*882 Personal holding company provisions of Revenue Act of 1936, Title I A, requiring stock ownership in not more than five individuals, held applicable to petitioner by virtue of ultimate ownership by members of same family notwithstanding that stock was owned in part through intervening operating corporation and that some of the stock was pledged and its holders insolvent.
*279 Petitioner by this proceeding challenges respondent's determination of a deficiency of $12,771.31 in income tax and the assertion of a penalty of $3,190.16 for the year 1937.
The primary questions presented are whether petitioner is taxable as a personal holding company under the provisions of Title I A of *280 the Revenue Act of 1936, as amended by Title I of the Revenue Act of 1937, and whether the section 291 penalty should attach.
FINDINGS OF FACT.
The stipulated facts are hereby found. In the following findings those facts which are not from the stipulation are otherwise found from the record.
Petitioner*883 is a Pennsylvania corporation which was incorporated on May 27, 1931, and has its principal place of business at Oakmont, Allegheny County, Pennsylvania. It was authorized by its charter to engage in the business of purchasing, acquiring, investing in, holding, selling, and dealing in stocks, bonds, debentures, notes, mortgages, leases, obligations, contracts, and cognate securities or evidences of indebtedness, and the transaction of all such business as is necessary and incidental thereto.
Petitioner was formed for the sole purpose of owning and holding the capital stock of the Unity Railways Co., a common carrier and an industrial coal road, all the stock of which was then owned by Union Collieries Co., the predominant and at times the only shipper over the road. There was no thought, idea, or intention of incorporating petitioner for the purpose of avoiding or evading surtaxes upon its stockholders or any other person.
The corporation income and excess profits tax return, Form 1120, of petitioner for the year 1937 was filed on March 15, 1938, with the collector of internal revenue for the twenty-third collection district of Pennsylvania at Pittsburgh, Pennsylvania.
*884 On February 26, 1940, a return of personal holding company, Form 1120H, for the year 1937 was filed by the petitioner with the collector of internal revenue for the twenty-third collection district of Pennsylvania at Pittsburgh, Pennsylvania. The return was filed out of time by petitioner on advice of counsel, prior to the issuance of the notice of deficiency but after the revenue agent had advised petitioner that in his judgment it was a personal holding company. The return was filed under protest and solely to avoid the possibility of a penalty. the return disclaims any liability as a personal holding company.
During the entire year 1937 petitioner owned 100 percent of the stock of the Unity Railways Co., Pittsburgh, Pennsylvania, and 100 percent of the stock of the Piercedale Supply Co., Oakmont, Pennsylvania.
Petitioner's gross income for the year 1937 amounted to $75,000, of which $65,000 represented dividends received from the Unity Railways Co., Pittsburgh, Pennsylvania, and $10,000 represented dividends received from the Piercedale Supply Co., Oakmont, Pennsylvania.
The net operating income, dividends received, and dividends paid by petitioner for the years 1932*885 to 1939, both inclusive, were as follows:
| Year | Net operating income | Dividends received from Unity Railways and Piercedale Supply Co. | Dividends paid to Union Collieries Co. | |
| 1932 | $13.26 | $50,000 | $45,000 | |
| 1933 | 52.35 | 55,000 | 55,000 | |
| 1934 | * 62.58 | (U. Rys.) | 190,000 | 190,000 |
| 1935 | * 23.17 | (U. Rys.) | 225,000 | 205,000 |
| 1936 | * 15,852.04 | (U. Rys.) | 95,000 | 109,500 |
| (P.S.) | 20,000 | |||
| 1937 | * 22,078.13 | (U. Rys.) | 65,000 | 35,000 |
| (P.S.) | 10,000 | |||
| 1938 | * 20,330.27 | (U. Rys.) | 75,000 | 65,000 |
| 1939 | * 21,408.54 | (U. Rys.) | 70,000 | 75,000 |
| 10,000 | ||||
| Total | 865,000 | 779,500 |
*281 On March 1, 1936, petitioner borrowed $300,000 and loaned the money to Union Collieries Co. for the purpose of retiring a 20-year bond issue which became due on that date. A payment of $30,000 was made on that indebtedness in 1937.
During the last half of the taxable year 1937 the outstanding and issued capital stock of petitioner consisted of 100 shares of common stock, all of which was owned by the Union Collieries Co.
