Revocation of G.C.M. 32835

G.C.M. 32835, April 29, 1964, * * * I-955, disagreed with your proposal to reaffirm the Service's position. Subsequently, representatives of * * *., filed a request for a ruling, accompanied by a supporting brief, that room rental charges by a hotel constitute rent for personal holding company purposes.

At a conference in * * * office on November 10, 1964, the issues raised by the two cases were discussed, and it was ultimately agreed that the instant case, along with * * * would be submitted to this Office for further consideration.

G.C.M. 32835, supra, pointed out that a hotel involves the active conduct of a risky and competitive commercial enterprise. General management, procurement, and personnel problems are involved in what is essentially a business providing a variety of services. Although noting that the statute broadly defines rent to mean "compensation, however designated, for the use of, or right to use, property . . . (543(a)(7))", it was concluded that room charges do not constitute rent. This conclusion was based on three points:

The position of your office and of the representatives of * * * rely on the Congressional indication that the remedial definition of rent was to be broadly construed:

It must also be observed that an unduly broad interpretation of "rents" can under certain circumstances frustrate the remedial intent of the statute, an intent that Congress has recently reaffirmed by adding more restrictive percentage requirements in the 1964 Revenue Act. Thus an organization may derive 45% of its adjusted gross income from a bare lease of a building or of vacant lots; since no services at all would be involved, this would be a classic example of the personal holding company income envisioned by Congress. Another 50% of the organization's income may be derived from dividends. The organization, deriving 95% of its income from classic personal holding company sources, would seem to be a personal holding company, especially since the 1964 Revenue Act lowered the percentage requirements from 80 to 60 percent. However, by deriving the final 5% of its income from the operation of a hotel, it could escape coverage. ² The example is cited to show that any decision cuts both ways, and that effective implementation of the remedial purpose of the statute requires that the definition of rent be considered in the light of this remedial purpose and all of the specific features of hotel operations rather than by merely referring to general language in the committee reports and mathematical percentages in the statute.

Despite the views expressed in G.C.M. 32835, supra, and the reservations expressed in the earlier portions of this memorandum, this Office concurs in your proposal to reaffirm the long standing Service position. Room rentals by hotels have been held by the Service to constitute rent within the personal holding company provisions since 1938. See G.C.M.20535, July 28, 1938, * * * A-318075. The rental features of the personal holding company sections are definite and easy to plan around, and it possible that extensive planning has been predicated on the basis of the Service's present position. Since this is an area where certainty and continuity are more desirable than meticulous legality, since the legal question involved is not subject to a definitive answer, and since the present Service position can be supported by a respectable, if not wholly persuasive, legal argument, the administrative reasons for maintaining the status quo are persuasive.

For the foregoing reasons, G.C.M. 32835 in the instant case is hereby revoked.

The administrative files are returned herewith.

This is in response to your memorandum (T:I:C:2:3) dated October 11, 1966, requesting the litigating position of the Chief Counsel's Office with regard to the issue discussed in G.C.M. 32980, dated February 25, 1965, in re: * * *.

The views of Mr. Rudy P. Hertzog, Associate Chief Counsel (Litigation), were sought with respect to your inquiry and a copy of his memorandum (dated December 6, 1966) addressed to Mr. Richard M. Hahn, Director, Interpretative Division is attached hereto. In addition, a copy of a memorandum dated January 4, 1967, from Director, Tax Court Division, to Director, Legislation and Regulations Division, with respect to the same subject is attached.

The Income Tax Division administrative file transmitted to this Office as an attachment to the memorandum (October 11, 1966) referred to above is returned herewith.

Attachments

At a conference held on October 3, 1966, representatives of Income Tax Division, our office, and the Office of Tax Legislative Counsel discussed the possibility of adopting a uniform interpretation of the term "rents" for Federal income tax purposes. At the conclusion of this conference, the conferees from the Office of the Tax Legislative Counsel requested a memorandum from the Service stating its position with respect to "rents" under sections 543, 172, 512, and 1402. Income Tax Division informed us that before this memorandum could be prepared, it would be necessary to ascertain the litigating position of the Chief Counsel's office concerning the issue discussed in G.C.M. 32980.

In light of the nature of this request, we believed it desirable to obtain the views of Mr. Rudy F. Hertzog, Associate Chief Counsel, as to whether G.C.M. 32980 is correct and whether it could be sustained in litigation. In this regard, we forwarded a copy of G.C.M. 32980 for his consideration.