*2554 1. Petitioner, operating a theatre, held not to be entitled to classification as a personal service corporation.
2. No abnormalities of income or capital being shown, petitioner was held not to be within section 327(d) of the Revenue Act of 1918, although a large income was earned upon a small invested capital.
3. Tax apportioned between affiliated corporations.
*587 The Commissioner determined a deficiency of $44,443.48 in income and profits tax for 1920. The petitioner instituted this proceeding for a redetermination thereof alleging that the Commissioner erred in the following respects:
(1) In denying the claim of the petitioner for classification as a personal service corporation under the provisions of section 200 of the Revenue Act of 1918.
(2) In failing to compute the profits tax of the petitioner, if it be subject to tax, under the provisions of section 328 of the Revenue Act of 1918.
(3) In asserting a deficiency in tax against the petitioner based upon the combined net incomes of the petitioner and the Liberty*2555 Theatre Co. for 1920 instead of assessing such deficiency against the two corporations upon the basis of the net income properly assignable to each.
FINDINGS OF FACT.
The petitioner is a domestic corporation, organized in 1911 and existing under and by virtue of the laws of the State of New Jersey, with its principal office and place of business at the Board Street Theatre Building, Philadelphia, Pa.
*588 During 1920 petitioner was engaged in the business of conducting and operating a theatre in Philadelphia, known as the Grand Opera House. This theatre was operated as a moving picture and vaudeville house. The chief source of income was the price of admissions to the theatre. Its assets, liabilities and capitalization on December 31, 1919, and December 31, 1920, were as follows:
| Dec. 31, 1919 | Dec. 31, 1920 | |
| ASSETS | ||
| Cash | $57,136.90 | $15,063.95 |
| Deferred charges | 526.77 | 526.77 |
| 57,663.67 | 15,590.72 | |
| LIABILITIES | ||
| Capital stock | 2,000.00 | 2,000.00 |
| Surplus | 55,663.67 | 13,590.72 |
| 57,663.67 | 15,590.72 |
Its income and disbursements for 1920 were as follows:
| Receipts from admissions | $275,898.23 |
| Interest on bank balances | 800.59 |
| 276,698.82 |
*2556 Its expenses were as follows:
| Salaries | $51,728.59 |
| Sundries | 1,878.51 |
| Advertising | 5,771.05 |
| Light and heat | 7,764.16 |
| Janitor supplies | 625.53 |
| Stamps and office supplies | 75.70 |
| Hauling | 325.72 |
| Hardware | 970.59 |
| Managers' Association dues | 310.00 |
| Insurance | 1,741.15 |
| Repairs, painting and decorating | $3,301.25 |
| Rent | 30,000.00 |
| Acts | 88,527.50 |
| Film rent | 7,976.61 |
| Telephone | 317.43 |
| Taxes and licenses | 5,708.37 |
| Printing and stationery | 409.16 |
| Booking fees | 260.00 |
| 207,691.32 |
The operation of the petitioner's business showed a profit for every week in the year 1920 except three. The accumulated profits were sufficient to care for the losses sustained in the three weeks during which the business was operated at a loss. Dividends of $51,000 and $60,000, respectively, were declared and paid on January 14, 1920, and December 6, 1920.
The capital stock of the petitioner in 1920 consisted of 200 shares of the par value of $10 each. The stockholders as of January 1, 1920, and December 31, 1920, were as follows:
| Stockholder | Jan. 1, 1920 | Dec. 31, 1920 |
| Fred G. Nixon-Nirdlinger | 32 1/3 | 32 1/3 |
| Estate of Samuel F. Nirdlinger | 33 1/3 | 33 1/3 |
| J. Fred Zimmerman | 65 2/3 | 22 2/3 |
| J. Fred Zimmerman, Jr | 22 | |
| Frank G. Zimmerman | 1 | 22 |
| Thomas M. Love | 1 | 1 |
| B. F. Keith Theaters Co | 64 2/3 | 64 2/3 |
| E. F. Albee | 1 | 1 |
| Harry Jordan | 1 | 1 |
*2557 *589 The only change in stock ownership during the year 1920 took place on April 19, when 65 2/3 shares formerly owned by J. Fred Zimmerman were transferred as follows:
| J. Fred Zimmerman | 22 2/3 |
| J. Fred Zimmerman, Jr | 22 |
| Frank G. Zimmerman | 21 |
The petitioner occupied the Grand Opera House under a lease entered into in 1912. It paid rental of $30,000 annually, plus certain taxes and insurance. The owners of the Grand Opera House derived no income from the operations of the petitioner except rental under such lease.
The vaudeville acts which appeared at the theatre were secured through the B. F. Keith Vaudeville Exchange. The petitioner had a franchise arrangement with that exchange by which it was entitled to select acts booked through the exchange, which at that time controlled some of the best acts in the country. This arrangement gave petitioner the right to use the name "B. F. Keith" in connection with the acts which were exhibited at its theatre. It also used the Keith name in its advertising. This franchise was considered by the officers of the petitioner to be very valuable. It was secured and maintained through the instrumentality of E. *2558 F. Albee and the B. F. Keith Theatre Co. Motion pictures were booked through Fred G. Nixon-Nirdlinger.
E. F. Albee gave the petitioner the benefit of his advice in the booking of vaudeville acts for the theatre. The B. F. Keith Theatre Co. cooperated in the booking of such acts. Fred G. Nixon-Nirdlinger was active in the management of the theatre, and so was Harry T. Jordan. J. F. Zimmerman was a theatrical manager and was consulted in regard to the management and operation of the theatre. Thomas M. Love was secretary and treasurer. He kept the minute book of the corporation and received and audited the weekly statements submitted by the ticket seller. The estate of Samuel F. Nirdlinger took part in the management through one of its executors. The duties performed by these stockholders were executive and managerial. None of the stockholders appeared on the stage for the purpose of providing amusement to the patrons of the theatre. *590 The petitioner employed a number of employees, consisting of ushers, door tenders, ticket seller, janitors, stage hands, and others. Compensation was paid for each vaudeville act under separate contract for such act. Compensation*2559 was paid for moving picture films in the same manner.
