1928 BTA LEXIS 3671">*3671 The petitioner was a personal service corporation during the year 1919.
11 B.T.A. 973">*973 This is a proceeding for the redetermination of a deficiency in income and profits taxes of $15,164.28 for 1919. The deficiency results from the respondent's refusal to classify the petitioner as a personal service corporation.
FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of Georgia with its principal office at Atlanta. It was organized in 1904 as the successor to the business conducted from 1896 to 1904 by St. Elmo Massengale as an individual. The total capital stock of $20,000, consisting of 200 shares of a par value of $100 each, was issued for the good will and office furniture and fixtures of the predecessor business. No additional capital was paid in.
During 1919 the stockholders, the office and number of shares held by each, the time devoted to the business and compensation were as follows:
| Office. | |
| St. Elmo Massengale | President |
| Elizabeth Massengale (wife of St. Elmo Massengale). | Vice president |
| W. R. Massengale (brother of St. Elmo Massengale). | Secretary and treasurer |
| Number of shares held. | Time devoted to business. | Compensation. |
| 198 | Entire | $16,182.25 |
| 1 | Part | 2,900.00 |
| 1 | Entire | 9,194.85 |
The petitioner conducted an advertising agency and during the year involved in this proceeding carried on business in the following manner:
St. Elmo Massengale and W. R. Massengale solicited business from prospective advertisers. They also conferred with advertisers and after making a study of their business as to sales and organization advised them as to the best and most advantageous method of advertising and developing the product being advertised.
When desired, the agency would prepare cuts or drawings and also drafts of advertising matter, make prints and offer suggestions as to the best medium or mediums of advertising and give a statement of the cost thereof. The customer if he approved would designate the medium or mediums desired.
11 B.T.A. 973">*974 The petitioner had a small printing plant and other facilities for the purpose of making copies, drawings, cuts, etc., which appear on the balance sheet included with furniture and fixtures at $2,235.52, as at December 31, 1919. An artist was employed for the purpose of making1928 BTA LEXIS 3671">*3673 drawings. The drawings, preparing cuts, and printing service was rendered by the petitioner to its clients at cost.
When the newspapers, bill posters, or other mediums of advertising were agreed upon, the petitioner would send to the publisher the copy, and cuts or drawings agreed on for the number of insertions desired or the number of billboard sheets as the case might be. An order was sent in by the petitioner in each particular case in the name and behalf of each advertiser. The petitioner acted in the capacity of agent. The publisher or other advertising medium paid the petitioner a commission on the business sent in. The rate for space for each advertiser was governed by the amount of space contracted for by him. If a large amount of advertising was contracted for and used a better rate was obtained than if only a portion of the amount contracted for was used.
As a rule, the publishers sent to the petitioner the bills for advertising, which were itemized for each client. Some bills, however, were sent by the publishers direct to the advertisers, and did not pass through petitioner's office. The petitioner sent out bills which called for payment before the payment1928 BTA LEXIS 3671">*3674 was due to the newspapers or other mediums. The petitioner would check up the amount of space used, see that the advertisements were in accordance with the contracts, and copies, and then remit to the publishers the amounts received from the different advertisers, less the commissions. The petitioner acted only as agent and never sent an advertisement to a paper until it had obtained an agreement from the advertiser. It never in any case procured space in bulk in newspapers or other advertising mediums and sold it to advertisers, but always ordered definite space for a particular advertiser. It did not by agreement obligate itself to assume liability for any loss in case advertisers failed to pay their bills, but in order to hold the good will of the publishers and to maintain its standing it as a rule paid the debts of customers who did not pay. During 1919 on total bills in excess of $767,000 the petitioner lost about $3,878 in this way. In a few cases the petitioner had the publisher submit the unpaid accounts to the advertisers and the losses on these were not borne by the petitioner, but by the publisher. The publishers could have collected their bills direct without the1928 BTA LEXIS 3671">*3675 medium of the petitioner. In any event, the petitioner was not responsible for any space not taken or used by any advertiser and it suffered no loss on that account except that it received a smaller commissioner because of the lesser amount of space used.
