*3000 Personal service classification denied.
*1006 This proceeding is an appeal from the Commissioner's determination of deficiencies in income and profits taxes for the fiscal years ending April 30, 1921, and April 30, 1922, in the sums of $9,399.76 and $2,682.40, respectively. The petitioner alleges that the respondent erred in refusing to grant it classification as a personal service corporation under the Revenue Act of 1918. By its amended petition the petitioner requests that in the event personal service classification be not allowed by the Board its tax liability be computed under the special assessment sections of the applicable revenue acts.
FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of the District of Columbia with its principal office in Washington, D.C., and operated a correspondence school of art.
Its authorized capital stock was $10,000, the par value of each share being $100. At the time of its organization in 1914, 49 shares each were issued to Will H. Chandlee*3001 and Arthur J. Luchs and one share each to Nettie L. Chandlee and Joseph Luchs. For the stock issued to him and Joseph Luchs, Arthur J. Luchs paid the sum of $4,400 in cash. In payment of the stock issued to him and Nettie L. Chandlee, Will H. Chandlee assigned to the corporation his interest in the school of art, which for some time previous he had conducted under his own name. Subsequently, Arthur J. Luchs purchased *1007 the stock of Will H. Chandlee, Nettie L. Chandlee and Joseph Luchs and reassigned their shares so that during the years in question the stock ownership was as follows:
| Shares | |
| Arthur J. Luchs | 97 |
| Morton J. Luchs | 1 |
| Sylvan Luchs | 1 |
| Wallace Luchs | 1 |
Will H. Chandlee prepared a course of instructions consisting of 32 lessons. He received $1,000 therefor from the corporation and repaid the amount to the corporation as additional payment or in part payment for the stock previously issued to him. Each lesson in the course of instructions was prepared by Chandlee individually and in the course of instructions are found many references to Chandlee, to his experiences and to his individual method of instruction. It was represented to prospective*3002 students that Chandlee personally corrected all papers submitted to the petitioner during the progress of the course.
All papers examined by Chandlee passed over the desk of Luchs, who some times made changes and occasionally wrote letters of criticism to students. Luchs had sole charge of the review and correction of examination papers submitted in connection with lessons one and two. Luchs also had charge of the administration of the petitioner's business, including the soliciting of students, through magazine advertising and other means, the purchase and sale of art supplies, the employment of typists, clerks, stenographers, and other employees and all further details required by the business. He devoted his entire time to the enterprise.
Chandlee reviewed and corrected all examination papers submitted in connection with lesson 3 to 32, both inclusive. In petitioner's catalogue, in its magazine advertising, and in other promotion literature presented by it to the public, particular stress was laid upon the name and fame of Will H. Chandlee, a nationally known cartoonist, illustrator, and commercial artist. The respondent filed as exhibits various circulars, copies of*3003 advertisements, etc., in many of which particular emphasis is laid upon the personal supervision and direction to be given to the work of the students by Chandlee.
In order to induce students to enroll in the course offered by the petitioner, the letters of former students expressing gratitude and appreciation of the benefits of the instruction were incorporated in the advertising matter and other literature circulated by the petitioner. These letters were usually directed to Chandlee personally and related to the individual attention and consideration paid by Chandlee to the students' needs.
It was stipulated that during the fiscal year 1921 Chandlee examined 27,219 papers and during the fiscal year 1922 examined 26,210 *1008 papers, for which he was paid a compensation of 8 1/3 cents per paper, and that such papers were in connection with lessons 3 to 32, both inclusive. It was also stipulated that during the fiscal year 1921 Arthur J. Luchs examined approximately 5,000 papers and during the fiscal year 1922 approximately 5,000 papers in connection with lessons Nos. 1 and 2. The petitioner received $40, $60, and $90 at various times for the same course of instructions, *3004 including the same supplies and equipment. During the fiscal year 1921 the petitioner received $43,405.19 for courses sold at $40 each and $69,162.62 for courses sold at $60 each. During the fiscal year 1922 it received $1,445.25 for courses sold at $40 each, $100,755 for courses sold at $60 each, and $9,595.25 for courses sold at $90 each. Additional income was received from students to whom printed lessons and equipment were furnished but who had not submitted written answers to the questions contained in the lessons and also from students who had given up the course before submitting examination papers.
No segregation was made in the amounts received by the petitioner in payment of the supplies it sold to students from the amounts it received as tuition fees. The petitioner received as additional income in 1921 the sum of $1,092.65 and in 1922 the sum of $1,080.53 representing cash discounts.
