*2262 Petitioner, an advertising agency, held entitled to personal service classification.
*1126 These proceedings involve deficiencies for the calendar years and in the amounts as follows:
| 1918 | $11,880.45 |
| 1919 | 63,704.03 |
| 1920 | $68,856.28 |
| 1921 | 38,390.45 |
For the year 1920 respondent sent petitioner two notices of deficiency, one dated January 22, 1926, stating a deficiency of $66,799.23, and the other dated July 30, 1926, setting forth a deficiency of $68,856.28. The letter of July 30 contains a statement that it supersedes the earlier one. Petitioner has taken each of these as a basis for a petition, one petition being docketed under number 11512 and the other under number 19391. We will consider these two petitions as one and treat the larger amount as being the amount in controversy.
For each of the four years involved petitioner alleges that the respondent erred in denying it personal service classification. For the year 1918 there is an alternative issue as to officers' *2263 salaries disallowed by respondent.
The proceedings were consolidated for hearing and decision.
FINDINGS OF FACT.
Petitioner, an advertising agency, was incorporated under the laws of New York in 1913. The original capital stock consisted of 500 shares of common and 100 preferred, each of a par value of $100 per *1127 share. No cash was paid in to the petitioner for its common stock, and the preferred was issued for the assets, subject to the liabilities, of a predecessor corporation which was not in a flourishing condition.
In 1920 petitioner's capital stock was increased to 3,094 shares of common stock, and 500 so-called "founder's shares" were issued in place of the old preferred stock. Following is a list of the stockholders of record in the taxable years:
| 1/1/19 to | ||||||
| 1918, | 10/1/19, | 10/1/19 to 12/31/19 | 1920 and 1921 | |||
| Name | common | common | Preferred | Common | Preferred | Common |
| R. Tinsman | 184 | 184 | 184 | 736 | 184 | 736 |
| Carl Kaufman | 135 | |||||
| F. E. Nixon | 85 | 85 | 85 | 504 | 85 | 504 |
| Joseph Kaufman | 96 | |||||
| Isabel M. Kaufman | 231 | 231 | 1,120 | 231 | 1,120 | |
| J. J. Geisinger | 300 | 300 | ||||
| F. Bruns | 25 | |||||
| Wm. C. Bittle | 40 | |||||
| L. E. Carson | 10 | |||||
| A. Enroth | 20 | |||||
| M. Fitzsimmons | 5 | |||||
| M. J. Foulon | 8 | |||||
| G. Gilpatric | 20 | |||||
| M. Goodman | 50 | |||||
| J. J. Hughes | 2 | |||||
| F. J. Kaus | 80 | |||||
| E. G. Perry | 3 | |||||
| (during 1920 only) | ||||||
| E. Rollins | 16 | |||||
| H. S. Richland | 40 | |||||
| C. J. Rohde | 10 | |||||
| F. Umlauff | 5 | |||||
| J. F. Woods | 100 | |||||
| E. R. Rutledge | 3 | |||||
| (during 1921 only) | ||||||
| 500 | 500 | 500 | 2,660 | 500 | 3,094 |
*2264 The first four stockholders listed, namely, Tinsman, Carl Kaufman, Nixon, and Joseph Kaufman, were the organizers of petitioner. Tinsman and Nixon had formerly been connected with the Drygoods Economist in positions which brought them in contact with advertisers. Carl and Joseph Kaufman, brothers, had formerly conducted an advertising agency.
Tinsman was president and general manager of petitioner. In the latter capacity he had under his supervision the various department managers who reported to, and consulted, him on problems that required assistance. He was also in charge of his accounts with clients on which he worked as an account executive. Carl Kaufman was treasurer of petitioner and an account executive. In his capacity of treasurer he had charge of petitioner's finances. Nixon was vice president of petitioner, was an account executive, and was in charge of the service department which included the departments of copy, art, shipping, printing, engraving, checking, and filing. Joseph Kaufman in 1918 was an account executive. His principal account *1128 was that of the American Safety Razor Corporation, of which he was president. He retired from petitioner*2265 at the close of 1918 and turned his stock over to Carl Kaufman. Commissions amounting to $9,425.89 paid him in 1919 arose out of advertising placed prior to his withdrawal from petitioner.
