*75 Decision will be entered for the respondent.
Corporation engaged in the business of managing farms for absentee owners, employing trained agriculturists to do the actual work of surveying and platting the farm, planting the crops, and supervising the operation of each farm, under the direction of its three principal officers, who owned, individually or through their wives, more than 70 per cent of the corporation's stock, and who devoted full time to the business, held, not a personal service corporation within the meaning of section 725, I. R. C.
*505 This proceeding involves excess profits tax deficiencies of $ 31,988.90 and $ 6,246.24 for 1943 and 1944, respectively. Some of the issues raised in the pleadings were waived by counsel for the petitioner at the hearing. The only issue remaining for our determination is whether the petitioner, during the taxable years 1943 and 1944, was a personal service corporation within the meaning of section 725, Internal Revenue Code. The facts have been stipulated in part and are found accordingly.
FINDINGS OF*76 FACT.
The petitioner is a Nebraska corporation, with its principal office located at Omaha, Nebraska. Its tax returns for the years 1943 and 1944 were filed with the collector of internal revenue for the district of Nebraska. In these returns the petitioner signified its desire not to be subject to excess profits tax.
Petitioner's stock, consisting of common shares only, was owned during the years 1943 and 1944 as follows:
| Shares held | ||
| Stockholder | ||
| 1943 | 1944 | |
| Cornelius J. Claassen | 11 1/2 | 14 |
| Gertrude C. Claassen | 89 | 111 |
| Bruce Russell | 43 1/2 | 54 |
| Ruth E. Wait | 5 1/2 | 6 |
| Randolph M. Claassen | 5 1/2 | 6 |
| Gale T. Tucker | 5 | 9 |
| Total | 160 | 200 |
Gertrude C. Claassen, one of the above named shareholders, is, and was at all times herein mentioned, the wife of Cornelius J. Claassen. Cornelius J. Claassen, Bruce Russell and Gale T. Tucker were president, *506 vice president, and general manager of petitioner, respectively. During the taxable years they were all actively engaged in the affairs of the petitioner and devoted full time to it.
The petitioner is engaged in the business of managing farms for absentee owners. It receives as compensation for*77 its services 10 per cent of the owner's share of the income, with a minimum of $ 100 per year for the first year and $ 75 per year thereafter. Through its officers and employees, and under contract with the owners and tenants, the petitioner takes over complete management of the farm, beginning with the preparation of a general farm plan and extending to the marketing of the crops.
All of petitioner's activities were directed from its central office at Omaha, Nebraska, under the supervision of its three principal officers, Claassen, Russell, and Tucker.
Claassen was chiefly responsible for promotional activities and advertising. He had a broad acquaintance among agricultural and banking interests and kept in close contact with the agricultural colleges and various farm activities throughout the territory in which the petitioner operated. He was not a graduate of an agricultural college and had had no practical experience in farm operation.
Russell directed the field offices and was in charge of crop planning and general field activities. He was a graduate of Iowa State Agricultural College and had had five or six years' experience in farm operation. He had served as agricultural*78 agent of Clay County, Nebraska, for three or four years prior to petitioner's organization. He was directly in charge of the selection, training, and supervision of field men.
Tucker's principal assignment was the coordination of the various activities of the organization, especially the general office policies and the field operations. He assisted Russell in selecting and training the field men.
