1928 BTA LEXIS 3397">*3397 The petitioner is not a personal service corporation.
12 B.T.A. 1161">*1161 This is a proceeding for the redetermination of a deficiency in income and profits tax for the calendar year 1919 amounting in the aggregate to $2,529.10. The petitioner alleged that the entire amount of such deficiency was an error since it should have been classed as a personal service corporation.
12 B.T.A. 1161">*1162 FINDINGS OF FACT.
The petitioner was organized in 1917 under the laws of the State of Indiana with an authorized capital of $30,000 divided into 300 shares of a par value of $100 each. Of these shares nine were actually issued, such nine shares being distributed equally among the three original subscribers. The subscriptions were not paid for in cash but by the transfer to the corporation of an automobile, certain office furniture and fixtures, and a leasehold agreement.
The purpose of the lease was the opening up of a coal mine on the leased premises under the direction of the lessees, all of whom were men with long experience in the coal industry either as practical1928 BTA LEXIS 3397">*3398 mining engineers or as persons skilled in the handling and disposition of coal.
The material provisions of the lease are as follows:
That parties of the first part hereby demise and lease to the parties of the second part for the following term towit: beginning with the 21st day of August, 1917, and terminating with the 1st day of April 1920, the coal mine located on the North part of the northeast quarter (1/4) of Section Seven (7), Township Fourteen (14) north, Range Nine (9) West, in Vermillion County, Indiana, together with all coal and other minerals in the coal owned, controlled or which the parties of the first part, or either of them have in said Section Seven (7) or any parts of Section Six (6), township and range aforesaid, together with the right to mine, remove and sell said coal and other minerals in the coal, and with enough of the surface of said lands adjacent to said mine as shall be necessary for the proper operation of the same not exceeding eight (8) acres, and the right of ingress and egress to and from said mine to the public highway, upon the following terms and conditions, to wit:
Parties of the first part are to furnish all money required to place said1928 BTA LEXIS 3397">*3399 mine in good condition, construct an air shaft, complete the tipple to said mine, build a mule barn, build a wash house and construct a railroad switch to said mine, and the placing of a fan and all other permanent work and equipments during the life of this lease as may be deemed necessary by said second parties for the proper operation of said mine, said work to be under the superintendence and orders of the said parties of the second part.
In consideration whereof the parties of the second part agree to pay to the parties of the first part one-half (1/2) of the net profits accruing from the operation of said mine for the period covered by this lease as rental for said premises and for such coal and other minerals in the coal as shall be under this ease mined and removed.
It is further understood and agreed that the parties of the second part are in no way nor manner to become liable for any damages to the surface of said lands by reason of the operation of said mine or because of any damages by reason of the subsidence of the surface by reason of the mining and removal of said coal.
It is further understood and agreed that the parties of the first part in furnishing the1928 BTA LEXIS 3397">*3400 money with which to complete said improvements above referred to are to borrow in the aggregate the sum of Thirty-Four Thousand Seven Hundred ($34,700.00) Dollars and place the same at the disposal of the said parties of the second part for the purpose of erecting and constructing the improvements 12 B.T.A. 1161">*1163 contemplated herein, and it is understood and agreed that parties of the second part are to procure said loan but parties of the first part are to furnish the securities for said loan. It is further understood and agreed that parties of the first part are to apply not less than sixty per cent. (60%) of all net profits received by them towards extinguishing said indebtedness above mentioned.
Parties of the second part hereby agree that all overhead expenses shall be kept in reason with the amount of tons produced and the coal is to be sold at the highest price possible to obtain at all times. And said parties of the second part further agree that a correct record of all accounts shall be kept at their office in Clinton, Indiana, and shall be open for inspection by said parties of the first part.
This agreement shall be binding upon the heirs, representatives and assigns1928 BTA LEXIS 3397">*3401 of the parties hereto respectively, but none of the parties hereto shall be bound by any of the terms of this agreement unless a railroad switch to said mine and the loan above referred to are procured.
The parties of the second part agree to give peaceable possession of all of said premises and mine when this lease shall expire and all assets in the hands of or due said parties of the second part as operators of said mine on the 1st day of April 1920, shall be divided according to the terms of this lease relating to net profits.
