*4124 1. Classification as a personal service corporation denied.
2. Contention of the respondent set up in his answer that he erroneously allowed a deduction for expense is disallowed for lack of evidence.
*338 The proceeding in Docket No. 128 is for the redetermination of a deficiency in income and profits taxes of $6,069.57 for 1918; the proceeding *339 in Docket No. 5085 is for the redetermination of deficiencies in income and profits taxes of $7,919.01 and $765.01 for the years 1919 and 1920, respectively, and the proceeding in Docket No. 13847 is for the redetermination of a deficiency of $3,953.43 in income and profits tax for 1921. These proceedings were consolidated for the purpose of trial and decision.
The deficiencies result from the respondent having refused to classify the petitioner as a personal service corporation.
At the hearing the respondent amended his answer so as to admit that the correct deficiency for 1920 is $418.21 instead of $765.01 as*4125 previously determined by him. The respondent also amended his answer for the year 1921 so as to allege that the allowance of an amount of $3,125 as expense to stockholders made by him in determining the deficiency for the year in question was erroneous and that the correct taxable income for 1921 is $19,887.26 instead of $16,762.26, the amount used as a basis for determining the deficiency.
FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of Missouri on January 15, 1900, and has its principal office at Kansas City, Mo. During the years involved in this proceeding it was engaged in the live stock commission business at the Kansas City stock yards, acting as agent for shippers and purchasers of live stock. The stock yards company furnished facilities for the handling of live stock.
The live stock, which consisted principally of hogs and cattle, with some sheep, came from farmers and shippers and was consigned to the petitioner. It was received by the stock yards company, which notified the petitioner of its arrival. The petitioner thereupon drove the stock to certain pens allotted to the petitioner by the stock yards company. There the petitioner*4126 if necessary sorted the stock by size and kinds in order to meet the demands of the different classes of buyers. After the stock had been sorted and placed in the proper pens it was necessary to obtain purchasers, who were to be found in the stock yards.
Sometimes the stock was accompanied by the owner and sometimes not. Sometimes the petitioner was notified in advance of the shipment, but usually it was not so notified.
All sales were made for cash and collections were deposited in the bank either on the date of sale or on the following day. Collections were made through what was known as the clearing house. When a sale was made before 2 o'clock the collection was made the same day, but if a sale was made after 2 o'clock payment was received by 10 *340 o'clock the next morning. When a sale was made an "account sales" was made for the owner showing the number of head, the kind of stock, price, weight, freight, feed, stock yard charges and commission. Freight, charges of the stock yards company for the use of its pens, yards, scales and other facilities and charges for feed were paid to the stock yards company out of the proceeds from the sale of the live stock sold*4127 by petitioner for shippers. The balance remaining from the sale after payment of freight, commission and other charges was remitted to the shipper. Collections were made faster than the remittances could be made.
Where petitioner purchased live stock for a customer it usually received a check at the time of purchase. In some cases where the purchaser was financially responsible the cattle were shipped to the purchaser upon whom a draft was drawn and deposited to the credit of the petitioner.
The petitioner did not buy or sell live stock on its own account, but acted only as agent for the owners, from whom it received a flat commission, the amount of which was determined by the kind and number or per car of live stock sold and not by the selling price of the live stock. The amount the petitioner could charge per head or per car for its services was determined by the Kansas City Live Stock Exchange up until the passage of the Packers and Stock Yards Act in 1921, after which it was determined by the Department of Agriculture. The petitioner, however, gave a bond to the stock yards company to guarantee the payment of freight on all live stock sold by petitioner.
The service*4128 rendered by the petitioner was to find a purchaser for live stock or to purchase live stock for a customer. When selling live stock the petitioner attempted to obtain the highest price possible for the owner. The price was determined by the quality, the supply, the demand and market conditions generally. In all cases the selling price was agreed upon after and as a result of bargaining.
