1928 BTA LEXIS 2928">*2928 Alternative claims for personal service classification, special assessment, or additional invested capital on account of assets alleged to have been erroneously excluded, rejected by reason of insufficiency of evidence.
14 B.T.A. 738">*738 This proceeding results from a determination of a deficiency of $4,071.07, asserted in income and profits taxes for the calendar year 1920. The three errors alleged and pressed are in the alternative. Petitioner asserts the right to personal service classification, special assessment, or the inclusion of additonal assets in its invested capital.
FINDINGS OF FACT.
Petitioner is, and was during 1920, an Illinois corporation handling butter, eggs and poultry on a commission basis in the City of Chicago. It was organized in 1911, at which time $8,000 cash was paid in by the incorporators for the 80 shares of stock issued them. By 1920 the capital stock par value had been increased to $16,000 by capitalizing accumulated surplus by stock dividends. Ten shares were held1928 BTA LEXIS 2928">*2929 as treasury stock during the year in question.
14 B.T.A. 738">*739 During 1920 its stockholders and the dividend distributions made were as follows:
| Stockholders | Dividend |
| Charles E. McNeill | $6,360 |
| Fred H. Bockelmann | 6,360 |
| Jacob Jacobson | 2,880 |
| Joseph B. Schneider | 2,400 |
The officers of the corporation were stockholders. All the stockholders were experienced in such commission business and well known to the trade before becoming interested in petitioner corporation. During the year in question Jacobson was elderly and only devoted a part of his time to the business. Sometimes he would go to the office as many as three or four days a week, while other weeks he would not go to the office at all. He drew no salary. He also acted in the capacity of traveling representative soliciting business among the shippers. His principal contribution to the business was to cause several large creameries, which had been customers in a predecessor business, to ship their product to petitioner. His predecessor business had been turned over to his employees.
The other three stockholders devoted all their time to the business and received a salary for their services. The business1928 BTA LEXIS 2928">*2930 was divided into three departments. Bockelmann was in charge of the butter department and McNeill was in charge of the poultry and egg departments. Schneider was office manager.
Petitioner conducted its business strictly on a commission basis. It received shipments in varying quantities. Live poultry might be received in coop or carload lots. The shipments were sometimes made to the shipper's order, and sometimes to petitioner's order. Where the shipment was to the order of the shipper the bill of lading was usually presented by the bank, together with a draft, and payment thereof demanded before petitioner could get possession. The draft never exceeded 80 per cent of the expected selling price of the shipment. No drafts were drawn in approximately 90 per cent of the shipments. The remainder of the selling price, after deducting freight and handling charges, was sent to the shipper after petitioner had sold the thing shipped. Usually the sales were effected the same day, but sometimes the goods were held over for from 2 to 4 days. At other times the shipment, unless it be poultry, was stored. In such instances the shipments were stored at the order of the shipper but1928 BTA LEXIS 2928">*2931 in petitioner's name.
Sales were effected by the stockholders only through their personal contacts with buyers and by being offered through the medium of the several exchanges listing the various products. Shipments were sold either from the railroad car or from petitioner's place of business. The trade board fixed the commission on poultry at 5 per cent. 14 B.T.A. 738">*740 Trade custom fixed the commission at 1 cent per pound on butter and at 1/2 to 1 cent per dozen on eggs.
Sales were made on a strictly cash basis, requiring payment on the day following the sale. Though the rules of the exchange allowed settlement of all purchases during one week by the following Thursday, such credit delay was not actually allowed in the trade and was not permitted by petitioner. On the day the shipment, or the last of the shipment was sold, a check in final settlement was mailed to the shipper.
The business was conducted during 1920 in a large four-story building. Petitioner had, prior to 1920, purchased a lease thereon, held by a prior lessee, for $5,000, and paid $175 per month under such lease. The two upper stories were used as storage space for egg cases and coops. The second floor1928 BTA LEXIS 2928">*2932 was used for office purposes, the main floor as a store, and in the basement petitioner had installed a refrigerating plant in 1914 for handling butter. The entire building was equipped by petitioner to make it suitable for its uses at a cost in excess of $6,000. Equipment and tools of the office and store accounted for at least an additional $5,000 investment.
The balance sheets for the years 1919 and 1920, as shown by a schedule attached to the return for 1920, follow:
| 1919 | 1920 | |
| ASSETS | ||
| Cash on hand and in bank | $10,004.61 | $31,529.99 |
| Accounts receivable | 52,928.91 | 41,100.84 |
| United States Liberty bonds | 2,500.00 | 1,000.00 |
| Inventory | 6,312.34 | |
| Drafts paid to apply in part payment on goods in transit | 12,530.00 | 5,284.76 |
| 77,963.52 | 85,227.93 | |
| LIABILITIES | ||
| Capital stock | 14,437.50 | 14,437.50 |
| Surplus | 17,484.23 | 27,761.11 |
| Undivided profits | 16,276.88 | 19,907.00 |
| Accounts due shippers | 25,750.73 | 17,344.86 |
| Freight and express charges | 1,042.46 | |
| Fersonal accounts due members of corporation | 4,014.18 | 4,735.00 |
| 77,963.52 | 85,227.93 |
Only the merchandise carried over at the close of the day was included in inventory. Office and store equipment1928 BTA LEXIS 2928">*2933 was not so included. The capital used consisted of capital stock account, built up from the original capital of $8,000 as pointed out above, accumulated surplus, and borrowed capital. During 1920, petitioner borrowed a total of $115,000 from its bank at eleven different times. The 14 B.T.A. 738">*741 amounts borrowed were $10,000 in all instances save one, where the amount was $15,000. The notes were for from 10 to 90 days, with an average of about 30 days each. All were paid on the due dates. Petitioner also borrowed $28,960 from the North American Storage Co. on demand notes to offset drafts paid on goods stored. Interest paid during the year amounted to $1,805.63, which represented about 5 to 6 per cent on the money borrowed. Net income for 1920 as adjusted was $17,182.42.
Petitioner had about ten employees in its store to do the manual labor, care for the live poultry, inspect the shipments, weighing, etc. The office force consisted of a bookkeeper, stenographer and several accounts sales clerks, who made daily sales returns to shippers. The year's pay roll of nonstockholding employees was $27,508.76.
The business was seasonable and highly competitive. Advertising in trade1928 BTA LEXIS 2928">*2934 papers during the year cost $2,907.23. The expenses of trips to shippers' conventions, all of which were held during a dull business week, to keep in contact with shippers was charged to expense. The expenses of attending out-of-town meetings of the several trade boards were likewise charged to expense.
At the time petitioner was incorporated the incorporations turned in to the corporation shippers' lists, good will, furniture, fixtures and equipment from their predecessor businesses. No stock in addition to that purporting to be issued for the cash paid in at that time was issued for such additional assets. The shippers' lists represented the accumulated lists of names of those with whom the incorporators had had contact and had done business before. In 1925 the petitioner sold that part of its shippers' list pertaining to its poultry business (together with equipment of that part of the business having only a nominal value) to an employee and one of its customers for $5,000, and agreed not to engage any further in that branch of business.
OPINION.
SIEFKIN: One of the prerequisites to personal service classification as that status is defined in section 200, Act of 1918, 1928 BTA LEXIS 2928">*2935 is that the principal owners or stockholders be regularly engaged in the active conduct of corporate affairs. Insufficient proof has been offered to establish compliance with such requirement. The activities of Jacobson were occasional rather than regular. The only evidence we have 14 B.T.A. 738">*742 concerning the number of shares of stock held by Jacobson is the proportions in which the dividend declared after the close of the taxable year was distributed between the several stockholders. Such evidence indicates he held 16% of the outstanding stock. But there is nothing in the record to show and we can not assume that the dividends were distributed in proportion to stockholdings.
Nor does the record show that capital was not a material income-producing factor as required by the statutory definition. The evidence upon this point is incomplete due, in part, perhaps, to petitioner's inability to produce its books which have been lost in moving since the year in question. Such evidence as we have indicates capital, invested and borrowed, was a factor in the production of income. A plant which was necessary to petitioner's business had been installed in the leased premises at considerable1928 BTA LEXIS 2928">*2936 capital cost. The remainder (aside from that invested in office equipment) of what appears to be rather a substantial amount of capital, when compared to the income produced, was used to take up drafts of shippers in advance of sale of shipments by petitioner. The testimony that this was merely a matter of accommodation to the shippers and of doubtful necessity to the business is not very convincing, in view of the fact that the business was highly competitive and that the degree of necessity led to the borrowing of the funds. .
Respecting petitioner's alternative contentions that it is entitled to special assessment or, failing that, additional invested capital on account of assets erroneously excluded, the proof is likewise insufficient. The record shows only that petitioner's books have been lost, and that shippers' lists, good will, and equipment turned in at incorporation were excluded from invested capital. The only evidence concerning the value of any of such assets is the testimony of one who had become interested in the corporation some years after its organization. He testified that the present1928 BTA LEXIS 2928">*2937 shippers' list could be sold for $20,000 and, in fact, a part thereof was sold in 1925 for $5,000. Obviously such record contents do not present a case under section 327 requiring special assessment. Nor does it establish the value of the alleged assets when paid in to the corporation, which value determines the invested capital allowable therefor.
Judgment will be entered for the respondent.