*2304 1. Henry Cappellini,14 B.T.A. 1269">14 B.T.A. 1269, followed.
2. A corporation held to be entitled to classification as a personal service corporation.
*881 The proceedings were consolidated for hearing and decision. Respondent has determined that each of the petitioners is liable as a transferee of the assets of Bell & Crane Co. in the amount of $4,939.88. These liabilities arise from an unpaid deficiency in income and profits taxes determined by respondent against Bell & Crane Co. for the calendar year 1921 in the amount of $4,939.88. Petitioners assert that the latter was during said year a personal service corporation within the meaning of section 200(5) of the Revenue Act of 1921, and that section 280 of the Revenue Act of 1926 as amended by the Revenue Act of 1928 is unconstitutional because it denies petitioners due process of law in contravention of the Fifth Amendment of the Federal Constitution, and, further, because it attempts to vest judicial power in the Commissioner of Internal Revenue in violation*2305 of Article III, section 1, of the Constitution.
FINDINGS OF FACT.
Each petitioner is an individual and resides at Charleston, W. Va. In May, 1907, the New River Agency Co. was organized under the laws of West Virginia with a paid-in capital stock of $4,700. In December, 1920, its name was changed to Bell & Crane Co., hereafter referred to as the corporation. By December 31, 1920, the capital stock had increased to $25,000, and on that date a stock dividend of 50 per cent was declared and $3,000 additional stock was issued to an employee, making the total outstanding capital stock on said date $40,500.
The business of the corporation was to represent certain fire and casualty insurance companies, approximately fifteen or more; to solicit and write policies of insurance and collect the premiums and remit them to the insurance companies, less commissions earned. *882 The remittances to the insurance companies were made generally sixty and sometimes seventy-five days after the end of the month in which the insurance was written. The gross and net income of the corporation for the calendar year 1921, both as returned by petitioner and determined by respondent, were*2306 the respective amounts of $60,676.94 and $20,173.65. All the gross income, except interest in the amount of $373.74, represented commissions. During the year 1921 F. R. Bell was president, J. T. Crane was secretary, M. A. Davis was auditor, and F. P. Drumheller was vice president and treasurer, and their respective salaries were $7,000, $6,000, $3,600, $3,000, and $262.00. In addition to the above amounts the corporation paid for salaries and wages the amount of $9,448.46. The clerical work in writing up the insurance was done by the clerical help. No insurance was solicited by any employee who was not a stockholder. It was the policy of the corporation to sell its stock to only such persons as were able to assist it in building up the volume of its business. When a stockholder died his stock was purchased by the other stockholders. At the beginning of 1921 E. B. Rocke held 75 shares of stock. He was not active in securing business and in April, 1921, his stock was purchased by Crane and Bell, Crane purchasing 50 and Bell 25 shares. With this exception there was no change in the stockholders during the year 1921. At the end of 1921 the following stockholder held the number*2307 of shares, and had solicited and secured business which paid premiums in the amounts set opposite their respective names:
| Stockholders | Shares | Amounts |
| W. A. Brown | 75 | $724.11 |
| F. R. Bell | 1,600 | 62,323,88 |
| C. C. Beury | 150 | 23,723.54 |
| C. A. Cabell | 150 | 24,250.11 |
| J. R. Crane | 1,025 | 54,787.19 |
| F. D. Drumheller | 150 | 20,216.86 |
| George Lawton | 150 | 6,374.34 |
| Thomas Nichol | 112 1/2 | $6,762.67 |
| James F. Prince | 75 | 5,718.03 |
| J. R. Thomas | 150 | 12,068.80 |
| M. A. Davis | 112 1/2 | 3,938.29 |
| H. D. Litaker | 300 | 62,942.30 |
| 4,050 | 283,830.12 |
In addition to the above, further insurance was secured without solicitation Which paid premiums in the amount of $12,259.17.
W. A. Brown lived at Greenwood, about 75 miles from Charleston. He was managing certain coal mines in which he did not own a controlling interest, but was able to influence the insurance of said mines and of other businesses in the same vicinity to the corporation.
F. R. Bell, president and director of petitioner, resided in Charleston, managed the business of the corporation, solicited insurance in Charleston and the vicinity, and was in constant touch with the stockholders who resided away from Charleston.
*2308 *883 C. C. Beury, who was a director, resided at Claremont, W. Va., and was the manager of certain other corporations having insurance to place but was not in control of the stock of such corporations. He placed such insurance with the corporation and also sought and secured other customers.
