*2571 Respondent's denial of personal service classification approved.
*534 These proceedings, which were consolidated for hearing and decision, involve deficiencies in income and profits taxes for the fiscal year ending June 30, 1919, and the 6-month period ending December 31, 1919, in the respective amounts of $5,555.45 and $3,398.99. Both deficiencies arise from respondent's denial of personal service classification and the only issue is whether petitioner was a personal service corporation during the taxable periods in question.
*535 FINDINGS OF FACT.
Petitioner is a Colorado corporation with principal offices at the Union Stock Yards, Denver. It was organized in 1908 with a capital stock of $15,000 divided into 150 shares of the par value of $100 each, all of which was issued for cash and was outstanding during the periods in controversy. Its stockholders, officers and their salaries, and the class and extent of personal services rendered by stockholders may be tabulated as follows:
| Stockholder | Shares | Office | Salaries |
| A. G. Prey | 42 | President | $5,000 |
| R. G. Denham | 31 | Vice president | 3,000 |
| W. W. Swearingen | 35 | Secretary and treasurer. | 3,000 |
| Alta M. Prey | 21 | None | None. |
| Zelma Prey | 7 | do | None. |
| A. C. Prey | 7 | do | 1,800 |
| E. L. Prey | 7 | do | 2,100 |
| Class of service | Amount of time devoted to business |
| Cattle salesman | Practically entire time. |
| do | Entire time. |
| Hong salesman | Do. |
| None | |
| do | |
| Cattle salesman | Entire time excepting absence in military service from |
| fall of 1917 to spring of 1919. | |
| Field man solicitor | Entire time. |
Petitioner had employees who were neither officers nor stockholders. One of these employees was a member of the Exchange and a yard buyer. Salaries paid to employees in undisclosed amounts were included in amounts listed as deductions under the head "Salaries of others and Travel," which totaled $12,645.33 for the fiscal year 1919 and $8,351.16 for the following 6-month period.
Alta M. Prey was the widow of W. D. Prey, a brother of A. G. Prey, and president of the petitioner prior to his death in 1916. Zelma Prey, A. C. Prey, and E. L. Prey were the children of W. D. prey and Alta M. Prey. W. D. Prey died intestate. His estate was kept intact as nearly as possible. The Denver Stock Exchange agreed to placing his membership in the name of the son, E. L. Prey, who had been active with his father as representing the heirs' entire interest in the business, no other membership*2573 being required of the other heirs for the time being. The 42 shares of stock held by W. D. Prey at the time of his death were carried on petitioner's books in the name of Alta M. Prey as administratrix until July 23, 1919, when a correcting entry was made placing the stock in the name of the respective heirs, the widow taking 21 shares and the three children 7 shares each under the intestate laws. Thereafter dividends were paid directly to the heir owners whereas before the proper distribution among the heirs was made by the administratrix.
Petitioner is and has been engaged in the buying and selling of live stock on a commission basis conducting its operations in the Union Stock Yards at Denver, Colo. It kept patrons posted by letter and telephone of market changes and assisted in the actual shipment *536 by arranging for cars in times of shortage and expedited movement of stock by keeping in touch with and securing better dispatch on shipments made. Stock was shipped to them on consignment with authority to sell. Once the shipment had arrived petitioner took charge and saw that the animals were properly cared for and that they were sorted and classified, after which*2574 they were graded as to size and quality. The classification and grading accomplished, the stock was placed in sale pens in the stockyards to be shown to buyers and offered for sale.
The buyers were usually yard traders, packing house buyers and country feeders. The stock was sold for the best price the salesman could obtain. The sale was made by the process of bargaining and the price received depended in large part upon the salesman's knowledge of market conditions and his skill as a salesman. He had to know his class of stock, market prices, the relation between the supply and the demand in his particular class and the buyer and his needs.
