*256 Decision will be entered for the respondent.
1. Interest received on mortgage constituted personal holding company income because the property covered by mortgage was held by petitioner for investment purposes and not for sale in the ordinary course of its trade or business.
2. For the failure to file personal holding company income tax returns the 25 per cent penalty under section 291 (a) of the Internal Revenue Code of 1939 is approved.
*816 *257 This proceeding involves deficiencies in income tax and penalties under section 291(a) of the Internal Revenue Code of 1939 as follows:
| Year | Deficiency | Penalty |
| 1948 | $ 766.12 | $ 191.53 |
| 1949 | 857.69 | 214.42 |
The deficiencies in income tax occur because the respondent has determined that the petitioner was a personal holding company during the years 1948 and 1949 and that the interest received by the petitioner during these years constituted personal holding company income within the meaning of section 502 (a) of the Internal Revenue Code of 1939. Penalties were attached because the petitioner failed to file personal holding company returns for the 2 years involved.
Most of the facts have been stipulated.
FINDINGS OF FACT.
Petitioner is a corporation organized in New Jersey on May 16, 1912. Its corporation income tax returns for the calendar years 1948 and 1949 were timely filed with the collector of internal revenue for the third district of New York.
The corporate purposes set forth in petitioner's certificate of incorporation, as amended by a certificate of amendment filed February 26, 1924, were and are as follows:
THIRD. The objects for which this corporation is formed*258 are:
a. To purchase, lease, hire or otherwise acquire real and personal property, improved and unimproved, of every kind and description, and to sell, dispose of, lease, convey and mortgage said property, or any part thereof: To acquire, hold, lease, manage, operate, develop, control, build, erect, maintain for the purposes of said company, construct, re-construct or purchase, either directly or through ownership of stock in any corporation, any lands, buildings, offices, stores, warehouses, mills, shops, factories, plants, machinery, rights, easements, permits, privileges, franchises and licenses, and all other things which may at any time be necessary or convenient in the judgment of the Board of Directors for the purposes of the company. To sell, lease, hire, or otherwise dispose of the lands, buildings or other property of the company, or any part thereof.
* * * *
FIFTH. The corporation shall also have power to conduct its business in all its branches, have one or more offices, and unlimitedly to hold, purchase, mortgage and convey real and personal property in any of the states, territories, possessions and dependencies of the United States, the District of Columbia and foreign*259 countries.
* * * *
TENTH. The period of existence of this corporation is unlimited.By a deed dated June 7, 1924, and recorded in the Monmouth county clerk's office, New Jersey, on August 8, 1924, in Book 1268 of Deeds, page 43, petitioner acquired title from Simon Hess of New York City, its principal stockholder, to the following premises:
*817 ALL that certain tract or parcel of land and premises, hereinafter particularly described, situate, lying and being in the City of Long Branch, in the County of Monmouth, and State of New Jersey, bounded and described as follows:
BEGINNING in the middle of Brighton Avenue at the intersection of Brighton and Ocean Avenues; running thence along the middle of Ocean Avenue in a southwesterly direction, two hundred and eleven (211) feet and twenty one-hundredths (20/100) of a foot; thence along a line parallel with Brighton Avenue in a southwesterly direction, six hundred and fifty (650) feet and ten one hundredths (10/100) of a foot; thence along a line on Second Avenue, parallel to Ocean Avenue in a northeasterly direction, two hundred and eighteen (218) feet and forty-six one-hundredths (46/100) of a foot; thence along the middle of Brighton*260 Avenue in a northeasterly direction six hundred and twenty-seven (627) feet to the point or place of Beginning.
When petitioner acquired title to the premises referred to above, there were on the premises the following structures:
1 -- three story brick apartment house containing ten apartments and two stores
7 -- stores in a one-story tax-payer
1 -- gasoline station
4 -- single bungalows, one-story
4 -- double bungalows, two-story
On August 8, 1925, the petitioner entered into a contract with the Jefferson Corporation, a New York corporation, for the sale of part of the premises referred to above at a price of $ 82,000 and received as a deposit on account thereof the sum of $ 1,500. The Jefferson Corporation thereafter refused to fulfill its agreement and take title to the premises, and petitioner thereupon kept the deposit of $ 1,500. William Kirch of West End, New Jersey, was the broker on this transaction.
On July 27, 1928, petitioner sold and conveyed the part of the premises which was unimproved to Evander Realty Corporation, a New York corporation.
On May 3, 1946, petitioner entered into an agreement for the sale of the remainder of the premises referred to above to the West*261 End Corporation, a New Jersey corporation, for the sum of $ 55,000 and, in connection with the sale, agreed to take back a purchase money mortgage on the premises in the sum of $ 35,000, the balance of the purchase price to be paid in cash to the petitioner. At the time of this sale, there were on the premises the structures listed above, and also the following structures:
1 -- two-car garage
1 -- six-car garage
On July 2, 1946, the sale was completed by the delivery of a deed to the remainder of the premises to West End Corporation and a payment by the latter of $ 20,000 in cash and the delivery of the purchase money mortgage in the sum of $ 35,000. The purchase money mortgage provided for the payment of $ 116.67 per month, plus interest at 4 per cent *818 per annum until July 1, 1956, at which time the entire balance was to be paid. It further provided for prepayment at the mortgagee's option in multiples of $ 500, or the entire balance, on any interest date.
During the calendar years 1948 and 1949, the petitioner received income in the amounts of $ 1,294.74 and $ 1,238.58, respectively. Such income consisted solely and exclusively of the interest payments made to the*262 petitioner on the $ 35,000 purchase money mortgage referred to above. Those amounts of $ 1,294.74 and $ 1,238.58 are the items referred to as "the items of interest" in the statutory notice of deficiency mailed to the petitioner on December 9, 1952. No distributions of such income of the petitioner were made to the stockholders of the petitioner during the calendar years 1948 and 1949.
