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Girard Inv. Co. v. Commissioner of Internal Revenue.


August 22, 1941


Appeal from the United States Board of Tax Appeals.

Author: Clark

Before BIGGS, MARIS, and CLARK, Circuit Judges.

CLARK, Circuit Judge.

This is a second attempt to construe away the effect of some quite unambiguous language.We say second because now one more closely held small loan company seeks to avoid the application of the "incorporated pocketbook" provision of the Revenue Act of 1934.*fn1 In the first case*fn2 the First Circuit Court of Appeals, in an able opinion by its presiding judge, refused relief. Learned counsel, who argued as amicus curiae in that case, may have given and no doubt has given some polish to his earlier contentions. They are, however, in essence the same and, we think, should receive the reception previously accorded. Counsel maintained then and now: first, that the return charged for the use of money loaned in small amounts is not interest; second, that the plain and specific words of the Act are overridden by a general intention not to apply them to operating companies; and third, that a subsequent amendment is clarifying rather than altering.

The petitioner's interpretation of interest seems to us a curious one. It is unnecessary to set down the depressing history of the small loan industry. It seems to be a discouraging example of human cupidity.*fn3 We had occasion too note it in a recent opinion.*fn4 The regulation of these companies turns on what rate of interest is excessive and so usurious.*fn5 The authors of the Encyclopaedia of the Social Sciences define "interest" as follows:

"Interest in its primary meaning is the payment for the use of money. * * * In theoretical analysis it is generally taken to mean a 'pure' remuneration for the use of money, or yield on money capital; pure interest is deduced from nominal interest by elimination of all elements imputable to cost or effort of administration, to insecurity of payment of interest or principal, to prospective changes in the purchasing power of money and to amortization necessary to maintain the principal intact." 8 Encyclopaedia of the Social Sciences 131

With many small loans to the kind of people who need small sums the "effort of administration" and the "insecurity of payment" is more pronounced. The small loan compaines have advocated and been granted rates covering this increased cost and risk. It is a non sequitur to use this justifiable excess in nominal interest as an argument in support of its own exclusion from the general word interest and the limitation of that word to pure interest.

The "general intention" versus "specific language" theory has this basis. The incorporated pocketbook became a quite candalous device for tax avoidance.*fn6 The recipient of a large income incorporated himself and so took advantage of legal ghost lore.*fn7 In the average case the person thus desiring taxwise invisibility was of the "rentier" class.Undoubtedly that most usual instance was predominantly in the legislative mind. That is not to say, however, that the Congress approved any individuals paying the low corporate rates on what was in substance individual income. Such an approval would be to import into our law the English distinction between earned and unearned income.*fn8 Because that is the only difference between the incorporation of income from your investments and the incorporation of income from the operation of your business, small loan or otherwise.*fn9 We think, therefore, that petitioner has failed to bring his case within the "occasions when words may be interpolated."*fn10 This may be done only when the statutory language is equivocal*fn11 or where literal interpretation leads to absurdity "so gorss as to shock the general moral or common sence."*fn12

If the existing is obscure anything subsequent can be interpreted either as a clarification or as a change. If the former, the effect is retrospective and therefore to be eschewed. It can, of course, be so stated and if it is, governs. One might prescribe this the sine qua non. In any event, caution has been indicated:

"Statutory construction is often aided by a consideration of later enactments which may clarify doubt as to the meaning of the earlier statute or correct manifest error in its administration.*fn13 No rule of construction needs more careful application. Ordinarily, the deliberate selection of language differing from the language of previous acts indicates an intended change of the law. But no change may be intended; the later statute may be declaratory of the meaning of the previous law or a codification, or recognition of a contemporaneous construction, crystallizing it into statutory law; it may be a clarification of an earlier act. On the other hand, a later statute may be intended to supplant an earlier act rather than as an elucidation of it. * * * Above all, the courts may not apply later acts to a period prior to their adoption by assuming that they supply inadvertent omissions. This, of course, is but another way of saying that statutes must be given a prospective application if a contrary intention does not clearly appear, and that the function of the courts is judicial, not legislative." 1 Paul and Mertens, Law of Federal Income Taxation, § 3.15, pp. 46, 47.

