*2373 Personal service classification denied petitioner for the years 1920 and 1921.
*60 This is a proceeding for the redetermination of income and profits taxes for the calendar years 1920 and 1921 in the respective amounts of $7,120.21 and $2,351.03. The petitioner alleges that it should be classified as a personal service corporation as defined by section 200 of the Revenue Acts of 1918 and 1921, thus making the profits earned taxable to its stockholders.
FINDINGS OF FACT.
The petitioner is an Illinois corporation, organized in 1918, having its principal office at Union Stock Yards, Chicago. During the years 1920 and 1921 it filed its income-tax returns as a personal service corporation. The respondent determined that it was not a personal service corporation and determined the deficiencies involved herein.
During the years 1920 and 1921 the petitioner was engaged in handling livestock on a commission basis. Its business was conducted according to the rules and regulations of the Chicago Live Stock Exchange.
The feeder or farmer would advise petitioner*2374 of the feed and facilities which he had for handling stock. Petitioner would advise him as to the class and grade of stock to buy, being governed by the time he would ship them, because the demand for stock varies with the seasons of the year. Thereafter petitioner kept in touch with the feeder and advised as to the best time to sell. Thus petitioner knew to within three or four days when shipments could be expected. When it arrived the petitioner's yardman secured the stock from the stockyard company which had unloaded it from the cars and drove it to pens assigned to petitioner by the stockyard company. Members of the firm of petitioner would then grade and sort the stock, and it was fed and watered at the yards. The stock was then shown to the various buyers and was sold to the highest bidder whose credit was good.
About 99 per cent of all stock is sold the same day it is received by petitioner. The net amount was remitted to the client after deducting charges for feed, freight, yard charges and petitioner's commission. The commission was a fixed rate per head of stock sold.
*61 Petitioner also purchased stock for clients but always received the money from the*2375 clients in advance. The petitioner was under a bond to guarantee to the stockyard company the payment of freight, yard charges and feed.
Each one of the stockholders of the petitioner had a list of customers whose business he attended to and mail from such customers, although addressed to the firm, was turned over to the individual stockholder who was attending to that customer's business.
In some cases the petitioner assisted in financing its clients. Petitioner took from the producer a note and chattel mortgage after having made arrangements with the bank. The notes and mortgages were endorsed by petitioner and presented to the banks which discounted the notes and petitioner was credited with the amount of the loan. Petitioner then passed the money on to the producer.
During the year 1920 the petitioner had notes receivable totaling $55,967.72. During that year, in addition to this, there were discounted notes totaling $167,587.40. During the year 1921 the petitioner had notes receivable totaling $72,611.22. During that year, in addition to this, there were discounted notes totaling $106,226.37. Some of these loans were to petitioner's employees.
During each of*2376 the years 1920 and 1921 petitioner did a gross sales and purchase business of between $40,000,000 and $45,000,000. During each year it dealt with between 17,000 and 18,000 customers. Loans were negotiated to less than 30 of these customers.
The stockholders of the petitioner, for the years 1920 and 1921, the number of shares owned, the duties and salaries for the year 1920, were as follows:
| Shares | Salary | ||||
| Stockholders | Duty | 1920 | 1921 | 1920 | 1921 |
| Helen Conover | None | 60 | 60 | ||
| L. W. Conover | Cattle salesman | 157 | 271 | $9,000 | $22,000.00 |
| J. M. Martin | do | 108 | 10 | 7,000 | 11,250.00 |
| J. T. Alexander | Cattle buyer | 85 | 85 | 4,000 | 3,999.96 |
| Z. T. Martin | Cattle salesman | 66 | 10 | 7,000 | 9,650.00 |
| G. S. Conover | do | 60 | 144 | 4,200 | 10,400.00 |
| L. H. Conover | Hog salesman | 60 | 65 | 3,600 | 5,400.00 |
| E. J. Rea | Cattle buyer | 34 | 5 | 4,200 | 5,550.00 |
| W. J. Fredericks | Cashier | 5 | 5 | 3,600 | 3,950.00 |
| M. Dalk | Office | 2 | 3 | 1,750 | 2,020.00 |
| J. A. Frazier | 10,683.51 |
All were members of the Live Stock Exchange except Fredericks and Dalk.