The following is a statement of the principal disbursements by way of supplies, salaries and pay-roll expenditures during the years under consideration:
| Expenses | 1921 | 1922 | ||
| Literature, art and stationery: | ||||
| Equipment | $11,309.04 | $10,131.55 | ||
| Circulars, catalogs, and printed matter | 11,309.05 | 10,131.56 | ||
| $22,618.09 | $20,263.11 | |||
| Magazine advertising | 35,819.87 | 45,651.87 | ||
| Salaries: | ||||
| A. J. Luchs, President | 3,600.00 | 3,600.00 | ||
| Will H. Chandlee, instructor and examiner | 2,268.23 | 2,183.82 | ||
| R. W. Davis, chief clerk | 2,488.61 | 2,631.32 | ||
| Other employees | 8,197.83 | 9,601.33 | ||
| 16,554.67 | 18,016.47 |
*3005 Prior to March 1, 1921, Arthur J. Luchs received a salary $40of per week, during the fiscal years 1921 and 1922 he received $300 per month, and for the fiscal year ending in 1923, the sum of $7,500, as his yearly salary. During the years under consideration Luchs agreed with R. W. Davis that the said Davis should receive a bonus of 5 per cent of the net profits of the business provided Luchs was paid only $300 per month as his salary. During the fiscal year ending in 1921 the petitioner employed 30 nonstockholders. During the fiscal year ending in 1922 the petitioner employed 13 named nonstockholders, and paid $2,116.26 for the service of various other unnamed nonstockholders.
*1009 The following are comparative balance sheets of the petitioner for the fiscal years ending April 30, 1920, 1921, and 1922:
| 1920 | 1921 | 1922 | |
| ASSETS | |||
| Foreign currency | $1,037.41 | ||
| Cash, office | $918.57 | 222.31 | $371.09 |
| Cash, bank | 6,141.97 | 817.76 | |
| Inventory, literature, art and stationery | 6,895.95 | 8,148.63 | 6,947.94 |
| Furniture and fixtures | 2,009.40 | 4,196.52 | 4,273.85 |
| Correspondence course | 1,000.00 | 1,000.00 | 1,000.00 |
| Good will | 5,600.00 | 5,600.00 | 5,600.00 |
| Liberty bond | 350.00 | 65.00 | |
| 22,565.89 | 22,372.63 | 18,257.88 | |
| LIABILITIES | |||
| Accounts payable | 4,214.42 | 2,648.51 | 1,585.12 |
| Bank account (overdraft) | 935.77 | ||
| Capital stock | 10,000.00 | 10,000.00 | 10,000.00 |
| Surplus | 8,351.47 | 9,724.12 | 5,736.99 |
| 22,565.89 | 22,372.63 | 18,257.88 |
*3006 OPINION.
VAN FOSSAN: The primary question for our consideration is whether or not the petitioner should be classified as a personal service corporation under section 200 of the Revenue Act of 1918.
The three essential requirements of that Act entitling the petitioner to denomination as a personal service corporation are (1) its income must be ascribed primarily to the activities of the principal owners or stockholders; (2) such principal owners or stockholders must be regularly engaged in the active conduct of the affairs of the corporation; and (3) capital (whether invested or borrowed) must not be a material income-producing factor. All three elements must concur and the burden is upon the petitioner to show that it meets clearly all the requirements of the statute. ; ; and .
The record discloses that Arthur J. Luchs owned 97 per cent of petitioner's stock and devoted all of his time to the corporate business. Petitioner thus meets the second of the above-named qualifications.
*3007 It also appears, however, that the school was built almost entirely around the name of Will H. Chandlee, an experienced artist, illustrator, and instructor. Although he was not a stockholder in the corporation, in petitioner's catalogue, in its advertising, and in its course of instruction Chandlee was featured to the exclusion of any one else. He prepared and sponsored the course of instruction and was represented as personally supervising all art instruction. Not only was Chandlee put forward as the chief asset of the school, but *1010 in fact he personally corrected all lessons from 3 to 32. Letters from former students expressing appreciation for instruction received and addressed to Chandlee personally were published in petitioner's magazine advertising. The apparent design was to create the impression that the Washington School of Art and Chandlee were one.
In such a situation, although the principal stockholder, Luchs, may have been in charge of administration, and planned and organized the capitalization of Chandlee's name and reputation, facts not all definitely appearing in the record but assumed therefrom, we are unable to say that petitioner's income was*3008 primarily ascribable to the activity of Luchs. Rather we are persuaded it was primarily attributable to the name and activity of Chandlee. We thus conclude that petitioner has failed to prove that its income was primarily to be ascribable to the activities of the principal owner or stockholder.
Though the conclusion we have indicated above renders further consideration of the personal service question unnecessary, it is noted that petitioner employed a relatively large force of clerks, sold a considerable quantity of materials and supplies to students, and spent large sums for advertising. In the record no segregation of the amounts of income attributable to these sources is attempted.
As to petitioner's alternative proposals for special assessment the record fails to disclose any such abnormal conditions as would entitle petitioner to this relief.
Judgment will be entered for the respondent.