1926 BTA LEXIS 2660">*2660 Taxpayer was not, during 1919 and 1920, a personal service corporation.
3 B.T.A. 464">*464 Before JAMES, LITTLETON, SMITH, and TRUSSELL.
This is an appeal from the determination of deficiencies in income and profits tax for the years 1919 and 1920 in the amounts of $6,154.20 and $5,104.07, respectively, arising from the refusal of the Commissioner to classify taxpayer as a personal service corporation.
FINDINGS OF FACT.
Taxpayer is a New York corporation, engaged in photo engraving, with principal office in New York City. It was organized in 1904 and, during the taxable years, its entire capital stock of the par value of $8,200 was owned by Henry J. Roes, president and treasurer, who, during the taxable years, devoted his entire time to the business. He determined the policies of the corporation and supervised the manufacture of its product. The taxpayer's entire net income was derived from the manufacture of photo engravings, both halftone and line, upon orders secured by the principal stockholder and salesmen employed by taxpayer. The cost of1926 BTA LEXIS 2660">*2661 all material and labor was borne by the taxpayer and the price charged customers for the engravings was determined by taxpayer upon completion of the work contracted for. Taxpayer leased the building in which it carried on its business and, in addition, had equipment consisting of cameras, lenses, and etching, routing, and blocking machines, and various tools.
The gross income and deductions for the year 1919 were as follows:
| Gross income from operations | $139,642.28 | |
| Interest | 544.14 | |
| Gross income from other sources | 5.82 | |
| Total | $140,192.24 | |
| DEDUCTIONS. | ||
| Ordinary and necessary expenses | $101,880.52 | |
| Compensation (H. J. Roes) | 14,000.00 | |
| Taxes | 86.95 | |
| Bad debts | 717.50 | |
| Exhaustion, wear and tear | 693.79 | |
| Total | 117,378.76 | |
| Net income | 22,813.48 |
3 B.T.A. 464">*465 The item of ordinary and necessary expenses, amounting to $101,880.52, consisted of the following:
| Cost of materials | $16,389.58 |
| Salaries: | |
| 5 Gallery employees | 10,225.07 |
| 3 negative turners | 5,549.68 |
| 4 etchers | 7,249.70 |
| 8 finishers | 21,087.11 |
| 2 routers | 6,535.04 |
| 1 Ben Day employee | 2,931.52 |
| Factory rent | 1,840.64 |
| Factory insurance | 307.30 |
| Electric service | 1,266.36 |
| Plant expense | 155.01 |
| Compensation insurance | 417.59 |
| Gas | 291.73 |
| Water | 109.85 |
| Rent | 460.00 |
| Office salaries, bookkeeper, and stenographers | 9,369.99 |
| Office expense | 272.70 |
| Telephone | 309.72 |
| Insurance | 49.70 |
| Stationery and supplies | 20.00 |
| Repairs | 98.00 |
| Auditing and legal | 225.00 |
| Advertising | 10.00 |
| Salaries, 3 salesmen | 8,733.33 |
| Commissions to salesmen | 1,857.50 |
| Management expense | 4,975.00 |
| Photo Board of Trade | 1,144.00 |
| Total | 101,880.52 |
1926 BTA LEXIS 2660">*2662 The gross income and deductions for the year 1920 were as follows:
| Gross income from operations | $144,066.00 | |
| Interest | 650.51 | |
| Gross income from other sources | 503.14 | |
| Total | $145,219.65 | |
| DEDUCTIONS. | ||
| Ordinary and necessary expenses | 121,618.79 | |
| Taxes | 1,245.87 | |
| Bad debts | 421.97 | |
| Exhaustion, wear and tear | 624.41 | |
| Total | 123,911.04 | |
| Net income | 21,308.61 |
3 B.T.A. 464">*466 The item of ordinary and necessary expenses, amounting to $121,618.79, consisted of the following:
| Labor | $60,284.81 |
| Rent | 2,850.04 |
| Insurance | 496.94 |
| Electric service | 1,404.15 |
| Gas | 438.60 |
| Water | 308.71 |
| Repairs | 107.45 |
| Plant expense | 464.10 |
| Office salaries | 12,421.06 |
| Office expense | 659.82 |
| Telephone | 257.92 |
| Stationery | 123.25 |
| Legal and auditing | 221.07 |
| Advertising | 325.00 |
| Light | 42.90 |
| Salesmen's salaries and commission | 11,083.00 |
| Photo Board of Trade | 1,218.32 |
| Materials | 12,911.65 |
| Management expense | 4,500.00 |
| Management salaries | 11,500.00 |
| 121,618.79 |
The number of employees, their duties, and the wages paid them during 1920 were substantially the same as during 1919, and are included in the item of "Labor" in the above statement.
The balance sheets1926 BTA LEXIS 2660">*2663 at January 1 and December 31, 1919, and December 31, 1920, were as follows:
| Dec. 31, 1918. | Dec. 31, 1919. | Dec. 31, 1920. | |
| ASSETS. | |||
| Plant equipment | $6,827.70 | $6,117.93 | $5,506.14 |
| Furniture and fixtures | 140.21 | 126.19 | 113.57 |
| Inventory | 500.00 | 500.00 | 500.00 |
| Accounts receivable | 10,073.01 | 27,354.59 | 13,455.92 |
| Bonds | 1,550.00 | 1,550.00 | 30,400.00 |
| Cash | 19,554.08 | 24,948.56 | 23,229.49 |
| Unexpired insurance | 287.43 | 277.12 | 310.67 |
| 38,932.43 | 60,874.39 | 73,515.79 | |
| LIABILITIES AND CAPITAL. | |||
| Capital stock | 8,200.00 | 8,200.00 | 8,200.00 |
| Surplus | 26,882.30 | 48,917.75 | 62,654.20 |
| Reserve for discounts | 778.03 | 579.23 | |
| Reserve for taxes | 892.65 | ||
| Accounts payable | 3,850.13 | 2,978.61 | 889.71 |
| 38,932.43 | 60,874.39 | 73,515.79 |
DECISION.
The determination of the Commissioner is approved.
3 B.T.A. 464">*467 OPINION.
LITTLETON: From the evidence before us, we are of the opinion that the taxpayer is not entitled to classification as a personal service corporation. It is true that the principal and only stockholder was regularly engaged in the active conduct of the business, but it can not be said that the taxpayer's income was due primarily to his activities. 1926 BTA LEXIS 2660">*2664 Both capital and the activities of other employees were material income-producing factors.