Isabel M. Kaufman was the wife of Carl Kaufman. Prior to her marriage to Carl Kaufman in 1913, Mrs. Kaufman had been engaged in business and at that time was employed in a secretarial capacity and was supporting herself and her mother. She was interested in business matters and upon giving up her position at the time of her marriage she sought to prepare herself to help her husband in his business. At that time she and Carl Kaufman orally agreed between themselves that they would share equally in any success they might achieve and any property they might acquire. Carl Kaufman often took his problems home from the office and discussed them with his wife. She studied the merchandise that was to be advertised, interviewed clerks in stores selling it, investigated competitive products, and thereby evolved advertising ideas which she communicated to her husband. Mrs. Kaufman worked principally on the accounts controlled by her husband, although he occasionally took home problems discussed by*2266 other stockholders.
Carl Kaufman at the time of his marriage was in poor health and because of that fact and the necessity of several operations, up until 1918 he and Mrs. Kaufman had accumulated but little property. In 1918 when the petitioner's business "started to show some life" Carl Kaufman, because of the uncertain state of his health and in order to protect his wife, caused the stock in petitioner standing in his name to be recorded in the name of his wife, who indorsed the certificates in blank and handed them back to him. Kaufman thereafter kept the certificates in a compartment in petitioner's safe in which he stored his personal papers. He always voted the stock standing in Mrs. Kaufman's name.
Geisinger during all the years involved was an account executive. When he entered petitioner's employ he was conducting a business of his own and he had previously been connected with another advertising agency. When he came with petitioner he was told that when petitioner felt he was qualified to become a principal in the firm he would be given an opportunity to purchase stock. His stock was issued to him in October, 1919.
F. Bruns, L. E. Carson, G. Gilpatric, M. Goodman, *2267 and H. S. Richland, were employed in petitioner's copy department under Nixon's supervision. William C. Bittle was in charge of that division of the copy department which handled such mechanical details *1129 as cuts and engravings. His work was under the supervision of Nixon. A. Enroth was in the art department under Nixon. M. Fitzsimmons was a clerk. M. J. Foulon was in petitioner's rate department under Carl Kaufman. J. J. Hughes was in the shipping department under Nixon. F. J. Kaus was an assistant account executive under Carl Kaufman. E. G. Perry was a telephone operator. E. Rollins and C. J. Rohde were in the media department under Carl Kaufman. F. Umlauff was in the production department under Bittle and Nixon. J. F. Woods was an account executive or salesman under Tinsman's supervision.
Petitioner's business was that of counselling advertisers, and preparing and inserting advertisements in various advertising media. Only in a few cases was petitioner's service limited to giving counsel to the advertiser. The majority of cases handled covered a much wider scope. Petitioner's business was obtained largely by solicitation on the part of so-called account*2268 executives, who, for the most part, were stockholders. When an advertiser-client was secured, the first thing determined was the amount of the advertising appropriation of the client. This being agreed upon, the petitioner would formulate an advertising plan, which might include direct mail advertising, or space in publications such as newspapers, magazines, trade papers, or billboards. The petitioner also obtained special information for a client's use by sending out investigators to visit the trade and obtain answers to questions that might puzzle the client as to his trade relations, or might guide the petitioner in preparing an advertising program. Petitioner at times made what it called a survey by testing out in advance the reaction of consumers to some form of advertising before committing the client to a large expenditure. Petitioner also studied the sales policies of its clients, analyzed the business of competitors of its clients and the methods by which they were securing business, and advised clients as to methods of obtaining business from the same line of customers or territory. The results of investigations were reported to clients usually in writing, but often*2269 were discussed orally.
