*200 A corporation formed to act under power of attorney or otherwise as factor, agent, or broker for others for the purpose of exchanging contracts of indemnity against various kinds of liability on the reciprocal or interinsurance plan is not, where capital was a material income-producing factor or where only approximately 56 per cent of its stockholders were regularly engaged in the active conduct of its affairs, entitled to classification as a personal service corporation under the provisions of section 200 of the Revenue Act of 1918.
*263 Before JAMES, STERNHAGEN, TRAMMELL, and TRUSSELL.
This appeal involves income and profits taxes for the calendar years 1918, 1919, and 1920. The Commissioner determined the tax liability of the taxpayer under the provisions of sections 230 and 301 of the Revenue Act of 1918, whereas the taxpayer contends that it was, during the years in question, a personal service corporation within the meaning of section 200.
FINDINGS OF FACT.
The taxpayer was a corporation*201 engaged in the business of acting under power of attorney as agent or broker for individuals, firms, or corporations in exchanging contracts of indemnity against various kinds of liability on the reciprocal or interinsurance plan. It was organized in February, 1911, under the laws of the State of Missouri under the name of John S. Day Service Co., with a capital stock of $10,000 fully paid in cash. The name of the corporation was changed November 27, 1911, to the Utilities Service Co. Capital capital stock was again increased, the increase being $100,000, of which $75,000 was preferred stock issue for cash and $25,000 being paid in cash. It was further increased May 5, 1916, to $50,000, the increase also being paid in cash. On July 23, 1917, the capital stock was again increased, the increase being $100,000, of issued as a stock dividend. The corporation had capital stock outstanding of $150,000 for 1918, 1919, and 1920.
*264 The following is a statement of the names of the stockholders who were regularly engaged in the active conduct of the affairs of the corporation and the amount of compensation they received:
| Number of shares owned, 1918. | Salary, | Number of shares owned, 1919. | Salary. | |
| Lynton T. Block | 1,032 | $5,700.00 | 1,012 | $8,200.00 |
| C. W. Black | 83 | 2,100.00 | 83 | 2,100.00 |
| B. H. Batte | 52 | 3,425.00 | 51 | 3,900.00 |
| J. G. Owen | 70 | 3,766.65 | 70 | 4,500.00 |
| Bert Hoffman | 8 | 980.00 | 12 | 1,117.00 |
| Leslie D. Lassus | 1 | 675.00 | 1 | 1,071.00 |
| Roland Holtgrewe | 2 | 300.00 | 3 | 1,185.00 |
| Anna Greiner | 10 | 900.00 | 10 | None. |
| J. J. Nagle | 15 | 3,600.00 | ||
| A. E. Werner | 3 | 1,071.00 | ||
| H. H. Rhein | 6 | 1,260.00 | ||
| Phebe Murray | 2 | 1,008.00 | ||
| H. G. McKim | 5 | 2,300.00 | ||
| 1,258 | 17,846.65 | 1,273 | 31,312.00 |
*202 Stockholders who were not regularly engaged in the active conduct of the affairs of the corporation, who did not receive compensation from the taxpayer but served either as directors, members of advisory board, or claims attorney, were as follows:
| Number of shares owned, 1918. | Number of shares owned, 1919. | |
| W. H. Bixby | 1 | 5 |
| J. J. Frey | 121 | 121 |
| P. C. Block | 82 | 82 |
| R. E. Moran | 15 | |
| D. G. Taylor | 275 | 275 |
| F. J. Postal | 15 | |
| 494 | 498 |
Any service rendered by these stockholders was occasional or advisory. The amount of stock owned by this group was approximately 22 per cent of the total outstanding capital stock.
Stockholders who owned approximately 22 per cent of the total stock outstanding and who performed no service to the corporation were as follows:
| Number of shares owned, 1918. | Number of shares owned, 1919. | |
| J. B. Coryell | 21 | 21 |
| W. K. Bixby | 449 | 417 |
| Bransford Lewis | 10 | 10 |
| C. L. Mathews | 5 | 5 |
| M. J. Wolf | 10 | 10 |
| G. P. Moran | 15 | |
| W. A. Greiner | 1 | 1 |
| A. O. Beimieik | 2 | |
| 498 | 479 |
*265 The following stockholders devoted their entire time to the business of the corporation and received compensation for their*203 service for the year 1920:
| Number of shares owned. | Salary. | |
| Linton T. Block | 1,012 | $10,000 |
| C. W. Block | 83 | 2,100 |
| J. G. Owen | 90 | 5,400 |
| J. J. Nagle | 15 | 4,200 |
| H. G. McKim | 33 | 3,300 |
| 1,233 | 25,000 |
The stockholders who were regularly engaged in the active conduct of the affairs of the corporation owned approximately 56 per cent of the total stock outstanding for each of the years 1918, 1919, and 1920.
The principal business of the taxpayer was to act as attorney-in-fact for subscribers at the Utilities Indemnity Exchange and the Utilities Fire Exchange, and to act as an insurance broker. At the Utilities Indemnity Exchange and the Utilities Fire Exchange individuals, firms, and corporations exchange contracts of indemnity against various kinds of liability, on the reciprocal or interinsurance plan, each subscriber making a deposit out of which his share of the underwriting losses and expenses is paid. In order to become subscribers at the exchange, the individual, firm, or corporation was required to execute a power of attorney to Lynton T. Block and to appoint the taxpayer substitute attorney with authority to appoint other substitute attorneys to*204 act for and in the place of the subscriber in carrying out the exchange of indemnity.