Certainly a three years' rejection of the later language betokens a change. We hesitate to alter but hasten to explain. In 1935,*fn14 1936*fn15 and 1937,*fn16 a plea for exemption was unsuccessfully pressed. In preparing the Revenue Act of 1936, the House bill omitted Section 351 entirely. The Senate Finance Committee rewrote the section and attempted to specifically exempt small loan companies. This insertion in the provision was eliminated by the Conference Committee.*fn17 Finally in 1938 counsel for a body of which the petitioner was a member was persuasive.*fn18 Personal finance companies that met certain specified conditions were exempted.*fn19 But the amendment of 1938 is to be given no retroactive effect.*fn20

The petitioner also resists the imposition of a 25 per cent penalty for failure to fild a separate return on Form 1120 H as required by Article 351-8 of Regulations 86.Section 351(c) of the Revenue Act of 1934 incorporates the administrative provisions (including penalties) applicable in respect to the tax imposed by that section. One of those administrative privisions reads:

"In case of any failure to make and file a return required by this title, within the time prescribed by law or prescribed by the commissioner in pursuance of law, 25 per centum of the tax shall be added to the tax, except that when a return is filed after such time and it is shown that the failure to file it was due to reasonable cause and not due to willful neglect no such addition shall be made to the tax. * * * " 29 U.S.C.A. Internal Revenue Act of 1934, § 291, page 750.*fn21

Petitioner's taxes for 1934, 1935 and 1936 were returned on From 1120. This Form is entitled "Corporation Income and Excess-Progits Tax Return." The fourth question at the top of this return reads: "Is the Corporation a Personal Holding Company Within the Meaning of Section 351 of the Revenue Act of 1934? . . . (If so, and additional return on Form 1120 H must be filed.)" Petitioner answered the question in the negative and so did not disclose either its stock ownership or the percentage of its gross income from interest. In the space provided for remarks on page 2 of this Form, we find the following:

"The Girard Investment co. is in business to make loans up to $300.00. It is an operating company charging a flat rate fixed by the Legislature of Penna. to cover examination fees, investigation fees, service charges incidental to operating the business. We are therefore of the opinion that the company is not apersonal holding company." Exhibit C, Appendix to Petitioner's brief, p. 60..

The return was prepared by a firm of accountants, Snyder and McAlpine. On June 3, 1939, and two years after the last of these Forms 1120 wer filed, petitioner made his return on Form 1120 H, "Return of Personal Holding Company." This was done at the suggestion of the revenue agent concerned.

We agree with the respondent that the filing of Form 1120 does not constitute a sufficient return.*fn22 The information therein contained is clearly not adequate. Petitioner fails to mention that the case on which he relies*fn23 is under an earlier Act*fn24 which contains much the broader phraseology "In case of any failure to make and file a return or list * * * ."*fn25 That being so, we must determine, first, whether the penalty is mandatory and second, if it is not mandatory whether the facts disclose "resonable cause" for the failure to file. Since there was ultimately a correct return, the very words of the statute preclude any mandatory impact. The principal case falls within the facts of Edmonds v. Commissioner,*fn26 Sabatini v. Commissioner,*fn27 and Plunkett v. Commissioner,*fn28 rather than Helveing v. Boekman*fn29 and Noteman v. Welch.*fn30 It is iteresting, perhaps, to observe that the harsh language of the 1934 Act*fn31 has since been modified.*fn32

The burden of establishing reasonable cause is on the taxpaye*fn33 The rule as to "reasonable cause" has been well stated by a leading authority:

"Obviously, ignorance of the necessity of filing a return does not of itself relieve the taxpayer of the 25% penalty. Nevertheless, the fact the 'every man is presumed to know the law' hardly justifies the imposition of the penalty. A more satisfactory reason would be that the penalty is directed to some extnent against such delinquents. Efficient administration of the Act demands that some penalty be imposed. Where, however, the ignorance of the necessity of filing the return or the belief that no return was or the by a reasonable cause, the penalty will not be imposed. Here our test of 'ordinary business prudence' is applicable.

"Where taxpayers have been delinquent in the filing of a return because of a belief that no retrun was due, frequently they have been fortified in this belief by the advice of counsel or of accountants. The question arises as to whether this advice is sufficcient to constitute reasonable cause for the delinquency.If the taxpayer consulted a lawyer or accountant and upon the presentationof the full information in his possession was advised that no return was necesary, a sufficient showing of 'reasonable cause' for the delinquency has been made. In such instances the taxpayer undoubtedly exercised 'ordinary business prudence.' Where, however, the taxpayer in consulting his lawyer or accountant failed to furnish him with complete information and withheld facts the existence of which would make a return necessary, the advice that no return was necessary obviously furnishes no grounds for relief from the 25% penalty. The taxpayer must act in good faith." Klein, Federal Income Taxation 1674.*fn34

The remarks included on the return prepared by petitioner's accountant*fn35 incline us to the belief that it has satisfied the requirements of the rule. The returns were filed long before counsel for petitioner's association's legislative efforts to have the bill amended.*fn36 The somewhat inadepate condition of the record suggests, however, that in fairness the case should be remanded for further proof with respect to the imposition of the penalty.

The decision of the Board of Tax Appeals is reversed and the cause is remanded for further proceedings in accordance with this opinion.

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