Petitioner also prepared estimates of the cost of advertising. Where the packages or containers in which the client's goods were sold did not have sufficient selling quality, petitioner designed new containers. It devised slogans, trade names and trade-marks, and selected trade leaders for exploitation.
During the course of an advertising campaign petitioner's supervision extended to every function from the conception of the idea to the production of the advertisement in print or illustration. It selected the advertising media and the amount of space to be used in *1130 each. It prepared the copy which included the writing of the advertising text and the preparation of illustrations which were submitted in the form of rough sketches and after approved by the client were put in finished form. The finished product, after being approved by the client, went through the mechanical department for the preparation of engravings, and the advertising matter set up from them was again submitted to the client and when approved, petitioner's media department sent insert orders to the publisher Petitioner's checking department checked the appearance of the*2270 advertisements in publications to make sure of proper insertion and in case of error petitioner took the matter up with the publisher. A similar procedure was followed in the preparation of show cards and booklets and outdoor advertising work.
Some of the art work was done by artists in petitioner's employ, but for special work outside artists were engaged who worked with Nixon and under his supervision in the expression of the advertising idea. Engraving work and the preparation of mats was done outside but under the supervision and contract of the petitioner.
Nonstockholding employees were assisted in every detail of soliciting and operation by the stockholders. Nonstockholding solicitors were not permitted to close contracts with advertisers without the approval of stockholders. As a rule, stockholders actually closed the contracts.
All advertising plans were passed upon by a so-called executive board consisting of Tinsman, Nixon, and the two Kaufmans, with the substitution of Geisinger for Joseph Kaufman in 1920, and this board also passed upon every detail of the work as it progressed. This was accomplished by submitting to the members of the board at the end of*2271 each week all advertising copy in proof form and by discussions among the members together with other account executives.
During the taxable years petitioner employed, under a written contract, John Lee Mahin as a representative or contact man. The contract provided, among other things, that all contracts on accounts handled by Mahin were to be made in petitioner's name, that petitioner was to do all copy and clerical work on Mahin's accounts, that Mahin was to receive one-third of the gross profits from accounts handled by him, and that he was to be made a member of petitioner's board of directors so that he could use the word "director' in signing letters, with the privilege of purchasing stock when billings on his accounts reached a stated figure. Mahin was not a stockholder during the taxable years. In actual practice Mahin did not close accounts for petitioner. When he found a prospective advertiser he *1131 would call in a stockholder to cooperate with him and the actual closing was done by the stockholder. The execution of the account was turned over to petitioner's organization and Mahin's subsequent contact with it was only to make sure that the advertiser was*2272 satisfied with the execution.
The number of petitioner's employees and the amounts paid from in the years 1919 and 1920 were as follows:
| 1919 | 1920 | |||
| Number | Amount paid | Number | Amount paid | |
| Copywriters | 16 | $ 31,914.50 | 14 | $ 41,944.49 |
| Artists (including art | 41 | 44,870.29 | 39 | 60,373.48 |
| director and overhead) | ||||
| Stenographers | 19 | 6,806.33 | 18 | 11,536.49 |
| Space buyers | 3 | 5,347.00 | 3 | 6,070.00 |
| Production (including | 9 | 5,449.50 | 4 | 5,847.83 |
| engraving and printing) | ||||
| Accounting | 8 | 7,916.00 | 10 | 12,029.99 |
| Checking | 3 | 965.00 | 7 | 3,865.00 |
| Forwarding | 3 | 2,142.33 | 3 | 2,345.00 |
| Shipping | 15 | 3,878.74 | 16 | 3,076.49 |
| Business manager | 1 | 5,570.00 | ||
| Business detail | 2 | 3,410.00 | ||
| Miscellaneous (filing, | 4 | 2,875.00 | 10 | 6,204.65 |
| telephone, etc.) | ||||
| Total | 122 | 117,734.69 | 126 | 156,703.42 |
The number of employees in the above schedule does not represent the number employed at one time, but the total employed throughout the year. The average number employed in the several departments and their average weekly salaries were:
| Number | Salary | |
| range | ||
| Copywriters | 8-10 | $ 35-40 |
| Artists | 12-15 | 25-75 |
| Space buyer (chief) | 1 | 75 |
| Space buyers (assistants) | 2 | 25-35 |
| Production (head) | 1 | 75 |
| Production (assistants) | 6-7 | 25-40 |
| Accounting (head) | 1 | 60-70 |
| Accounting (clerks) | 6-7 | $ 20-30 |
| Checking | 2 | 12-15 |
| Forwarding | 25-30 | |
| Shipping clerk | 1 | 22-25 |
| Messengers | 6-8 | |
| Telephone | 2 | 25 |
*2273 The same facts obtained, with but slight variations, as to employees in the years 1918 and 1921.