The Union Collieries Co. is a Pennsylvania corporation engaged in the business of mining and selling bituminous*886 coal, with mines in Allegheny County, Pennsylvania. Its gross income for 1937 consisted of the following:
| Gross profit from sales | $762,578.70 |
| Interest received | 2,149.08 |
| Interest on U.S. obligations | 1,675.00 |
| Rents | 65,093.77 |
| Dividends | 35,000.00 |
| Other income (sales of scrap, discounts, commissions, etc.) | 25,047.90 |
| Total | 891,544.45 |
The net operating income or loss of Union Collieries Co., dividends received, and total income or loss for the years 1930 to 1939, both inclusive, were as follows:
| Year | Operating income | Dividend income | Total income |
| 1930 | * $146,151.09 | $50,000.00 | * $96,151.09 |
| 1931 | * 217,238.64 | 50,000.00 | * 167,238.64 |
| 1932 | * 130,000.49 | 95,000.00 | * 35,000.49 |
| 1933 | * 300,621.83 | 110,000.00 | * 190,621.83 |
| 1934 | * 29,709.03 | 190,000.00 | 160,290.97 |
| 1935 | * 110,785.58 | 205,000.00 | 94,214.42 |
| 1936 | * 97,607.61 | 109,500.00 | 11,812.39 |
| 1937 | 95,375.13 | 35,000.00 | 130,375.13 |
| 1938 | * 321,777.14 | 65,000.00 | * 256,777.14 |
| 1939 | * 105,241.53 | 75,000.00 | * 30,241.53 |
*282 The income of and dividends paid by Unity Railways Co. for the years 1930 to 1939, both inclusive, were as follows: *887
| Year | Income | Dividends paid |
| 1930 | $73,996.92 | $50,000 |
| 1931 | 46,601.06 | 50,000 |
| 1932 | 51,424.29 | 50,000 |
| 1933 | 221,263.75 | 55,000 |
| 1934 | 86,653.39 | 190,000 |
| 1935 | 69,085.38 | 225,000 |
| 1936 | $101,054.65 | $95,000 |
| 1937 | 95,989.61 | 65,000 |
| 1938 | 72,503.19 | 75,000 |
| 1939 | 74,720.88 | 70,000 |
| Total | 893,293.12 | 925,000 |
The excess of dividends over income less Federal income taxes was paid out of surplus created by a recovery under section 206 of the Emergency Railroad Transportation Act of 1933. The surplus account increased from $249,435.16 on December 31, 1929, to $264,643.73 on December 31, 1939, a total of $15,208.57.
During the last half of the taxable year 1937, the outstanding and issued capital stock of the Union Collieries Co. consisted of 121,540 shares of common stock, exclusive of 21,000 shares of treasury stock.
During the entire year 1937, Bessemer Coal & Coke Corporation owned 79,655 shares, or 65.539 percent, of the total outstanding and issued capital stock of Union Collieries Co.
During the last half of the taxable year 1937, the outstanding and issued capital stock of Bessemer Coal & Coke Corporation consisted of 19,766 shares of common stock, *888 exclusive of 2,420 shares of treasury stock.
The stockholders of record of Bessemer Coal & Coke Corporation during the last half of the taxable year 1937, with one exception hereinafter noted, and the number of shares standing in the name of each, were:
| Name | Shares |
| Floyd L. Barnhart | 30 |
| John G. Bart | 250 |
| Dalton Co | 550 |
| Henry K. Holmes | 250 |
| Geo. W. Kepler | 250 |
| Myra Love Lermann | 2,563 |
| Wm. W. Lermann | 100 |
| Edwin M. Love | 2,950 |
| Frank S. Love, deceased | 3,110 |
| Geo. H. Love | 824 |
| Jos. K. Love | 350 |
| Margaret McC. Love | 200 |
| Rebecca L. Love | 5,400 |
| Russell C. Love | 1,939 |
| Wm. H. Robinson | 1,000 |
| Total | 19,766 |
In addition Bessemer Coal & Coke Corporation held 2,420 shares as treasury stock. The only change in record ownership between July 1 and December 31, 1937, was the transfer of 150 shares from the name of Edwin M. Love to the name of Avery J. Bradford, receiver of the Monongahela National Bank, Pittsburgh, Pennsylvania.
