*2960 PERSONAL SERVICE CORPORATION. - The petitioner was engaged in business as a real estate, rental, insurance, and loan agent during the year 1920, and is entitled to be classified as a personal service corporation pursuant to section 200 of the Revenue Act of 1918.
*522 The respondent determined a deficiency in income and profits taxes against the petitioner in the sum of $2,359.82 for the year 1920. Petitioner avers that the respondent erred in not classifying it as a personal service corporation and seeks a redetermination. At the hearing the respondent amended his answer to increase the deficiency by the sum of $200.72, making, the claimed deficiency $2,560.54. It was agreed that the additional deficiency asserted was correct, provided petitioner was not entitled to personal service classification.
FINDINGS OF FACT.
Petitioner is a Washington corporation with its principal office and place of business in Seattle. It is engaged in the real estate, rental, loan and insurance agency*2961 business. Its business is confined to that of acting as agent for others in the sale of real estate, the renting and management of property belonging to others, the negotiation of loans between borrower and lender, and a general insurance *523 agency business other than life insurance. Petitioner does not sell, rent, or manage nay property of its own nor does it loan out its own funds.
The corporation was organized in 1917 with a capital stock of $20,000, all of which was issued for good will and which during the taxable year was held as follows:
| Shares | |
| John H. Carter | 60 |
| D. K. MacDonald | 60 |
| Vincent D. Miller | 60 |
| E. F. Zimmerman | 10 |
| R. W. Barker | 10 |
| Total | 200 |
During the year 1920, each of the officers and stockholders of the corporation was regularly engaged in the active conduct of its affairs during the taxable year.
Petitioner was formed by a consolidation of two other corporations in which all of the stockholders of petitioner were interested, viz, Carter & MacDonald, Inc., and Vincent D. Miller, Inc.
John H. Carter was president of the company during 1920. He gave his attention mainly to the management of large properties and general*2962 supervision over all departments. He began business life in 1893, in a bank and as a side-line undertook the management of property belonging to the president of the bank and others. After about ten years his real estate connections became so extensive that he left the service of the bank and went into the real estate, rental and insurance business. Subsequently, D. K. MacDonald joined Carter and they organized and operated as Carter & MacDonald, Inc., until the formation of the petitioner. Carter had the rental and management of a number of large buildings, which he brought with him to petitioner. D. K. MacDonald had charge of the insurance department of Carter & MacDonald, and of the petitioner; he devoted all his time to that and was soliciting most of the time. He was considered one of the most aggressive insurance men in Seattle, and a good producer.
Vincent D. Miller, another of the principal stockholders, had a long and varied career in real estate matters. For a number of years he was associated with the real estate firm of John Davis & Co., in Seattle and had charge of the rental department. In 1916 he formed his own firm under the name of Vincent D. Miller, Inc. *2963 , and engaged in real estate, rentals, loans, and insurance business as agent. He was known as an expert in such matters and had wide experience as an appraiser. This firm was consolidated with Carter & MacDonald to form petitioner and several estates and a number of clients were *524 brought into the new firm by Miller. E. F. Zimmerman and R. W. Barker, both stockholders, came to petitioner with Vincent D. Miller. They were experienced men and worked in the rental and property management part of the business.
The income of the petitioner consisted of commissions and fees for services rendered as agents and also included interest in the sum of $2,099.70, and for the taxable year was follows:
| Commissions - | ||
| Insurance Department | $49,561.44 | |
| Real Estate Department | 39,428.31 | |
| Rental Department | 33,131.26 | |
| Loan | 17,454.43 | |
| Interest | 2,099.70 | |
| Gross profit | $141,675.14 | |
| Salaries of employees - | ||
| Insurance Department | 17,930.18 | |
| Real Estate Department | 2,678.19 | |
| Rental Department | 12,484.03 | |
| Loan | ||
| Commissions - | ||
| Insurance Department | 16,054.41 | |
| Real Estate Department | 22,882.32 | |
| Rental Department | 1,106.37 | |
| Loan | 1,680.06 | |
| Salaries of officers and stockholders | 27,574.94 | |
| Other ordinary expenses | 26,606.61 | |
| Bad Debts | 607.86 | |
| Total deductions | 129,887.50 | |
| Net income | 11,787.64 |
*2964 The gross income of the loan department was $17,454.43. This department was exclusively in charge of Vincent D. Miller and its income resulted from commissions on placing or obtaining loans for others through his personal efforts. There were also included in this department's income commissions on several real estate sales consummated by Vincent D. Miller alone. The rental department had a gross income of $33,131.26 and a salary expense of $12,484.03. The clients of this department were obtained by the solicitation of the three principal stockholders and by the reputation they had built up. There were certain employees to collect rents, keep the accounts, and look after the payment of water bills, taxes, etc., but they did not secure the business. Upon the organization of petitioner, Carter brought to it the agency and management of the following large buildings in Seattle, viz, United States Rubber Building, corner of Third and Jackson; MacDougall Building, Second and Pike; Public Market, First and Pike; Hancock Building, First and Union; and Realty Building. In addition, many other and smaller properties *525 were added by Miller and Carter. Petitioner did not advance*2965 money in behalf of lessees for the payment of loans for taxes on properties rented.