11 B.T.A. 973">*975 The petitioner did not employ solicitors of advertising, but all of the business done was through the personal services of St. Elmo Massengale and W. R. Massengale, principally through the services of St. Elmo Massengale. The business was secured largely on account of the personality and the experience of these two men, and their acquaintance with the advertising public, and the advertising mediums. The petitioner acted and procured space for clients upon a letter received from a particular advertiser or upon a personal request.
About December, 1919, the petitioner's name was changed from Massengale Advertising Agency, which it had been for some years, to Massengale Investment Co. Its return for 1919 was filed under the name of "Massengale Investment Company, Successor To Massengale Advertising Agency." Subsequently and before filing this appeal the name was changed back to that of Massengale Advertising Agency. 1928 BTA LEXIS 3671">*3676 There is no question as to the identity of the petitioner.
In addition to the Massengale brothers who alone produced business the petitioner's personnel during 1919 consisted of a bookkeeper, an artist, a copy writer and a stenographer. The petitioner did not advertise its own business.
The following are the balance sheets of the petitioner at the beginning and end of 1919:
| Jan. 1, 1919. | Dec. 31, 1919. | |
| ASSETS. | ||
| Cash | $11,556.87 | $11,992.15 |
| Accounts and notes receivable: | ||
| Trade accounts and notes | 17,795.43 | 89,080.31 |
| Other - Personal accounts | 1,474.84 | 17,988.27 |
| Total accounts and notes receivable | 19,270.27 | 107,068.58 |
| Investments: | ||
| United States Liberty loan bonds | 6,600.00 | 16,300.00 |
| Stock of domestic corporations | 1,000.00 | 21,875.00 |
| Real estate - Land | 100.00 | 100.00 |
| Life insurance - Cash surrender value | 5,106.00 | 6,485.25 |
| Total investments | 12,806.00 | 44,760.25 |
| Fixed assets: | ||
| Automobile | 2,141.00 | 1,248.95 |
| Furniture, fixtures, and printing press | 2,845.96 | 2,235.52 |
| Total fixed assets | 4,986.96 | 3,484.47 |
| Deferred charges - Prepaid license | 50.00 | |
| Total | 48,670.10 | 167,305.45 |
| LIABILITIES. | ||
| Notes payable | 1,000.00 | 20,500.00 |
| Accounts payable: | ||
| Trade | 30,034.99 | 90,500.11 |
| Other - Members | 476.97 | |
| Total accounts payable | 30,034.99 | 90,977.08 |
| Reserve for Federal taxes | 1,199.88 | |
| Capital stock | 20,000.00 | 20,000.00 |
| Surplus | (2,364.89) | 34,628.49 |
| Total | 48,670.10 | 167,305.45 |
1928 BTA LEXIS 3671">*3677 11 B.T.A. 973">*976 The amount of $17,795.43 appearing on the balance sheet of January 1, 1919, as an asset under "Trade Accounts and Notes" represented amounts billed to clients which had not been collected at the end of the preceding year and only a small portion of which was due. The same item appeared at $89,080.31 on December 31, 1919. The amounts of $30,034.99 and $90,500.11 appearing on the balance sheets of January 1, 1919, and December 31, 1919, respectively, under "Accounts Payable - Trade," represented the amounts that petitioner was to remit to the advertising mediums. A certain time was allowed for the payment of bills and some were payable on the 10th, some on the 15th, and others on the 20th of the month. By collecting from the advertisers and then making payment to the publisher the petitioner was able to carry on its business with practically no capital. The item "Personal Accounts" appearing on the balance sheet at January 1, 1919, at $1,474.84 and at December 31, 1919, at $17,988.27 represented advances and overdrafts of petitioner's officers and employees and the mother of St. Elmo Massengale. Of the amount of $17,988.27, $16,911.04 represented an advance or overdraft1928 BTA LEXIS 3671">*3678 to St. Elmo Massengale. No interest was collected on any of the advances or overdrafts.
During 1919, the amount of United States Liberty Loan bondholdings increased from $6,600 at the beginning of the year to $16,300 at the end of the year. These bonds were acquired during loan campaigns, of which St. Elmo Massengale had charge and for which he was handling the publicity. They were not acquired for use in the business or for producing income to the business. They were later sold at a loss. Interest received by the petitioner from those bonds during the year as reported in its return amounted to only $236.80.
