment & Finance Co., supra, represent a modification of that doctrine to the effect that, while ignorance of the law in general is no excuse for a failure to comply with it, an ignorance of the Federal tax laws, which are largely self-assessing and which impinge upon every business man and corporation in the country, is, of itself, an excuse for failing to comply with the provisions of those laws. If we are wrong, and those cases do stand for that proposition, then we respectfully decline to follow them.

Reviewed by the Court.

Decision will be entered for respondent.

LEMIRE and JOHNSON, JJ., dissent.


1. Nor is this shown by the record before us. Because of petitioner's concession that it was a personal holding company during the taxable years, and because of references made during the hearing to section 502 (f) of the Internal Revenue Code, we assume that the rent was received from either Herman or Max Ringel, or both.


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