The following is a statement of the petitioner's income, with interest paid and bad debts, for the years 1918 to 1921:
| 1918 | 1919 | 1920 | 1921 | |
| Commissions on buying and selling live stock | $95,760.07 | $97,190.13 | $81,767.20 | $88,801.32 |
| Interest received | 11,611.54 | 10,054.51 | 9,572.41 | 7,127.05 |
| Total gross income | 107,371.61 | 107,244.64 | 91,339.61 | 95,928.37 |
| Net income | 21,205.64 | 26,650.02 | 5,298.27 | 16,762.26 |
| Interest paid (deducted in determining net income) | 9,038.56 | 7,054.51 | 7,254.32 | 5,127.05 |
| Bad debts (deducted in determining net income) | 3,551.77 | 3,024.55 |
The petitioner's balance sheets for the years involved in these proceedings are as follows:
*341
| Dec. 31, 1917 | Dec. 31, 1918 | Dec. 31, 1919 | Dec. 31, 1920 | Dec. 31, 1921 | |
| ASSETS | |||||
| Cash | $89.76 | $38.51 | $20.00 | ||
| Bank accounts | $2,406.80 | 10,188.15 | |||
| Accounts receivable (stockholders) | 2,131.37 | ||||
| Accounts receivable (employees) | 90.12 | 5,540.93 | $645.59 | 185.00 | 70.00 |
| Accounts receivable (others) | 8,844.37 | 1,282.01 | 4,874.29 | 2,645.30 | 3,981.57 |
| Notes receivable (employees) | 2,005.16 | ||||
| Notes receivable (others) | 116,395.36 | 116,264.52 | 76,441.25 | 82,382.10 | 76,470.14 |
| Uncleared sales | 12,262.95 | 71,401.79 | 15,384.18 | 80.10 | 146.87 |
| 1 Farm account | 5,848,56 | 5,568.35 | 5,645.96 | 5,419.76 | 5,734.12 |
| Membership | 1,400.00 | 1,600.00 | 1,600.00 | 1,750.00 | 1,675.00 |
| Liberty bonds | 3,000.00 | 4,000.00 | 4,000.00 | ||
| Office fixtures | 500.00 | 500.00 | 500.00 | 500.00 | 650.00 |
| 147,436.28 | 207,327.48 | 109,091.27 | 99,369.06 | 98,935.85 | |
| LIABILITIES | |||||
| 2 Bank overdraft | 4,341.95 | 65,113.58 | 4,448.19 | ||
| Accounts payable (stockholders) | 10,387.15 | 3,243.97 | 23,958.45 | 11,373.28 | 11,082.83 |
| Accounts payable (employees) | 2,014.15 | 3,413.38 | 364.21 | 987.68 | |
| Accounts payable (others) | 21,830.52 | 10,148.96 | 6,154.68 | 250.94 | 1,187.04 |
| Discounts (notes receivable of customers) | 83,390.98 | 100,347.28 | 48,623.12 | 60,849.16 | 34,982.50 |
| Customers' credits (notes payable) | 18,500.00 | ||||
| Unearned interest | 428.05 | 60.61 | 328.09 | 566.76 | |
| Commissions held by Government | 1,531.15 | 6,604.80 | |||
| Capital stock | 25,000.00 | 25,000.00 | 25,000.00 | 25,000.00 | 25,000.00 |
| Commission (surplus) | 43.71 | 578.55 | 24.27 | ||
| 147,436.61 | 207,327.78 | 109,091.08 | 99,368.74 | 98,935.88 |
During the years involved in these proceedings, the petitioner as an accommodation made loans to its old-line customers, taking notes therefor. Part of the notes thus acquired and secured by mortgages were indorsed by the petitioner and discounted at the banks, which allowed the petitioner from 1 per cent to 2 per cent for inspecting the loan and drawing papers. Others were discounted by individuals and the remainder was held by the petitioner at the end of each year.
Of the notes receivable amounting to $116,395.36 as at December 31, 1917, which represented loans to its customers, the petitioner held 15 which totaled $33,004.38, and ranging in amounts of from $20 to $10,363.19. *4130 Eleven notes ranging in amounts from $1,235.22 to $25,000 and totaling $83,390.98 had been discounted.
Of the notes receivable totaling $116,264.52 representing loans as at December 31, 1918, the petitioner held 12, ranging in amounts from $307.54 to $2,658.50 and amounting to $18,917.24. Eleven notes, ranging from $1,490.32 to $24,469.50, had been discounted. Of the notes receivable of $76,441.25 shown at December 31, 1919, the petitioner held 17, varying in amounts from $27.65 to $6,941.06 and amounting to $47,318.13. The remainder, $29,123.12 composed of 9 notes varying in amounts from $1,696.41 to $6,543.62, had been discounted.
