*125 Decision will be entered under Rule 50.
During the year 1945, petitioner's outstanding stock was owned by three brothers, who also operated a retail furniture and jewelry store as a partnership. On March 1, 1945, the partnership entered into a lease with petitioner for premises which petitioner owned and on which it proposed to construct a building which would be occupied by the partnership. The lease provided for rent of $ 2,000 per month. Petitioner constructed the building which was ready for the partnership's occupancy on July 1, 1946. The partnership paid petitioner the sum of $ 20,000 in December 1945, which sum petitioner reported as rental income on a delinquent corporation income tax return which it filed on December 12, 1946. It had no other income. It did not file a personal holding company return for that year on the advice of its attorney and accountant, who were competent tax advisors and fully familiar with all facts concerning its ownership and income. Held, the $ 20,000 rental payment received by petitioner in 1945 was personal holding company income within the meaning of section 502 (f) of the 1939 Code. Held, further, petitioner's failure to *126 file a personal holding company return was due to reasonable cause.
*812 This proceeding involves a deficiency in personal holding company tax in the amount of $ 8,253.60 and a penalty under section 291 (a) *813 of the 1939 Code in the amount of $ 2,063.40 determined by the respondent for the year 1945.
The issues are: (1) Whether petitioner's income for the year 1945 was personal holding company income as defined by section 502 (f); 1 and (2) if so, whether petitioner's*127 failure to file a personal holding company return was due to reasonable cause rather than to willful neglect.
Some of the facts were stipulated.
FINDINGS OF FACT.
The stipulated facts are so found and are incorporated herein by this reference.
Petitioner was incorporated under the laws of the State of Alabama*128 on December 16, 1944. Its office and place of business is in the city of Birmingham. On December 12, 1946, it filed a delinquent corporation income tax return for the calendar year 1945 with the collector of internal revenue for the district of Alabama.
From the date of its incorporation and during all times here material, all of petitioner's outstanding capital stock was owned in equal amounts by three brothers, Robert H., William C., and Frank H. Bromberg, who were its president, vice president, and secretary-treasurer, respectively.
In February 1945, petitioner acquired title to certain real estate on Second Avenue in the city of Birmingham and, between the date of acquisition and July 1, 1946, constructed thereon a 5-story building. During the year 1945 and until July 1, 1946, the Bromberg brothers operated a retail jewelry and furniture store as a partnership. On March 1, 1945, they entered into a lease with petitioner for the premises which it owned on Second Avenue. The term thereof commenced on February 8, 1945, and terminated on September 30, 1966. The period from February 8, 1945, to September 30, 1946, was referred to in the lease as the "short term." The partnership*129 contracted to pay rent at the rate of $ 2,000 per month during such "short term." For the remainder of the lease, it agreed to pay annual rent at the rate of $ 2,000 per month plus 5 per cent of the partnership's gross sales in excess of $ 480,000 per year. Pursuant to the terms of the lease, petitioner undertook to construct a building on the land and *814 did so construct such building which was ready for occupancy on July 1, 1946. The Bromberg partnership was incorporated on that date and occupied the premises under a new lease which it signed with petitioner on that day, and which contained substantially the same terms as the original lease.
In December 1945, petitioner received from the partnership one lump-sum payment in the amount of $ 20,000. Such sum was the only amount which it received from any source during that year. On the delinquent corporation income tax return which petitioner filed on December 12, 1946, it reported such sum as rent received from the partnership. No answer was given on the return to the questions of whether petitioner was a personal holding company or as to whether 50 per cent or more of its voting stock was owned by any individual or partnership.