Petitioner did not buy advertising space in bulk for resale to its clients. Petitioner was never asked to, and never did, guarantee clients' accounts. In some cases, however, where the advertiser failed to pay, petitioner paid the publisher in order to retain the latter's good will.
Deductions claimed by petitioner for bad debts in its returns for 1920 and 1921 were, respectively, $49,920.61 and $6,198.07. No bad debt deductions were claimed in the 1918 and 1919 returns.
During the taxable years petitioner was a recognized advertising agency.
*1132 Petitioner received its income from counsel and service fees, commissions, and discounts. Counsel fees were charged in those cases where petitioner merely advised a client and rendered no advertising service. In cases where advertising was placed petitioner billed the advertiser for the amount of the publisher's bill plus an agency commission of 15 per cent. Petitioner also charged advertiser-clients a service fee. The name of the advertiser always appeared on bills rendered to petitioner by publishers, and on such*2274 bills a 2 per cent discount was allowed for cash payment. It was petitioner's practice to bill its clients in advance of the date payment was due the publisher and where the client made timely payment the 2 per cent cash discount was passed along to it. Bills received from publishers were checked by petitioner as a part of its service to clients. As a rule payments were received from clients before the publisher's due date. Petitioner did, however, in a number of cases take notes and trade acceptances from clients which in the taxable years aggregated the following amounts:
| 1918 | $24,038.34 |
| 1919 | 1,000.00 |
| 1920 | $132,611.44 |
| 1921 | 93,167.82 |
These notes and acceptances were paid off in periods ranging from 16 days to a little over 4 months.
On bills to petitioner by electrotypers and engravers a cash discount was allowed which was taken advantage of by petitioner and was not passed on to its clients. On such bills petitioner charged clients a service fee of 15 per cent.
The various sources and amounts of petitioner's income were as follows in the taxable years:
| Source | 1918 | 1919 | 1920 | 1921 |
| Magazine | $118,978.86 | $325,890.86 | $471,578.78 | $299,213.58 |
| Newspaper | 44,328.63 | 122,714.87 | 181,711.20 | 164,565.82 |
| Service | 17,454.02 | 20,250.89 | 23,154.99 | |
| Billboard | 108.00 | 4,481.16 | 2,017.61 | |
| Street car card | 356.40 | 29,852.23 | ||
| Art | 11,499.80 | 6,102.03 | 1 4,246.42 | 1 2,221.30 |
| Art write off | 9,469.84 | |||
| Engraving | 5,036.41 | 9,443.50 | 27,559.33 | 11,670.60 |
| Engraving write off | 450.67 | |||
| Printing | 2,346.13 | 4,556.93 | 8,804.79 | 5,384.45 |
| Printing write off | 1,488.10 | |||
| Photo | 1,713.42 | 2,255.49 | 2,629.98 | 2,183.85 |
| Photo write off | 198.65 | |||
| Discount earned | 34,577.85 | 74,060.35 | 87,156.40 | 57,901.32 |
| Interest earned | 950.33 | 3,110.79 | 5,745.80 | 7,127.86 |
| Old paper | 64.40 | 137.99 | 162.17 | |
| Dividends received | 200.00 | |||
| 236,949.85 | 580,595.36 | 815,435.42 | 571,198.78 |
*1133 Discounts allowed to clients were: 1918, $33,727.95; 1919, $71,658.29; 1920, $76,620.73; 1921, $50,165.67. The difference between discount earned and discount allowed represented for the most part discount on engraving, electrotyping, and other mechanical work which was not passed on to clients.