The total issued stock of the petitioner is 100 shares of a par value of $ 100 per share. The 100 shares were originally issued on August 1, 1928, as follows:
80 shares to Simon Hess
10 shares to Elizabeth Hess
10 shares to Maud Hess
Simon Hess died on January 25, 1933, and the 80 shares issued to him passed under his last will to a trust of which Maud Hess and Elizabeth Hess are the sole beneficiaries and trustees. Maud Hess was the daughter of Simon Hess and Elizabeth Hess was the daughter-in-law of Simon Hess.
Petitioner's principal source of income from 1924 through 1945 was the rents on the structures on the property. Petitioner operated at a loss except for the years 1930 and 1931.
During the years 1948 and 1949, petitioner's only source of income was the interest payments received in connection*263 with the sale of the remainder of the real property in 1946.
From 1924, the date of the acquisition of the real property from Simon Hess, until 1946, the petitioner made only one sale of its real property. That sale comprised the unimproved section of its property which was sold in 1928.
No expenditures were ever made for advertising the remainder of the tract for sale. The property was never listed with a broker and an acceptable price for the property was never determined by petitioner's officers.
During the years between 1928 and 1946, there was no market for the remainder of the tract which the petitioner owned and the property was held to await an increase in real estate values in the area. During this period, the property was not held primarily for sale to customers in the ordinary course of petitioner's trade or business.
The interest income received by petitioner during 1948 and 1949 was not interest on a debt representing the price for which real property *819 held primarily for sale to customers in the ordinary course of a trade or business was sold.
The petitioner failed to file personal holding company returns for the calendar years 1948 and 1949 and such failure*264 to file was not due to reasonable cause but to willful neglect.
OPINION.
The petitioner's total income during the years 1948 and 1949 was interest received on a purchase money mortgage which was given when petitioner disposed of all of its real estate holdings in 1946. The income received was clearly personal holding company income within the meaning of section 502 (a) of the Internal Revenue Code of 1939, unless the purchase money mortgage from which the interest flowed was given in connection with the disposal of property held primarily for sale to customers in the ordinary course of business. (Section 502 (g) of the Internal Revenue Code of 1939.) 1 We have held in our findings that the property was not so held at the time of its sale in 1946.
*265 The record in this case is not too satisfactory. We do not know when Hess, who transferred the property to the corporation in 1924, first acquired it or built it and the circumstances surrounding this transaction. We do not know the circumstances surrounding the transfer of the property to petitioner or why it was transferred. We do know that between 1928 and 1946 the bottom was out of the real estate market in this area and even the rents were insufficient in most years to pay the expenses of operation. During these years, what the petitioner did was to retain its holdings and hope for a better day. During this period, it did not list the property for sale, fix a price it would take for it, or advertise it to interest would-be buyers. It sat passively by until 1946 when two prospective buyers appeared and accepted the better of the two offers it then received. Petitioner's entire holdings were disposed of at this time in one transaction. The purchase price was $ 55,000, $ 20,000 was paid in cash and a purchase money mortgage of $ 35,000 executed by the buyers. These facts do not warrant a finding that the property in question was held *820 primarily for sale to customers*266 in the ordinary course of petitioner's business. In fact, they require a holding to the contrary.
It follows that the interest received by petitioner during 1948 and 1949 constitutes personal holding company income and petitioner is required to file and pay the personal holding company tax imposed by section 502.
There remains only the question of whether the petitioner is liable for the penalty under section 291 (a)2 for its failure to file personal holding company returns for the years 1948 and 1949. The foregoing provision provides for a penalty for failure to file a personal holding company return "unless it is shown that such failure is due to reasonable cause and not due to willful neglect." The burden of establishing reasonable cause is on the petitioner.
*267 Nothing was said on this issue by the petitioner except its basic contention that it was not liable for the personal holding company surtax because it had no personal holding company income. However, it has not been shown how petitioner's officers arrived at this conclusion. There is nothing to indicate that this conclusion was based upon the opinion of reputable counsel or of other expert tax advisors who had been given all the facts regarding petitioner's debatable status. In fact, there is nothing to indicate that petitioner's officers even considered the possibility of liability for the personal holding company surtax until it was suggested by the respondent's claims. In such circumstances we cannot find that petitioner's officers exercised the necessary business prudence to constitute reasonable cause for failure to file the required returns. Wm. J. Lemp Brewing Co., 18 T. C. 586. Therefore, we hold that the penalty determined by the respondent is appropriate.
Decision will be entered for the respondent.
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:
(a) Dividends, interest (other than interest constituting rent as defined in subsection (g)), royalties (other than mineral, oil, or gas royalties), annuities.
* * * *
(g) Rents. -- Rents, unless constituting 50 per centum or more of the gross income. For the purposes of this subsection the term "rents" means compensation, however designated, for the use of, or right to use, property, and the interest on debts owed to the corporation, to the extent such debts represent the price for which real property held primarily for sale to customers in the ordinary course of its trade or business was sold or exchanged by the corporation * * *↩
2. SEC 291. FAILURE TO FILE RETURN.
(a) In case of any failure to make and file return required by this chapter, within the time prescribed by law or prescribed by the Commissioner in pursuance of law, unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the tax: 5 per centum if the failure is for not more than thirty days with an additional 5 per centum for each additional thirty days or fraction thereof during which such failure continues, not exceeding 25 per centum in the aggregate. The amount so added to any tax shall be collected at the same time and in the same manner and as a part of the tax unless the tax has been paid before the discovery of the neglect, in which case the amount so added shall be collected in the same manner as the tax.↩