Edwin M. Love, Joseph K. Love, Russell C. Love, and Myra Love Lermann are brothers and sister. Frank S. Love, another brother, *283 died September 26, 1933, survived by his widow and daughter, Rebecca L. Love and Rebecca*889 Frances Love.
George H. Love, the son of Joseph K. Love, and Margaret McC. Love are husband and wife.
The issued and outstanding stock of the Dalton Co. was owned by George H. Love, Jennings Love and J. E. Love, brothers, all sons of Joseph K. Love, in equal shares.
William W. Lermann is the husband of Myra Love Lermann.
By agreement dated May 28, 1932, F. S. Love assigned and transferred 1,000 shares of stock of Bessemer Coal & Coke Corporation to Rebecca L. Love, George H. Love and the Union Trust Co. of Pittsburgh, in trust for the benefit of his daughter, Rebecca F. Love, reserving no right to alter, modify or amend the trust in any particular, and no reversionary interest. The agreement made the following reservations to the donor:
During the life time of the Donor
(a) the Trustees shall not sell, purchase or exchange any securities at any time in or for the trust estate without the written consent of the Donor or his attorney-in-fact;
(b) the Trustees shall make sales, purchases or exchanges upon the written request of the Donor or his attorney-in-fact; and
(c) the Trustees shall vote the securities in the trust estate on any corporate matter as directed*890 by the Donor or his attorney-in-fact.
The stock certificates were assigned in blank and delivered to the trustees, but remained in the record name of Frank S. Love until December 27, 1940, when they were transferred to the name of Mac & Co., the nominee of the Union Trust Co. of Pittsburgh.
The specific legatees named in the will of Frank S. Love were Joseph K. Love, Edwin M. Love, Russell C. Love, Myra Love Lermann, Jennings Kirk Love, George Hutchinson Love, John Evans Love, and Edna Heffley Love, each being named to a legacy of $5,000. The residue of the estate was bequeathed as follows: One-half to Rebecca L. Love absolutely; one-fourth to Rebecca F. Love absolutely, payable at certain ages; and one-fourth in trust for Rebecca F. Love, with remainder to her children, or in case of default, as she may appoint.
The record owners of the stock and certain relationships to each other were as follows throughout the last half of 1937:
| Shares | |
| I. Joseph K. Love | 350 |
| George H. Love, son | 824 |
| The Dalton Co. (owned by George H. Love, see above, Jennings Love, son J. E. Love, son) | 550 |
| Edwin M. Love, brother | 2,950 |
| Russell C. Love, brother | 1,939 |
| Myra Love Lermann, sister | 2,563 |
| II. Rebecca L. Love, mother | 5,400 |
| 1/2 of shares held by estate of Frank S. Love (1/2 of 3,110 shares - 150 shares transferred to name of receiver, Monongahela National Bank) | 980 |
| Rebecca Frances Love, daughter: | |
| 1/2 of shares held by estate of Frank S. Love | 980 |
| Beneficiary of trust holding shares in name of Frank S. (not transferred of record) | 1,000 |
| III. Wm. H. Robinson | 1,000 |
| IV. Henry K. Holmes | 250 |
| V. Geo. W. Kepler | 250 |
| 19,036 | |
| In addition there were 250 shares owned by John G. Bart; 30 shares by Floyd L. Barnhart; 100 shares by Wm. W. Lermann, husband of Myra Love Lermann; 200 shares by Margaret McC. Love, wife of George H. Love | 580 |
| And, 2,420 shares were held as treasury stock | 2,420 |
| And, 150 shares transferred between July 1, 1937, and Dec. 31, 1937, from name of Edwin M. to name of receiver, the Monongahela National Bank | 150 |
| Total | 22,186 |
*891 *284 The estate of F. S. Love was insolvent. The entire estate was used to pay administration expenses, secured debts, and taxes. No distribution was made to general and unsecured creditors, nor to the legatees named in the will. Respondent received a distribution of only $10,713.57 on his preferred claim of $71,741.46, exclusive of interest, for a deficiency in 1927 income taxes. The widow, Rebecca L. Love, received her widow's exemption of $500 allowed under the laws of the Commonwealth of Pennsylvania.
The Farmers Deposit National Bank was a secured creditor of the estate of Frank S. Love and received a distribution of $142,880.49. No stockholder of Bessemer Coal & Coke Corporation as listed above was, during the last half of 1937, a stockholder in the Farmers Deposit National Bank.
