*2836 PERSONAL SERVICE CORPORATION. - Petitioner, upon the facts proven, held to be entitled to classification for the years 1919 and 1920 as a personal service corporation, as defined in section 200 of the Revenue Act of 1918.
*549 In these proceedings, consolidated for hearing and decision, petitioner appeals from deficiencies determined in income and profits taxes for the fiscal years ended July 31, 1919 and 1920, as follows:
| Year | Docket | Amount |
| 1919 | 18082 | $3,757.64 |
| 1920 | 7396 | 4,511.03 |
The errors assigned by petitioner are, in each proceeding, the same - (a) the denial by respondent of petitioner's claim for classification in each year as a personal service corporation, and if not entitled to such classification, (b) the use of improper comparatives in computing petitioner's tax liability under sections 327 and 328 of the Revenue Act of 1918. The hearing for purpose of the present consideration was, under Rule 62, limited to the first issue alone.
FINDINGS OF FACT.
Petitioner is a Massachusetts corporation with office*2837 at Boston, and since organization on August 2, 1918, and during the taxable years here involved, was engaged solely in the furnishing of expert advice and assistance to business concerns in respect to development of their sales forces and the increasing of sales through advertisements in such mediums and in such form as would give the greatest return for the expenditure made. In rendering this service a study would be made by the agency of the client's business, its product and the market in which it must be distributed, and a method or program of advertising developed for the particular case in newspapers, magazines, billboards, theatre programs or by pamphlets or brochures. Sketches would be made and forms of advertisements drafted suiting the needs of the particular client. The arrangements with clients as to the service were not all the same. To some were furnished merely the sketches and pamphlets and an agreed fee charged. To others general advice was furnished, with supervision of their advertising, the *550 advertisements being prepared and run in various periodicals by petitioner and the client billed for the amount of the advertising charges plus a commission. *2838 In these cases the bill of the periodical for space would be rendered to petitioner. In cases of this last character petitioner would bill its client for the charges on the first of the month and secure collection on an average by the 10th and in all cases by the 16th of the month and with the funds so received would pay the bill rendered to it by the publisher. Petitioner served other clients on the basis of a yearly fee for advice and counsel.
For some years prior to the organization of petitioner one Ernest J. Goulston had carried on an individual advertising business at Boston in the manner above described and under his name, and was well known as an experienced advertising man. In the year 1918 the said Goulston became involved financially, having personal debts owing, and which he was unable to meet, of approximately $36,000. As a result of this an arrangement was effected with his creditors to incorporate his business, elect as treasurer his brother, Edward S. Goulston, an attorney, and to issue to the latter all of the capital stock in trust and have the latter receive and pay out the dividends declared by the corporation in satisfaction of the debts referred to.
*2839 To carry out this agreement the petitioner corporation was on August 2, 1918, organized with a capital stock of 30 shares of a par value of $3,000. Only 10 shares of this stock was issued for cash paid in, the balance being for the furniture and fixtures and the accounts receivable of the former business of Ernest J. Goulston. All of these 30 shares were issued to Edward S. Goulston, Trustee, and so held by him until his death in 1923, at which time the stock was reissued to Ernest J. Goulston. During this period the said Edward S. Goulston liquidated in full the personal indebtedness of Ernest J. Goulston, of approximately $36,000, with dividends declared and paid by petitioner upon this stock. At all times during this period the actual and beneficial owner of all of this stock was Ernest J. Goulston.
