*1135 LITTLETON: This is an appeal from the determination of a deficiency in tax for the years 1918, 1919, and 1920 in the amounts of $6,278.65, $28,067.84, and $26,632.70, respectively. The whole of the deficiency results from the Commissioner's denial of the petitioner's claim for classification as a personal service corporation under section 200 of the Revenue Act of 1918.
*1136 FINDINGS OF FACT.
The petitioner is a Pennsylvania corporation, with principal office at Philadelphia. It was organized in 1914 with a capital stock of $10,000, consisting of 1,000 shares of $10 par value each, which were originally issued for furniture and fixtures in the amount of $2,000 and good will in the amount of $8,000.
The business was founded as an advertising agency about the year 1900 by Richard A. Foley, formerly a newspaper man, who served as president from its incorporation until his death in 1922.
During the years 1918, 1919, and 1920 the capital stock of the company was held by the following officers and individuals:
| Shares | |
| Richard A. Foley, president | 742 |
| R. Jenny Foley (not an officer) | 190 |
| C. H. Eyles, vice president and secretary | 21 |
| L. E. Hood, vice president and general manager | 15 |
| C. C. Shoemaker, treasurer | 15 |
| James Montgomery, director | 14 |
| Ida E. Thomas (not an officer) | 3 |
*2088 All of the stockholders were actively engaged in the business and devoted practically all of their time to it during the tax years in question. Richard A. Foley, president, was a man of unusual capacity and genius for advertising work and it was through his reputation and his individual efforts in soliciting accounts that most of the business was secured for the company. C. H. Eyles, L. E. Hood, and James Montgomery assisted Foley in soliciting accounts, interviewing clients, originating advertising ideas and exercising general supervision of the business. The several titles of these officers were more or less honorary and did not bespeak a clear division of the duties performed. C. C. Shoemaker performed the usual duties of treasurer, having supervision of the office work. Ida E. Thomas was designated executive assistant and had charge of the stenographic, clerical, and other work performed by the employees. R. Jenny Foley, wife of Richard A. Foley, assisted in formulating recipes for food products, made experiments and cooking tests in her own home with various products advertised by the company, gave talks on occasions before women's clubs and endeavored to familiarize the*2089 customers with the use of the client's product.
The business organization of the agency consisted of seven distinct departments. The average number of employees in each department and their total compensation for each of the years 1918, 1919, and 1920 were as follows:
| average number of employees | Compensation | |
| 1918 | ||
| Copy, Art, and Research Department | 2 | $4,368.35 |
| Rate Department | 3 | 2,094.00 |
| Forwarding Department | 4 | 2,574.15 |
| Bookkeeping Department | 2 | 2,187.00 |
| Stenographic Department | 5 | 4,136.60 |
| Checking Department | 1 | 686.50 |
| Filing Department | 1 | 678.85 |
| 1919 | ||
| Copy, Art, and Research Department | 5 | 17,483.88 |
| Rate Department | 4 to 5 | 5,688.35 |
| Forwarding Department | 5 to 6 | 4,502.92 |
| Bookkeeping Department | 2 to 3 | 4,191.65 |
| Stenographic Department | 7 to 8 | 8,173.95 |
| Checking Department | 2 to 4 | 3,084.55 |
| Filing Department | 2 to 3 | 2,120.50 |
| Chauffeur | 1 | 1,245.00 |
| 1920 | ||
| Copy, Art, and Research Department | 7 to 8 | 28,038.32 |
| Rate Department | 3 to 4 | 6,134.85 |
| Forwarding Department | 8 | 8,830.45 |
| Bookkeeping Department | 3 | 8,482.60 |
| Stenographic Department | 8 | 9,308.85 |
| Checking Department | 4 | 4,358.67 |
| Filing Department | 3 | 2,711.85 |
*1137 *2090 It was necessary at times for the agency to employ the services of outside artists, engravers, printers and others in the preparation of advertisements.
The handling of all accounts was fairly regular. Having secured a client, the agency submitted rough copies of the proposed advertisements with a list of the publications in which they would appear and an estimate of the cost. The client made a selection of the copy to be used and gave approval to the agency in the form of an order for the advertising as specified in the approved copy. The agency thereupon developed the copy and placed the order with the various publications, seeing that the insertions were made according to specifications.
In the meantime, the agency submitted a bill to the client for the exact total cost of the advertisement, including the cost of materials, art work, engraving, etc., obtained from outside sources, and the cost of the advertising space plus a 15 per cent commission. At some time during the month in which the advertisement appeared, the publications submitted bills therefor to the agency, payable before the 20th of the succeeding month. These bills were made out to the agency with the name*2091 of the client usually stated and were paid by the agency with the funds already collected from the client after deduction of the 15 per cent commission. The various publications allowed the agency the 15 per cent discount on the list price of advertising space customarily allowed to reputable advertising agencies. The bills for the materials and outside work were likewise made out to and paid by the agency. There were no written contracts between *1138 either the client and the agency or the agency and the publisher. The advertiser was privileged at any time to withdraw his account and transfer it to another agency, retaining the advertising space in its own name under the same terms.
