Hatfried, Inc. v. Commissioner of Internal Rev.

Decision Date11 June 1947
Docket NumberNo. 9180.,9180.
Citation162 F.2d 628
PartiesHATFRIED, Inc., et al. v. COMMISSIONER OF INTERNAL REVENUE.
CourtU.S. Court of Appeals — Third Circuit

Abraham L. Shapiro, of Philadelphia, Pa., and Louis Stein, of Union City, N. J. (Shapiro & Shapiro, of Philadelphia, Pa., on the brief), for petitioners.

Irving I. Axelrod, of Washington, D. C. (Sewall Key, Acting Asst. Atty. Gen., A. F. Prescott, Sp. Asst. to the Atty. Gen., on the brief), for respondent.

Before GOODRICH and KALODNER, Circuit Judges, and MADDEN, District Judge.

KALODNER, Circuit Judge.

This appeal is taken from the decision of the Tax Court.

Two questions are presented: (1) whether the taxpayer should be classified as a personal holding company within the meaning of Sections 501 and 502(f) of the Internal Revenue Code, 26 U.S.C.A. Int.Rev. Code, §§ 501, 502(f); (2) whether, if the taxpayer is taxable as a personal holding company, there was a proper imposition of the penalty imposed by Section 291 of the Internal Revenue Code, 26 U.S.C.A. Int. Rev.Code, § 291, for failure to file a personal holding company return.

The Tax Court upheld the Commissioner's determination that the taxpayer was a personal holding company and therefore liable for a personal holding company surtax in the sum of $24,854.51, together with a 25% penalty thereon in the sum of $6,213.63 for the fiscal year ended October 31, 1941.

The facts as found by the Tax Court may be summarized as follows:

Hatfried, Inc., hereinafter called the taxpayer, is a corporation organized under the laws of the State of Florida, and with principal offices in Miami Beach, Florida. It was organized to purchase property and erect buildings thereon. In 1940 it bought a lot at 18th Street and Collins Avenue, Miami Beach, Florida, and by the end of that year completed the construction of the Shelborne Hotel at a cost of $825,000. The taxpayer held title to the hotel free and clear of all mortgages. During all periods here involved Hattie Friedland was the sole owner of all the capital stock of the taxpayer.

On December 1, 1940, the taxpayer leased the hotel to Hattie Friedland for a term of three years at $85,000 a year. The lease provided that the hotel was to be used and occupied as a resort and commercial hotel. From the beginning of the lease until November, 1942, when the United States Army took over the hotel at an annual rental of $70,000, Hattie Friedland operated the hotel as a legitimate and bona fide business enterprise. The rental income from the Shelborne Hotel comprised the entire gross income of the taxpayer. It paid no dividends during the taxable year.

All tax returns for the taxpayer for the tax year were prepared and filed by I. H. Rosenberg of Rosenberg, Goldstein & Schultz, Philadelphia, Pennsylvania, certified public accountants. Rosenberg was advised of the facts and circumstances surrounding the leasing of the hotel. He never suggested the filing of a personal holding company surtax return and none was filed.

The taxpayer was legally dissolved on December 10, 1944 but continues as a corporate body for the purpose of prosecuting and defending suits by and against it and to enable it to liquidate its affairs. The individual petitioners are the taxpayer's directors and trustees in dissolution.

Finally the Tax Court found that there was no reasonable cause for the taxpayer's failure to file a personal holding company surtax return.

To the above outline of the facts as found by the Tax Court may be added the fact disclosed by the record in the proceedings before the Tax Court that Mr. Rosenberg, the accountant, prepared and filed the "Corporation Income and Declared Value Excess-Profits Tax Return" (Form 1120) for Hatfried, Inc., for the period in question and answered "No" to the following question constituting a part of said return: "7. Is the corporation a personal holding company within the meaning of Section 501 of the Internal Revenue Code? * * * (If so, an additional return on Form 1120H must be filed.)"

He answered "Yes" to the following question of said form: "9(b). Did any corporation, individual, partnership, trust, or association own at any time, during the taxable year 50 per cent or more of your voting stock? (If either answer is `yes', attach separate schedule showing: (1) name and address; (2) percentage of stock owned; (3) date stock was acquired; and (4) the collector's office in which the income tax return of such corporation, individual, partnership, trust or association for the last taxable year was filed)." and submitted a schedule indicating that Hattie Friedland was the owner of 100 per cent of the outstanding stock of Hatfried, Inc.

On the facts as stated the Tax Court held that the taxpayer is a personal holding company under the statute and that its income for the tax year in the form of rent paid by the taxpayer's sole stockholder, is personal holding company income within the meaning of Section 502(f).

In doing so it ruled that the situation disclosed "exact compliance with the specifications of subsection (f)", namely, that compensation received by a taxpayer for the use of its property by a stockholder who owns 25% or more in value of the corporation's stock is personal holding company income.

The Tax Court further held that the "exact compliance" with subsection (f) eliminates consideration of subsection (g) since the latter provides that it "* * * does not include amounts constituting personal holding company income under subsection (f)".

The taxpayer concedes taxability under a strict or literal construction of subsection (f). It urges, however, that the legislative history of subsections (f) and (g) evidences the Congressional intent to limit applicability of subsection (f) to instances of "non-business use of non-business property" and that only rents received on the leasing of "luxury" properties such as "yachts, country homes, city residences and similar luxury establishments intended for the personal use of the stockholder" constitute personal holding company income.