Shortly after the lease was entered into, the interest of Pinson, one of the original incorporators, was transferred to one Cochran. During the period in question the persons interested in the petitioner were Spears, Milward, and Cochran. All of these persons had other interests and were not devoting their exclusive time to the business of the petitioner. Spears was a practical mining engineer of some years' experience, had examined mines, inspected coal and familiarized himself with the quality of the coal mined. At the inception of the enterprise he arranged with a railroad company for the construction of a spur. Practically all this man's time1928 BTA LEXIS 3397">*3402 was devoted to the petitioner's business in 1919.
Cochran was president of a company designated by the name Enders Coal & Coke Co., a sales organization in Chicago, in which he had a controlling interest. He was a man of good financial standing and his connection with the petitioner was desirable through his ability to facilitate the disposition of the coal mined. Cochran devoted 25 or 50 per cent of his time to the petitioner's business.
The coal sales for the year in question amounted to over $237,000 and the pay roll to over $183,000, the latter figure representing payments made for services and labor at the mine. The mine foreman hired the labor, and the petitioner sold the coal and billed its customers under its own name.
While under the terms of the lease the lessees were to provide collateral for the loans negotiated by the lessors, the lessors had sufficient resources in other assets to make it unnecessary to carry out this provision of the lease.
12 B.T.A. 1161">*1164 OPINION.
MURDOCK: The petitioner asks us to hold that it was a personal service corporation during the taxable year in question. While the determination of this question is one necessarily depending1928 BTA LEXIS 3397">*3403 to a great extent on the particular facts of the case, Congress in defining the term "personal service corporation" has in the Revenue Act of 1918, section 200, specified certain essentials that must be complied with before that classification can be applied to a taxpayer.
(1) The income must be ascribed primarily to the activities of the principal stockholders.
(2) Such stockholders must be regularly engaged in the active conduct of the affairs of the corporation.
(3) Capital (whether invested or borrowed) must not be an income-producing factor.
(4) The taxpayer must not be a foreign corporation; less than 50 per cent of its income must be attributable to trading as a principal or from Government contracts made during the period of the World War.
It is our opinion that the business was not a business where the income is to be ascribed primarily to the activities of the principal stockholders. All business requires the services of men skilled in the particular field to which the business relates. But unless the business of a corporation can be successfully maintained primarily by the activities of its principal stockholders, it can not meet the test laid down by the1928 BTA LEXIS 3397">*3404 statute. See .
While the three stockholders possessed in a high degree the skill and experience necessary to the conduct of a coal-mining business, it is clear that without substantial capital it would have been impossible to continue the business at all.
Coal sales for the year 1919 amounted to $237,680.94 and the pay roll to $183,688.80. The mine foreman hired the labor. The petitioner sold the coal and billed the customers. The coal deposits yielded the commodity dealt in and the petitioner had the control over that commodity by reason of its leasehold. That the leasehold, a valuable asset, constituted capital there can not be the slightest doubt. .
With respect to the fourth requirement of the statute, the petitioner is also disqualified, since it was clearly trading as a principal. Title to the coal when mined was in the petitioner. It sold the coal and billed its customers directly only accounting to the lessee for 50 per cent of the net profits from the mine which was the measure of the rental. As we said in the case of 1928 BTA LEXIS 3397">*3405 .
That the petitioner was a principal is clear, since it was acting in its own behalf. Was it then dealing in a commodity or thing of such a nature that it 12 B.T.A. 1161">*1165 was trading as a principal within the meaning of the Revenue Acts of 1918 and 1921? We think that it was. It was trading in a commodity that is as well defined and capable of being bought, sold and delivered as are iron, coal, corn or wheat. It was buying and selling space and the privilege of advertising in certain theatres, and it paid large amounts therefor, because they were valuable and readily salable. * * *
We think the case at bar presents a more striking example of trading as a principal than the case from which we have quoted above.
In view of the fact that we have reached the conclusion that the petitioner has failed to meet the first, third and fourth requirements of the statute we do not deem it necessary to discuss the second ground.
The determination of the Commissioner must be affirmed.
Judgment will be entered under Rule 50.