Of the notes receivable amounting to $82,382.10 on December 31, 1920, representing loans, the petitioner held 14, varying in amounts *342 from $157.67 to $5,625.14 and totaling $26,032.94. The remainder, totaling $56,349.16, composed of 11 notes ranging from $544.42 to $15,312.40, had been discounted.
Of the notes receivable of $76,470.14 as at December 31, 1921, representing loans, the petitioner held 26, ranging from $200 to $8,081.17 and totaling $41,487.64, and the remainder, composed of 10 notes varying in amounts from $1,341.54*4131 to $5,125.24 and totaling $34,982.50, had been discounted. The foregoing represent loans outstanding and unpaid on the dates indicated.
The petitioner's note register for the period prior to January 1, 1920, has been lost or destroyed and the record of each individual note is not available. During the year 1920 the petitioner accepted notes in the number of 57, ranging in amounts from $157.67 to $15,312.40, and totaling $229,967.65, representing loans. In 1921, the petitioner took 67 notes varying in amounts from $100 to $11,766.63 and totaling $186,532.83 representing loans.
The petitioner discounted notes receivable in the following amounts for the years indicated:
| 1918 | $297,170.58 |
| 1919 | 215,085.59 |
| 1920 | 207,585.70 |
| 1921 | 116,129.21 |
These amounts include all notes discounted during the year, whether they had been taken up by the makers during the year or were still outstanding at the end of the year. The amounts shown in the balance sheets as "Accounts payable (stockholders)" represent the distributions made to the stockholders at the end of the year. In 1917, the capital stock of the petitioner corporation was increased from $10,000 to $25,000.
*4132 The stockholders, offices held by them, amount of stock owned and salaries were as follows:
| 1918 | ||
| Shares | Salary | |
| C. G. Bridgeford, president until his death in October, 1918 | 130 | $4,870.00 |
| B. R. Bridgeford, vice president | 50 | 4,100.00 |
| C. P. Crider, secretary and treasurer | 70 | 4,296.63 |
| 250 | 13,266.63 |
| 1919 | ||
| Shares | Salary | |
| C. P. Crider, president | 96 | $4,800 |
| B. R. Bridgeford, vice president | 96 | 4,800 |
| S. G. Smith, secretary | 48 | 4,200 |
| C. A. Horine | 10 | 3,000 |
| 250 | 16,800 |
*343
| 1920 | ||
| Shares | Salary | |
| C. P. Crider, president | 96 | $6,000 |
| B. R. Bridgeford, vice president | 96 | 6,000 |
| S. G. Smith, secretary | 48 | 4,500 |
| C. A. Horine | 10 | 3,420 |
| 250 | 19,920 |
| 1921 | ||
| Shares | Salary | |
| C. P. Crider, president | 96 | $4,800 |
| B. R. Bridgeford, vice president | 96 | 4,800 |
| S. G. Smith, secretary | 57 | 4,500 |
| C. A. Horine | 1 | 3,300 |
| 250 | 17,400 |
C. G. Bridgeford, who had been "on the market" since 1900 and who was president of the petitioner corporation prior to his death in October, 1918, was manager of the petitioner's cattle department. In that capacity he inspected and sorted cattle, *4133 estimated the price at which the cattle should be sold and supervised the work of the cattle salesmen. He would make trips to the country upon request from customers to advise them as to market conditions and as to whether their cattle were in a condition for market. He gave his entire time to the business.
B. R. Bridgeford, who had been "on the market" since 1890 and who was vice president, had charge of the hog department. His duties consisted of sorting and selling hogs, seeing that the business was properly conducted, advising and consulting with customers so as to help them put their hogs on the market when prices were good and keep them off when the market was bad. He also advised with customers as to whether they should buy hogs and feed them for the purpose of selling them at a future time. He went into the country upon request of customers to advise them as to market conditions and whether their cattle were ready to ship. He was a member of the Kansas City Live Stock Exchange, and devoted all of his time to the petitioner's business.