Mrs. Helen Conover, who performed no services, owned 60 shares of stock in 1920 and 1921. The rest of the*2377 stockholders devoted their entire time to the business of petitioner.
The following were employees, other than stockholders, who received $3,000 a year or more, and the duties each performed, all of whom were members of the Chicago Live Stock Exchange:
| Salary | |||
| Duty | 1920 | 1921 | |
| J. A. Frazier | Assistant cattle salesman | $10,000 | $10,000 |
| J. G. Jackson | Assistant hog salesman | 3,600 | 3,600 |
| W. J. O'Flynn | Assistant cattle salesman | 5,200 | |
| M. J. Callahan | Assistant hog salesman | 3,500 | |
| W. E. Stewart | Assistant cattle salesman | 3,975 | 3,975 |
| C. F. Shipman | Office manager | 5,300 | 5,300 |
| I. R. McAdams | Assistant cattle salesman | 6,000 | |
| J. B. Galloway | Assistant cattle buyer | 3,600 | |
| R. L. Yancey | do | 5,000 | 5,000 |
| W. A. Burns | Sheep salesman | 4,200 | 4,200 |
*62 The duties of these assistant salesmen were to assort and watch the stock and assist the various stockholders on days of unusually large receipts. They sold only when the receipts were excessive. If the receipts were so large that it was necessary to take part of the stock out of the division assigned to the petitioner, the assistant salesmen were put in charge of the sale of that stock. *2378 In such cases L. W. Conover appraised the stock to be sold and instructed the assistant salesmen as to the price to be received therefor. When not selling the assistant salesmen were assorting and watering stock.
Petitioner also had other employees whose salaries were less than $3,000. They consisted of yard men, stenographers, and office help. The yard men drove the stock from the chutes, when they were turned over to petitioner from the stock-yard company, to the pens assigned to the petitioner. They also did work in assorting stock under the supervision of the assistant salesmen.
The income reported and the deductions claimed by petitioner in its returns for 1920 and 1921 were as follows:
| 1920 | 1921 | |
| INCOME | ||
| Gross income other than trading | $268,590.04 | $302,625.31 |
| Less commissions paid | 4,182.66 | |
| Net commissions | 298,442.65 | |
| Interest | 731.51 | |
| Net interest from notes receivable | 2,641.80 | |
| Miscellaneous overage | 365.21 | |
| Total gross income | 269,321.55 | 301,449.66 |
| DEDUCTIONS | ||
| Salaries nonstockholders | 131,718.10 | 129,958.02 |
| Salaries stockholders | 41,395.00 | 74,219.96 |
| Advertising | 32,816.32 | 42,996.96 |
| Bad debts | 2,491.20 | 4,338.61 |
| Depreciation | 1,368.89 | 1,307.61 |
| Rent | 4,622.75 | 6,438.00 |
| Traveling expense | 6,274.85 | 4,881.78 |
| Telephone and telegraph | 3,475.94 | 4,251.39 |
| Other loss (see return) | 2,434.07 | |
| Interest paid | 705.06 | |
| Other deductions | 17,810.94 | 16,854.25 |
| Total deductions | 244,408.06 | 285,951.64 |
| Net income reported | 24,913.49 | 15,498.02 |
*2379 *63 The item "net interest from notes receivable" also includes interest received on Liberty bonds.
The item "advertising" represents market letters prepared by petitioner and sent out weekly to each of its clients. This item represents principally cost of postage.