These three officers received compensation in 1943 and 1944, as follows:
| 1943 | 1944 | |
| Cornelius J. Claassen | $ 21,727.50 | $ 21,747.50 |
| Bruce Russell | 11,785.00 | 8,980.00 |
| Gale T. Tucker | 11,200.00 | 9,300.00 |
| Total | 44,712.50 | 40,027.50 |
In addition to the officers referred to above there were three district managers, with headquarters in the Omaha office. It was their duty to check the reports filed by the field men and to handle all correspondence with the farm owners, keeping them informed as to the progress *507 of the farm operations. These district managers received salaries in 1943 and 1944 as follows:
| 1943 | 1944 | |
| A. E. McMillan | $ 1,922.08 | $ 3,006.50 |
| W. E. Minier | 3,217.50 | 3,614.80 |
| Glen Schlotter | 2,814.50 | 3,008.00 |
| Total | 7,954.08 | 9,629.30 |
There*79 were 18 field men in petitioner's employ in 1943 and 1944, receiving salaries as follows:
| 1943 | 1944 | |
| Cecil Benton | $ 787.50 | |
| H. C. Breckenridge | 3,100.45 | $ 3,263.00 |
| Laurance Buller | 2,550.00 | 3,012.50 |
| W. E. Cunningham | 2,620.50 | 2,989.45 |
| Ralph Elliott | 2,514.60 | 3,247.76 |
| Howard Ely | 3,062.03 | 3,279.25 |
| LeVern Gingrich | 3,227.70 | 3,630.83 |
| J. W. Graham | 3,086.93 | 3,721.25 |
| Gomer Jones | 2,613.70 | 3,421.95 |
| Kenyon V. King (part) | 655.00 | |
| Floyd Leland | 2,675.75 | 3,147.08 |
| Fred Meridith | 2,753.10 | 2,307.81 |
| Roy J. Murray | 1,672.40 | 2,953.50 |
| Ray B. Nordyke | 2,440.00 | 3,092.50 |
| George Putnam | 2,612.00 | 3,094.45 |
| J. Carl Rush (part) | 629.70 | 2,887.50 |
| E. H. Stover | 2,730.62 | |
| Carl Swanson | 2,413.00 | 2,965.50 |
| J. E. Wilkin | 2,698.00 | 3,026.60 |
| George Brodersen | 2,069.00 | |
| Total | 43,526.36 | 53,426.55 |
In addition to the district managers and field men, petitioner had about 15 employees, including accountants, auditors, appraisers, cashiers, stenographers, typists, and clerks. The total compensation of the officers and employees in 1943 and 1944 was as follows:
| 1943 | 1944 | |
| Officers (Claassen, Russell, Tucker) | $ 44,712.50 | $ 40,027.50 |
| District managers (McMillan, Minier, Schlotter) | 7,954.08 | 9,629.30 |
| Field men (18) | 43,526.36 | 53,426.55 |
| Office workers | 23,857.07 | 29,683.72 |
| Total | 120,050.01 | 132,767.07 |
*80 The petitioner's gross income was $ 203,050.65 in 1943 and $ 206,508.15 in 1944. Its net income for those years, as shown in its books after adjustment for the Federal income taxes reported in its returns, was $ 33,559.82 for 1943 and $ 16,097.66 for 1944.
Practically all of the field men are selected from agricultural college graduates who have been born and reared on the farm and have technical agricultural education and experience that peculiarly fits them for the management and operation of farms. Each field man is given a week's training in the central office and several weeks in the field, getting acquainted with his tenants and their farm problems. He is then taken out into the field by Russell, or an experienced field man, and brought in contact with the tenants on the farms. This part of *508 the training sometimes covers a period of several weeks. Each field man is then given a limited number of farms to manage, under the direction of a district supervisor, until he demonstrates that he is able to handle the job. He is then assigned to a territory where he manages from 50 to 75 farms.
The duties of the field man, after being placed in a territory, are to take *81 over, manage, and supervise the operation of farms placed in his care. Where a new farm is brought in he makes the initial inspection, including a complete survey of the land, and all improvements. He then reports in writing to the central office, setting out the conditions which he finds, and makes recommendations as to what should be done to make it a good, income-producing farm. He also makes soil tests and recommendations in regard thereto. The home office takes his report and, by contacting the owner, ascertains what, if any, of the field man's suggestions the owner is willing to carry out. In conjunction with the owner, the petitioner works out a program for the operation of the farm and enters into an agreement with the owner to that effect. The field man is then given definite information as to what is to be done in connection with the operation of that particular farm and must procure a suitable tenant who will put the program into operation. Having procured and settled the tenant, he visits the farm every four or five weeks between April 1 and the middle of October each year to see that the tenant carries out the program. Practically all contacts with the tenant are*82 by field men. The field men plan their own itineraries for each week in advance and report them to the central office. Thereafter, they make a written report of each visit to the central office, setting forth anything of importance in connection with the operation and management of the farm which they think may be of interest to the owner. All reports to owners are prepared originally by field men in rough draft, in the field, and are edited and recopied in the central office before being sent to the owners.
The proceeds from the sale of all crops on all farms are handled through the central office at Omaha, Nebraska.
The central office keeps in contact with field men by calling what are designated as district meetings throughout the summer. The field men in the vicinity of these meetings are called in for a discussion of the problems confronting them and matters of general interest, such as new crop varieties, new fertilizers, and weed control. Once a year the entire field force is called in for a meeting held in Omaha.