During the taxable years in question Ernest J. Goulston was in entire charge of the business of petitioner, giving it all of his time and attention. It was a small business, the employees and the salaries paid them in each of those years being as follows:
| Joseph R. Batt, assistant | $4,420 |
| Sadie R. Ziegler, bookkeeper | 1,820 |
| Rene Donovan, typist | 832 |
| Joseph Marshall, checking room | 728 |
*2840 All of these employees worked under the personal supervision and direction of Ernest J. Goulston. Batt did some work on production and getting of business, but under direction of and as an assistant to Goulston. At times the latter would employ an outside artist for some special work or pay an outsider for some particular idea. *551 Petitioner in its returns filed for the years 1918, 1919, and 1920 reported salary paid Ernest J. Goulston as follows:
| From August 1 to December 31, 1918 | $2,100 |
| From January 1 to December 31, 1919 | 7,300 |
| From January 1 to December 31, 1920 | 18,000 |
For the fiscal years ended July 31, 1919 and 1920, petitioner declared and paid dividends of $10,200 and $13,500, respectively, upon the stock held by Edward S. Goulston, Trustee, and these payments were applied by him in reduction of the personal indebtedness of Ernest J. Goulston heretofore referred to. The petitioner upon organization was capitalized at $3,000 for the reason that this was the minimum capitalization required of advertising agencies by the American Newspaper Publishers Association as a requisite for recognition by it of the agency. Petitioner during the taxable*2841 years in question did not buy or sell news space.
During the taxable years in question Ernest J. Goulston was the owner of all of the capital stock of petitioner; was regularly engaged in the conduct of its affairs, and its income was primarily due to his personal activities in production and management. During those years capital was not a material factor in the production of petitioner's income.
OPINION.
TRUSSELL: The picture of the petitioner presented by the record in this proceeding is one of a business of purely personal service of professional character furnished to clients, this business built around and absolutely dependent upon the knowledge, training, experience and reputation of one individual whose name the corporation bears.
Section 200 of the Revenue Act of 1918 defines a personal service corporation as:
* * * A corporation 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; * * *.
That Ernest J. Goulston owned all of*2842 petitioner's stock and was regularly engaged in the active conduct of its affairs is shown by the record without contradiction. Upon the question as to whether petitioner's income must be ascribed primarily to his activities, it is shown that Goulston was in entire charge of the business and directed and supervised the work of its four other employees. Three of these employees performed what it is evident were merely clerical duties. The fourth acted as a paid assistant to Goulston, performing work in production and solicitation similar to that done by the latter but all under his direction. The evidence convinces us that the business *552 received by petitioner was business given by clients because of Goulston's knowledge, experience and judgment; that these clients were employing Goulston's services; and that the income received was consequently primarily due to the latter's activities and personal supervision of all the work.
In respect to the question as to whether capital was a material factor in the producing of petitioner's income, the record shows that the entire capital invested on organization was $3,000 and that the use of this in the production of income was*2843 limited to office furniture and petty cash. It is shown that petitioner's clients were large business concerns who paid their bills promptly and that petitioner in furnishing service arranged for the payment by clients of their accounts at a period prior to its having to meet expenses incurred on account of such service and in this way it secured the funds necessary to be used. The amount of capital is trifling in comparison with the total income produced, which for the calendar years 1919 and 1920, including amounts paid Goulston as salary, was reported by petitioner in its returns as $28,000 and $36,000 respectively. In view of this evidence we can but conclude that the income of petitioner was produced by the personal service rendered and the use of capital was an incidental and minor factor. See ; ; ; ; .
By the exemption from taxation of corporations as such when the conditions enumerated in section 200 of the*2844 Revenue Act of 1918 exist, the intent of Congress is clearly evident to treat a revenue-producing organization upon its substance rather than its form and to consider as a partnership for income-tax purposes a corporation whose character as such is evidenced solely by its activities being carried on under a corporate charter and where the activities themselves and the production of income through those owning the business, as distinguished from the mere use of capital, show it to be an association of individuals obtaining a return for the furnishing of their personal service, and such as could be and generally is carried on under a partnership contract. In the present case it is noted that the business of petitioner had been carried on prior to August, 1918, as a personal business of Goulston, its profits being his personal income and taxable as such, and that the incorporation of it effected no change whatsoever in the manner in which it was conducted, the interest of Goulston in the profits or the extent of his participation in its activities and the production of its income thereby. The business continued under the same name with merely a formal organization of corporate character, *2845 acquired solely for the purpose of avoiding a bankruptcy proceeding and to satisfy his personal creditors *553 that the profits, after they were earned, would be applied in payment of his personal debts.
We hold that petitioner is entitled to classification as a personal service corporation for the taxable years in question.
Judgment will be entered for the petitioner.