Crider, who had been "on the market" since 1900, was secretary and treasurer of the petitioner corporation prior to the death of*4134 C. G. Bridgeford and after Bridgeford's death became president. Crider had entire supervision of the business in the office and partial supervision of the cattle yards. He attended to the correspondence, sending of telegrams, making of telephone calls and the preparation of a weekly news letter relating to prices and market conditions. When requested by customers, he would go to the country and advise them about market conditions and whether their cattle were *344 ready for shipment. Crider had charge of making loans. He hired the employees, fixed their salaries and also had charge of determining the salaries of the stockholders. Crider took over part of C. G. Bridgeford's work after the latter's death and until January 1, 1919, sorted cattle and told the salesmen what each class should bring. After January 1, 1919, S. G. Smith, who had been "on the market" for about 21 years and who became a stockholder on that date, assisted Crider in performing the work previously done by C. G. Bridgeford.
Prior to January 1, 1919, Smith was employed as a cattle salesman by the petitioner. On becoming a stockholder in 1919, his duties were enlarged over what they were in 1918 in*4135 that he assumed a larger part in the supervision of the cattle yards. After becoming a stockholder he assisted Crider in sorting cattle and deciding what each class should sell for. He would also sometimes accompany a cattle buyer of the corporation and pass on the price to be paid for cattle. After 1918 he managed the cattle department with the assistance of Crider. Smith was a member of the Live Stock Exchange and devoted all of his time to the business.
Prior to becoming a stockholder in 1919, Horine was in the employment of the petitioner as cashier and office man. After becoming a stockholder his duties were similar to what they had been previously.
The following is a list of petitioner's employees receiving a salary of $1,000 per annum or over, and the positions held for the years indicated:
| 1918 | 1919 | 1920 | 1921 | |
| S. G. Smith, salesman and member Live Stock Exchange | $4,000.00 | |||
| J. A. Bender, salesman and member Live Stock Exchange | 3,600.00 | $4,800.00 | $4,800 | $4,800 |
| George Nichols, salesman and member Live Stock Exchange | 1,200.00 | 1,200.00 | 1,300 | 1,300 |
| W. B. Ecton, salesman and member Live Stock Exchange | 4,500.00 | 6,000 | ||
| R. H. Rea, salesman and member Live Stock Exchange | 2,250 | 3,600 | ||
| I. S. Barnes, salesman and member Live Stock Exchange | 4,100 | |||
| Sam McFall, feeder, buyer, and member Live Stock Exchange | 2,700.00 | 3,000.00 | 2,700 | 3,150 |
| J. R. McPhee, Feeder, buyer, and member Live Stock Exchange | 1,750.00 | |||
| E. M. Copeland, feeder, buyer, and member Live Stock Exchange | 1,800.00 | 1,725.00 | 1,800 | 1,800 |
| J. A. Tracy, feeder, buyer | 1,320.00 | 1,500.00 | 1,800 | |
| Vernon Bates, yardman | 1,800.00 | 1,322.50 | ||
| John Power, yardman | 1,720.00 | 1,280.00 | ||
| B. C. Shufelt, yardman | 1,460.00 | |||
| John Andie, yardman | 2,900.00 | 2,200 | 2,220 | |
| E. R. Adams, yardman | 1,050.00 | 1,800 | 1,050 | |
| A. F. Gunnie, yardman | 1,500.00 | |||
| Joe McFall, yardman | 1,920.00 | 1,920 | 1,920 | |
| L. G. McFall, yardman | 1,800.00 | 1,800 | ||
| Hugh Owens, yardman | 1,800.00 | |||
| Smith Brandon, yardman | 1,225 | 1,500 | ||
| H. W. Owens, yardman | 1,800 | |||
| Merwin McClune, yardman | 1,500 | 1,800 | ||
| Hughie Owens, yardman | 1,800 | |||
| C. A. Horine, cashier | 2,380.00 | |||
| R. A. King, bookkeeper | 1,012.50 | |||
| R. T. Lewis, bookkeeper | 1,800.00 | 1,860 | 2,150 | |
| Ramona Brown, stenographer | 1,320 | 1,210 | ||
| Ekla McFall, stenographer | 1,080 | |||
| 29,242.50 | 27,597.50 | 36,075 | 33,480 |
*4136 *345 All of the petitioner's employees, with the exception of Sam McFall, devoted their entire time to the business.