C. A. Cabell was a director of petitioner and the manager of several coal mines. He resided at Carbon, W. Va. He was in constant touch with the office of the corporation, solicited among his friends and associates in the coal business, and was instrumental in securing for the corporation quite a volume of new business.J. T. Crane, secretary and director of petitioner, resided in Charleston, was connected with a number of large property owners, was in constant touch with the office of the corporation, and advised with its officers a great deal on credits and besides secured quite an amount of business to the corporation.
George Lawton resided at Quinnimont, W. Va., and was connected with coal properties, but did not control them. Through his influence the corporation was able to secure a volume of business which he solicited from individuals, neighbors, and friends. He also*2309 used his influence with other coal people.
Thomas Nichols was a property owner and controlled other properties of which he was superintendent but in which he owned no interest. He solicited insurance in his vicinity.
James F. Prince solicited business in the vicinity of Prince, W. Va. He was engaged in business other than that of the corporation.
J. R. Thomas resided in Charleston, was engaged in business other than that of the corporation, and was instrumental in influencing his friends and acquaintances to bring their insurance business to the corporation.
M. A. Davis, in addition to his duties as auditor, secured business among his friends and acquaintances.H. D. Litaker resided in Charleston, was a director and the bonding and casualty manager of the corporation, and solicited business in Charleston and vicinity.
The following are the assets and liabilities of the corporation as of December 31, 1920:
| Assets | |
| Cash | $4,857.94 |
| Bills receivable | 233.53 |
| Accounts receivable | 91,452.36 |
| Accounts receivable | 91,452.36 |
| Liberty bonds | 5,960.40 |
| Good will | 27,761.73 |
| Contingent commissions | 1,620.00 |
| Total | 34,635.96 |
| Liabilities | |
| Accounts payable | $76,612.51 |
| Capital stock | 40,500.00 |
| Surplus | 7,523.45 |
| Total | 134,635.96 |
*2310 *884 The following are the assets and liabilities of the corporation as of June 30, 1921:
| Assets | |
| Cash | $11,836.24 |
| Bills receivable | 3,233.53 |
| Accounts receivable | 72,159.27 |
| Furniture and fixtures | 3,818.96 |
| Liberty bonds | 5,960.40 |
| Good will | 27,755.42 |
| Total | 124,763.82 |
| Liabilities | |
| Accounts payable | $60,447.88 |
| Capital stock | 40,500.00 |
| Surplus | 23,815.94 |
| Total | 124,763.82 |
The following are the assets and liabilities of the corporation as of December 31, 1921:
| Assets | |
| Cash | $6,192.06 |
| Bills receivable | 3,233.53 |
| Accounts receivable | 80,318.61 |
| Furniture and fixtures | 5,000.00 |
| Liberty bonds | 6,055.65 |
| Good will | 23,877.71 |
| Contingent commissions | 3,000.00 |
| Total | 127,677.56 |
| Liabilities | |
| Accounts payable | $53,303.05 |
| Bills payable | 10,000.00 |
| Capital stock | 40,500.00 |
| Surplus | 23,874.21 |
| Total | 127,677.56 |
The reductions of the value of good will shown above were charged against surplus.
The amounts of premiums on insurance written during the months of April, May, and June, 1921, were respectively $21,930.03, $18,757.49, and $26,887.06, or a total for said three months of $67,565.58. The amounts of premiums on insurance written*2311 for the months of October, November, and December, 1921, were respectively $19,226.62, $26,519.87, and $26,562.51, or a total of $72,309. During the year 1921 the corporation charged off as bad debts the total amount of $136.24. The bills payable in the amount of $10,000 shown in the balance sheet of December 31, 1921, were incurred under the following circumstances: The insurance companies represented by the corporation, desiring favorable financial statements for the year ending December 31, 1921, requested their agents to remit what they could prior to the end of the year and the corporation, in order to comply with the wishes of the companies, and as a courtesy and not of necessity, borrowed the said sum of $10,000 for thirty days and thus complied with the insurance companies' wishes. The corporation needed no capital in order to carry on its business except that at the beginning it used the $4,700 paid in for stock to purchase office furniture and pay clerk hire until the agency had received sufficient business to pay expenses.
The corporation was engaged in no business other than the soliciting of insurance. It derived no gains, profits or income from trading as a principal. *2312 It had no Government contracts during the year *885 1921 and no other corporation owned or controlled any part of its stock during said year.
The corporation made its return for the calender year 1921 on Form 1065 as a personal service corporation. Respondent determined the net income returned was the true net income, but determined that the corporation was not a personal service corporation and that it was subject to the taxes imposed by sections 230(a), 301, and 302 of the Revenue Act of 1921.