The balance sheets of the taxpayer as at December 31, 1918, December 31, 1919, and December 31, 1920, are as follows:
| Dec. 31, 1918. | Dec. 31, 1919. | Dec. 31, 1920. | |
| Assets: | |||
| Cash | $23,970.41 | $3,218.33 | $6,017.51 |
| Trade accounts and notes receivable | 31,089.72 | 26,728.08 | 56,988.26 |
| Loans to officers and employees | 1,228.85 | 866.82 | |
| Mortgages and securities | 67,700.00 | 71,950.00 | 900.00 |
| Insurance policy, surrender value | 1,502.50 | 2,378.55 | 4,631.40 |
| Furniture and fixtures | 9,486.79 | 12,552.81 | 17,831.40 |
| Automobiles | 4,200.00 | 4,381.00 | 1,827.41 |
| Purchased clientele cost | 16,861.77 | 16,861.77 | 16,861.77 |
| Stock in domestic corporation | 105,660.00 | 105,660.00 | |
| Improvement to leased property | 302.90 | 1,920.67 | |
| 156,040.04 | 244,900.26 | 212,628.42 | |
| Liabilities: | |||
| Notes payable | 33,784.92 | 105,462.66 | 63,151.15 |
| Accounts payable | 6,363.62 | 8,031.26 | 20,017.67 |
| Reserve for depreciation | 2,756.29 | 4,041.86 | 6,017.07 |
| Reserve for bad debts | 1,392.91 | 1,392.91 | |
| Reserve for moving | 1,900.00 | ||
| Reserve for Federal taxes | 5,311.32 | ||
| Reserve for Government bonds | 4,402.50 | ||
| Capital stock | 150,000.00 | 150,000.00 | 150,000.00 |
| Surplus (deficit) | 36,864.79 | 30,330.93 | 33,251.70 |
| 156,040.04 | 244,900.26 | 212,638.42 |
*205 *266 The following schedule shows the available capital invested and borrowed for use in the taxpayer's business for the years stated:
| Dec. 31, 1917. | Dec. 31, 1918. | Dec. 31, 1919. | Dec. 31, 1920. | |
| Capital stock | $150,000.00 | $150,000.00 | $150,000.00 | $150,000.00 |
| Notes payable | 21,000.00 | 33,784.92 | 105,462.66 | 63,151.15 |
| 171,000.00 | 183,784.92 | 255,462.66 | 213,151.15 | |
| Less deficit | 36,220.62 | 36,864.79 | 30,330.93 | 33,251.70 |
| Available capital | 134,779.38 | 146,920.13 | 225,131.73 | 179,899.45 |
One of the duties provided by the power of attorney agreement under which the corporation conducted the major portion of its business was to provide reinsurance. In order to do this the taxpayer established a fund consisting of assets, such as cash or securities that could easily be converted into cash, which were placed in escrow subject to the use of the members of the Indemnity Exchange in the event of excess losses. This fund amounted to $72,500, and gave the corporation financial security and ability to finance its customers.
The income and deductions for the three years were as follows:
| 1918 | 1919 | 1920 | |
| Income: | |||
| Fees on exchange | $88,850.93 | $139,841.54 | $154,212.15 |
| Insurance brokerage | 10,743.31 | 23,610.69 | 47,659.52 |
| Adjusted fees | 9,439.27 | 13,497.88 | 14,363.26 |
| Fees on reinsurance | 13,221.87 | 23,651.72 | 25,781.68 |
| Accident insurance commission | 1,096.70 | 1,095.62 | |
| Interest income | 2,769.84 | 5,898.68 | 1,379.71 |
| 126,121.92 | 207,596.13 | 243,396.49 | |
| Deductions: | |||
| Salaries of stockholders | 17,846.65 | 31,312.00 | 25,000.00 |
| Other salaries | 26,337.25 | 43,216.21 | 84,044.52 |
| Traveling expenses | 4,366.41 | 5,418.06 | 6,310.39 |
| Claim department expenses | 12,108.11 | 20,909.60 | 25,528.26 |
| Sundry commissions | 4,321.15 | 10,503.10 | 23,421.36 |
| Auto expense | 4,561.91 | 7,503.80 | |
| Reinsurance | 9,875.00 | 13,500.00 | |
| Bad debts | 1,652.31 | ||
| Advertising | 4,536.71 | 4,765.00 | 7,401.97 |
| Inspection expense | 3,241.50 | 2,376.64 | 755.77 |
| Legal expense | 5,939.35 | 1,804.07 | 1,520.94 |
| Depreciation | 948.68 | 1,285.57 | 1,975.27 |
| Interest and discount | 906.09 | 888.67 | 2,838.53 |
| Other expense | 21,633.55 | 33,722.80 | 39,907.44 |
| 106,647.36 | 176,132.83 | 232,204.45 | |
| Total income | 126,121.92 | 207,596.13 | 243,396.49 |
| Total deductions | 106,647.36 | 176,132.83 | 232,204.45 |
| Total net income | 19,474.56 | 31,463.30 | 11,192.04 |
*206 It was customary for the taxpayer to accept short time notes from a number of clients when premiums became due if it was inconvenient for them to pay in cash. Such were the notes receivable appearing on the balance sheets.
The paid in capital of the company less the amount of the deficit as it existed from time to time, and the borrowed money were regularly used in the taxpayer's business. It constituted a fund which was *267 the basis for credit when credit was needed and which enabled the corporation to enlarge its business activities, to obtain reinsurance more advantageously and to provide for losses in excess of amounts anticipated by insurance averages.
DECISION.
The determination by the Commissioner of a deficiency in the amount of $207.25 for 1918, $1,993.22 for 1919, and $716.59 for 1920, is approved.