Of the shares of stock of Bessemer Coal & Coke Corporation standing in the name of Russell C. Love, as mentioned above, 239 were pledged as collateral on his indebtedness to F. S. Love. On May 21, 1937, the executors of the estate of F. S. Love offered the stock at public auction and bought it in as an asset of the estate.
The 2,950 shares of Bessemer stock standing of record*892 in the name of E. M. Love had been pledged by him as early as 1928, 2,000 shares with the Bank of Pittsburgh, N.A., on a loan of $150,000; 800 shares with the First National Bank of Johnstown, and 150 shares with the Monongahela National Bank on a loan of $125,000.
As early as 1931, E. M. Love was absolutely insolvent and he remained so throughout 1937.
*285 In the fall of 1936, E. M. Love made an offer to his creditors to settle his liabilities, which offer was accepted by the Comptroller of the Currency for the Bank of Pittsburgh, N.A., on October 22, 1936, and for the Monongahela National Bank on October 31, 1936, and approved by the District Court of the United States for the Western District of Pennsylvania on November 28, 1936, and February 4, 1937, respectively.
Pursuant to that settlement, E. M. Love received releases dated June 29, 1937, from Avery J. Bradford, receiver of both banks, releasing Love of and from all his liability to the two banks, which releases recited the delivery to the receiver of 2,000 shares of Bessemer stock and 150 shares of Bessemer stock, respectively.
Several weeks later E. M. Love, at the request of the receiver of the Bank of*893 Pittsburgh, N.A., signed a typewritten letter titled "Certificate of Settlement of Sale", and bearing pen and ink date July 16, 1937, in which the following appears:
* * * I hereby certify that on July 16, 1937, I delivered to said Receiver 6109 shares of Carnegie Metals Company stock and cash in the amount of $2,133.69 * * * together with an outright assignment of 2000 shares of Bessemer Coal and Coke Corporation Common Stock now held as collateral, in full settlement of my liability to the Bank of Pittsburgh, N.A., * * *
This paper was signed by E. M. Love on the assumption that it was a supplemental memorandum for the sake of completing the transaction and freeing it from any legal technicalities that might possibly have arisen at a later date. He signed with the understanding that the deal had previously been closed.
Both the release from the receiver of the Bank of Pittsburgh of June 29, 1937, and the letter of E. M. Love to the Comptroller of the Currency dated July 16, 1937, referred to an "outright assignment of 2,000 shares" of Bessemer stock, but E. M. Love did not execute any assignment of said shares at that time. The only assignment he ever executed was the original*894 stock power which he had signed in 1928 when the shares were originally pledged.
The 150 shares were actually transferred into the name of the receiver of the Monongahela National Bank during the last half of the taxable year 1937 and the 2,000 shares were actually transferred into the name of the receiver of the Bank of Pittsburgh, N.A., on January 31, 1938.
The issued and outstanding stock of the Bank of Pittsburgh, N.A., during the last half of 1937 consisted of 60,000 shares, of which 400 stood in the name of E. M. Love and 100 each in the name of F. S. Love, Myra Love Lermann, and W. W. Lermann, E. M. Love thus owning two-thirds of 1 percent and each of the others owning .001 2/3 of the stock of the bank. None of the other stockholders of Bessemer Coal & Coke Corporation owned any stock in the Bank of Pittsburgh, *286 N.A. The issued and outstanding stock of the Monongahela National Bank during the last half of 1937 consisted of 10,000 shares, none of which was owned by any of the stockholders of Bessemer Coal & Coke Corporation.
By agreement dated December 23, 1927, the First National Bank of Johnstown took over all the assets of the Union National Bank of Johnstown*895 and agreed to assume all its liabilities and liquidate its assets and liabilities, within a period of three years.
By agreement dated January 23, 1928, E. M. Love, F. S. Love, Myra L. Lermann, J. K. Love, and R. C. Love agreed to indemnify the First National Bank of Johnstown against loss by reason of its agreement to take over and liquidate the assets and liabilities of Union National Bank in an amount not in excess of $200,000, and for that purpose deposited 2,300 shares of Bessemer stock, 800 shares standing in the name of E. M. Love, 800 standing in the name of F. S. Love, and 700 standing in the name of Russell C. Love, all to be held until the termination of the First National-Union National liquidation agreement. The indemnity was solely applicable to the deposited stock and there was no personal liability upon the indemnitors. The assignors received the right to receive the dividends on the stock deposited and until sold, retained the right to vote it, either in person or by proxy.
