*3697 Upon the evidence it is held that petitioner is a personal service corporation subject to the provisions of section 218(d) of the Revenue Act of 1921.
*896 This proceeding results from the determination of a deficiency in income and profits taxes for the year 1921, amounting to $12,402.42.
Petitioner claims to be a personal service corporation and alleges error in that respondent has held that section 218(d) of the Revenue Act of 1921 does not apply to petitioner.
FINDINGS OF FACT.
Petitioner is a California corporation with its principal place of business at San Francisco, and is engaged in the business of an advertising agency.
The outstanding capital stock of petitioner was issued at incorporation in 1915 as follows: For good will, par value $18,000; for furniture and fixtures, par value $12,000.
In 1915, Vernon R. Churchill purchased from Louis Honig 600 shares of the capital stock of petitioner for $5,000 cash.
During 1921 the stockholders of petitioner were as follows:
| Shares. | |
| Louis Honig | 2,397 |
| Vernon R. Churchill | 600 |
| 3 individuals, 1 share each | 3 |
| Total | 3,000 |
*3698 *897 Under the accounting system of petitioner in 1921, entries were made upon the books immediately upon the receipt of invoices for advertising, regardless of whether the payments of the invoices were then due, and also regardless of the extent, if any, to which petitioner was liable for the payment of the accounts. Clients' accounts were charged with the amounts of the invoices less any cash discount allowed, and the accounts of the publishers were credited with the amounts of the invoices less whatever commission was allowable to petitioner, the same usually being 15 per cent. The differences between the foregoing charges and the credits, being the commissions due petitioner, were credited to gross income. Immediately thereafter bank checks were drawn for the net amounts due the publishers but the checks were retained in the office and were not issued until the clients remitted for the accounts. Consequently, the amounts of "cash on hand" and of "agency liabilities, etc." shown by the books were less than the actual balances, the deficiencies being measured by the amounts of outstanding or "unissued" checks. The outstanding checks amounted as follows: On January 1, 1921, $24,573.11; *3699 on December 31, 1921, $19,677.45.
At times the account of the largest client of petitioner ran as high as $60,000 per month.
After making adjustments by way of cancellation of checks drawn up but not issued and eliminating meaningless "Good Will" and also debit accounts against credit accounts relating to agency transactions, the books of account of petitioner reflected the following assets:
| Jan. 1, 1921. | Dec. 31, 1921. | |||
| Furniture and equip- | ||||
| ment (less deprecia- | ||||
| tion) | $10,433.25 | $9,946.17 | ||
| Work in process | 1,650.39 | 1,587.48 | ||
| 12,083.64 | 11,533.65 | |||
| Cash on hand | $33,905.65 | $45,173.82 | ||
| Deduct net credit | ||||
| accounts | n1 6,608.38 | n2 279.69 | ||
| Free cash | 27,297.27 | 44,894.13 | ||
| Liberty bonds | 2,000.00 | 2,000.00 | ||
| War savings stamps | 842.76 | 842.76 | ||
| 30,140.03 | 47,736.89 | |||
| Stockholders' personal | ||||
| accounts (net) | Cr. 2,023.26 | Dr. 729.46 | ||
| Total free assets | 28,116.77 | 48,466.35 | ||
| 28,116.77 | 48,466.35 | |||
| 40,200.41 | 60,000.00 | |||
| 40,200.41 | ||||
| 19,799,59 | ||||
| Increase during the | ||||
| year: | ||||
| Total credit accounts | 68,833.13 | 90,298.94 | ||
| Total debit accounts | 62,224.75 | 90,019.25 | ||
| Remainder | *6,608.38 | **279.69 |
*3700 *898 The net increase, per the books, during 1921 of the capital of petitioner was attributable to the following transactions:
| Gross income: | |||
| Attributable to 10 principal clients | $100,483.90 | ||
| Attributable to 15 other advertisers | 31,760,56 | ||
| $132,244.46 | |||
| Expenses: | |||
| Salaries and wages - | |||
| 2 officers | $13,800.00 | ||
| 5 copywriters | 14,483.50 | ||
| 6 artists | 18,035.00 | ||
| 8 stenographers | 6,675.00 | ||
| 1 bookkeeper | 3,880.00 | ||
| 2 production clerks | 5,932.61 | ||
| 3 order clerks | 2,175.00 | ||
| 1 merchandiser | 2,080.33 | ||
| 1 service man | 3,300.00 | ||
| Telephone operators, errand boys, | |||
| and temporary help | 3,237.45 | ||
| 73,598.89 | |||
| Art department | 2,783.88 | ||
| Rent, travel, printing and supplies, telephone and telegraph, postage and express, insurance, taxes, and general expenses | 18,569.60 | ||
| Liability of client paid | 253.68 | ||
| Depreciation allowance | 1,105.13 | ||
| 96,311.18 | |||
| Taxable net income | 35,933.28 | ||
| Less - | |||
| Donations | 129.00 | ||
| Income tax for 1919 (balance) | 684.89 | ||
| Insurance premiums | 319.80 | ||
| Dividend, Dec. 31, 1921 | 15,000.00 | ||
| 16,133.69 | |||
| Net increase | 19,799.59 |