The real estate department had a gross income of $39,428.31. It paid $2,678.19 salary and $22,882.32 commissions. It had only one salaried employee and an average of five salesmen throughout the year, who worked on commission. They were supplied with desk room and telephone service and commissions were divided between them and the office on deals consummated by them or in which they assisted. Miller was in charge of this department, made many sales himself and assisted in and closed practically all the others. All of the listings and leads were the result of the personal efforts and reputations of the principal stockholders and were not contributed to in any way by the salesmen. Of the entire gross income of this department, over $20,000 resulted from sales made by Miller personally and he assisted in 75 per cent of the remainder. Every morning he held a meeting of the salesmen and discussed the condition of the real estate market. The list of conveyances, building permits, new incorporations, probable buyers, and sellers were gone over and discussed and leads were given to salesmen by him, *2966 but in all cases the sales were closed by Miller. It was the custom of the petitioner to divide the commission with the salesmen who assisted, whether he actually brought the seller and buyer together or not.
The insurance department was under the personal management of D. K. MacDonald, one of the principal stockholders, who devoted practically his entire time to it. Total premiums of $194,731.18 were placed in 1920, of which $147,880.78 were brought in by the three principal stockholders. Commissions earned on this business amounted to $49,561.44, while salaries were $17,930.18 and commissions $16,054.41.
The company had one insurance solicitor who worked throughout the year and produced about $7,500 gross premiums, upon which he was paid a commission of approximately 15 per cent. One other worked for a short time and earned $400. The item of $16,054.41 commissions charged against the insurance department does not represent commissions paid in securing insurance except in a small amount. It represents nearly entirely commissions returned by the petitioner when insurance was canceled by customers. The balance represents a few items of split commissions or brokerage paid*2967 to outsiders.
The items rental department commissions, $1,106.37, and loan commissions, $1,680.06, represent split commissions or brokerage to outsiders. *526 Advertising expenses were as follows:
| Real Estate Department | $6,194.22 |
| Furth Estate (real estate) | 1,425.41 |
| Kinnear Estate (real estate) | 131.25 |
| Total | 7,750.88 |
| Rental Department | 3,758.09 |
| Insurance Department | 826.90 |
| General expense account charge | 587.45 |
| Total advertising expense | 12,923.32 |
The items of $17,930.18 and $12,484.03 listed as salaries of insurance department and real estate department, represent salaries of bookkeepers, stenographers, clerks and collectors.
In the conduct of the rental department petitioner looked after the payment of bills, water rents, repairs and taxes against property in their charge. These payments were usually made from funds on hand belonging to the owners, but if not on hand it would be advanced by petitioner. This is a service ordinarily rendered by it and others in a similar business, but considered purely an accommodation.
Under arrangements which the petitioner had with underwriters it had two full months after the month in which the policy*2968 was written within which to pay the premiums due. In some instances the premium would be paid by petitioner, who subsequently collected it, or canceled the insurance. During May, 1920, total premiums on insurance placed amounted to $15,626.70, of which $4,629.40 was uncollected by August 1, date of settlement. During August, premiums were $20,659.99 of which $5,872.01 was uncollected by date of settlement. During those two months a large part of the insurance was on canned salmon, which is usually written for a full year but canceled as soon as the insured property is sold, and not paid for until then. Petitioner averaged paying in advance for insurance $1,400 monthly. This was done to establish and maintain petitioner's standing with insurance companies. The petitioner at all times had a strong policy against carrying premiums and warned all employees that they would not give credit in writing insurance.
On December 2, 1920, petitioner borrowed $40,000 from banks for the purpose of paying taxes and other accounts for clients, whose buildings they managed, but it was paid January 3, 1921. Occasionally during the year amounts would be borrowed from banks on 10 or 20-day notes*2969 for payment of taxes or other emergencies. During the year petitioner collected in interest $2,099.70 for amounts advanced for its clients, but it paid out for the same purpose, $875.40. It was not a part of its contract to pay taxes, etc., for clients but was done as a voluntary act to give the utmost in service to its clients.