During the taxable years petitioner paid to solicitors, whether stockholders or nonstockholders, one-third of its commission on the business produced by them. For the years 1919 and 1920 petitioner attributed approximate gross and net income accruing to it to the services of nonstockholder solicitors as follows:
| 1919 | 1920 | |||
| Gross | Net | Gross | Net | |
| John Lee Mahin | $74,802 | $49,868 | $190,586 | $127,058 |
| F. T. Short | 35,400 | 10,225 | 2,319 | 767 |
| Joseph Kaufman | 18,851 | 9,430 | ||
| John F. Woods | 13,376 | 8,924 | ||
| H. S. Richland | 6,948 | 4,632 |
Commissions paid to stockholders and nonstockholding solicitors, as far as shown, were as follows:
| 1918 | 1919 | 1920 | 1921 | |
| Tinsman | $16,830.46 | $25,620.00 | $52,235.47 | $43,399.22 |
| Carl Kaufman | 18,544.11 | 54,054.76 | 57,866.00 | |
| Joseph Kaufman | 8,645.60 | 9,425.89 | ||
| Nixon | 512.73 | 13,393.73 | 11,439.67 | |
| J. F. Woods | 3,991.17 | 4,452.00 | 10,561.47 | |
| H. S. Richland | 4,726.00 | 10,034.71 | ||
| F. T. Short | 12,407.85 | 25,175.00 | 1,552.00 | |
| J. L. Mahin | 6,451.67 | 24,934.00 | 63,528.00 | 29,439.09 |
| J. J. Geisinger | 2,450.00 | 26,800.81 | 30,109.77 | |
| W. B. Bennett | 106.40 |
*2276 Of the commissions paid Geisinger in 1919, the amount of $15,004.45 was paid for the period January 1 to October 1, during which he was not a stockholder.
The following is a summary of petitioner's balance sheets at December 31 of each of the taxable years:
*1134
| 1918 | 1919 | 1920 | 1921 | |
| ASSETS | ||||
| Cash | $25,703.00 | $69,249.94 | $119,037.48 | $195,228.49 |
| Postage inv | 233.14 | |||
| Liberty bond account | 17,342.00 | 11,450.00 | ||
| Receivables: | ||||
| Notes | 4,322.00 | 70,679.01 | ||
| Trade acceptances | 10,813.00 | |||
| Accounts (sales less res.) | 79,039.40 | 272,968.53 | 255,507.89 | 189,371.68 |
| Personal advances | 1,339.12 | 27,997.00 | 11,273.90 | 43,444.03 |
| Accrued interest | 131.81 | 189.72 | 177.16 | |
| Inventory - work in process | 6,803.06 | 21,523.43 | 8,661.09 | |
| Suspense | 172.00 | 762.80 | ||
| Insurance | 553.51 | 2,254.17 | 3,064.33 | 3,815.95 |
| Deferred items | 212.80 | 3,823.39 | 20,543.40 | 729.90 |
| Deferred purchase a/c | 27,416.25 | |||
| M. Dammann spec. a/c | 631.00 | |||
| Fed. Snap Corp | 1,300.00 | |||
| Res. for discount earned | 4,553.83 | 4,051.33 | ||
| Furniture and fixtures | 4,541.59 | 6,982.13 | 25,510.03 | 26,212.45 |
| Investment a/c | 24,100.00 | 2,700.00 | 200.00 | |
| Stock subscriptions | 7,540.00 | 1,100.00 | ||
| Treasury stock | 700.00 | |||
| Good will | 60,000.00 | 60,000.00 | 60,000.00 | 60,000.00 |
| 200,160.29 | 489,088.31 | 1 615,137.86 | 551,570.08 | |
| LIABILITIES | ||||
| Payables accounts | 203,233.26 | |||
| Audit vouchers (less dis.) | 58,596.69 | 212,842.29 | 232,681.21 | |