While the petitioner did not handle many sheep, as compared with cattle, during 1918 it sold 40 or 50 carloads. On sheep sales the salesmen were paid a commission of 40 per cent or 50 per cent of whatever charge was made by the petitioner.
Total salaries paid other employees, who received less than $1,000 per annum, were as follows:
| 1918 | $8,608.46 |
| 1919 | 9,715.96 |
| 1920 | 2,852.83 |
| 1921 | 649.96 |
Petitioner's employees were engaged at the lowest possible salaries.
The salesmen helped bring the stock from the train to the pens and after they had been sorted would seek buyers, show the stock and sell it. They were under the direction and supervision of the Bridgefords, Crider, or Smith. Sometimes the salesmen went into the country to classify and sort cattle, and at the request of cattle owners would go and look over cattle to see if it were ready to market. Frequently the salesmen went to Lincoln, Nebr., to sort cattle.
The "feeder buyers" were engaged in locating and buying "feeders" and "stockers" on orders at the stock yards*4137 for customers to take to the country and feed or raise from and later sell. They consulted with and received instructions from C. G. Bridgeford during his lifetime and afterwards with Crider or Smith. In some instances they would go out into the country and buy cattle for customers.
The yard men were engaged in getting stock from the cars into the pens, looking after the feeding and watering of it, helping sort it, taking it to the scales and seeing that it was properly weighed. They did not advise with customers in regard to prices or market conditions.
In the determination of the deficiency for 1921, the respondent allowed as a deduction an amount of $3,125 claimed by the petitioner as an "expense to stockholders." The deduction is composed of the following amounts which were credited to the accounts of the stockholders at the end of the taxable year:
| C. P. Crider | $1,200.00 |
| B. R. Bridgeford | 1,200.00 |
| S. G. Smith | 712.50 |
| C. A. Horine | 12.50 |
| Total | $3,125.00 |
OPINION.
TRAMMELL: The two issues presented in these proceedings are: (1) Whether the petitioner was a personal service corporation for the *346 years 1918 through 1921, and (2) the deductibility*4138 of the amount of $3,125 allowed by the respondent in determining the proposed deficiency for 1921.
With respect to the first issue, section 200 of the Revenue Acts of 1918 and 1921 defines a personal service corporation to be -
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; but does not include * * * any corporation 50 per centum or more of whose gross income consists * * * of gains, profits, or income derived from trading as a principal * * *.
The first requirement of the statute is that the corporation's income be ascribable primarily to the activities of the principal owners or stockholders.
During the years involved in these proceedings the petitioner was engaged in the live stock commission business acting as agent for shippers and purchasers of live stock. It did not in any case purchase or sell live stock on its own account nor did it have any interest in the live stock. Its business was that of dealing for others*4139 on a commission basis, receiving as compensation for its services a certain amount per head or per car of stock handled by it. Its compensation was not even dependent on the amount or consideration for which the stock sold.
All of the stockholders were regularly engaged in the active conduct of the business. With the exception of Horine they consulted with customers as to the condition of the stock, the time for purchasing stock to feed, the time to sell, and as to market conditions generally. They sorted or assisted in sorting the stock. They managed the affairs of the office, directed and supervised the activities of the salesmen, buyers, yardmen and office employees.
The petitioner employed salesmen whose duties were to look over stock in the country, to see if it were ready for market, sort and help sort stock, seek buyers therefor, and sell the stock. Buyers were employed to locate and to buy cattle on orders for customers. As a rule the salesmen and buyers did not consummate sales or purchases until after one or more of the stockholders had considered the proposed action and had directed or authorized the sale or purchase to be closed. In some instances, however, *4140 the buyers went out into the country and made purchases. Yard men were employed in getting stock from the cars to the pens, caring for it, taking it to the scales and seeing that it was properly weighed. The services rendered by these men were menial in character.