The taxpayer further contends that it is a bona fide real estate company and that Congress intended that such companies whose main source of income constitutes rent received from the ownership of office buildings, apartment houses, etc., should continue to be free under subsection (g) to maintain their operations without being subjected to the personal holding company surtax provisions.

We cannot subscribe to the taxpayer's view. We find ourselves in complete accord with the Tax Court's ruling that "Nothing in the legislative history of either subsection persuades us that the provisions were intended to eliminate real estate holding companies which do not operate properties and fall squarely within the statutory language."

Additionally it may be pointed out that the taxpayer is seeking a judicial "construction" of a statute which would be tantamount to its re-writing by inserting a criterion which Congress did not see fit to insert. We refer to taxpayer's contention that the scope of subsection (f) should be judicially limited to instances of "non-business use of non-business property."

It is well-settled that "There is, of course, no more persuasive evidence of the purpose of a statute than the words by which the legislature undertook to give expression to its wishes." United States v. American Trucking Ass'ns, 310 U.S. 534, 543, 60 S.Ct. 1059, 1063, 84 L.Ed. 1345. As we pointed out in Girard Inv. Co. v. Commissioner, 3 Cir., 122 F.2d 843, 845, 846, words may be interpolated in a statute "* * * only when the statutory language is equivocal or where literal interpretation leads to absurdity `so gross as to shock the general moral or common sense'". See Fides v. Commissioner, 4 Cir., 137 F.2d 731. In its most recent ruling on the subject of statutory construction, the Supreme Court in Crane v. Commissioner, 67 S.Ct. 1047, 1051, stated: "In the first place, the words of statutes — including revenue acts — should be interpreted where possible in their ordinary, everyday senses. * * * Strong countervailing considerations would be required to support a contention that Congress, in using the word `property', meant `equity', or that we should impute to it the intent to convey that meaning."

In Caminetti v. United States, 242 U,S, 470, 37 S.Ct. 192, 196, 61 L.Ed. 442, L.R.A. 1917F, 502, Ann.Cas. 1917B, 1168, the Supreme Court held that language "* * * must be taken as the final expression of legislative intent and * * * (is) not to be added to or subtracted from by considerations drawn from titles or designating names or reports accompanying their introduction, or from any extraneous source."

As to the question whether there was a proper imposition of the penalty under Section 291 of the Internal Revenue Code, that Section provides for a maximum 25% penalty for failure to file a personal holding company return on Form 1120H "* * * unless it is shown that such failure is due to reasonable cause and not due to willful neglect. * * *." It is well-settled that the burden of establishing "reasonable cause" is on the taxpayer, Girard Inv. Co. v. Commissioner, supra, and that what constitutes "reasonable cause" is a question of fact in the first instance for the Tax Court's determination. Commissioner v. Lane-Wells Co., 321 U.S. 219, 225, 64 S. Ct. 511, 88 L.Ed. 684; Dobson v. Commissioner, 320 U.S. 489, 64 S.Ct. 239, 88 L.Ed. 248.

However, there must still be a "* * * substantial basis in the evidence * * *" for the facts as found by the Tax Court and if that is lacking "the appellate court may then indulge in making its own inferences and conclusions or it may remand * * *". Commissioner v. Scottish American Investment Co., Ltd., 323 U. S. 119, 124 65 S.Ct. 169, 171, 89 L.Ed. 113. While we are aware of the injunction in the case cited that "* * * the judicial eye must not * * * rove * * *", we are of the opinion that in this case...

To continue reading

Request your trial
95 cases
  • Acker v. Commissioner of Internal Revenue, 13320.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (6th Circuit)
    • September 3, 1958
    ...40 F.2d 472, and "all questions in doubt must be resolved in favor of those from whom the penalty is sought." Hatfried, Inc., v. Commissioner, 3 Cir., 1947, 162 F.2d 628, 633. Furthermore, even if the exactions involved be treated as "additions to Tax," as they are denominated by § 294 of t......
  • United States v. Boyle
    • United States
    • United States Supreme Court
    • January 9, 1985
    ...See Orient Investment & Finance Co. v. Commissioner, 83 U.S.App.D.C. 74, 75, 166 F.2d 601, 602 (1948); Hatfried, Inc. v. Commissioner, 162 F.2d 628, 634 (CA3 1947); Janice Leather Imports Ltd. v. United States, 391 F.Supp. 1235, 1237 (SDNY 1974); Gemological Institute of America, Inc. v. Ri......
  • Koithan v. Comm'r of Internal Revenue (In re Estate of La Meres), Docket No. 6909-88.
    • United States
    • United States Tax Court
    • March 23, 1992
    ...Emp., 204 F.2d 19, 21 (7th Cir. 1953); Haywood Lumber & Mining Co. v. Commissioner, 178 F.2d 769 (2d Cir. 1950); Hatfried, Inc. v. Commissioner, 162 F.2d 628 (3d Cir. 1947); Zabolotny v. Commissioner, 97 T.C. 385 (1991); Estate of Dipalma v. Commissioner, 71 T.C. 324 (1978); Coldwater Seafo......
  • Neonatology Assocs., P.A. v. Comm'r of Internal Revenue, 1201–97
    • United States
    • United States Tax Court
    • July 31, 2000
    ...to the disputed item. See United States v. Boyle, 469 U.S. 241, 105 S.Ct. 687, 83 L.Ed.2d 622 (1985); see also Hatfried, Inc. v. Commissioner, 162 F.2d 628, 635 (3d Cir.1947); Girard Inv. Co. v. Commissioner, 122 F.2d 843, 848 (3d Cir.1941); Estate of Young v. Commissioner, 110 T.C. 297, 31......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT