*1572 The petitioner does not satisfy the requirements of the statute for classification as a personal service corporation.
*942 This proceeding is for the redetermination of deficiencies in income and profits taxes of $979.76, $2,348.37 and $2,923.66 for the fiscal years ended July 31, 1919, 1920 and 1921, respectively, based upon the following errors alleged to have been committed by the respondent in his determination:
(1) His failure to classify the petitioner as a personal service corporation; and
(2) His use of improper comparatives in computing the tax under the provisions of sections 327 and 328 of the Revenue Acts of 1918 and 1921; and
(3) His failure to disclose the names of comparatives used as aforesaid, thereby depriving the petitioner of an opportunity of being heard in objection thereto.
Upon motion of the respondent, duly granted by the Board, the hearing in this proceeding was limited, in the first instance, to a trial of the issue numbered one above, as prescribed*1573 in Rule 62 of the Board and consequently the findings of fact and opinion herein will be confined to such issue.
FINDINGS OF FACT.
The petitioner is a corporation, organized and incorporated under the laws of the State of New York in 1908, with a capitalization of $50,000, to maintain and conduct a general mercantile business in all parts of the world, also a collection business for the collection, by presentation, suit or otherwise, of accounts and obligations of all kinds, together with a general printing, publishing, bookbinding and advertising business and to prepare, sell and distribute books, directories, lists, reports, ratings, and other matters of interest to traders, bankers, attorneys, mercantile and collection agencies and business men generally, its object being to take over the assets, consisting of a small quantity of office equipment, and assume the liabilities of The Credit Reporter Company, a Missouri corporation then engaged in *943 a similar business, which was accomplished through the issuance of one share of its stock (nominal par value $100) for two shares of its predecessor's stock, having a par value of $50 a share. Its original directors and*1574 subscribers to its capital stock were: F. W. Meckfessel, Wm. R. Meckfessel, Wm. Oepts, Elmer Enfield, Samuel Taylor, and George H. Murdock. Although no money was put into the business at this time, capital stock to the extent of between $1,500 and $3,000 was issued to The Fitch Publishing Company in payment of a printing bill.
At a meeting of the board of directors on August 19, 1908, an agreement was spread upon the minutes, signed by all of the stockholders, by which they agreed to donate certain of their stock, upon issuance to them in accordance with their subscriptions, to be assigned to Samuel Taylor, he to dispose thereof at such prices, either in money property, or services for the purpose of procuring additional capital or other advantages to the company. Upon resolution of acceptance it was further "Resolved, That for the purpose of securing necessary money to carry out to the best advantage the operations of the company the board of directors deem it advisable to authorize the sale of stock remaining in the treaasury at not less than eighty-five (.85) per cent of par value, and such sale is hereby authorized." At the same meeting an offer of George H. Murdock was read*1575 into the record to purchase 10 shares of said stock and to pay therefor $1,000, which said offer was approved.
A report was submitted to the board of directors of the petitioner by Elmer Enfield, Samuel Taylor and George H. Murdock, which was spread upon the minutes of the directors' meeting of October 27, 1908, stating that they had been conducting The Law and Commerce Publishing Company, engaged in publishing a magazine devoted to legal questions as they pertained to commercial transactions, as a copartnership, for the convenience of the petitioner; that the petitioner was the real owner thereof and that it had advanced a large sum of money "in carrying it along"; that said company was then indebted to the petitioner for $3,489.47; and that said publishing company owed debts of $1,271.06 which the petitioner would be required to advance, and said report set forth assets aggregating $3,886.12 in value, and urged incorporation of the company. The petitioner acquired and took over the business of said publishing company, paid its debts, operated it for approximately two years thereafter and, finding it unprofitable, finally disposed of it. It was intended that the publishing company*1576 should be operated in conjunction with the petitioner in establishing relations with forwarders of business.
By consent of the stockholders of July 8, 1909, the capitalization of the petitioner was increased to $75,000 for the purpose of issuing *944 $5,000 worth of stock to each of five leading forwarding concerns in order to secure their business over the "list," but after further consideration the contract was never completed and the additional stock was never issued.
A further increase in capital stock was authorized at a meeting of the stockholders of February 13, 1917, to $200,000, consisting of 1,000 shares of common, par value $100, and 1,000 shares of preferred, par value $100. The purpose of this increase was to correct a disproportion in the capital structure. The stock was issued to the old stockholders, one share of common and two shares of preferred for each old share then held. After such distribution the remaining $50,000 of unissued stock was issued to Samuel Taylor for the cancellation of a certain working contract which he had with the petitioner entitling him to a percentage of earnings from the business. No money was paid into the company for stock*1577 at that time.
The petitioner investigated and selected attorneys, whose names were published in a "list," or directory, which was distributed, without charge, to "forwarders" of business, i.e., collection agencies having large commercial claims, or accounts, of wholesalers or retailers for collection in various parts of the United States. In the larger cities, the petitioner had an investigator, or "contact man," who interviewed and maintained personal contact with attorneys, and through this medium the names of attorneys were chosen for inclusion in the list. In the smaller cities or towns, however, the names were selected by investigation through banks and attorneys located nearby and such other references as were deemed necessary to ascertain the fitness of the party for such inclusion. Forwarders with whom lists were placed were also selected through investigation of the contact man.
The proper attorney having been selected, a contract was entered into whereby the petitioner agreed to enter the attorney's name in its list in consideration of the payment of one year's representation fee, "said payment being made in consideration of the editing, publishing and circulating*1578 the C-R-C Directory," which said contract provided for the payment of the following commissions for the handling of business submitted by forwarders:
* * * If no schedule accompanies claim the following rates will govern: Collections up to $500, 15 per cent.; on excess of $500 to $1,000, 10 per cent.; on excess of $1,000, 5 per cent.; minimum fee, $7.50; total collections under $15.00, 50 per cent. Collections by suit: Minimum suit fee $7.50, plus commission, the whole not exceeding 50 per cent of amount collected. Expenses: No expenses to be charged to forwarding attorney unless especially authorized in advance. Bar Association Rates: Where bar rates obtain, attorney must on each claim notify forwarding attorney of the fact and obtain his consent to local schedule before action is taken; otherwise abide by rates stipulated by *945 fowarding attorney. Division with forwarding attorney: All charges for handling of claims to be divided with the forwarding attorney on basis of mutual services and in accordance with the prevailing custom of one-third to forwarding attorney where other terms are not especially arranged.
The names so selected, throughout the*1579 United States and in some foreign countries, the number in each vicinity depending upon its population, were compiled into a list by the petitioner, submitted to a printer for printing and binding, and was published and distributed quarterly during 1918, 1919 and 1920 and semiannually during 1921, and supplements of changes or corrections therein were issued every six weeks. Each volume of the quarterly publication in 1919 contained 428 printed pages, or a total of 1,712 pages actually published and distributed to each forwarder for the four quarters of that year, and there were between 3,200 and 3,600 such volumes distributed to forwarders. The same is approximately true of 1920. The volumes published in 1921 also contained 428 printed pages, but by reason of the fact that publications were only twice annually during that year the total number of printed pages per distributee was 856, and also by reason thereof only between 1,600 and 2,000 volumes were distributed in said year. The distributed directories were paper bound. All printing costs were borne by the petitioner.
After a list had been placed with a forwarder the petitioner kept in constant communication therewith through*1580 its contact man. Also Taylor, Keys and Mrs. Taylor, and others, made frequent trips in the interest of the business.
Claims properly forwarded according to the terms and conditions imposed by the petitioner were guaranteed by it and were indemnified through the Fidelity & Deposit Company of Maryland in an amount not to exceed $30,000, guaranteeing the forwarder against fraudulent failure of attorneys to account for claims collected in their behalf, the premium upon which said bond was borne by the petitioner. In order for the forwarder to claim indemnification under the bond he was required to fill out a "Bonding Coupon" provided for the purpose, with the name of the debtor, name of attorney, amount of claim and name of the creditor, and forward it to the petitioner within 30 days after forwarding the claim. A portion of such coupon was attached to the claim itself when forwarded to the attorney, informing him that "your name is taken from The C.R.C. Law List."
Although said bond was in force during all of the years in question, all failures of attorneys to account for funds collected were made good by the petitioner itself, the bonding company never having been called upon.
*1581 *946 Whenever it came to the knowledge of the petitioner, through a forwarder, that an attorney had defaulted in payment, the fact of the collection was verified and some one was dispatched to the community to investigate generally and action was instituted to recover from the attorney, adjusting with the forwarders for whatever amount remained due. Such adjustments were sometimes before receipt from the attorney and sometimes afterward. The following sums were paid out to forwarders and recovered from attorneys for the fiscal years 1919, 1920 and 1921, the debits representing payments and credits recoveries as shown in the attorney guarantee account:
| Year | Debit | Credit |
| 1919 | $13,148.04 | $11,740.87 |
| 1920 | 7,880.04 | 6,310.96 |
| 1921 | 9,740.61 | 7,948.66 |
The difference between the amounts paid out and those recovered was closed into its profit and loss account each year.
The petitioner's business has grown from a very modest beginning to one of the largest concerns of its kind in the United States. There are in the neighborhood of about 150 companies engaged in the same or a similar endeavor, but the greater portion of the business is transacted over*1582 not more than ten lists, and of these there are only two companies comparable in size to the petitioner, which are, the American Lawyers Quarterly and the United States Fidelity & Guaranty Company. Since the business of the latter company is somewhat different from the petitioner in certain respects, the former is probably the only comparable one that approximates the petitioner in volume of business. In 1919 there was transacted over the petitioner's list between $12,000,000 and $13,000,000, in 1920 about $14,000,000, and in 1921 about $27,000,000 or $28,000,000. The volume of business transacted by the old company, The Credit Reporter Company, was possibly one-fifteenth of the volume of business transacted in later years. In 1909 the petitioner's quarters were comparatively small. It then had three employees, other than the officers of the company, as compared with twelve or thirteen in 1919, 1920 and 1921. Such employees were stenographers, typists, a file clerk and bookkeeper.
The following are balance sheets of the petitioner for the fiscal years ended July 31, 1918, to July 31, 1921, both inclusive:
| July 31, 1918 | July 31, 1919 | July 31, 1920 | July 31, 1921 | |
| ASSETS | ||||
| Cash | $10,740.77 | $14,131.50 | $11,370.67 | $18,116.67 |
| Accounts receivable | 3,250.00 | 1,129.62 | 1,074.49 | 437.49 |
| Loans receivable | 9,071.83 | 7,971.05 | 10,963.35 | 8,623.81 |
| Liberty bonds | 1,200.00 | 2,283.75 | ||
| Furniture and fixtures | 1,300.00 | 1,425.00 | 1,425.00 | 3,717.61 |
| Miscellaneous | 200,000.00 | 200,000.00 | 200,000.00 | 200,000.00 |
| Total | 225,562.60 | 226,940.92 | 224,833.51 | 230,895.58 |
| LIABILITIES | ||||
| Accounts payable | 2,000.00 | 1,000.00 | 3.64 | |
| Reserve for depreciation on furniture | 715.00 | 851.25 | 993.75 | 1,250.88 |
| Surplus | 22,847.60 | 25,089.67 | 23,836.12 | 29,644.70 |
| Capital stock | 200,000.00 | 200,000.00 | 200,000.00 | 200,000.00 |
| Total | 225,562.60 | 226,940.92 | 224,833.51 | 230,895.58 |
*1583 *947 The following is a partial (partial in the sense that the figures are not exactly as shown in the balance sheets) list of accounts and loans receivable as shown in the balance sheets hereinabove:
| Name | July 31, 1918 | July 31, 1919 | July 31, 1920 | July 31, 1921 |
| Wilson & Buckley | $400.00 | $50.00 | ||
| W. T. G. Weymouth | $3,000.00 | 60.00 | ||
| Samuel Taylor | 8,430.00 | 5,825.00 | 10,250.00 | $5,955.00 |
| M. J. Keys | 394.00 | 660.00 | 271.00 | 340.00 |
| W. D. Eyre | 215.83 | 1,394.05 | 442.35 | 523.81 |
| C. K. Fitch | 1,660.00 | |||
| H. Fitzgerald | 32.00 | 92.00 | 25.00 | |
| Sundry debtors | 250.00 | |||
| A. D. Confelt | 100.13 | |||
| Chas. King | 45.00 | |||
| W. L. Finn & Co | 500.00 | 400.00 | ||
| Grace N. Taylor | 120.00 | |||
| E. Golden | 13.00 | |||
| Total | 12,321.83 | 8,576.18 | 11,513.35 | 9,036.81 |
The foregoing represent personal advances or loans to employees or business and personal friends.
The items of accounts payable in the foregoing balance sheet, $2,000 in 1918, and $1,000 in 1919, represent a repayment by F. W. Meckfessel for a loan which the petitioner had previously made to W. T. G. Weymouth for $3,000, which appears in the partial list of accounts and loans receivable hereinabove*1584 set forth.
Although the petitioner borrowed no money during the years in question, it was compelled to borrow in the earlier period of its existence up to possibly 1912. Also, it thereafter, in or about 1914, borrowed a sum of $3,000 for the purpose of satisfying a judgment against the Credit Reporter Company included among the liabilities of that company which it assumed.
The following is a statement of gross income and expenses for the fiscal years ended July 31, 1919, 1920, and 1921, as shown by the *948 books and records of the petitioner, and the net taxable income as adjusted:
| Item | Fiscal year ended July 31, 1919 | Fiscal year ended July 31, 1920 | Fiscal year ended July 31, 1921 |
| Gross Income | $70,247.57 | $73,197.35 | $84,446.91 |
| Expenses | |||
| Atty. Guar | 1,407.17 | 1,569.08 | 1,791.95 |
| Salary | 29,620.06 | 33,036.27 | 35,096.53 |
| Prtg. & Staty | 4,135.99 | 5,781.20 | 5,631.14 |
| Postage | 4,115.70 | 2,609.53 | 1,958.79 |
| Rent | 2,827.01 | 2,925.00 | 3,955.33 |
| Trav. & Sol | 486.55 | 982.83 | 1,098.98 |
| General Expense | 1,882.01 | 1,475.60 | 2,017.87 |
| Bond Insurance | 412.50 | 362.50 | 512.50 |
| Telegraph | 364.60 | 282.07 | 419.64 |
| Telephone | 241.09 | 261.09 | 218.70 |
| Carfare & Sund | 1.05 | .40 | 3.20 |
| Insurance | 781.91 | 846.03 | 1,005.75 |
| Ice & Water | 72.56 | 67.68 | 53.82 |
| Type. S. & Repairs | 75.90 | 37.68 | 461.35 |
| Toilet Supplies | 45.60 | 39.50 | 52.03 |
| Expressage | 7.71 | 3.68 | 23.65 |
| Taxes | 1,133.67 | 3,835.27 | 4,352.20 |
| Exchange | 155.09 | 180.17 | 209.68 |
| Total | 47,766.17 | 54,295.58 | 58,863.11 |
| Income by books | 22,481.40 | 18,901.77 | 25,583.80 |
| Adjusted taxable income | 21,785.34 | 22,179.78 | 28,593.06 |
*1585 The income shown in the above tabulation is made up of receipts from contracts, interest on bank balances and such sums as were recovered from attorneys and applied to the attorney guarantee account hereinbefore referred to. The amount received in any year for interest did not exceed $300.
About one-half of the total salary shown among the expenses was paid to officers and the remainder to employees other than officers.
Forwarders looked to the petitioner to see that their claims were properly handled by attorneys. There were a great number and variety of complaints, made either by the forwarders themselves or the attorneys, averaging possibly 9,000 during the course of the year. Such complaints, among other things, were with respect to defaults in payments by attorneys and the failure of such attorneys to keep the forwarder informed of the status of his claim, and the complaints of the attorneys themselves were over fee matters and the failure to receive proper cooperation from the forwarder. Every complaint made was properly recorded and presented to Keys or one of his assistants for handling.
The following were the stockholders during the years in question, together*1586 with their respective holdings and the percentage of their holdings to the total stock issued:
| Stockholder | Shares of common and preferred stock | Percentage of stock held |
| Per cent | ||
| Samuel Taylor | 1,295 | 64.75 |
| Cornelia K. Fitch | 500 | 25.00 |
| John K. Fitch | 9 | .45 |
| M. J. Keys | 43 | 2.15 |
| W. D. Eyre | 23 | 1.15 |
| H. A. Fitzgerald | 5 | .25 |
| G. N. Taylor | 10 | .50 |
| S. G. Taylor | 9 | .45 |
| John K. Fitch, Jr | 15 | .75 |
| Muriel Fitch | 15 | .75 |
| Marjorie Fitch | 15 | .75 |
| Lillian W. Fitch | 6 | .30 |
| S. F. Swayne | 1 | .05 |
| Francis E. Fitch, Inc., and/or E. A. Mayriss 1 | 54 | 2.70 |
| Total | 2,000 | 100.00 |
*949 Samuel Taylor, aforesaid, who died in 1922, a salaries officer, was president, general manager and also a director of the petitioner, and devoted his entire time to its business during all of the years in question. As such he was charged with the supervision of finances, renewal of contracts, employed all help, directed the affairs of the petitioner generally, *1587 and made frequent trips for the purpose of interviewing forwarders and attorneys, and on special occasions he was compelled to assume some of the duties arising under the complaint department conducted by Merton J. Keys. His salary for 1919 and 1920 was $6,000, and for 1921 was $9,000.
Cornelia K. Fitch, aforesaid, a woman between 60 and 65 years of age, although a director in the petitioner, was not an officer, nor did she hold any position of employment therewith, and consequently received no salary therefrom. As a director she was not an active attendant at meetings of that body from August 1, 1918, to August 2, 1921. She visited the offices of the petitioner, however, on an average of twice weekly and was in close touch with the business. Upon such visits she commonly consulted with Taylor, possibly for an hour's duration, usually inquiring about the business generally and its prospects for future dividends.
John K. Fitch, aforesaid, a salaried officer, was treasurer and a director of the petitioner. His sole duty was the issuance of checks. During the years here in question he was engaged in another business and did not devote his entire time to the affairs of the*1588 petitioner.
M. J. Keys, aforesaid, a salaried officer, was vice president, secretary and a director of the petitioner, and he devoted his entire time to the business. He was in charge of the complaint department involving the adjustment of differences or disputes arising between forwarders and attorneys.*950 W. D. Eyre, aforesaid, a salaried officer, who was vice president, solicitor and a director of the petitioner, devoted his entire time to the business. He was commonly known as "contact man," whose duties were in the field traveling and calling upon forwarders and attorneys arranging contracts and establishing contact between forwarders and attorneys.
H. A. Fitzgerald, aforesaid, a woman, a salaried employee, was in direct charge of the books and, in a measure, of the office, and she devoted her entire time to the business.
G. N. Taylor, aforesaid, wife of Samuel Taylor, president of the petitioner, was not an officer or employee, nor was she actively engaged in its business except in the sense that she attended conventions held at various places throughout the United States, once annually, and entertained important forwarders of claims in a social way. She*1589 visited them frequently, and they visited her. She devoted about 25 per cent of her time to such activities.
S. G. Taylor, aforesaid, is the son of Samuel Taylor and is the present president of the company. Other than as a stockholder, however, during the years in controversy he was not employed by nor actively engaged in the business of the petitioner.