The district managers and field men performed a substantial part of the services rendered by the petitioner in 1943 and 1944 and were responsible for a substantial*83 portion of its income in those years. The petitioner was not a personal service corporation during those years.
*509 OPINION.
The respondent determined in his notice of deficiency that:
* * * the income realized for the years here in issue may not be ascribed primarily to the activities of your shareholders who are regularly engaged in the active conduct of your affairs, and that capital is a material income producing factor. Your contention that the corporation is a personal service corporation is denied.
The respondent states in his brief that he does not contend in this proceeding that capital was an income-producing factor, but does contend that the income may not be ascribed to the activities of petitioner's 3 officer-stockholders, but must be ascribed in substantial part to the activities and services of petitioner's employees, particularly to the 3 district supervisors and the 18 field men.
The pertinent provisions of the statute are set out in the margin. 1
The Commissioner's regulations (Regulations 112, sec. 35.725-2 (c)) provide:
* * * If employees other than shareholders contribute substantially to the services rendered by a corporation, such corporation is not*84 a personal service corporation unless, in every case in which services are so rendered, the value of and the compensation charged for such services are to be attributed primarily to the experience or skill of the shareholders and such fact is evidenced in some definite manner in the normal course of the business or profession. * * *
We have found as a fact, and the evidence, we think, permits of no contrary finding, that the district managers and field men, who were not shareholders of the petitioner, performed a substantial portion of the services for which petitioner received*85 its income.
There is no doubt that the officer-stockholders were capable and well qualified for their positions with the petitioner; that they were responsible for petitioner's efficient organization; and that petitioner could not have functioned successfully without their services. That, however, does not meet the requirements of the statute. The same might be said of most successful corporate enterprises. The requirement of the statute, and the regulations, is that the income must be ascribable primarily to the activities of the shareholders. We said in Patterson-Andress Co., 6 B. T. A. 392, that:
* * * this clause means more than that the stockholders shall obtain the clients and supervise the work, or that clients shall look to their experience; it *510 means, among other things, that the corporation may not rely upon nonstockholders to do a substantial amount of the work which produces the income whether such work be detailed or supervisory. * * *
The evidence here is that the field men were relied upon to do, and did do, not just a substantial part, but the greater part, of the work which produced petitioner's income. That work was*86 the actual management of the farms. It required the constant personal attention of the field men and the application of their scientific training. These men were carefully selected not only for their special schooling, but for their character and their ability to accept individual responsibility. In the publication prepared by petitioner's president, entitled "Successful Farming for Absentee-Owners," which is attached to the written stipulation of facts, it is stated, following a description of the duties and qualifications of the field men, that "The success of our System is largely due to our selection of field men of this type."
In H. K. McCann Co., 14 B. T. A. 234, we said that:
We have no doubt that there is a point beyond which the services of employees may not be used without creating an organization which overshadows its supervisors in producing income, or so materially assists that income can no longer be said to be produced primarily by those who originate the business and supervise its execution. Whether that point has been reached must be decided in each case upon the facts in such case. * * *
The facts here, we think, go well beyond*87 that point.
One of the cases relied upon by the petitioner is H. Newton Whittelsey, Inc., 9 T.C. 700">9 T. C. 700. The taxpayer there was a corporation engaged in naval architecture and marine engineering. It had an organization not unlike the petitioner's, but with considerably more employees and a much larger pay roll. We found that "The contributions made by most of petitioner's nonstockholder employees were minor in character." That could by no means be said of the services performed by petitioner's field men and district managers. Their services were vital and valuable to the petitioner.
Nothing would be gained here by an attempt to review the numerous cases on this point. In one feature or another, the facts here might be said to resemble those in cases where personal service status has been granted, as well as cases where it has been denied. The question is one of fact that must be determined on the evidence in each case. The evidence in the instant case leaves no doubt in our minds that petitioner's income for the taxable years was not attributable primarily to the activities of its shareholders. It follows that petitioner was not in those years a*88 personal service corporation within the meaning of section 725.
Decision will be entered for the respondent.
Footnotes
1. SEC. 725. PERSONAL SERVICE CORPORATIONS.
(a) Definition. -- As used in this subchapter, the term "personal service corporation" means a corporation whose income is to be ascribed primarily to the activities of shareholders who are regularly engaged in the active conduct of the affairs of the corporation and are the owners at all times during the taxable year of at least 70 per centum in value of each class of stock of the corporation * * *.↩