Before GOODRICH and KALONDER, Circuit Judges, and MADDEN, District Judge.
This appeal is taken from the decision of the Tax Court.
Two questions are presented: (1) whether the taxpayer should be classified as a personal holding company within the meaning of Sections 501 and 502(f) of the Internal Revenue Code, 26 U.S.C.A. Int. Rev. Code, §§ 501, 502(f); (2) whether, if the taxpayer is taxable as a personal holding company, there was a proper imposition of the penalty imposed by Section 291 of the Internal Revenue Code, 26 U.S.C.A. Int. Rev. Code, § 291, for failure to file a personal holding company return.
The Tax Court upheld the Commissioner's determination that the taxpayer was a personal holding company and therefore liable for a personal holding company surtax in the sum of $24,854.51, together with a 25% penalty thereon in the sum of $6,213.63 for the fiscal year ended October 31, 1941.
The facts as found by the Tax Court may be summarized as follows:
Hatfried, Inc., hereinafter called the taxpayer, is a corporation organized under the laws of the State of Florida, and with principal offices in Miami Beach, Florida. It was organized to purchase property and erect buildings thereon. In 1940 it bought a lot at 18th Street and Collins Avenue, Miami Beach, Florida, and by the end of that year completed the construction of the Shelborne Hotel at a cost of $825,000. The taxpayer held title to the hotel free and clear of all mortgages. During all periods here involved Hattie Friedland was the sole owner of all the capital stock of the taxpayer.
On December 1, 1940, the taxpayer leased the hotel to Hattie Friedland for a term of three years at $85,000 a year. The lease provided that the hotel was to be used and occupied as a resort and commercial hotel. From the beginning of the lease until November, 1942, when the United States Army took over the hotel at an annual rental of $70,000, Hattie Friedland operated the hotel as a legitimate and bona fide business enterprise. The rental income from the Shelborne Hotel comprised the entire gross income of the taxpayer. It paid no dividends during the taxable year.
All tax returns for the taxpayer for the tax year were prepared and filed by I.H. Rosenberg of Rosenberg, Goldstein & Schultz, Philadelphia, Pennsylvania, certified public accountants. Rosenberg was advised of the facts and circumstances surrounding the leasing of the hotel. He never suggested the filing of a personal holding company surtax return and none was filed.
The taxpayer was legally dissolved on December 10, 1944 but continues as a corporate body for the purpose of prosecuting and defending suits by and against it and to enable it to liquidate its affairs. The individual petitioners are the taxpayer's directors and trustees in dissolution.
Finally the Tax Court found that there was no reasonable cause for the taxpayer's failure to file a personal holding company surtax return.
To the above outline of the facts as found by the Tax Court may be added the fact disclosed by the record in the proceedings before the Tax Court that Mr. Rosenberg, the accountant, prepared and filed the "Corporation Income and Declared Value ExcessProfits Tax Return" (Form 1120) for Hatfried, Inc., for the period in question and answered "No" to the following question constituting a part of said return: "7. Is the corporation a personal holding company within the meaning of Section 501 of the Internal Revenue Code? * * * (If so, an additional return on Form 1120H must be filed.)"
He answered "Yes" to the following question of said form: "9(b). Did any corporation, individual, partnership, trust, or association own at any time, during the taxable year 50 per cent or more of your voting stock? (If either answer is 'yes', attach separate schedule showing: (1) name and address; (2) percentage of stock owned; (3) date stock was acquired; and (4) the collector's office in which the income tax return of such corporation, individual, partnership, trust or association for the last taxable year was filed)." and submitted a schedule indicating that Hattie Friedland was the owner of 100 per cent of the outstanding stock of Hatfried, Inc.
On the facts as stated the Tax Court held that the taxpayer is a personal holding company under the statute and that its income for the tax year in the form of rent paid by the taxpayer's sole stockholder, is personal holding company income within the meaning of Section 502(f).
In doing so it ruled that the situation disclosed "exact compliance with the specifications of subsection (f)", namely, that compensation received by a taxpayer for the use of its property by a stockholder who owns 25% or more in value of the corporation's stock is personal holding company income.
The Tax Court further held that the "exact compliance" with subsection (f) eliminates consideration of subsection (g) since the latter provides that it "* * * does not include amounts constituting personal holding company income under subsection (f)".
The taxpayer concedes taxability under a strict or literal construction of subsection (f). It urges, however, that the legislative history of subsections (f) and (g) evidences the Congressional intent to limit applicability of subsection (f) to instances of "nonbusiness use of non-business property" and that only rents received on the leasing of "luxury" properties such as "yachts, country homes, city residences and similar luxury establishments intended for the personal use of the stockholder" constitute personal holding company income.
The taxpayer further contends that it is a bona fide real estate company and that Congress intended that such companies whose main source of income constitutes rent received from the ownership of office buildings, apartment houses, etc., should continue to be free under subsection (g) to maintain their ...