Petitioner filed a return for 1921, on Form 1065, headed "Partnership and Personal Service*3701 Corporation Return of Income," reporting the above taxable net income amounting to $35,933.28, and in addition an amount, $28.50, of interest on Liberty bonds which was not accrued on the books, or a total net income of $35,961.78. Respondent has accepted the net income reported, and also the invested capital according to the books, and after making adjustment of the invested capital on account of the preceding year's tax, also an additional tax for 1917, and for the statutory limitation of the good will acquired for stock, has computed the profits tax under section 302 and the income tax under section 230 of the Revenue Act of 1921.
The service of petitioner to its clients consisted, first in making a study of business conditions, of the commercial or trade problems, *899 and then in inventing or adapting a plan of advertising procedure deemed suitable to the case. Methods of merchandising and of advertising were recommended, specimens of copy were submitted and after a number of interviews, plans were settled upon. Thereafter, the copy was written, the drawings made, the advertising space arranged for, and the advertising was followed through to publication.
The income*3702 of petitioner is to be ascribed primarily to the activities of the principal stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation. The clients of petitioner were obtained through personal influence and solicitation, always by either Honig or Churchill, usually upon their personal reputations. Honig and Churchill owned all of the capital stock of petitioner save three qualifying shares; they devoted all of their time to the business, were both men of long experience in the business, in the enjoyment of good reputations, and were well qualified to render expert service in the field of advertising agency. They personally secured all of the business of petitioner except a small amount which came in unsolicited and either one or the other was in charge of and personally conducted all consultations with clients. They both engaged actively in performing the services for which petitioner was engaged by the clients, including the writing of advertising copy, the selection of advertising mediums and the planning of advertising methods and campaigns. They were assisted in part by copywriters and artists who worked according to the ideas*3703 and under the directions of Honig and Churchill in subordinate capacities.
Capital was not a factor and did not produce the income of petitioner. Understandings with clients were sometimes oral and at others by written agreements. The written agreements provided for a commission to petitioner of 15 per cent to be derived from the publisher where allowed, and if allowed only in part, then the client agreed to make up the difference to equal 15 per cent. The client was obligated to pay the net cost of all designs, sketches, photoengravings, typesetting of advertisements, electrotypes, printed matter and other miscellaneous items, plus 15 per cent thereon. For special booklets, catalogs, market compilations and the like, prices were left open to be specially agreed upon.
Departures from the settled practice of petitioner of withholding payment of the bills of publishers for advertising until the client had paid for the same occurred in April and May, 1921, when two payments each for approximately $21,000 were made out of the general cash fund of petitioner, for the account of the largest client of petitioner, an association of prune and apricot growers. These payments were*3704 made for the purpose of maintaining a reputation for *900 prompt payment for the prune and apricot advertising and the advances were for very short periods, not in excess of two weeks.
In many cases the publishers billed the charges for advertising in the names of the clients, with address care of petitioner. In some cases the publishers required the clients to obligate themselves in writing to pay for the advertising.
OPINION.
TRUSSELL: The facts are set out in detail in the findings. They need not be repeated here. Petitioner comes squarely within the provisions of section 218(d) of the Revenue Act of 1921. There are no quiescent stockholdings. All of the capital stock save three qualifying shares is owned by two individuals who devote their entire time, energies, experience, and influence to the conduct of the affairs of petitioner. To their activities, and to them only, is to be ascribed primarily the income of petitioner. The considerable amount of cash capital of which petitioner was the fortunate possessor is free and untrammelled. It is of no direct significance here. That capital is not a factor and does not produce the income of petitioner, is shown*3705 most convincingly. Compare ; ; ; ; ; ; ; .
Decision of no deficiency will be entered.