*130 The Brombergs were not versed in tax matters and relied exclusively on the advice of their certified public accountant and their attorney. Petitioner's existence was made known to the accountant in the spring of 1945, but not until the summer of 1946 was the possibility that petitioner was subject to tax as a personal holding company discussed by him, the attorney, and the Brombergs. When petitioner was incorporated, the attorney was concerned only that petitioner's existence would not bring it within the purview of section 45 of the Code. Robert H. Bromberg was present when the discussion took place between the attorney and the accountant in the summer of 1946, at which time it was decided by the latter two that petitioner was not a personal holding company. Their decision to that effect was based on their conclusion that the $ 20,000 payment which the partnership made to petitioner was not compensation paid to it for the use of, or right to use, its property and, hence, did not constitute personal holding company income. The attorney was of the opinion that the payment, in effect, was a contribution of capital. The accountant treated the payment as rent on the delinquent corporation*131 income tax return only because such payment was made pursuant to a lease. Both the attorney and the accountant were experienced tax advisors on whom petitioner was entitled to rely in preparing and filing its tax returns. Both were fully aware of all facts on which a determination of petitioner's tax liability could be made.
In the deficiency notice the respondent determined that the $ 20,000 received from the partnership in 1945 was personal holding company income within the meaning of section 502 (f) of the Code and determined the deficiency herein. He likewise determined a 25 per cent penalty for petitioner's failure to file a personal holding company return for the year 1945.
The $ 20,000 payment which petitioner received from the partnership in 1945 was compensation for the use of, or right to use, property. *815 Petitioner's failure to file a personal holding company tax return was due to reasonable cause.
OPINION.
Petitioner argues that the $ 20,000 payment received from the partnership in 1945 was not personal holding company income but was, in fact, a capital contribution in that amount from the three Bromberg brothers. In the alternative, it argues that even if*132 the $ 20,000 payment was not a capital contribution it was not received "as compensation for the use of, or right to use, property of the petitioner."
Although we have given careful consideration to all of the evidence in the record before us, we have found nothing which establishes the $ 20,000 payment as a capital contribution from the Brombergs. All of the documentary evidence in the record clearly denominates the payment as rent and nothing else. Petitioner so reported the sum on its delinquent corporation return. The terms of the lease between it and the partnership provided for the payment of rent during the "short term" of the lease. In addition, Robert H. Bromberg testified that insofar as he knew the payment to petitioner was deducted by the partnership as an expense. The accountant testified to the same effect. Nor was there any evidence that the partners' capital or drawing accounts were charged with the $ 20,000 payment. Although petitioner claims that the payment was a capital contribution, Robert H. Bromberg did not explicitly testify that he and his brothers considered the payment to be a capital contribution by them. The only statement which he made with respect*133 to what he thought the payment was was in answer to the question:
I want to ask you as a matter of ordinary understanding and judgement on your part, was that money paid as compensation for the use of the Amo Realty Company property which we are discussing here?
He testified:
I didn't understand it as use because the building was under construction and we couldn't use it. I understand that it was customary and proper that Bromberg and Company should contribute money to Amo during the period under which they were building the building for Bromberg and Company to occupy.
That testimony is not sufficient to establish petitioner's contention that the amount received by it from the partnership was a capital contribution.
We are also unable to agree with petitioner's alternative argument that the payment was not for the use of, or the right to use, its property. Petitioner contends that the building itself was the property which the partnership was interested in occupying and that the partnership could not have the use of, or the right to use, the building since it was not in existence during the year in question.
*816 The lease which petitioner entered into with the Bromberg*134 partnership provided for rental payments during the year 1945 substantially equal to the amount which petitioner actually received in that year. The partners, of course, knew at the time the lease was made that the building would not be ready for occupancy until sometime in 1946. They, nevertheless, contracted to pay rent of $ 2,000 per month for the so-called short term of the lease. By making the lease and agreeing to pay the rent specified, the partnership unquestionably had the right to use the property in whatever form it existed in 1945, and contracted and paid rent pursuant to its contract for that right.