The balance sheets of the petitioner at the beginning and end of each of the years 1920 and 1921 as shown in the returns were as follows:
| Jan. 1, 1920 | Dec. 31, 1920 | Dec. 31, 1921 | |
| ASSETS | |||
| Cash | $29,217.93 | $23,931.21 | $14,135.81 |
| Collections | 100,607.53 | 22,364.07 | |
| Accounts receivable | 21,733.97 | 31,261.46 | 17,768.73 |
| Bills receivable | 152,205.69 | 229,019.07 | 73,236.84 |
| Investments | 20,000.00 | 20,000.00 | 12,300.00 |
| Liberty bonds | 39,859.35 | 16,350.00 | 16,250.00 |
| Furniture and fixtures | 12,150.84 | 12,320.08 | 12,565.88 |
| 375,775.31 | 355,245.89 | 146,257.26 | |
| LIABILITIES | |||
| Accounts payable | 51,974.56 | 45,042.06 | 33,623.42 |
| Bills payable | 137,636.76 | 174,604.51 | 10,766.11 |
| Unremitted proceeds | 92,549.62 | 37,351.46 | 1,333.54 |
| Capital stock | 64,600.00 | 63,700.00 | 63,800.00 |
| Surplus | 29,014.37 | 34,547.86 | 36,734.19 |
| 375,775.31 | 355,245.89 | 146,257.26 |
"Accounts receivable" represent amounts*2380 due from packers and order houses to which stock had been sold during the day before the close of petitioner's books. Stock sold after 12 o'clock is carried over to the next day.
"Bills receivable" represent the loans which have been made to customers in the manner hereinbefore set forth.
"Accounts payable" represent chiefly cost of feed. This is paid twice a week by check.
The item "bills payable" is an offset to the item representing loans to customers.
"Unremitted proceeds" represent stock sold the day before the books were closed.
The petitioner operated a branch office at Kansas City. This office was much smaller than the Chicago office but required the same investment, about $20,000. From this office petitioner made a profit of $5,151 in 1920 and lost $3,071 in 1921.
None of the gross income of the petitioner in the years in question was derived from trading as a principal or from gains, profits, commissions or other income derived from Government contracts entered into between April 6, 1917, and November 11, 1918.
The respondent granted petitioner personal service classification in the years 1918 and 1919.
*64 In 1920 the petitioner's invested*2381 capital was approximately $63,000, and its invested capital for 1921 was approximately $66,000.
OPINION.
SIEFKIN: The sole question for decision is whether petitioner is entitled to personal service classification for the years 1920 and 1921.
Section 200 of the Revenue Acts of 1918 and 1921 provides:
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 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 evidence discloses that all of the stockholders of petitioner except one were regularly engaged in the active conduct of the affairs of the petitioner. *2382 However, from the evidence, we can not find that the income of the petitioner is to be ascribed primarily to the activities of the principal stockholders. If the value of the services rendered by the nonstockholding employees is to be measured by the salaries paid them, and we consider this a fair indication of such value, we must conclude that the income for the years in question was not primarily ascribable to the principal stockholders. See, in this regard, . The testimony in the case shows that the nonstockholding employees simply assisted the stockholders in rendering the services for which petitioner received its income but since the salaries of the nonstockholding employees are so large we are constrained to the view that such nonstockholders contributed materially to the income derived.
Furthermore, the petitioner has not met the third requirement imposed by the statute. During the year 1920 it had invested capital of approximately $63,000, and in 1921 invested capital of approximately $66,000. It expended large amounts as salaries to nonstockholding employees and for advertising. It also carried accounts and notes receivable*2383 and payable in large amounts. Petitioner contends that the income received from the trade to which loans were made was only nominal, but we do not doubt that such practice of petitioner maintained the good will of all of its customers and was an inducement in securing business. We conclude that capital was a material income-producing factor during the years 1920 and 1921.
The respondent did not err in denying personal service classification to the petitioner for the years 1920 and 1921.
Judgment will be entered for the respondent.