In 1918, the petitioner employed 4 salesmen at salaries ranging from $1,200 to $4,500; 4 buyers at salaries from $1,320 to $2,700, and *347 three yard men at salaries of from $1,460 to $1,800. In 1919 it employed 2 salesmen at salaries of $1,200 and $4,800; 3 buyers at salaries of $1,500, $1,725, and $3,000; and 8 yard men at salaries ranging from $1,050 to $2,900. In 1920 the petitioner employed 4 salesmen whose salaries ranged from $1,300 to $6,000 3 buyers - 2 of whom received a salary of $1,800 each, and the other $2,700, and seven yard men at salaries of from $1,225 to $2,200. In 1921, 4 salesmen were employed at salaries of from $1,300 to $4,800, 2 buyers - one of whom received a salary of $1,800 and the other $3,150, and 6 yard men, whose salaries ranged from $1,050 to $2,220. During these years the number of petitioner's office employees varied from 1 in 1919 to 3 in 1921. In addition to the foregoing, *4141 all of whom received salaries in excess of $1,000 each per annum, the petitioner had other employees, each of whom received less than $1,000 per year.
In 1918, the petitioner employed 11 salesmen, buyers, and yard men, while it employed 13 in 1919, 14 in 1920, and 12 in 1921. Practically all the salesmen and buyers were members of the live stock exchange. As such members they were regulated in their conduct according to the rules of the exchange and were held personally responsible to the exchange for every violation of the rules prescribed. While their services were under the direction and subject to the supervision of one of the stockholders, in some instances buyers would go out in the country and buy cattle for customers. They were high-salaried men. The services which they performed were a substantial and material part of the services rendered by the corporation. While as a rule these persons acted under the direction of a stockholder in making sales or purchases, other important services were rendered independently. They went out to inspect cattle, sorted them out and determined if and when they were ready for sale. They located cattle to be bought or sold and sometimes*4142 bought on orders from customers. They came in direct contact with the people with whom they did business. They were the persons who did the bargaining in the purchases and sales. The services of these persons were different in their nature and importance from the services rendered by the employees in the case of . In that case the court said:
On the whole, it must be found that the employees to whom these salaries were paid, were clerks and assistants, such as are found in every law office and whose work has no material relation to the success of the business, either as a business getter or as a directing head.
The compensation paid to employees in 1918 who received more than $1,000 per annum was in excess of $29,000 and in addition the petitioner paid in excess of $8,000 for that year to other employees, making a total of more than $37,000. Approximately the same total *348 compensation was paid for 1919. It was in excess of $36,000 for 1920, and in excess of $34,000 for 1921. The total income from commissions for 1918 was $95,760.07; for 1919, $97,190.13; for 1920, $81,767.20; and for 1921, $88,801.32.
*4143 In the conduct of its business, the petitioner relied to a substantial extent on the services of nonstockholders. We think that what we said in , is applicable here. There we said:
In our opinion this clause means more than that the stockholders shall obtain the clients and supervise the work, or that clients shall look to their experience; it means, among other things, that the corporation may not rely upon non-stockholders to do a substantial amount of the work which produces the income whether such work be detailed or supervisory. Just as another clause excludes from personal service classification those corporations where capital contributes materially to the income, so does this clause exclude corporations where the services of employees so contribute.
We can not find that the services of the nonstockholding employees taken as a whole was not a material income-producing factor or that in view of the services of such employees the income was to be ascribed primarily to the activities of the principal stockholders.
In *4144 , the court said:
The plaintiff claims the benefit of an exception to the general method and extent of taxing corporations. The burden is upon the plaintiff to show that it clearly comes within the terms of such exception. "In such cases, a reasonable doubt is fatal to the claim. Prima facie every presumption is against it. It is only when the terms of the concession are too explicit to admit fairly of any other construction that the proposition can be supported." ). See also .
With respect to the question as to whether capital was a material income-producing factor, we have found that where petitioner purchased live stock for a customer a check usually was received at the time the purchase was made. However, in some instances where the purchaser was financially responsible the cattle were shipped to the customer, upon whom was drawn a draft which was deposited to the credit of the petitioner. This amounted to an extension of credit and the*4145 use of capital under similar circumstances as those presented in the case of , where the court said:
Vendors were paid by the plaintiff's checks; vendees were extended credit, secured by the bills of lading until drafts could be collected, and it must be assumed that payment of vendors immediately and the extension of credit to vendees rather than requiring a cash advance upon the purchase were necessitated by the nature of the business and existing competition and for the purpose of holding trade. Credits were also secured from banks in the discount of drafts.
*349 While we do not know the extent to which capital in this form was used, we can not say that as so used it did not contribute materially to the business success. See .
