GRONER, C. J.
These two cases involve the same question in precisely the same circumstances. We shall dispose of them as a single case. Petitioners filed ordinary income tax returns for the years 1940-41-42. Several years later, on an examination of petitioners' books, the Commissioner determined that both were liable for personal holding company surtaxes, and asserted penalties for failure to file personal holding company returns. Petitioners paid the tax and interest, but disputed the penalty. The Tax Court found petitioners were liable for the penalty and entered an order accordingly. The single question here is — Was this decision correct?
The Tax Court found that there was no dispute on the facts. Petitioners are corporations and have their principal offices at Orlando, Florida. They filed their income tax returns for the years involved with the Collector for the District of Florida, at Jacksonville. One of them, the Orient
The Tax Court found that the accountants made all the entries in petitioners' books and prepared their income tax returns. In making them out they answered "No" to the question — "Is the corporation a personal holding company * * *?" And accordingly did not prepare and file a personal holding company surtax return for either of petitioners for any of the years involved. So far as the evidence shows, they did not consider or discuss the matter of filing such returns. They never brought the matter to the attention of Burman, who had no knowledge of that requirement nor, in fact, of any of the other requirements of the tax laws. The Tax Court found that Burman is a man of little education, who would not understand the requirements of the tax statutes, and who therefore left those matters entirely in the hands of the experts whom he employed for that purpose. These accountants were reputable, licensed accountants, and Burman had complete confidence in them. He believed that they had filed all of the returns and had done all of the things required under the law. The accountants had before them at all times all of the records of both companies as to stock ownership, as well as the sources of income. No information concerning any of those matters was ever withheld from them by Burman, or any other officer or stockholder. The first time that
Burman had notice of the requirement for personal holding company returns was in 1945, when a revenue agent brought the matter to his attention. Another revenue agent, who had previously (1941) made an official examination of petitioners' books, had failed to make any mention of personal holding company returns, and obviously thought petitioners were not within that provision of the law.
Petitioners paid the additional tax and interest, as we have said, but refused to pay the penalty.
In this state of the record the Tax Court — one judge sitting — held, as appears to us, that because of the accountants' dereliction petitioners were liable for the penalty. Section 291 (a) of the Internal Revenue Code, as amended, 26 U.S.C.A. Int.Rev. Code, § 291(a), provides — "In case of any failure to make and file return required by this chapter, within the time prescribed by law or prescribed by the Commissioner in pursuance of law, unless it is shown that such failure is due to reasonable cause and not due to willful neglect * * *," the penalty shall be exacted. And the Commissioner's general interpretation of the exception in the statute is that if the delinquency occurs notwithstanding the exercise of ordinary care and caution, the penalty will not be charged. That is this case.
In applying the statute and the regulation it is well to bear in mind that the Tax Court definitely found that in the instances we are concerned with there was no willful neglect on the part of the petitioners or their officers. The Court was at pains to say:
"There is no cause whatever to question the good faith of this witness, nor, in view of his limited education, can we question his professed inability to understand the income tax laws. * * * We are convinced that there was no willful neglect here in the sense of `an intentional or designed' failure to file on the part of petitioners or their officers."
In the light of this finding, obviously, the only question left is — whether the failure in the years in question was "due to reasonable cause." The Judge of the Tax Court
The question we have been discussing is not new, either in the Tax Court or in the appellate courts, and is elaborately dealt with in Hatfried, Inc., v. Commissioner, 3 Cir., 162 F.2d 628, 635, decided just six months ago. The latter case involves precisely the point involved in the present case in the respect in which we are concerned, on substantially the same factual basis. Judge Kalodner, in the Hatfried case, traces and analyzes the cases decided by the Tax Court pro and con, as well as some two or three cases decided in the Circuit Courts of Appeals. To repeat here this elaborate opinion and analysis would, we think, unduly prolong this opinion. Accordingly, we refer to the Hatfried case and the cases there examined as fully and amply supporting the conclusion we reach, — namely, that "The irrefragable conclusion from the record is that the taxpayer here, in fact and in law, exercised such
In the argument in this case there was a mild suggestion that whether the Tax Court's decision was right or wrong is not conclusive, for the reason that under the doctrine of the Dobson case,
As the Third Circuit said in the Hatfried case, whether the elements which constitute reasonable cause are present is a question of fact, and as to that question of fact the Board found in favor of the taxpayer. But the real question is what elements must be present to constitute reasonable cause, and that is a question of law. "For example: whether the elements which constitute `murder in the first degree' are present is a question of fact; what elements must be present to constitute `murder in the first degree' is a question of law."
As we have indicated, we are of opinion that the decisions of the Tax Court were without substantial basis and must be reversed and the cases remanded for proceedings in accordance with this opinion.
Reversed and remanded.