Haywood Lumber & Min. Co. v. Commissioner of Int. Rev.

• Citation: 178 F.2d 769
• Decision Date: 04 January 1950
• Docket Number: No. 127,Docket 21468.,127
• Parties: HAYWOOD LUMBER & MINING CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

178 F.2d 769 (1950)

HAYWOOD LUMBER & MINING CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 127, Docket 21468.

United States Court of Appeals, Second Circuit.

Argued December 6, 1949.

Decided January 4, 1950.

C. Addison Keeler, of Binghamton, New York, Attorney for petitioner.

Theron Lamar Caudle, Assistant Attorney General, C. Oliphant, Washington D. C.; Ellis N. Slack, Helen Goodner and Francis W. Sams, Special Assistants to the Attorney General, for the respondent.

Before L. HAND, Chief Judge and SWAN and FRANK, Circuit Judges.

SWAN, Circuit Judge.

The taxpayer is a personal holding company. The Commissioner determined deficiencies in personal holding company surtaxes for the years 1941 and 1942 and added thereto a 25% penalty, pursuant to § 291 of the Internal Revenue Code, for petitioner's failure to file personal holding company returns for those years. The sole question presented to the Tax Court and likewise here is whether the taxpayer's failure to file personal holding company returns for the years in suit was "due to reasonable cause and not due to willful neglect".¹ The Tax Court held that it was not due to reasonable cause.

"Reasonable cause" has been defined by the Regulations to mean that the taxpayer exercised ordinary business care and prudence. Treas.Reg. 103, § 19.291-1; see Southeastern Finance Co. v. Commissioner, 5 Cir., 153 F.2d 205; Girard Inv. Co. v. Commissioner, 3 Cir., 122 F.2d 843, 848, certiorari denied 314 U.S. 699, 62 S.Ct. 479, 86 L.Ed. 559, citing Klein, Federal Income Taxation 1674. In the case at bar Mr. Sprague, the taxpayer's secretary-treasurer, requested a certified public accountant, Mr. Wolcott, who was competent to advise on tax matters, to prepare the proper corporate tax returns for the years 1941 and 1942. Sprague fully disclosed to Wolcott all necessary information about the corporation and Wolcott knew that the taxpayer was a personal holding company but "through inadvertence" did not inform Sprague of this fact nor submit to him a personal holding company surtax return. Sprague was aware of the personal holding company surtax statute but he had never studied its application and it did not occur to him that the petitioner was a personal holding company. He filed on behalf of the corporation only the returns prepared by Wolcott. Because Sprague did not "specifically inquire" of Wolcott "concerning the personal holding company status of petitioner" but "merely awaited passively for such tax advice as Wolcott might volunteer to give," the Tax Court held, one judge dissenting, that petitioner had not sustained the burden of proving that ordinary business care and prudence were exercised in failing to file the personal holding company surtax returns.

With this conclusion we disagree. When a corporate taxpayer selects a competent tax expert, supplies him with all necessary information, and requests him to prepare proper tax returns, we think the taxpayer has done all that ordinary business care and prudence can reasonably demand. Sprague had not "awaited passively for such tax advice" as Wolcott "might volunteer to give"; he affirmatively requested the preparation by his consultant of proper returns.² To require Mr. Sprague to inquire specifically about the personal holding company act nullifies the very purpose of consulting an expert. We doubt if anyone would suggest that a client who stated the facts of his case to his lawyer must, in order to show ordinary business care and prudence, inquire specifically about the applicability of various legal principles which may be relevant to the facts stated. The courts have recognized that reliance on the advice of counsel³ or of expert accountants,⁴ sought and received in good faith is "reasonable cause" for failing to file a tax return. We think those cases are correctly decided and in principle control the case at bar. The Tax Court relies on Hermax Co v. Commissioner, 3 Cir., 175 F.2d 776, affirming 11 T.C. 442. There the accountant was not qualified to advise about tax matters and the corporation's president testified to no reason why he relied on him. Here the undisputed evidence showed that Wolcott had had over twenty years of extensive tax experience with a prominent accounting firm in Binghamton and had advised the petitioner on tax matters in previous years.

The...