*4278 Petitioner held not to be entitled to personal service classification.
*1197 This is a proceeding for the redetermination of deficiencies in income and profits taxes for the years 1918, 1919, and 1920, in the amounts of $3,357.03, $10,753.17, and $6,790.31, respectively.
It is alleged that the respondent erred in refusing to classify the petitioner as a personal service corporation during the years involved and in the alternative, if the petitioner was properly classified as not being a personal service corporation, its tax should be computed under the provisions of section 328 of the Revenue Act of 1918, which the respondent refused to do.
FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of Ohio, having its principal office at Springfield. When organized in 1907, it had an authorized capital stock of $1,500, of which $1,000 par value of stock was issued. The corporation acquired from Gus Sun furniture and fixtures of inconsiderable value, not to exceed $500. Prior to the years involved in this proceeding, *4279 the authorized capital stock was increased to $50,000 par value, all common stock.
The corporation was engaged in the booking-exchange business, in which it sought to represent various vaudeville theatres in furnishing them theatre actors, entertainers, and acts. The remuneration from the business was solely from commissions received for *1198 such services. During the years involved the capital stock was owned of record as follows:
| Shares | |
| Gus Sun | 204.5 |
| United Booking Offices Co. (Corporation) | 201.5 |
| Ray H. Leason | 10 |
| Olean Amusement Co. (corporation) | 1 |
| Jno. M. Cole | 1 |
| Chester Sargent | 1 |
| Jules Hurtig | 10 |
| Jno. E. McCarthy | 5 |
| Mr. White | 1 |
| Thos. Garry | 1 |
| John McCreary | 1 |
| Mr. Thurston | 5 |
| Proctor E. Seas | 30 |
| Consolidated Amusement Co | 1 |
| Ray Andrews | 10 |
| 483 |
No actual cash was paid for the stock issued and nothing of value paid except as above stated.
The increase in the authorized capital stock from $1,500 to $50,000 was for the convenience of the corporation in issuing stock to certain theatre operators and others; $25,400 par value of the stock was issued to Sun without any consideration whatever. One reason for the additional issue*4280 of stock was that Sun was negotiating a contract of affiliation or a working agreement with the United Booking Offices, a New York corporation, which was then engaged in part in work of the same kind and character as the petitioner but on a more extensive scale. It represented the owners and proprietors of "big time" as well as "small time" vaudeville theatres throughout America. One hundred, forty-nine shares of the capital stock were issued to the United Booking Offices and 55 1/2 shares were assigned by Gus Sun to that company, making a total of 204.5 shares, three of which were placed one each in the names of White, Garry, and McCreary, who were attorneys for the United Booking Offices.
Sun caused to be issued $1,000 par value of stock to Ray Leason, who was secretary-treasurer and assistant booker of the petitioner corporation. The other blocks of stock appearing in the names of individuals above set out were issued gratuitously to theatre owners, operators and customers of the petitioner whose good will was desired.
In 1914, Sun and the petitioner corporation signed affiliation contracts or working agreements with the United Booking Offices as above stated. The contracts*4281 gave the petitioner the facilities of the United Booking Offices in Chicago and New York and afforded the petitioner the right to place a personal representative in each of said offices in order to better enable it to keep itself informed and make booking contracts. The petitioner agreed to pay the United Booking Offices one-half of its total net earnings annually so long as the arrangement lasted and not to become a competitor in certain cities and under certain circumstances.
*1199 To insure the United Booking Offices that the petitioner would perform its obligations, the contract required it to issue to that corporation $14,900 par value of capital stock and that Gus Sun transfer to it $5,550 par value of his own stock. The contract, with respect to the stock, contained a provision as follows:
It is mutually agreed that this agreement shall commence on March 1st, 1914, and continue for a period of twenty (20) years and thereafter, until the capital stock mentioned in section "FIRST" above shall be legally returned to the second party; provided, nevertheless, that the party of the first part may terminate this agreement, without cause, on March 1st, 1916, or on March*4282 1st of any year thereafter, but not after March 1st, 1919, by giving written notice of such termination to the party of the second part on or before the 1st day of January preceding such date of termination, in which event the party of the first part shall surrender and return to the party of the second part all the shares of stock of the party of the second part held by it. If the party of the first part shall violate any of the terms of this agreement and shall not discontinue such violation within thirty days after its attention is called thereto by the party of the second part by registered mail, the party of the second part may terminate this agreement at any time thereafter upon sixty days written notice of such termination, in which event the party of the first part shall surrender and return to the party of the second part all the shares of stock held by it in the party of the second part. If the party of the second part shall violate any of the terms of this agreement and shall not discontinue such violation within thirty days after its attention is called thereto by the party of the first part, by registered mail, the party of the first part may terminate this agreement*4283 at any time thereafter upon sixty days written notice of such termination, in which event the party of the first part may retain its shares of stock held by it in the party of the second part.
