Plastic Parts Development Corp. v. C.I.R., 061851 FEDTAX, 26686

Docket Nº:26686.
Opinion Judge:Disney, Judge:
Attorney:Harold Wisan, Esq., for the petitioner. John E. Mahoney, Esq., for the respondent.
Case Date:June 18, 1951
Court:United States Tax Court

10 T.C.M. (CCH) 584 (1951)




No. 26686.

United States Tax Court

June 18, 1951

Penalty for failure to file personal holding company return not imposed where taxpayer relied upon competent accountants.-

Harold Wisan, Esq., for the petitioner.

John E. Mahoney, Esq., for the respondent.

The taxpayer corporation placed its tax affairs in the hands of a well qualified and highly reputable accounting firm. Four members of the firm were authorized to practice before the Tax Court and all senior accountants, 10 in number, were admitted to practice before the Treasury. Due to an almost inexplicable error, the firm failed to file a personal holding company return for the corporation although one was required. Held that the failure to file a return was due to reasonable cause and the 25% penalty was improperly imposed.- Ed.


Disney, Judge:

This case involves a deficiency in income tax of $169.74, a deficiency of $9,030.01 in personal holding company surtax, and a 25 per cent penalty in the amount of $2,257.50, all for the fiscal year ended October 31, 1946. Only the $2,257.50 as 25 per cent penalty is placed in issue.


Petitioner is a personal holding corporation incorporated with a capital of $3,000 in November 1945. It filed with the collector for the fifth collection district of New Jersey a corporation income and declared value excess profits tax return, and an excess profits tax return, both for the petitioner's first fiscal year, ended October 31, 1946. It did not file, and had never at any time, up to the hearing, filed a personal holding company return for the taxable year here involved.

Petitioner was organized by Islyn Thomas, Benjamin H. Shapiro and John Hohl. After the incorporation three shares of stock, out of sixty issued equally to the three men, were given to one Edwards, an attorney and friend of Thomas and Shapiro. He had incorporated the company, without charging a fee. He became secretary. He was not experienced in tax matters. He acted as counsel for petitioner but did not attempt to advise on tax matters. He did not consider himself qualified to do so. Thomas, Shapiro and Hohl had been partners before the incorporation in the matter of some patents issued or pending on toys that the three had developed, and tools, plans and dies worked out for manufacture of toys. These, including rights under a patent upon which royalties were already accruing, were turned into the corporation. They wished to limit their personal liability. The intent was to manufacture patented items of toys. Some effort was made to manufacture but there was difficulty in procuring machinery, and at the end of the first fiscal year no manufacturing had been done and the only income was from royalties. The company never engaged in manufacturing.

Thomas was an engineer who had attended the University of Scranton and Columbia University and had been an instructor of engineering in Brooklyn Polytechnic Institute for two years. He taught designing and engineering of plastic molds. He did not have a degree in engineering. He never took a course in tax law or taxation. He left school in 1930 and was thereafter engaged in the manufacture of plastic parts. After being works manager of Ideal Plastic Corporation and chief engineer of Consolidated Motor Products at Scranton, Pennsylvania, he started Thomas Manufacturing Corporation.

Hohl had an engineering degree from the Newark Engineering School. He organized Newark Die Company about 25 years ago. The company made tools and dies for the plastics industry. Hohl died about 1948.

Shapiro was president of the Acme Plastic Toys Company, manufacturers and sellers of toys, merchandising toys to chain stores. Its sales volume was about $2,000,000. Neither Hohl nor Shapiro manufactured metal parts. The accounting firm of Simonoff, Peyser & Citrin had been recommended to him about 1940 by his attorneys and by a bank. They were recommended as tax experts. They were the first accountants for Shapiro's company, Acme Plastics, and handled all of its tax matters and auditing. They were satisfactory to Acme Plastics. Shapiro never took a course in tax law and did not know there were special sections of law pertaining to personal holding companies. No one in Simonoff, Peyser & Citrin informed him of that and the first time he knew it was in connection with a notice from the Internal Revenue Bureau. He relied on Peyser, also on Musterer and Ilson, employees of the accounting firm, and had done so since he retained the firm for his own company, Acme Plastics, about 1940. Shapiro spent little time in the affairs of petitioner and never signed any papers on its behalf. He was not present when the firm of accountants was employed and did not know of the terms of employment. He had read about holding companies in the market sheet of the newspaper. He never inquired of the accountants as to whether petitioner was a personal holding company.

Petitioner has been inactive for about two years. It still holds the earnings that it made in the period ending October 31, 1946, less...

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