1941 BTA LEXIS 1323">*1323 1. Corporation actively engaged in the business of pawnbroker, and more than 50 percent of the stock of which was owned by less than 5 individuals, held to be a personal holding company within meaning of Revenue Acts of 1934 and 1936, section 351. Noteman v. Welch, 108 Fed.(2d) 206, followed.
2. Failure to file personal holding company returns held to justify imposition of penalties.
44 B.T.A. 498">*498 Respondent determined dificiencies in petitioner's surtax liability and added 25 percent penalties for failure to file personal holding company returns as follows:
| Year | Deficiency | Penalty |
| 1934 | $19,563.02 | $4,890.76 |
| 1935 | 29,355.07 | 7,338.77 |
| 1936 | 2,731.97 | 682.99 |
The full amounts of the deficiencies and penalties are in issue in this proceeding. The questions presented are whether petitioner, 44 B.T.A. 498">*499 engaged in business as a pawnbroker, is a personal holding company within the meaning of section 351 of the Revenue Acts of 1934 and 1936, and, if so, whether it is liable for the penalties proposed to be1941 BTA LEXIS 1323">*1324 assessed for failure to file personal holding company returns.
FINDINGS OF FACT.
Petitioner was incorporated under the laws of New York on July 1, 1918. During the taxable years it had two places of business, the principal one at 143 West 42d Street and the other on Broadway at the corner of 67th Street, both in the city of New York. It was qualified to conduct a general pawnbroking and loan business upon pledges of personal property, and was licensed to conduct such business by the Bureau of Licenses of New York City. Petitioner continued in corporate form a business that was established in 1827 and which had been conducted first by one Robert Simpson and then by his nephew, Thomas Simpson, father of the present head of the company. The incorporation was decided upon in 1918 when Thomas Simpson was getting along in years and his son was in the Army.
A summary of petitioner's activities during the taxable years is as follows:
| 1934 | 1935 | 1936 | |
| Number of pledges issued | 32,131 | 32,045 | 28,673 |
| Amount loaned | $2,489,617.86 | $2,502,604.22 | $2,390,217.23 |
| Number of pledges redeemed | 28,543 | 29,118 | 28,138 |
| Number of pledges booked for sale | 7,452 | 8,561 | 8,192 |
| Number of pledges sold | 2,941 | 3,167 | 2,841 |
| Gross income | $428,437.49 | $469,386.95 | $410,576.81 |
| Reported in Federal income tax returns as interest on loans, etc | $422,437.49 | $442,545.28 | $407,464.53 |
1941 BTA LEXIS 1323">*1325 Petitioner employs 12 appraisers at its 42d Street store and 4 appraisers at its 67th Street store. As a rule there are approximately twice as many applications for loans as there are loans actually made. The average rate of interest on the loans is between 15 and 17 percent. If the appraisal of jewelry and its safekeeping were not required and if compliance with the law and police regulations and the auctioning and the accounting for surplus moneys were not necessary, the rate of interest computed with respect to the same volume of business could be reduced by 30 percent.
Petitioner, during the taxable years, was actively engaged in the conduct of business with the general public in the operation of its pawn shops. It loaned money on personal property consisting almost entirely of jewelry. During the years 1934, 1935, and 1936 more than 50 percent of its capital stock was owned by less than five stockholders. More than 80 percent of its gross income for the taxable years was derived from interest.
44 B.T.A. 498">*500 On or before the due dates petitioner filed its complete income and excess profits tax returns, Form 1120, for the taxable years. The question asked on each return, 1941 BTA LEXIS 1323">*1326 whether the reporting corporation was a personal holding company within the meaning of section 351 of the applicable revenue acts, was answered in the negative. The form of return for each of the three years advised the taxpayer that if it was a personal holding company the filing of an additional return on Form 1120-H was required. Petitioner also filed information returns, Form 1096, with the attached Form 1099 listing the amounts of dividends over $300 paid to its stockholders, for the years in question. Petitioner's books and records, which gave some indication that more than 50 percent of its stock was owned by less than five stockholders and disclosed that at least 80 percent of its income was derived from interest, were at all times available to respondent and were actually made available to respondent's agents during audit of the income tax returns for the taxable years.
Petitioner did not file personal holding company returns, Form 1120-H, for the taxable years. Robert C. Simpson, who has been president of petitioner since 1932 and was its treasurer from 1922 until 1932 and who executed its income tax returns for the years in question, having personally prepared the1941 BTA LEXIS 1323">*1327 returns for two of the years, was aware of the provisions of section 351 of the Revenue Acts of 1934 and 1936 and the requirements with respect to the filing of personal holding company returns. He did not file personal holding company returns on behalf of petitioner for the taxable years because he thought petitioner was not a personal holding company within the meaning of section 351.
Duting the years 1934, 1935, and 1936 petitioner was a personal holding company within the meaning of section 351 of the applicable revenue acts.
OPINION.
OPPER: Every argument advanced by petitioner in its principal brief save one was made and considered unfavorably in . See also ; . Efforts to distinguish the Noteman case in the reply brief on the basis of details of operation of a pawn shop as compared to a "personal finance company", even if borne out by the record or authority which they are not, must be unavailing as falling short of impeaching the underlying principle. 1941 BTA LEXIS 1323">*1328 We may consider that "the taxpayer makes out an appealing case, but mindful of the limits of our judicial function, we cannot save the taxpayer from an exaction which Congress required of it * * *." .
44 B.T.A. 498">*501 Petitioner attacks the constitutionality of the section if applied to its situation, a question not expressly raised in the Noteman case on appeal. But see . We think, however, that it was inferentially disposed of. The contention is that the section 351 surtax would operate in an arbitrary and discriminatory fashion upon petitioner. in , the court quotes Congressional Committees to show "that the bill would work no real hardship upon any corporation except one that was being used to reduce the surtaxes of its stockholders, because the corporation 'can always escape this tax by distributing to its stockholders at least 90 percent of its adjusted net income.'" In the case of corporations having a handful of shareholders, a class to which the operation of the section is confined, such a distribution would scarcely cause the sort of significant1941 BTA LEXIS 1323">*1329 burden requiring resort to the dignity and consequence of the Federal Constitution. And if corporations whose stock is more widely held are expressly omitted from the regulated group, the classification is for that very reason deprived of any discriminatory or arbitrary quality. The line may have been drawn unfortunately for petitioner, but wherever drawn someone could frustrate it if petitioner can here. Nor can it be a legitimate cause of complaint that Congress has chosen to make the section applicable to petitioner by the device of definition and characterization as a "holding company." While petitioner may not be a holding company for purposes of other statutes, it suffers no detriment by being called one here except such as would be equally severe if it were defined merely as a "taxpayer." Cf. .
The penalty for failing to file a personal holding company return is mandatory for the years 1934 and 1935, since no return was ever filed. By the time the 1936 return was due, the statute had been in effect for practically three years. 1941 BTA LEXIS 1323">*1330 Each corporation income tax form had asserted the necessity that petitioner file such a return if it were a personal holding company, and petitioner's failure to file was due entirely to its erroneous impression that it was not one. This can not be the reasonable cause required by the penalty section, , and requires approval of respondent's imposition of the penalty, , without the necessity of passing upon petitioner's contention that under the wording of the 1936 Act a showing of reasonable cause entitles the taxpayer to a remission of the imposition in spite of the complete absence of even a delinquent filing.
Decision will be entered for the respondent.