The legislative purpose behind the personal holding company provisions of the Code are too manifest and too all-inclusive to permit calling the $ 20,000 payment here anything other than rent. It was clearly denominated as rent by the parties at the time the lease was made and subsequently so treated by them until the question of petitioner's tax liability arose. The fact that the partners agreed to and did pay rent to petitioner for a short period prior to the time when the premises were ready for occupancy is not a basis for distinguishing this case from the ordinary*135 situation where more than 80 per cent of a personal holding company's income is derived from compensation paid by persons owning more than 25 per cent of its stock, for the use of, or the right to use, its property. (C. A. 3, 1947); (C. A. 3, 1949); ; and .
The petitioner also argues on brief that the respondent's determination that its 1945 income was "personal holding company income would, under all the facts and circumstances, be harsh and unjustified." This argument is advanced in view of the enactment of section 223 of the Revenue Act of 1950. 2Congress there provided that section 502 (f) of the Code should not apply to rents received by what would otherwise be a personal holding company during taxable years ended after December 31, 1945, and before January 1, 1950, if such rents were received for the use of its property in the operation of a bona*136 fide commercial venture by persons holding 25 per cent or more of its stock. We pointed out in , that section 223 of the 1950 Act was limited exclusively to the years therein specified. In granting the relief for those years, Congress, as evidenced by the report of the Senate Finance Committee, 3 recognized *817 that even when a personal holding company's property was used for a bona fide commercial purpose the arrangements incident thereto could result in tax avoidance. It noted that fact as the reason for not extending the provisions of section 223 to years after 1950.
Although the petitioner here, apparently through no fault of its own, has run afoul of a technical provision of the Code, we are unable to grant its prayer for relief as it falls squarely within the statutory definition of a personal holding company, and the respondent is upheld on this issue.
We found*137 as a fact that petitioner's failure to file a personal holding company return for the year 1945 was due to reasonable cause. The Bromberg brothers were not versed in tax matters and relied exclusively on the advice of their accountant and lawyer, whom the parties stipulated were competent tax advisors. Robert H. Bromberg was present at the only discussion which was held as to whether a personal holding company return should be filed, and it was upon the advice of counsel that the decision was reached not to file such a return. The circumstances here are somewhat unusual, involving as they do a transfer of $ 20,000 by the three brothers as equal partners to their wholly owned corporation prior to the completion and occupancy of the building. The intended income of the petitioner was to be rent and we have held herein that this first payment of $ 20,000 was rent, which is personal holding company income. But we cannot say that the petitioner should have doubted the advice of the attorney and the accountant based upon their conclusion that this particular payment was not personal holding company income. Despite any poor judgment or inconsistency which may be charged to the attorney*138 and the accountant in connection with the delinquent filing of the income tax return and the failure to file a personal holding company return, nevertheless they never changed their advice to the petitioner that it did not have to file a personal holding company return, and the petitioner, in relying upon that advice, was not guilty of willful neglect. We think the facts of the instant case fall well within the scope of those decisions which hold that a taxpayer's failure to file a personal holding company return is due to reasonable cause if it is unversed in tax matters and relies exclusively on the advice of a competent attorney or accountant to whom a full disclosure of all facts is made. ;;; and , affd. (C. A. 6, 1948).
Decision will be entered under Rule 50.
Footnotes
1. SEC. 502. PERSONAL HOLDING COMPANY INCOME.
For the purposes of this subchapter the term "personal holding company income" means the portion of the gross income which consists of:
* * * *
(f) Use of Corporation Property by Shareholder. -- Amounts received as compensation (however designated and from whomsoever received) for the use of, or right to use, property of the corporation in any case where, at any time during the taxable year, 25 per centum or more in value of the outstanding stock of the corporation is owned, directly or indirectly, by or for an individual entitled to the use of the property; whether such right is obtained directly from the corporation or by means of a sublease or other arrangement.↩
2. 64 Stat. 947.↩
3. S. Rept. No. 2375, 81st Cong., 2d Sess., p. 64.↩