The income and expenses of the company for each of the years 1918, 1919, and 1920 were substantially as follows:
| 1918 | 1919 | 1920 | |
| INCOME | |||
| Advertising commissions | $87,324.51 | $248,559.29 | $208,158.38 |
| Interest on Liberty bonds | 565.89 | 1,039.90 | 1,328.40 |
| Interest on other bonds | 1,776.04 | 2,105.27 | 3,675.57 |
| Dividend on stock investment | 774.33 | 172.00 | 102.00 |
| Miscellaneous | 64.60 | ||
| Municipal and tax-exempt bonds | 80.00 | 80.00 | |
| EXPENSES | |||
| Compensation to stockholding employees | 29,143.34 | 97,267.21 | 105,841.04 |
| Compensation to other employees | 18,510.67 | 46,492.34 | 68,114.77 |
| Office rent | 3,236.14 | 6,333.32 | 7,500.00 |
| Foley stationery | 693.25 | 3,041.36 | 2,539.12 |
| Office supplies | 526.80 | 2,099.41 | 2,560.73 |
| Postage | 1,082.66 | 2,989.90 | 2,588.26 |
| Telephone and telegraph | 1,080.73 | 1,678.30 | 1,778.99 |
| Delivery | 3,073.63 | 3,564.84 | 5,890.59 |
| Solicitation items | 7,005.46 | 6,089.58 | 4,320.80 |
| Insurance premiums | 160.78 | 57.91 | 255.87 |
| Miscellaneous | 3,804.54 | 6,205.88 | 10,599.35 |
| Repairs | 75.42 | 402.57 | 158.02 |
| Interest | 101.67 | 110.67 | |
| Taxes | 545.55 | 261.87 | 570.00 |
| Depreciation on furniture and fixtures | 2,206.24 | 4,305.23 | |
| Loss on sale of investments | 2,661.85 | 3,364.87 |
*2092 In 1917 the agency handled 10 accounts aggregating $375,372.57 and 84 lesser accounts aggregating $172,940.31; in 1918, 12 accounts aggregating $1,475,581.21 and 60 lesser accounts aggregating $169,348.34; in 1920, 12 accounts aggregating $1,587,826.06 and 57 lesser accounts aggregating $214,508.90.
The advertisements appeared in as many as 2,300 publications in the United States and Canada.
The agency's balance sheets for the years 1918, 1919, and 1920 show assets and liabilities as follows:
| 1917 | 1918 | 1919 | 1920 | |
| ASSETS | ||||
| Cash | $16,738.97 | $38,761.70 | $43,558.46 | $30,795.07 |
| Accounts receivable - book value | 58,514.44 | 55,037.99 | 88,583.12 | 87,621.85 |
| Work in progress | 255.53 | 914.91 | 2,411.62 | 1,612.51 |
| Accounts receivable from others | 565.00 | 236.40 | 4,648.88 | |
| U.S. of America 2d Liberty 4 1/4's | 15,000.00 | 15,948.60 | 17,124.00 | |
| U.S. of America 3d Liberty 4 1/4's | 24,314.00 | |||
| U.S. of America 4th Liberty 4 1/4's | 4,050.00 | 50.00 | 6,053.20 | |
| U.S. of America Victory 4 3/4's | 500.00 | 983.50 | ||
| Stocks of domestic corporations | 20,454.22 | 3,136.25 | 2,150.00 | 2,150.00 |
| Bonds, municipal | 2,057.50 | 2,057.50 | 2,057.50 | 2,057.50 |
| Bonds, other | 23,686.18 | 20,957.43 | 35,397.35 | 25,082.08 |
| Amounts due from employees on their subscription to U.S. Liberty bonds | 1,308.00 | |||
| Advances to members | 7,641.12 | 649.89 | 1,046.60 | 55,895.08 |
| Advances to others | 64.69 | |||
| Office furniture and fixtures | 3,962.84 | 3,739.88 | 8,852.67 | 8,601.67 |
| Automobile | 3,220.00 | 2,576.00 | 8,361.87 | |
| 149,684.49 | 149,039.15 | 211,733.72 | 250,987.01 |
| 1917 | 1918 | 1919 | 1920 | |
| LIABILITIES | ||||
| Notes payable to bank | $4,500.00 | $12,000.00 | ||
| Accounts payable - for clients' advertising space, etc | 60,777.10 | 56,734.93 | $95,866.89 | $101,455.02 |
| Accounts payable - accrued compensation and expenses | 4,080.05 | 4,393.54 | 31,396.18 | 104.57 |
| Capital stock | 10,000.00 | 10,000.00 | 9,860.00 | 9,860.00 |
| Surplus and undivided profits | 70,327.34 | 65,910.68 | 74,610.65 | 139,567.42 |
| 149,684.49 | 149,039.15 | 211,733.72 | 250,987.01 |
*1139 In 1918 the net income to the agency from regular business was $87,324.51 and from securities and investments $3,116.26; in 1919, from regular business $248,559.29 and from securities and investments $3,317.17; in 1920, from regular business 281,158.38 and from securities and investments $5,105.93.
Judgment for the Commissioner. Order redetermining the deficiencies to be $6,278.65 for 1918, $28,067.84 for 1919, and $26,632.70 for 1920 will be entered accordingly.