By agreement executed in December 1930 the provisions of the aforesaid two agreements were continued until December 23, 1931. No further extension was granted either in writing or orally. *896 After it was renewed it was just allowed to drag along. The 2,300 shares of pledged Bessemer stock remained in the names of the pledgors throughout 1937 and were voted by them, either in person or by proxy.
The agreements having expired in December 1931, and the default or loss being in excess of the indemnification, the bank took the position that it had the right to take the securities at any time. In the fall of 1931 the indemnitors, after a conference with the president of the First National Bank of Johnstown, concluded that the loss on the liquidation of the Union National Bank would be greater than $200,000, saw no reason to ask for an extension. In a personal financial statement as of December 31, 1931, prepared in 1931 by E. M. Love at the request of the Bessemer Coal & Coke Corporation, to substantiate its charge-off of an indebtedness due it by E. M. Love, the assets included 2,171 shares of Bessemer Coal & Coke Corporation, omitting the 800 shares, because he considered that they had been forfeited under the agreement.
The First National Bank of Johnstown closed its doors March 4, 1933, a conservator was appointed March 17, 1933, and a receiver was appointed February 5, 1934. *897 Neither the bank, its conservator, nor its receiver had, prior to December 31, 1937, sold any of the said 2,300 shares of Bessemer stock.
*287 The 350 shares of Bessemer stock standing in the name of Joseph K. Love were pledged as collateral, 150 shares with the Bank of Pittsburgh, N.A., and 200 shares with Bessember Coal & Coke Corporation. Joseph K. Love was insolvent from 1929 through 1937 and is insolvent today.
Russell C. Love was insolvent from 1929 through 1937. In 1938 he went through bankruptcy.
OPINION.
OPPER: Petitioner's liability to tax as a personal holding company under Revenue Act of 1936, Title I A, is litigated here not on account of the character of petitioner's income, but solely on the question whether 50 percent of petitioner's stock was "owned directly or indirectly by or for not more than five individuals." 1
*898 An affirmative conclusion is resisted on two grounds: That while record ownership of well over 50 percent of petitioner's stock was ultimately and through intervening titles held in the names of not more than five individuals, considering as one those within the family relationship definition of section 354, 2 nevertheless, due to various circumstances, these individuals were not collectively the real owners of the *288 requisite amount of stock within the meaning of the stock ownership requirement of section 352; and, second, because the title of these individuals was not direct but stemmed through several corporations, including an operating company, a situation to which the statute is said to be inapplicable at least in the absence of a motive to escape surtaxes.
*899 The latter contention can perhaps best be summarized in the language of petitioner's brief: "Petitioner contends that the applicable sections of the Revenue Act are penal in nature being expressly designed for the purpose of penalizing corporations which permitted their earnings to accumulate, thus avoiding imposition of a surtax upon their shareholders; that petitioner was not formed for any such purpose and no tax has been lost to respondent through the formation and operation of petitioner; that the act does not specifically authorize respondent to go or look through an operating parent to its stockholders to determine whether a subsidiary is a so-called personal holding company; and being a penal section it is not to be extended to any degree beyond its expressed purpose or intent." We may note in passing that there is not the slightest evidence but that petitioner was in fact availed of to avoid surtax upon its shareholders or the shareholders of another corporation. 3 All that petitioner says on this subject is "even if Union [the parent] had made a taxable distribution to Bessemer [its controlling stockholder] and Bessemer had made a taxable distribution to its stockholders*900 [the Loves], where on this record could the respondent have collected any surtax? All the Loves [the individuals determined by respondent to constitute the controlling group] were hopelessly insolvent and it can safely be assumed that their interest deductions would have exceeded their dividend income." In the absence of evidence, and there is none, that is a violently unsafe assumption for the Board to make regardless of what it may be for petitioner; and the whole contention thus narrows to an attempt on petitioner's part to profit by a failure of proof where it has the burden. But in any event, we think that the legislative history of Title I A, as quoted in petitioner's brief, contains statements which demonstrate that this position may not be sustained. One of the purposes of enacting section 351, which was the forerunner of Title I A, was "to provide for a tax which will be automatically levied upon the holding company without any necessity for proving a purpose of avoiding surtaxes." Report, Revenue Act of 1934, Ways and Means Committee, H.R.No. 704, 73d Cong., 2d sess., p. 12. Since section 354(a)(1) 4 requires that stock be traced through intervening corporations*901 if necessary, but makes no distinction between holding and operating companies in that tracing process, *289 and since the history of the legislation denies the necessity of scrutinizing motives, we must reject petitioner's argument on this point.