As a result of the method by which the business was operated, the petitioner's bank account usually showed a substantial credit balance composed chiefly of amounts due customers. From this balance it made accommodation loans to certain of its old customers from whom it usually received notes. It was necessary for the*4146 petitioner from time to time to discount some of the notes as other loans were made. The amounts of these loans to customers are set out in the findings of fact.
In connection with its loans the petitioner received and paid interest as follows:
| Year | Interest received | Interest paid | Net |
| 1918 | $11,611.54 | $9,038.56 | $2,572.98 |
| 1919 | 10,054.51 | 7,054.51 | 3,000.00 |
| 1920 | 9,572.41 | 7,254.32 | 2,318.09 |
| 1921 | 7,127.05 | 5,127.05 | 2,000.00 |
| Total net | 9,891.07 |
As a result of loans the petitioner had bad debts of $3,551.77 and $3,024.55 for 1918 and 1921, respectively, which were much in excess of net amount of interest received for those years.
The petitioner contends that since the total net amount of interest, $9,891.07, less total bad debts of $6,576.32, is only $3,314.75 for the four years, or an average of $828.68 per year, income from interest did not constitute a material portion of its income.
The petitioner's income from commissions on live stock and interest was as follows:
| 1918 | 1919 | 1920 | 1921 | |
| Commissions | $95,760.07 | $97,190.13 | $81,767.20 | $88,801.32 |
| Interest | 11,611.54 | 10,054.51 | 9,572.41 | 7,127.05 |
| Total gross income | 107,371.61 | 107,244.64 | 91,339.61 | 95,928.37 |
*4147 Gross income from interest constituted the following percentages of total gross income for the years indicated:
| Per cent | |
| 1918 | 10.81 |
| 1919 | 9.37 |
| 1920 | 10.04 |
| 1921 | 7.43 |
*350 The petitioner in effect borrowed the greater portion of the money which it loaned from banks by discounting the notes and paying out to the banks most of the interest that was payable to it.
While there is testimony that the primary purpose in making these loans was to accommodate its old customers and not for the primary purpose of receiving any income from such transactions, the fact is that the gross amount received is not an insignificant amount. We must look to the gross amount received from such source and not the net amount. See . The gross amount of interest received is, in our opinion, a material part of the total gross income. In the case of , where the court held that the capital used by that company was not a material income-producing factor, the corporation received only .76 per cent of its income for 1918 from interest on funds loaned to its stockholders. *4148 Of its total earnings, 99.24 per cent was from personal services.
Even, however, if the interest itself received from the loans be held not to be a material part of the income of the petitioner, we can not say to what extent the making of the loans actually contributed to receiving the business or a material part of it. If these loans, through the good will created thereby or otherwise, held customers or added new ones, the money used was an income-producing factor aside from the mere interest received therefrom. It was doubtless necessary or advisable as the result of competition or otherwise to make these loans. In making them a very substantial amount of capital was used. Whether it was invested or borrowed is immaterial.
In view of all the evidence, in our opinion, the petitioner does not meet the tests prescribed by the statute to entitle it to personal service classification.
With respect to the second issue, the respondent at the hearing amended his answer so as to allege that he erred in allowing the deductions totaling $3,125 taken by the petitioner as expense. The respondent contends that the amounts were not an expense but represented a distribution of profits*4149 to the stockholders on the basis of $12.50 per share.
The respondent introduced no evidence in support of his contention nor did he develop from the witnesses produced by the petitioner any testimony which indicates that the amount was not an allowable deduction. The burden being on the respondent to establish his contention, and having failed to submit any evidence in support thereof, the contention set up in his answer must be denied.
Judgment will be entered on 15 days' notice, under Rule 50.
Footnotes
1. This farm is subject to a mortgage of $5,000 to Ed. Copeland, an employee of the firm, but the mortgage is not recorded on the books. Therefore, both assets and liabilities are understated $5,000 each for all years. ↩
2. Bank overdrafts of Dec. 31, 1917, Dec. 31, 1918, and Dec. 31, 1919, include checks written after banking hours but not delivered until following day. Bank statement of the Drovers National Bank shows balances as follows: Dec. 31, 1918, $24,641.46 Dec. 31, 1919, $32,017.28. ↩