*879 1. A corporation all of whose shares were owned by five individuals and over 97 percent of whose gross income was dividends on corporate shares which it owned, held, a personal holding corporation under section 352, Revenue Act of 1937, even though under the law of the state of its organization it might be prohibited from owning such shares and even though its principal shareholder might be shown not to be a wealthy man.
2. The failure of a personal holding company to file a personal holding company return supports the penalty of 25 percent even though an income tax return has been filed.
*1277 The Commissioner determined a deficiency of $8,011.89 in petitioner's income taxes for 1937 and a penalty of $801.19 for its failure to file a personal holding company income tax return. Petitioner assails the determination that it was a personal holding company as defined in section 352, Revenue Act of 1937, and the penalty.
FINDINGS OF FACT.
Petitioner, a New York corporation with principal office at Olean, New York, was organized in 1910*880 to publish newspapers, to do a general printing business, and to buy, own, hold, lease, and sell real estate. It engaged in the printing business and the publication of a daily newspaper, the Olean Times. Olean Herald, Inc., was engaged in the same business and published another daily newspaper at Olean, the Olean Herald. In 1932 petitioner and Olean Herald, Inc., transferred to the Olean Times-Herald Corporation, a new corporation, all of their assets, except cash and accounts receivable, in exchange for the entire 1,000 shares of the latter's capital *1278 stock. Petitioner received 60 percent of the shares and Olean Herald, Inc., 40 percent. The new corporation thereafter continued the printing business formerly conducted by the transferors and published the Olean Times-Herald. It retained the transferors' employees and the building and equipment of petitioner. It made collections on the transferors' accounts receivable, using the money so received in its business and crediting it to the owner of the account, together with interest. Petitioner did not engage in the publishing business after 1931.
In 1937 Times-Herald declared a dividend of $22 a share, or $22,000, *881 of which $13,200 was on petitioner's 600 shares. Times-Herald earned profits in 1937, but, having invested in capital improvements, did not have the cash with which to pay this dividend. Before its declaration, however, petitioner and Olean Herald, Inc. (then known as Gannett, Inc.), agreed to pay to Times-Herald $12,000 and $8,000, respectively, for preferred shares of Times-Herald. The necessary funds for payment of the dividend were thus provided. In 1937 petitioner had a gross income of $14,454.65, consisting of $14,043.75 dividends, $250.86 interest and $160.04 "Bad debts recovered." It paid a dividend of $1,200.
In 1937 all of petitioner's outstanding 600 shares were owned by M. G. Fitzgerald, 360 shares; E. B. Fitzgerald, his son, 9 shares; R. L. Davis, his son-in-law, 1 share; Jane Dodson, his sister, 110 shares; and George B. David, 120 shares. M. G. Fitzgerald enthem deavored for several years to purchase David's shares. He bought them and also the shares of the other shareholders in 1938, and petitioner was dissolved in that year.
For 1937 petitioner filed an income tax return, prepared by its accountant, on Form 1120. On this return it denied that it was a*882 personal holding company, but, in answer to the question "Kind of Business", stated "Holding Company." It gave the same answer on its capital stock tax return. It filed no personal holding company tax return.
OPINION.
STERNHAGEN: In 1937 all petitioner's shares were owned by five persons. Over 97 percent of its gross income was dividends, and over 1 percent was interest. Literally, therefore, it is a personal holding company as defined in the Revenue Act of 1937, section 352 (which is the same as Internal Revenue Code, section 501).
Petitioner argues that its charter gave it no power to hold corporate shares and that it could not become a holding company under New York law. But the definition of the revenue act clearly sets forth its own factors and does not import the New York law. The fact is that the petitioner owned the shares of the Times-Herald Co. and we do not adjudicate the propriety of that ownership. The *1279 statutory criterion of a "personal holding company" is not the corporation's ownership of other shares or the colloquial term "holding company." It is the existence of the factors set forth in the terms of the legislation.
Petitioner argues*883 that it is not within the intendment of the statute, and points to statements made in the course of the consideration of the bill to show that Congress intended to reach wealthy men who were "incorporating their pocketbooks" to reduce their taxes. But the express language is too clear to admit of this consideration even if it were permissible to suppose that the tax was intended to be limited to corporations of the rich.
Petitioner argues that it didn't really receive the dividend of $13,200 because it had to pay $12,000 for the preferred shares in order to enable the corporation to pay the dividend. The two events were, however, legally separate, as they were deliberately intended to be. So they must be recognized for present purposes.
Petitioner filed no personal holding company return, and hence the penalty of 25 percent imposed by the Revenue Act of 1936, section 291, is mandatory. Reasonable cause is only effective to avoid the penalty if the return is delayed - not when the return is omitted entirely, Alex Holmstrom,35 B.T.A. 1092">35 B.T.A. 1092; dismissed, *884 94 Fed.(2d) 747; National Contracting Co. v. Commissioner, 105 Fed.(2d) 488. This is true as to a personal holding company return even though an income tax return has been filed, Collateral Mortgage & Investment Co.,37 B.T.A. 630">37 B.T.A. 630; Rotorite Corporation,40 B.T.A. 1304">40 B.T.A. 1304 (on review C.C.A., 7th Cir.); Lone Pine Lawn Corporation,41 B.T.A. 638">41 B.T.A. 638 (on review C.C.A., 2d Cir.).
The determination of the deficiency is sustained and a penalty of 25 percent is properly to be added.
Decision will be entered under Rule 50.