In order that voting control over the petitioner corporation would be equally divided between Sun and the United Booking Offices, a voting trust was created and the petitioner and the United Booking Offices were each given three out of six directors of the petitioner's board so long as the contracts remained operative.
The contracts, under their terms, might have been canceled by the United Booking Offices at the end of the second, third, fourth, or fifth year, but otherwise they were to run for 20 years. Whenever the contracts were terminated, except for a willful breach on the petitioner's part, all shares of stock standing in the name of the United Booking Offices were required to be returned to the petitioner and Sun.
Sun, who was president and general manager, and Leason, who during the years involved in this proceeding was secretary and treasurer, devoted their entire time to the business. None of the other stockholders were regularly engaged in the active conduct of the business*4284 of the corporation. Sun acted as booking agent for the petitioner and personally executed contracts for all the bookings. Leason acted as assistant booker and did booking contract work.
*1200 During the years 1918 and 1919, the petitioner had seven booking agents to whom it paid total salaries and commissions of $25,617.95 and $29,603.88, respectively. Two of the booking agents acted as the petitioner's representatives at the United Booking Offices in New York and in Chicago. After the making of the contract with the United Booking Offices, all the petitioner's activities at New York and Chicago, so far as pertains to the making of contracts with actors, were performed by the United Booking Offices, subject to the approval of petitioner's representatives at those places and subject to the further approval of Sun.
One booking agent was in charge of a branch office established at Buffalo, N.Y., to facilitate the booking of a number of theatres located in that vicinity and his work was largely that of communicating between the United Booking Offices' exchanges in New York and Chicago, the petitioner's home office at Springfield, Ohio, and the various theatres. The other*4285 booking agents served on special occasions. They performed such services as going out from the home office to negotiate with actors under special circumstances and with specific instructions given by Sun, investigating the merits of various actors, attending performances and reporting to the home office.
The petitioner also employed clerks, stenographers, and bookkeepers whose duties were to keep its records, which are more or less voluminous, inasmuch as it was necessary to keep permanent records of the engagements of various actors at different theatres during the season, as well as informative records of the history and merits of the various actors applying for engagements.
Capital was not a material income-producing factor.
OPINION.
TRAMMELL: The principal question involved is whether the petitioner meets the tests required by section 200 of the Revenue Act of 1918, which is as follows:
The term "personal service corporation" means 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*4286 invested or borrowed) is not a material income-producing factor; but does not include any foreign corporation, nor any corporation 50 per centum or more of whose gross income consists either (1) of gains, profits or income derived from trading as a principal, or (2) of gains, profits, commissions, or other income, derived from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive.
The test laid down with respect to capital is clearly met. Capital was not an income-producing factor. The corporation had no capital, either invested or borrowed, except what was invested in its furniture and fixtures and this did not at any time exceed $1,000.
*1201 The corporation was engaged in rendering personal service, which consisted of securing vaudeville acts for theatres and obtaining contracts of employment for actors upon a commission basis. It had no responsibility, financial or otherwise, after the contracts had been obtained.
Were the principal stockholders regularly engaged in the active conduct of the affairs of the corporation? One of the principal stockholders of record, the United Booking Offices, a corporation, *4287 appears to be the owner of 201.5 shares. It is contended by the petitioner that this corporation did not actually own the shares appearing in its name but that they were merely issued and transferred to it in the nature of security. On that question the provisions of the contract dated June 23, 1914, are set out in the findings of fact.