The item of $21,875 appearing on the balance sheet at December 31, 1919, as "Stock of Domestic Corporations" represented investments which proved to be worthless, except the stock of the Coca Cola Co., which was sold before any dividend was accrued. No dividends were received on any of the stocks. The item "Automobile" represented an automobile used by St. Elmo and W. R. Massengale in their work for the petitioner. "Notes Payable" of $20,500 appearing in the balance sheet at December 31, 1919, consisted of a note for $15,000 dated September 19, 1919, and due March 19, 1920, given1928 BTA LEXIS 3671">*3679 to the Syndicate Investment Co. in payment for its stock, which proved worthless and never produced any income; a note for $4,500 dated November 18, 1919, and due January 18, 1920, given to a bank in connection with the purchase of Liberty bonds, and a note for $1,000 held by St. Elmo Massengale's mother and representing an indebtedness outstanding for several years.
11 B.T.A. 973">*977 The petitioner reported in its return as "Cash Discounts" an amount of $14,380.64, which was composed of $163,60 representing collections from accounts receivable previously written off, and $14,217.04 representing cash discounts on accounts payable. Of the $14,217.04, $5,686.75 represented the amount of discounts allowed by the publishers or advertising mediums for prompt payment of bills and passed along by the petitioner to its customers. The remainder, or $8,530.29, represented the amount of discounts received and retained by the petitioner through agreements which it had with two of its largest customers whereby it allowed them a portion of its 15 per cent commission received from the publishers and advertising mediums.
In addition to reporting interest received from Liberty bonds of $236.80, the1928 BTA LEXIS 3671">*3680 petitioner also reported a gross income of $107,452.99, of which amount $384.25 represented "Interest From Other Sources," which were not disclosed.
The respondent denied the petitioner's application for classification as a personal service corporation.
OPINION.
TRAMMELL: There is no controversy as to the correctness of the petitioner's net income and the only issue involved in this proceeding is whether the petitioner is entitled to personal service classification for 1919.
Section 200 of the Revenue Act of 1918 defines a personal service corporation to be one -
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 corporation 50 per centum or more of whose gross income consists * * * of gains, profits, or income derived from trading as a principal * * *.
The petitioner contends that the facts in its case entitle it to personal service classification and points out that for the year 1918 the Board held that1928 BTA LEXIS 3671">*3681 it was entitled to personal service classification on a statement of facts identical in many respects with the facts in this proceeding. . The respondent, however, contends that petitioner has not clearly and satisfactorily shown that its income was ascribable primarily to the activities of its principal owners or stockholders, and that capital did not play a material part in producing its income.
There is no controversy in regard to the principal stockholders being regularly engaged in the active conduct of the business of the corporation.
11 B.T.A. 973">*978 We have found that the petitioner did not employ solicitors of advertising, but all business done was through the personal service of the Massengale brothers, and principally through the service of St. Elmo Massengale. The business was secured largely on account of the experience of these two men in the advertising business and their acquaintance with the advertising public and advertising mediums. The petitioner acted as agent for its clients, and the services rendered by it to them were personal in nature. While the petitioner had in its employ an artist and a copy1928 BTA LEXIS 3671">*3682 writer the evidence indicates that their services, which consisted of preparing drawings, advertising copy and the like, were only incidental to the major services rendered by the petitioner to its clients. The petitioner was not manufacturing or trading in art or printing work but furnished such services in order that its clients could see what the proposed advertising would look like and also to be sure that the advertising mediums when setting up the advertising would have a proper idea as to how it should appear.
While the petitioner had certain investments as set out in the findings of fact, it was only the United States bonds that produced any income. The interest received by the petitioner from these, however, amounted to only $236,80. In addition to the interest of $236.80, the petitioner reported a gross income of $107,452.97, of which $384.25 represented interest from some undisclosed source. Of the total income, only $621.05, or approximately one-half of 1 per cent was interest from investments. Such a small percentage, is, in our opinion, a negligible factor in the determination of the petitioner's status as a personal service corporation.
Among the deductions1928 BTA LEXIS 3671">*3683 reported by the petitioner in its return is that of $5,686.75, representing "interest." It appears, however, that this amount represented discounts passed on to customers rather than interest on borrowed money.
From a consideration of all the evidence, it is our opinion that the petitioner has fairly met all the requirements of the statute, and that it is entitled to personal service classification for 1919.
Judgment of no deficiency will be entered for the petitioner.