| Unbilled advertising (res.) | 5,272.18 | 30,323.67 | 7,206.23 | |
| Commissions | 12,755.35 | (3,702.01) | ||
| Salaries | ||||
| Personal | 33,300.00 | |||
| Accrued commissions | 3,448.75 | 8,529.14 | ||
| Accrued salaries | 15,763.53 | 202.74 | ||
| Employees' deposits | 2,108.80 | |||
| Reserves: | ||||
| Discount allowed | 5,110.17 | 3,860.76 | ||
| Doubtful a/c | 5,148.92 | 5,148.92 | ||
| Depreciation | 4,318.89 | 7,318.89 | ||
| Auditing expense | 400.00 | 400.00 | ||
| Deferred income | 7,000.00 | 228.35 | 1,208.34 | |
| Interest prepaid and accrued | 52.50 | |||
| Donated capital | 900.00 | 900.00 | 200.00 | |
| Preferred stock | 50,000.00 | 50,000.00 | 50,000.00 | |
| Common stock | 50,000.00 | 13,300.00 | 16,170.00 | 16,170.00 |
| Surplus a/c "A" | 29,330.00 | 29,330.00 | ||
| Surplus | 59,210.65 | 9,800.00 | 24,470.64 | 238,401.92 |
| Earned surplus | 161,284.41 | |||
| P and L for year | 815.99 | 192,554.97 | ||
| 200,160.29 | 489,088.31 | 1 614,777.52 | 551,570.08 |
Salaries and commissions of the principal stockholders for 1917 and 1918, as far as shown by the record, were as follows:
| 1917 | 1918 | |
| Tinsman: | ||
| Salary | $5,520 | $16,560.00 |
| Commission | 16,830.46 | |
| Carl Kaufman: | ||
| Salary | 4,050 | 12,150.00 |
| Commission | 18,544.11 | |
| 1917 | 1918 | |
| Joseph Kaufman: | ||
| Salary | $8,640.00 | |
| Commission | 8,654.60 | |
| Nixon: | ||
| Salary | 10,650 | 16,422.20 |
| Commission | 512.73 |
Respondent disallowed as deductions $30,672.20 of the salaries paid to Tinsman, Carl Kaufman, joseph Kaufman, and Nixon in 1918. Respondent denied petitioner personal service classification for each of the years 1918, 1919, 1920 and 1921
Not more than 50 per cent of petitioner's income was derived from Government contracts.
*1135 OPINION.
ARUNDELL: The respondent in denying personal service classification contends that the petitioner fails to meet two of the statutory tests. First, that the principal stockholders were not regularly engaged in the active conduct of the affairs of petitioner, and second, that petitioner's income can not be ascribed primarily to the activities*2278 of the principal stockholders.
The first contention is based on the record stockholdings of Isabel M. Kaufman. In the year 1918 Mrs. Kaufman was not a stockholders of record, and the evidence shows that all the record stockholders were engaged in the active conduct of petitioner's affairs. Joseph Kaufman, while not exclusively engaged in working for petitioner, was one of its account executives and his activities bring him within the definitions of being "regularly" engaged in petitioner's service. ; . Isabel M. Kaufman can not be regarded as a stockholder in 1918 for whatever interest she ultimately held in petitioner's stock was a gift from Carl Kaufman and the gift had not been completed in 1918.
At the beginning of 1919 Joseph Kaufman had withdrawn from active participation in petitioner's business, his stock was acquired by Carl Kaufman who caused it, together with his other stockholdings, to be registered in the name of his wife. Mrs. Kaufman indorsed the certificates in blank and delivered them to her husband, who thereafter had custody of them. When the stock*2279 was increased in the latter part of 1919 Mrs. Kaufman became the record holder of a proportionately larger amount of stock, which likewise was held by her husband after indorsement in blank. The evidence establishes clearly that the stock was put in Mrs. Kaufman's name only as a matter of protection to her, prompted by the ill health of her husband, and that it was never intended that she should be the legal owner of more than one-half of it. In our opinion it must be held that Mrs. Kaufman owned no more than one-half of the 231 shares in her name from January 1 to October 1, 1919, and of the 1,351 shares thereafter. Cf. ; . On a percentage basis then, Mrs. Kaufman from January 1 to October 1, 1919, owned 23 per cent; from October 1 to December 31, 1919, 21.3 per cent; and in 1920 and 1921, 18.7 per cent. The owners of the remainder of the stock were all actively engaged in the petitioner's affairs and in our opinion the ownership of the above percentages by Mrs. Kaufman is not in itself sufficient to defeat personal service. See *2280 . We think it proper in this connection to bear in mind that Mrs. Kaufman was at least to some extent *1136 active in petitioner's affairs. She not only discussed with her husband his problems and those of other stockholders, but went out of her home and into the markets to secure information and advertising ideas which were of value to the petitioner.
Respondent's second reason for denying personal service classification is based on the contention that a substantial part of petitioner's income was derived from the activities of solicitors who were not stockholders.
In the schedules set forth in the findings of fact a part of petitioner's income in 1919 and 1920 is shown as attributed by it to Mahin, Short, Woods, and Richland, none of whom were stockholders in 1919. A part is also attributed to Joseph Kaufman in 1919, but this is explained as arising out of accounts he had secured before he gave up his stock holdings. In 1920 Woods and Richland had become stockholders. In addition to these, it would appear from the facts that Geisinger and Bennett were paid commissions that some business was attributable to*2281 their efforts. However, it is clearly shown by the evidence that the nonstockholding solicitors never closed accounts with advertisers, but that this important function was always performed by a principal stockholder. When an account was obtained the details necessary to execute it were handled by petitioner's organization under the very close supervision of petitioner's principal stockholders. It was, as we said in , to the principal stockholders that advertisers looked for service and not to solicitors or employees. See . The organizers of petitioner, who were also its principal stockholders, were all experienced advertising men and it was due to their ability to satisfactorily execute accounts that petitioner's income was primarily attributable. The principal stockholders could have conducted an agency without the aid of solicitors, but the solicitors could not have carried on an advertising business without the skilled supervision of the principal stockholders.
It is evident from the facts that capital was not a material income-producing*2282 factor. No capital was originally paid in to petitioner and such as it subsequently acquired was not necessary for successful operation, because of petitioner's practice of obtaining payment of its receivables before the due date of its payables. It was only in rare cases that payment was made to a publisher before receipt from the advertisers. Accounts and notes receivable and trade acceptances were offset by accounts payable to an extent to make it plain that they played no material part in producing income. For 1918 receivables amounted to $19,492.53 more than the payables and gross income was $236,949.85. For 1919 receivables exceeded payables by *1137 $57,799.57 and gross income amounted to $580,595.36. For 1920 the excess was $62,331.01 and gross income was $815,435.42. For 1921 the excess of receivables over payables was $29,582.45 and gross income was $571,198.78. See ; ; . The excess of discounts earned over those allowed did not arise out of the use of capital, but represented discounts on such work as engraving*2283 and electrotyping costs which were not passed along to clients.
Petitioner has met all the statutory tests for personal service classification and in our opinion the respondent erred in failing to so classify it. This conclusion makes it unnecessary to pass on the salary issue for 1918.
Reviewed by the Board.
Decision will be entered for the petitioner.