The contention that the individuals did not, in fact, own the stock within the meaning of Title I A is predicated generally upon the proposition that they or their estates were insolvent, that some of the Bessemer stock was pledged, and that hence the true owners of the stock were the pledgees and creditors and not the record owners. We may well agree with petitioner that the aim of the statute was to reach beyond mere naked legal title and to come to grips with the real beneficial owners. This is suggested at least by the provisions of section 354(a)(1) requiring the penetration of such impersonal entities as corporations and trusts to find the real parties in interest. It does not follow, however, that a person is not the beneficial as well as the legal owner of his property merely because it is pledged, or even because of insolvency. *902 Such circumstances may provide the means by which the debtor can be deprived of both legal and equitable ownership. But until some action has been taken by the creditors, we can not say that a future possibility is so nearly the equivalent of a present fact that the mere potentiality of tomorrow's foreclosure or bankruptcy destroys the ownership that certainly and indisputably exists today. See ; certiorari denied, ; ; . Petitioner is asking us to add to the provisions of 354(a)(1) attributing to the interested individuals the ownership of stock held by corporations, trusts, and the like, a command that the property of debtors shall be considered that of their creditors. This would be a clearly unwarranted extension if we were being asked to hold a mere creditor to be a present owner in computing the 50 percent ownership required to apply the statute; we think it equally out of the question to give the statute such a construction*903 in order for its application to be avoided.
In the case of J. K. Love and Russell C. Love, that is the full extent of petitioner's contention. The estate of F. S. Love is also asserted to be insolvent. Its residue was bequeathed to the testator's wife and daughter, after specific legacies to other relatives. Petitioner contends that these people were not "beneficiaries" of the estate within the meaning of section 354(a)(1) and did not, therefore, proportionally own the stock of the estate since the latter was insolvent and the creditors would take the stock to the exclusion of the legatees. To the extent that this is a further argument related to the definition of "beneficiaries" in the statute, we think it must also be rejected. "Beneficiaries" is obviously used as in pari materia with "stockholders" and "partners." A partner or a shareholder is none the less so because the partnership or corporation may happen to be insolvent; and we *290 think the same must be said as to the beneficiary of an estate or trust. As long as the stock was held by the estate, those having the beneficial interest therein are necessarily to be viewed as the owners under the plain terms*904 of the statute. It is also urged that since the financial condition of the estate was so unfavorable, efforts to allocate the stock between specific and residuary legatees would be hopeless, with the consequence that we can not tell who were in fact the beneficiaries as far as this stock ownership is concerned. But under the family ownership provisions of 354(a)(2), that is a matter of no consequence insofar as concerns our present problem. Precisely who would take the stock upon the termination of administration, so long as all are within the group which is considered as one person, is immaterial, for it can have no effect upon the result.
The same applies to a contention with respect to a trust created by Frank S. Love during his lifetime for the benefit of his daughter. Since she is included with her mother as a single person, it is of no moment whether the stock be considered as belonging to the estate on the one hand or to the inter vivos trust on the other.
Still another contention requires consideration as to a considerable block of stock pledged with a bank as security for the fulfillment of an indemnity agreement by several of the Loves. The argument is that, *905 since the indemnity was admittedly due, all the pledgors' interest had in effect been forfeited to the pledgee and the former were no longer the owners of the stock. The difficulty is that the original agreement permitted the Loves to vote the stock and receive the dividends thereon until it should be seized and sold by the pledgee, and this had not happened at any time during the period decisive here. The stock was in fact voted by the Loves and for all that this record shows any dividends paid by Bessemer on that stock were received by them. Under the circumstances it is impossible to reach the conclusion that their interest included so little of the rights attributable to stockholders that they can be disregarded as owners of the stock.