After a sale was consummated, the stock sold was weighed and assorted to determine ownership. Expenses such as freight, yardage, commissions, feeding and insurance charges were prorated among the various owners of the stock. The owner shippers were then credited with the proceeds of the sale less their share of the expenses. The sales were made for cash but payment to petitioner was sometimes delayed for as much as two days due to delay (occasioned by inability to get proper freight returns or prompt dispatch in calculating the sales*2575 ticket), in rendering the ticket and bill. Notwithstanding such delays in collections petitioner, in every case, remitted to the shipper on the day the stock was sold and weighed. Such payments prior to collection required the use of capital to clear from day to day. Also petitioner, in some instances, recognized drafts on stock shipped to the extent of from 25 per cent to 75 per cent of the expected selling price. Only drafts of regular shippers were recognized. The amount of the accepted drafts represented not more than one per cent of the gross business.
If no sale was made petitioner made no charge against the shipper; its only charge was its selling commission. The stockyards were owned by a company in which petitioner had no interest. The yardage charges, representing reimbursements to that company for use of the yards plus the cost of unloading and reloading, were paid by the petitioner and, together with other expenses, were deducted from the gross selling price. The commission rate charged was fixed by the Exchange. Petitioner operated only on the commission basis, the rules of the Exchange not permitting members to operate as principals.
Petitioner's buying*2576 was done principally on behalf of country feeders. Petitioner was required to pay for the stock purchased *537 immediately the bill was rendered. Several days were required after the purchase was made to brand and ship the stock, thus several (usually more than two) days elapsed before remittances were received, necessitating the use of capital, in some instances borrowed for short times on demand, to take care of these emergency instances.
During the fiscal year ending June 30, 1919, petitioner handled a gross commission business of $10,300,000 for 7,200 customers, its gross commissions amounting to $63,840.47. Its gross business for the 6-month period ending December 31, 1919, was $5,100,000 transacted in the interest of 2,500 customers, who paid petitioner gross commissions of $40,960.04.
During the war period the United States Food Administration, through the National Live Stock Exchange and the banks, urged petitioner to lend encouragement to producers to increase production by assisting them in obtaining needed finances. Petitioner arranged loans for producers with the bank and assisted them in the purchase of suitable stock. The patrons to which this assistance*2577 was rendered numbered about 80 during the fiscal year 1919 and between 25 and 30 during the succeeding 6-month period. Just how the loans were arranged is not shown. At any rate petitioner became an endorser on a number of obligations which were discounted at the bank, petitioner receiving the discount, which amounted to about one-half of 1 per cent of the amount borrowed. When these obligations came due, interest thereon was accrued on petitioner's books in accordance with its method of accounting, and when renewals or extensions were made, petitioner continued its liability on such obligations. During the fiscal year ending in 1919, petitioner accrued interest from this source in the amount of $11,227.44, and for the next 6-month period $4,325.93. None of this interest was collected during the respective periods. The expense apportioned to this interest income during the fiscal year 1919 by petitioner was about $3,500, while petitioner's losses incurred within the year as an endorser on paper made worthless by deflation in the cattle industry, together with the apportioned expense item, were considerably in excess of the interest accrued in either of the taxable periods in*2578 question. Petitioner lost prestige in these loan ventures. Gross commissions earned on stock transactions for patrons aided by the arrangement for loans amounted to only $1,265.70 and $784, of the above given totals, during the fiscal year 1919 and the succeeding 6-month period, respectively.
Petitioner also, on its own account, established a ranch known as the Sand Hill Cattle Ranch, which it operated for production purposes. The capital used for this purpose were amounts previously declared as dividends and credited to, but not withdrawn by, stockholders. The stock held on this ranch was inventoried at at least (there is some indication in the record that it should be more) *538 $33,700.68 on June 30, 1919, and at $31,220 on December 31, 1919. In computing the deficiencies in controversy respondent recognized losses of $8,710.72 and $3,069.54 for the fiscal year 1919 and the 6-month period ending December 31, 1919, respectively, on this ranch venture.
The dividends credited to stockholders were left in the business to support the stockholders' personal endorsement of petitioner's obligations. The evidence on whether petitioner paid interest on these credits to*2579 stockholders during the taxable periods involved is conflicting, though it appears clear that such interest was paid in subsequent years. In addition to the use of such funds to establish the Sand Hill Ranch, they were also used to finance several other partnership enterprises entered into between individual stockholders and outside parties. These partnerships paid interest on such advances. In determining the deficiencies in question respondent followed the recommendation of an examining revenue agent in excluding the gains from the above-mentioned partnerships from petitioner's income on the ground that such income was income to the respective partners.