No part of the gross income of the petitioner for 1920 was derived from gains, profits or income from trading as a principal or from gains, profits, commissions or other income derived from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive.
During the year 1920 the petitioner was affiliated with the Liberty Theatre Co. On or about March 15, 1921, the petitioner filed a return of income for the calendar year 1920 on Form 1065 entitled "Partnership and Personal Service Corporation Return of Income for the Calendar Year 1920." On such return the petitioner claimed classification as a personal service corporation under the provisions of section 200 of the Revenue Act of 1918. Thereafter and on or about May 22, 1924, the petitioner filed a consolidated corporation income and profits-tax return for 1920 on Form 1120, which set out in detail the separate income and deductions of the petitioner and the separate income and deductions of the Liberty Theatre Co. and also combined the income and deductions of such companies to compute the consolidated income and deductions. At*2560 the same time the Liberty Theatre Co. filed with the Commissioner of Internal Revenue for the year 1920, Form 1122 entitled "Information Return of Subsidiary or Affiliated Corporation," whose net income and invested capital are included in return of parent or principal reporting corporation for purposes of income and profits taxes. Such return stated the name of the parent corporation to be Park Amusement Company. Such return includes the following:
7. The Department prefers that the entire tax shown on a consolidated return be paid by the parent or principal reporting corporation, instead of being apportioned among the corporations composing the affiliated group. If apportionment is made, state the amount of income and profits taxes for the taxable period to be assessed against the subsidiary or affiliated corporation making this return. $ .
The space on the return opposite the symbol " $" was left blank.
The Liberty Theatre Co. was organized under the laws of the State of Delaware with a capital stock of $2,100 consisting of 2,100 shares of the par value of $1 each. On January 1, 1920, its capital stock was held as follows:
| Fred G. Nixon-Nirdlinger | 700 |
| J. Fred Zimmerman | 694 |
| Frank G. Zimmerman | 3 |
| B. F. Keith Theatres Co | 694 |
| E. F. Albee | 3 |
| Harry T. Jordan | 3 |
| Wm. C. Wetherill | 3 |
*2561 *591 On April 19, 1920, 230 shares formerly owned by J. Fred Zimmerman were transferred to Frank G. Zimmerman and 233 shares formerly owned by J. Fred Zimmerman were transferred to J. Fred Zimmerman, Jr. There was no agreement between the petitioner and the Liberty Theatre Co. that the entire tax shown on the consolidated return for 1920 should be paid by the petitioner.
The only salary paid to the officers of the petitioner was $300 paid to its secretary and treasurer. The only salary paid by the Liberty Theatre Co. to its officers was $400 paid to its secretary.
The Commissioner determined the net taxable income of the petitioner to be $69,138.23 and of the Liberty Theatre Co. to be $36,912.83. He determined the consolidated income of the two corporations to be $106,051.06. He determined their consolidated invested capital to be $12,136.40. He determined the excess-profits tax under section 301 of the Revenue Act of 1918 to be $40,832.06 and the excess-profits tax under section 302 of said Act to be $37,820.42. He determined the income tax upon the consolidated income to be $6,623.06. He determined the total income and profits-tax liability of the two corporations*2562 upon their consolidated income to be $44,443.48, all of which he asserts against the petitioner as a deficiency in tax due from it.
OPINION.
PHILLIPS: The first claim made by the petitioner is that it is entitled to classification as a personal service corporation. While the fact that petitioner had substantial profits may be due to efficient management on the part of its stockholders, it seems clear that the income is not to be ascribed primarily to their activities. ; . Furthermore, the record discloses that a substantial block of stock was held by the estate of a decedent, which could render no personal service, and by a corporation, B. F. Keith Theatre Co. The testimony, which was taken by deposition, is very unsatisfactory with respect to the services rendered by the stockholders. One witness states that certain of the stockholders "were active in the management of the theatre" while another "was consulted in regard to the management and operation of the theatre." The testimony is that the B. T. Keith Theatre Co., "through its officers, cooperated in*2563 the booking of the house," while the estate of Samuel F. Nirdlinger "was active in the management through one of the Executors." The duties performed are described as "executive and managerial." Such evidence is insufficient to justify the conclusion that the principal stockholders were "regularly engaged in the active conduct of the affairs of the corporation." G. F. Cotter*592 ; ; . The petitioner is not entitled to be classified as a personal service corporation.
It should be pointed out that the provisions of the Revenue Act of 1918 (section 200) are materially different from those of the Revenue Act of 1917 which the Court had before it in .
The petitioner urges, in the alternative, that it falls within section 327(d) of the Revenue Act of 1918 and is entitled to have its tax computed under section 328. To be successful petitioner is required to establish that there were abnormal conditions affecting its capital or income. The capital invested*2564 was small because petitioner conducted a cash business in leased premises, had no inventory and had need of little capital. While petitioner appears to have earned a high rate of profit upon the capital invested, the statute expressly excludes this as ground from granting relief under section 328. The record discloses no abnormality in either capital or income.
The third contention urged by the petitioner is that the Commissioner committed error in asserting against the petitioner the entire tax computed upon the combined net incomes of the petitioner and the Liberty Theatre Co. for 1920, instead of asserting such deficiency against the two corporations upon the basis of the net income properly assignable to each as provided in section 240(a) of the Revenue Act of 1918. The position of petitioner is well taken. ; ; .
Decision will be entered under Rule 50.