Orient Investment & Finance Co. v. COMMISSIONER OF IR

• Decision Date: 02 February 1948
• Docket Number: 9552.,No. 9551,9551
• Parties: ORIENT INVESTMENT & FINANCE CO., Inc. v. COMMISSIONER OF INTERNAL REVENUE. ELLEN INVESTMENT & FINANCE CO., Inc. v. SAME.
• Court: U.S. Court of Appeals — District of Columbia Circuit

166 F.2d 601 (1948)

ORIENT INVESTMENT & FINANCE CO., Inc. v. COMMISSIONER OF INTERNAL REVENUE.

ELLEN INVESTMENT & FINANCE CO., Inc. v. SAME.

Nos. 9551, 9552.

United States Court of Appeals District of Columbia.

Argued December 4, 1947.

Decided February 2, 1948.

Mr. H. N. Roth, of Orlando, Fla., with whom Messrs. Joseph Hartman, of Jacksonville, Fla., and H. Nathaniel Blaustein, of Washington, D. C., were on the brief, for petitioners.

Miss Louise Foster, Special Assistant to the Attorney General, with whom Miss Helen R. Carloss and Mr. A. F. Prescott, Special Assistants to the Attorney General, were on the brief, for respondents.

Messrs. John P. Wenchel, Chief Counsel, and Charles E. Lowery, Special Attorney, Bureau of Internal Revenue, both of Washington, D. C., also entered appearances for respondent.

Before GRONER, Chief Justice, and STEPHENS and WILBUR K. MILLER, Associate Justices.

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 Investment & Finance Company, Inc., whom we shall call "Orient," operates two citrus groves and also owns some turpentine interests. The other, the Ellen Investment & Finance Company, Inc., carries on no business, and its only assets consist of bonds of the Angebilt Hotel Holding Company. At all times material here, the capital stock of Ellen has been owned by Orient, and its stock in turn has all been owned by I. N. Burman, his wife and daughter. Burman has served as president of both corporations during their entire existence. The books and accounts of both have always been kept by licensed public accountants, two of whom, J. B. Asher and Myer Sigal, were certified public accountants. D. A. Garrett succeeded Asher, and in turn was succeeded by Myer Sigal. Garrett and Asher are both deceased.

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 who heard the case was apparently of the opinion that because of the ownership of the stock of both petitioners by Burman and his wife and daughter, it was clear that both petitioners were "holding companies,"...