The assets and liabilities of petitioner, with the exception of certain minor adjustments, during the two periods were as follows:
| BALANCE SHEET - June 30, 1918 | |
| Assets: | |
| Cash | $6,771.99 |
| Bills receivable | 88,995.64 |
| Accounts receivable | 41,005.43 |
| Furniture and fixtures | 1,673.80 |
| Membership Denver Live Stock Exchange | 5,000.00 |
| Liberty bonds | 6,000.00 |
| Totals | 149,446.86 |
| Liabilities: | |
| Bills payable | 8,148.04 |
| Accounts payable | 35,195.08 |
| Personal balances | 65,312.97 |
| Capital stock | 15,000.00 |
| Surplus | 25,790.77 |
| Totals | 149,446.86 |
| June 30, 1919 | |
| Assets: | |
| Cash | 19,680.48 |
| Bills receivable | 110,129.88 |
| Accounts receivable | 12,839.00 |
| Furniture and fixtures | 1,587.04 |
| Membership, etc | 5,000.00 |
| Liberty bonds | 13,000.00 |
| War Savings stamps | 836.00 |
| Totals | 163,072.40 |
| Liabilities: | |
| Bills payable | $7,579.18 |
| Accounts payable | 28,914.93 |
| Personal balances | 85,215.90 |
| Capital stock | 15,000.00 |
| Surplus | 26,362.39 |
| Totals | 163,072.40 |
| Period ended December 31, 1919 | |
| Assets: | |
| Cash | 13,001.64 |
| Bills receivable | 24,430.10 |
| Accounts receivable | 96,635.19 |
| Furniture and fixtures | 2,044.17 |
| Membership, Denver Live Stock Exchange | 5,000.00 |
| War Savings stamps | 836.00 |
| Totals | 141,947.10 |
| Liabilities: | |
| Accounts payable and personal balances | 109,522.55 |
| Capital stock | 15,000.00 |
| Surplus | 17,424.55 |
| Totals | 141,947.10 |
*2580 *539 Bills receivable were open accounts of patrons uncollected at the date of the statement.
Petitioner's net income was $19,377.28 for the fiscal year 1919 and $14,424.97 for the 6-month period ending December 31, 1919.
OPINION.
SIEFKIN: Petitioner asserts it is a personal service corporation, defined in section 200 of the Revenue Act of 1918 to mean:
* * * 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 * * *.
In the view we take of the case it is unnecessary to examine the facts in the light of the tests prescribed by the quoted excerpt from the statute other than the prerequisite that "capital invested or borrowed, is not a material income-producing factor." As to this aspect of the question petitioner urges that "income" as used in the statute means net income and, therefore, losses being sustained on the loans arranged for patrons and on the Sand Hill Ranch project, that no "income" was derived from those*2581 sources. We think capital was a material income-producing factor even though the capital invested in and the income from those items be excluded from consideration. We refer to the use of capital to carry patrons in connection with the strictly commission business. It appears that petitioner's capital stock and surplus account (though credits to stockholders be excluded) *540 was in excess of $40,000 from July 1, 1918, until some time between June 30, 1919, and December 31 of that year, when the capital made up of these combined items totaled more than $32,000. Petitioner at times found it essential to borrow money in undisclosed amounts to supplement available invested capital to enable it to make remittances to shippers in advance of collections and to pay for stock purchased before it received payment from the purchasers. Aside from unknown quantities of borrowed capital admittedly employed, it seems apparent that the invested capital item of $40,000 was a substantial factor in earning income. Petitioner rendered a dual service - the service of buying and selling stock, which was personal in its nature, and the service of providing funds to carry the customers, which*2582 was a service capitalistic in nature. It is true that each customer was carried for only a few days, but capital sufficient for that purpose was deemed essential to petitioner's business and was substantial in amount, and not incidental, when compared with the size of petitioner's business as indicated by commissions received. It is also true that the remuneration for this dual service took the form of commissions. Yet where both services were rendered and each was necessary to petitioner's successful operations, it can scarcely be said that the comparatively substantial capital used was not an income-producing factor or that such income could be primarily ascribed to the buying and selling activities of the stockholders. In this respect, the case is to be distinguished from , and is similar to .
Reviewed by the Board.
Judgment will be entered for the respondent.