John K. Fitch, Jr., Muriel, Majorie and Lillian Fitch were minor children of John K. Fitch, from whom they received their stock, and they were neither employed by nor actively engaged in the business of the petitioner.
S. F. Swayne, aforesaid, was an employee of Francis E. Fitch, Inc., and, other than being a director and stockholder of the petitioner, he took no active part in its affairs.
Francis E. Fitch, Inc., was a printing concern engaged in the publishing business which at one time did the printing for the petitioner.
E. A. Mayriss was neither employed by nor actively engaged in the conduct of the petitioner's business.
The agency of lawyers, known as the Commercial Law League of America, and certain organizations of forwarding agencies hold meetings from time to time, which are always attended by one or more*1590 of the petitioner's officers.
The nature of the petitioner's business has been the same since 1909 without deviation.
OPINION.
MORRIS: At this stage of the proceeding, two issues having been placed in abeyance under Rule 62 of the Board, we are concerned solely with the petitioner's contention that it is entitled to and should have been classified as a personal service corporation.
*951 Section 200 of the Revenue Act of 1918, in so far as applicable, provides:
That when used in this title -
* * *
The term "personal service corporation" means a corporation whose income is to be ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material income-producing factor; * * *
The petitioner contends that 96.8 per cent of its outstanding capital stock was owned by stockholders who were regularly engaged in the active conduct of its affairs during the years in controversy and it includes the following in its determination:
| Stockholder | Per cent held |
| Samuel Taylor | 64.75 |
| Cornelia Fitch | 25.00 |
| John K. Fitch | .45 |
| M. J. Keys | 2.15 |
| W. D. Eyre | 1.15 |
| H. A. Fitzgerald | .25 |
| G. N. Taylor | 0.50 |
| John K. Fitch, jr | .75 |
| Muriel Fitch | .75 |
| Marjorie Fitch | 75 |
| Lillian W. Fitch | .30 |
| Total | 96.80 |
*1591 In fact, the only stockholders which it does not contend were so engaged are S. G. Taylor, S. F. Swayne, Francis E. Fitch, Inc., and E. A. Mayriss, owning in the aggregate the remaining 3.20 per cent of its capital stock.
We have found as a fact that Samuel Taylor, deceased, one of its principal stockholders (to the extent of 64.75 per cent), M. J. Keys, W. D. Eyre, and H. A. Fitzgerald, owning in the aggregate 68.30 per cent of the capital stock, devoted their entire time to and were actively engaged in the conduct of the petitioner's business, but we disagree with the petitioner as to the remainder of its classification because, in the first place, with the exception of Cornelia Fitch, they were not "principal" stockholders and, furthermore, they failed to meet other requirements of the statute.
With respect to Cornelia K. Fitch, a stockholder to the extent of 25 per cent, we have found as a fact that she was a woman between 60 and 65 years of age and, that although a director during the years in question, she was not an officer nor did she hold any position of employment with the petitioner and she received no compensation therefrom.
*1592 That she was a principal stockholder is clear; see , wherein we held that a 20.8 per cent owner of stock was a "principal" stockholder, but she was not regularly engaged in the active conduct of the affairs of the corporation *952 within the meaning of the statute - certainly not in the sense that any portion of its income might be ascribed to her activities. Her activities, if such they may be termed, amounted to nothing more, so far as the record shows, than those of any other stockholder who might own a 25 per cent interest in a business.
, relied upon by the petitioner, is distinguishable from the instant case upon the facts.
We are, therefore, of the opinion that the petitioner fails to satisfy the requirements of the statute for classification as a personal service corporation, and we need not discuss the question of whether capital is a material income-producing factor. .
Reviewed by the Board.
Decision will be entered under Rule 62(c).
Footnotes
1. Mayriss was a stockholder to the extent of nine shares until December 29, 1919, when he transferred his holdings to Francis E. Fitch, Inc., increasing its holdings from forty-five to fifty-four shares ↩