On the question as to whether the petitioner corporation was a corporation coming within the scope of section 209 of the Revenue Act of 1917, that is, a trade or business having no invested capital or not more than a nominal capital, the United States District Court for the Southern District of Ohio, Western Division, in the case of , held that during 1917 the petitioner corporation came within the scope of section 209. The court, in its decision, stated as follows:
The ownership of the stock of the United Booking Offices is dependent solely upon the written contracts * * *. When the operation of those contracts is terminated, the stock goes back to the plaintiff company. It must be regarded as a deposit or a pledge for the due performance of the contract, or for some*4288 other purpose.
The court also said:
The authorization to issue and the issuance of substantially $50,000 in stock, raises a presumption, or at least casts a suspicion that substantial value in the form of capital is included within the corporate assets. This presumption, if it reaches the dignity of a presumption, may, however, be overthrown by proof that the outstanding stock was not exchanged for something of actual, potential, or substantial value.
Section 209 of the Revenue Act of 1917 is as follows:
That in the case of a trade or business having no invested capital or not more than a nominal capital there shall be levied, assessed, collected and paid, in addition to the taxes under existing law and under this Act, in lieu of the tax imposed by section two hundred and one, a tax equivalent to eight per centum of the net income of such trade or business in excess of the following deductions: In the case of a domestic corporation $3,000, and in the case of a domestic partnership or a citizen or resident of the United States $6,000; in the case of all other trades or business, no deduction.
The proceedings in the United States District Court were introduced in evidence*4289 here and it was contended that "the District Court's decision on each of such issues is binding on the Government by the rule of res judicata, so that the Board can not be required to *1202 decide any of them de novo and that acceptance of the District Court's determinations upon these issues of fact will result in this Board holding petitioner to be a personal service corporation under the 1918 Act."
We do not consider that the decision of the United States District Court upon the issue as to whether the petitioner was a corporation having no invested capital or not more than a nominal capital during 1917 is binding upon the Board or is determinative upon the question as to whether the petitioner comes within the scope of section 200 of the Revenue Act of 1918. The two sections are different in material respects. Conceding that the petitioner meets fully the requirements of section 209 of the Revenue Act of 1917, it does not follow that it meets the tests of section 200 of the Revenue Act of 1918. Under section 200 of the 1918 Act, the income must be ascribable primarily to the activities of the principal stockholders. This is one of the tests that must be met. *4290 As to this the question of the relationship and activities of the United Booking Co. become important.
All activities of the petitioner at New York and Chicago were carried on principally by the United Booking Offices. It is true that contracts made by it were subject to the approval of representatives of the petitioner in those offices who are not shown to have been stockholders and to the final approval of Sun. It would seem clear, however, that a material part of the income was ascribable to those services of the United Booking Offices. It appears that the principal part of the contracts and the business originated from this source. The petitioner recognized the value of those services of the United Booking Offices in agreeing to give to that company half its income in consideration therefor.
We agree with the United States District Court in the case of , that the United Booking Offices was not a stockholder. The stock in the name of that company was merely held pursuant to contract. That company not being a stockholder, it seems clear that a material part of the income was attributable to other sources than*4291 the services of the stockholders, especially when we consider the services rendered by employees who were not stockholders. The statute, however, requires that the income be attributable primarily to the activities of the principal stockholders. Taking this view of the relationship of the United Booking Offices and considering the number and the important services rendered by nonstockholding employees, the petitioner does not meet the test of section 200 of the 1918 Act. This question was not involved in the case decided by the United States District Court in determining whether the petitioner comes within the scope of section 209 of the 1917 Act.
*1203 On the other hand, even if the United Booking Offices was a stockholder, it being a corporation, the services rendered by it were not personal in their character. We have heretofore held that if the principal stockholder of a corporation was itself a corporation, personal service classification should be denied. ; .
For the foregoing reasons, in our opinion, the petitioner does not come within the scope of*4292 section 200 of the Revenue Act of 1918.
Inasmuch as the petitioner introduced no evidence in support of its contention that if it were found not to be a personal service corporation its tax should be computed under the provisions of section 328 of the Revenue Act of 1918, the contention is denied.
Judgment will be entered on 15 days' notice, under Rule 50.