*527 The petitioner was not engaged as a principal in trading, merchandising, or manufacturing during the year and made no contract with the Government between April 6, 1917, and November 11, 1918, both dates inclusive, and derived no gains, profits, commissions or other income from a Government contract made between April 6, 1917, and November 11, 1918, both dates inclusive.
OPINION.
MILLIKEN: Petitioner filed a retrun for 1920 and claimed classification as a personal service corporation. Respondent refused to allow such classification and determined the deficiency. The correctness of respondent's ruling is the only question presented for decision.
Section 200, Revenue Act of 1918, defines a personal service corporation to be "a corporation whose income is to be ascribed primarily to the activities of the principal owners or stockholders*2970 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." The court in the case of , commented on the purpose of section 200 as follows:
The law was directed at absentee stock ownership. If the service rendered is in the nature of personal service and is rendered by the owners of the business, the law intended a separate classification for income and excess-profits taxes. It was intended to give corporations performing services of this nature and in this manner the same tax position as a partnership.
The dominant purpose was to distinguish between corporations engaged in trade, merchandising, and manufacturing, in which much capital is required and without which profits may not be earned, and corporations performing personal services in which large capital is not usually required or necessary to its efficient conduct. The discrimination is between income earned by capital and income earned by personal effort. The specific limitations in Section 200 were inserted in aid of this dominant*2971 purpose and to prevent evasion. They should not be stressed to the point of destroying the major purpose of the law.
The evidence clearly establishes that all of the stockholders of the petitioner were regularly engaged in the active conduct of its affairs and in our opinion its income is to be ascribed primarily to their activities. They were men of experience, responsibility, and of good repute. Three of them had been at the head of similar firms for many years and had accumulated large listings of property, customers, and clients because of their personalities or satisfactory service rendered. During the taxable year they were constantly engaged in petitioner's affairs and all of its transactions were carried on by them or under their direct supervision.
The law does not require that the principal stockholders should personally perform all the various functions included in the service performed, and the employment of clerks, stenographers, salesmen *528 and others to perform detail duties does not deprive a corporation of the right to personal service classification. Thus in *2972 , the plaintiff corporation was engaged in soliciting and writing fire insurance, renting and selling real estate as agent of the owners, negotiating loans between borrowers and lenders, and appraisements. Frequently there was money on hand which had not been remitted to owners, and settlements with insurance companies were frequently delayed 60 days. At certain seasons of the year, taxes were advanced for customers. There were a number of employees. Personal service classification was allowed. See also ; ; ; . Petitioner had nothing to sell except its services and the evidence overwhelmingly establishes that petitioner was doing only an agency business. Such capital as it used was not a material income-producing factor. Such capital as was employed was used only incidentally to the real business of the plaintiff. It produced no income of any*2973 moment and was not used or intended to be used for profit. Its use was occasional and as an accommodation to its customers and under such circumstances such use does not deprive it of the right to personal service classification.
At stated periods during the year petitioner would pay the real estate taxes for various of its clients whose buildings it managed. This was a gratuitous act not called for by the terms of its employment. It borrowed sums to do so for a few days until it could bill the owner of the property and secure reimbursement. Such voluntary act was not necessary to procure the business or to hold the same. In all instances where it paid taxes it was shown that the owner of the buildings for whom the taxes were paid was solvent and a request of petitioner that such taxes be paid would have resulted in immediate payment.
It is also true that in some few instances petitioner advanced to the insurance company premiums due on policies written where the insured had not paid the premium within the 60-day period. This was not a settled or well defined policy of the petitioner and when the insured did not pay the premium promptly after having been notified the policy*2974 was canceled by petitioner and the underwriter charged back with the return premium. In fact the insurance department commissions account shows a large part of same as commissions on return premiums on policies canceled.
Respondent has also called our attention to $2,099.70 as interest received. This amount is a very small per cent of the gross income *529 for the year, and when further reduced by the interest paid is considerably less. We have set forth the circumstances under which the interest charges were incurred. We think the interest itme is so insignificant when compared with the total gross income that it can not be regarded as material.
Counsel for petitioner has cited to us many decisions of the court and Board regarding the law in personal service cases. We can not attempt a reconciliation of all the decisions and a weighing in the balance of the facts in each case that have caused the scales to tip for or against. Each case must be considered and judged on its own facts and what may be a decisive factor in one case is rendered the reverse in another in comparison with its own peculiar facts.
The petitioner is entitled to a personal service classification.
*2975 Judgment of no deficiency will be entered for petitioner.