Frederick Smith Enterprise Co. v. Commissioner of Internal Revenue, 060447 FEDTAX, 11158

Docket Nº:Docket 11158;
Opinion Judge:Opper, Judge
Attorney:Longstreet Heiskell, Esq., for the petitioner. Frank M. Thompson, Jr., Esq., and S. Earl Heilman, Esq., for the respondent.
Case Date:June 04, 1947
Court:United States Tax Court

1947 PH TC Memo 47,148




Docket No. 11158;

United States Tax Court

June 4, 1947

Special class income held sufficient to constitute taxpayer a personal holding company-rent received from corporate stockholder found to be personal holding company income-amount of profit from installment sales insufficient to remove taxpayer from classification of personal holding company-interest on purchase money mortgage does not constitute rent-deduction disallowed for dividend paid after time allowed by statute-failure to file return held due to reasonable cause and penalty disapproved.-

The taxpayer is found to have the necessary prerequisites of stock ownership and necessary portion of personal holding company income to be liable for the surtax in the years involved.

In determining that the taxpayer had sufficient personal holding company income the court decided the following issues:

That the rent received by the taxpayer was less than 50% of the gross income since the rent received from a corporate stockholder was held to be personal holding company income and not to be included in determining whether rents constituted more than 50% of the gross income.

Where the taxpayer elected to treat the profit on the sale of realty as an installment sale under Sec. 44. It cannot content that for the purpose of determining its holding company status that the entire profit should be considered in determining gross income in order to show a sufficient proportion of non-personal holding company income to remove it from that classification.

That since the property of the taxpayer was not ‘held primarily for sale to customers in the ordinary course of trade or business‘ it could not include as 'rent’ interest received on a purchase money mortgage, under Sec. 502(g).

A dividend declared early in 1941 but not paid until March 26th is disallowed as a dividend paid credit under Sec. 504(c) requiring such dividend to have been paid by March 15th.

The failure to file a personal holding company return is held to have been due to reasonable cause where the omission occurred as a result of advice of counsel. Considering the complications involved in determining the taxpayer's liability for holding company surtax, the enforcement of a penalty for failure to file a return was disapproved.- Ed.

Longstreet Heiskell, Esq., for the petitioner.

Frank M. Thompson, Jr., Esq., and S. Earl Heilman, Esq., for the respondent.


Opper, Judge:

By this proceeding petitioner challenges respondent's determination of deficiencies in personal holding company surtax and penalties for failure to file personal holding company tax returns for the years 1937, 1939, and 1940 in the following amounts:

Year Tax Deficiency Penalty

1937 .......................... $19,849.05 $4,962.26

1939 .......................... 22,695.76 5,673.94

1940 .......................... 26,667.70 6,666.93

Petitioner having conceded the stock ownership requirement, the principal issue is whether it meets the gross income requirement in any or all of the years involved so as thereby to fall within the statutory definition of a personal holding company.

If petitioner is found to be subject to the personal holding company surtax, an additional question arises whether petitioner is liable for the 25 percent penalty for failure to file any personal holding company tax returns.

If petitioner is found to be a personal holding company during the year 1940, a question is presented whether it is entitled to a dividends-paid credit under Internal Revenue Code, section 504(c), where it declared a dividend on March 3, 1941, but the checks in payment thereof were dated and delivered, and book entries made on or after March 26, 1941.

Many of the facts have been stipulated.


The stipulated facts are hereby found accordingly.

Petitioner, a Delaware corporation, was incorporated on August 24, 1935, with its principal place of business in Memphis, Tennessee. It filed its income and excess-profits tax returns for the years in question with the collector for the district of Tennessee.

It kept its books and filed its tax returns on an accrual and calendar year basis of accounting.

The purposes for which it was incorporated included the purchase and sale of real estate. On its tax returns in answer to the question-‘Kind of business‘-the answer given was ‘Real Estate Development and Investments.‘

Frederick Smith, petitioner's president, his brother, and his sister owned more than 50 percent of petitioner's stock at all times material to this proceeding.

Facts With Reference to 1937:

Among the real property held by petitioner in 1937 was the Matagorda Plantation, situated in Coahoma County, Mississippi, which it acquired in 1935. Prior arrangements for its acquisition had been undertaken by Smith, petitioner's president, and A. D. Moss, a resident of the county. The latter had entered into a contract to purchase the property which Smith had been instrumental in securing for him.

Shortly after the acquisition of the property petitioner leased the plantation to a partnership composed of Smith and Moss, which was formed on September 23, 1935, for the purpose of operating the plantation.

The partnership was dissolved on August 1, 1937, the agreement of dissolution providing in part as follows:

(3) in consideration of the cancellation by Frederick Smith of that indebtedness of $9712.50 due by A. D. Moss, the said A. D. Moss hereby expressly agrees to and does surrender and transfer to said Frederick Smith all his right, title and interest in any and all property and assets of such partnership of Smith & Moss;********

(3) A. D. Moss, in consideration of the cancellation of the abovementioned indebtedness, hereby sells, conveys and transfers to Frederick Smith all his right, title and interest in and to all property and assets of any nature, tangible or intangible, which may be owned or held by such partnership of Smith and Moss.

Petitioner's gross income for the year 1937 included the following types and amounts of income:

Dividends .............................................. $28,008.87

Interest .............................................. 1,437.32

Profit from the sale of stocks and bonds .... $12,676.97

Less: Loss on Cotton Contracts ........... 1,312.00 11,364.97


Rents .................................................. 45,040.24


Total ............................................ $85,851.40

Included in the item ‘Rents‘ is the amount of $14,229.12 received by petitioner as rent for Matagorda Plantation, which was reflected in...

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