Finally, there is the stock which E. M. Love had pledged with two national banks and which, to the extent of 2,150 shares, is said to have been transferred outright to the Comptroller of the Currency and the receivers of the banks during the first half of the year 1937. This is the most persuasive of any of the situations upon which petitioner relies. But, even if we were to hold, as we would be inclined to do, that as to this block of stock*906 not one of the five persons concerned was the owner at any time during the period to which the statute makes reference, that would still leave more than the requisite number of shares in the ownership of the statutory stockholding group and such a determination in petitioner's favor would be of no benefit to it. No matter how this point is decided, therefore, the conclusion on the whole case must be that at all times "during the last half of the taxable year *291 more than 50 per centum of the value" of petitioner's outstanding stock was "owned directly or indirectly by or for not more than five individuals" and, since the other requirements of the title are conceded, that petitioner is a personal holding company under Title I A, Revenue Act of 1937.
As far as we can see there is nothing unreasonable or pointless in such an application of this provision. If petitioner had distributed its income the object of the legislation would have been achieved, at least to the extent that the intervening companies likewise made distributions so that the ultimate receipt by an individual stockholder possibly liable to surtax would have been accomplished. For all that this record shows, *907 such a course of events, necessarily dependent upon petitioner's initiative, would have resulted in the collection of increased surtaxes from at least some of the individuals to whom the stock belonged. This is the very core and kernel of the end for which these provisions were designed. It is certainly not unreasonable that a failure to bring about the object contemplated by the statute should result in an application of the penalty devised to discourage that failure. Such a result can scarcely justify a charge of unconstitutionality. ; (C.C.A., 8th Cir.).
As to the penalty for delinquent filing, there is no evidence of the cause for the original default. We have been told why the overdue return was ultimately filed. If that is to be construed as a backhanded showing of the reason it was not filed sooner, the implied excuse is still insufficient. Mere misapprehension as to the scope of petitioner's obligation is no exculpation for the failure to perform it, at least where the statutory compulsion has reached so respectable*908 an age. .
Decision will be entered under Rule 50.
Footnotes
*. Loss. ↩
*. Loss. ↩
1. SEC. 352. [As amended by Revenue Act of 1937.] DEFINITION OF PERSONAL HOLDING COMPANY.
(a) GENERAL RULE. - For the purposes of this title and of Title I the term "personal holding company" means any corporation if -
(1) * * *
(2) STOCK OWNERSHIP REQUIREMENT. - At any time during the last half of the taxable year more than 50 per centum in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals. ↩
2. SEC. 354. STOCK OWNERSHIP.
(a) CONSTRUCTIVE OWNERSHIP. - For the purpose of determining whether a corporation is a personal holding company, insofar as such determination is based on stock ownership under section 352(a)(2), section 353(e), or section 353(f) -
(1) STOCK NOT OWNED BY INDIVIDUAL. - Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as beingowned proportionately by its shareholders, partners, or beneficiaries.
(2) FAMILY AND PARTNERSHIP OWNERSHIP. - An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family or by or for his partner. For the purposes of this paragraph the family of an individual includes only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants.
(3) OPTIONS. - If any person has an option to acquire stock such stock shall be considered as owned by such person. For the purposes of this paragraph an option to acquire such an option, and each one of a series of such options, shall be considered as an option to acquire such stock.
(4) APPLICATION OF FAMILY-PARTNERSHIP AND OPTION RULES. - Paragraphs (2) and (3) shall be applied -
(A) For the purposes of the stock ownership requirement provided in section 352(a)(2), if, but only if, the effect is to make the corporation a personal holding company;
(B) For the purposes of section 353(e) (relating to personal service contracts), or of section 353(f) (relating to use of property by shareholders), if, but only if, the effect is to make the amounts therein referred to includible under such subsection as personal holding company income.
(5) CONSTRUCTIVE OWNERSHIP AS ACTUAL OWNERSHIP. - Stock constructively owned by a person by reason of the application of paragraph (1) or (3) shall, for the purpose of applying paragraph (1) or (2), be treated as actually owned by such person; but stock constructively owned by an individual by reason of the application of paragraph (2) shall not be treated as owned by him for the purpose of again applying such paragraph in order to make another the constructive owner of such stock. ↩
3. See Revenue Act of 1936, sec. 102. ↩
4. Supra,↩ note 2.