*2524 On the evidence held that the taxpayer was not a personal service corporation.
*690 In this proceeding the petitioner seeks a redetermination of its income and profits tax for the fiscal year ended June 30, 1920, for which period the respondent has refused to classify the petitioner as a personal service corporation, and has determined a deficiency in the amount of $9,256.40.
FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of the State of South Carolina, with its principal office at Charleston, in that State, where it is engaged in the produce and fruit commission business. It was organized in 1915, with an authorized capital stock of $100,000, all of which was fully paid and outstanding during the fiscal year ending June 30, 1920. The stock in the petitioner was owned in equal amounts by W. H. Mixon and J. S. Mixon. W. H. Mixon was the president. While he was thoroughly conversant with the petitioner's business, he was not continuously employed or engaged in the business and drew no salary during the taxable year. *2525 He was actively engaged in business other than that of the petitioner, and was president of the Southern Fruit Co. and the W. H. Mixon *691 Seed Co., and received from each of said companies a substantial salary. J. S. Mixon was vice president, treasurer and general manager of the business of the petitioner. He devoted his entire time to the business during the year in question and received a salary of $2,500. The only other office of the petitioner was G. E. Blankens, who owned no stock. He devoted his entire time to the business and received compensation in the amount of $3,796.98. He acted as inspector of produce, shipping clerk and at various times traveled on behalf of the petitioner.
The balance sheets showing the assets and liabilities of the petitioner at the beginning and end of the fiscal year ending June 30, 1920, are as follows:
| July 1, 1919 | June 30, 1920 | |
| Assets: | ||
| Cash | $8,800.34 | $5,645.15 |
| Accounts receivable | 2,772.61 | 4,798.40 |
| Liberty bonds | 1,000.00 | 1,000.00 |
| Fixtures | 108.00 | 1,172.30 |
| 12,680.95 | 12,615.85 | |
| Liabilities: | ||
| Accounts payable | 928.00 | 1,460.00 |
| Dividends payable | 1,000.00 | |
| Capital stock | 10,000.00 | 10,000.00 |
| Surplus | 752.95 | 1,155.85 |
| 12,680.95 | 12,615.85 |
*2526 The petitioner's income and deductions for the fiscal year ended June 30, 1920, are as follows:
| INCOME | |||
| Commissions on sale of vegetables | $37,668.71 | ||
| Commissions on sale of containers | 3,310.49 | ||
| Total commission | 40,979.20 | ||
| Sale of apples | $139,359.14 | ||
| Cost of apples | 132,376.91 | ||
| $6,982.23 | |||
| Sale of seed potatoes | 42,326.83 | ||
| Cost of potatoes | 38,878.80 | ||
| 3,448.03 | |||
| Total trading profit | 10,430.26 | ||
| Gross income | 51,409.46 | ||
| DEDUCTIONS | |||
| Salary nonstockholders | $6,426.63 | ||
| Salary stockholders | 2,504.25 | ||
| Brokerage paid | 769.15 | ||
| Discount and interest | 361.05 | ||
| Telephone and telegraph | 3,197.20 | ||
| Traveling expense | 1,633.13 | ||
| Railroad claims paid | 147.83 | ||
| Exchange | 1,163.37 | ||
| Other deductions | 2,176.24 | ||
| $18,378.85 | |||
| Net income | 33,030.61 | ||
| Less Liberty bond interest | 42.50 | ||
| Net taxable income | 32,988.11 |
*692 In addition to the produce commission business, the petitioner, as a principal, bought and sold potatoes during the taxable year, accepting notes from some of its customers in payment of the potatoes sold, in the amount of $13,535.39. The gross profit realized from the sale of potatoes was $3,448.03. *2527 The petitioner, as a principal, bought and sold apples and realized a gross profit of $6,982.23. The gross profit from trading as principal in seed potatoes and applied during the taxable year amounted to $10,430.26, or 20.3 per cent of the total gross income for said year.
In buying and selling produce on a commission basis, drafts were used when the produce was shipped to northern markets. The cost of exchange and interest on these drafts amounted to $1,163.37 during the year in question.
The petitioner supplied its customers with various kinds of packages in order that the product might be uniformly marketed. The orders were taken from the farmers and placed with the manufacturer to be filled. Shipments were made direct to the farmers. Invoices were made by the manufacturer against the petitioner and petitioner in turn billed the farmers plus a 10 per cent commission. Payments were never made by the petitioner until after collection had been made from the farmers. The only instance of loss from the business was borne by the manufacturer.
The accounts receivable June 30, 1920, amounting to $4,798.40, consisted of $2,618.98 due from commission houses, $300.18 due*2528 on damage claims, $806.15 due from farmers for barrels sold to them, and $1,073.09 advances to farmers for goods not settled for.
Occasionally when farmers were in need of money the petitioner advanced funds to them on goods turned over for shipment. The petitioner employed brokers, in some instances, to assist in the marketing of goods.
*693 The capital used in the business during the period in question consisted of $10,000 paid in for stock, a total of $15,000 borrowed from and repaid to the bank, and credit extended it by the bank by furnishing funds to pay drafts drawn on petitioner pending payment on drafts drawn by petitioner and deposited with the bank for collection.
The respondent has denied the petitioner classification as a personal service corporation and determined a deficiency in income and profits taxes in the amount of $9,256.40 for the fiscal year ended June 30, 1920.
OPINION.
GREEN: We have for consideration here the single question whether or not the petitioner is entitled to classification as a personal service corporation under section 200 of the Revenue Act of 1918.
The Act specifies three essential elements that must concur to constitute*2529 a corporation one of personal service - (1) the principal owners or stockholders shall be regularly engaged in the active conduct of the affairs of the corporation; (2) its income must be ascribed primarily to their activities; and (3) capital (invested or borrowed) must not be a material income-producing factor. The absence of any of these elements is fatal to a claim for personal service.
In the instant case, W. H. Mixon, who owned one-half of the stock, devoted considerable of his time to the management of two other concerns, from which he drew substantial salaries, while he drew no salary from the petitioner. The company, in the conduct of its business, employed other brokers to assist in the marketing of its goods. The petitioner, in addition to carrying on its brokerage business, also at certain seasons of the year traded as principal in seed potatoes and apples. This trading produced over one-fifth of its income, and in order to carry on this feature it was compelled to borrow money in substantial amounts. In addition to the profit received from such trading, particularly in the case of the seed potatoes, the petitioner benefited indirectly by both increasing and holding*2530 its business with the truck farmers, and also by reason of its all-year contract with wholesale produce dealers. These indirect benefits are attributable to the use of capital.
Accordingly we are of the opinion that the petitioner does not come within the terms of the above-mentioned section and is not entitled to be classified as a personal service corporation.
Judgment will be entered for the respondent.
Considered by STERNHAGEN, LANSDON, and ARUNDELL.