On October 14, 1922, the corporation was dissolved. All of its assets were distributed to its stockholders and by reason of such dissolution the petitioners as stockholders received the following amounts: J. T. Crane, $8,925; H. D. Litaker, $2,550; and F. R. Bell, $10,837.50. On the 25th day of January, 1927, respondent assessed against the corporation additional income and profits taxes in the amount of $4,949.88, which, with interest thereon, is now wholly unpaid.
OPINION.
PHILLIPS: The decision of the various contentions to the effect that section 280 of the Revenue Act of 1926 as amended by the Revenue Act of 1928 is unconstitutional is controlled by our decision*2313 in Henry Cappellini,14 B.T.A. 1269">14 B.T.A. 1269.
The deficiencies determined against the corporation arise solely from the fact that respondent has determined it was not a personal service corporation within the meaning of section 200(5) of the Revenue Act of 1921. This provision reads:
The term "personal service corporation" means 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; but does not include any foreign corporation, nor any corporation 50 per centum or more of whose gross income consists either (1) of gains, profits, or income derived from trading as a principal, or (2) of 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.
The corporation was not a foreign corporation and none of its income arose from trading as a principal or from Government contracts; neither was any of its stock owned or controlled*2314 by any other corporation.
The record does not disclose that capital, invested or borrowed, was a material income-producing factor. It is not the presence of capital, but its use in producing income that is important. Fuller & Smith v. Routzahn, 23 Fed.(2d) 959; Atlantic Coast Distributors v. Commissioner, 33 Fed.(2d) 733. "Capital must be of such use that production of income would be materially less *886 without it." S. A. Conover Co.,6 B.T.A. 679">6 B.T.A. 679. See also H. K. McCann & Co.,14 B.T.A. 234">14 B.T.A. 234; Carter, MacDonald & Miller, Inc.,14 B.T.A. 522">14 B.T.A. 522. The only portion of the corporation's gross income of over $60,000 which was derived from capital was interest in the amount of $373.74. The remainder represented commissions. The fact that in December, 1921, the corporation borrowed $10,000 for 30 days does not detract from this view. This sum was borrowed not of necessity, but to accommodate the various insurance companies represented by the corporation, and served in no way to augment its income.
This brings us to the main contention of respondent, which is that the income of the corporation*2315 is not to be ascribed "to the activities of the principal * * * stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation * * *." Respondent divides the stockholders into two classes - active and inactive. He places in the first class Bell, Crane, Davis, and Litaker, and in the second class the remaining stockholders. He further insists that one can not be a manager of another business and at the same time regularly engage in the active conduct of an insurance agency. It will thus be perceived that he includes, as possessing the statutory requirements, those, and those only, who gave their whole time to the corporation, and excludes all who did not, irrespective of whether their personal services redounded to the good of the company. The requirement of section 200(5) is not that the stockholders be exclusively or continuously engaged in the active conduct of the affairs of the corporation, but that they be "regularly" so engaged. Atlantic Coast Distributors v. Commissioner, and Fuller & Smith v. Routzahn, both supra.
The business of soliciting insurance peculiarly involves the factor of personality - the personal*2316 touch. Hurst, Anthony & Watkins, Inc. v. Heiner, 26 Fed.(2d) 734; Kaufman, Ltd. v. Commissioner, 24 Fed.(2d) 44; Alexander & Garrett v. United States, 21 Fed.(2d) 547; F. Merges & Co.,11 B.T.A. 444">11 B.T.A. 444; Tifft, Layer & Co.,12 B.T.A. 481">12 B.T.A. 481. With the exception of the small amount of interest, the whole of the gross income of the corporation was the result of the personal service, not of its principal stockholders alone, but of all its stockholders, or of its good will, the latter being the result of their personal popularity. It is not necessary for us to decide that all the stockholders possessed the statutory requirements. It is only necessary to point out that those who gave their whole time to the affairs of the corporation owned 75 per cent of its outstanding capital stock. In addition to these, Drumheller, who owned 150 shares, with its vice president and treasurer, was in constant touch with its office advising on various matters, and during the year procured for it business which paid over $20,000 in premiums. Cabell and Beury, *887 who each owned 150 shares, procured insurance*2317 which paid premiums totaling nearly $48,000. It is pertinent to point out that the services performed were not merely those of permitting the corporation to write insurance on properties owned by these stockholders. They were active in soliciting insurance from others. While none of these three men gave his entire time to the service of the company, it is clear that each was actively engaged in its service.
It thus appears that the corporation fills every requirement of section 200(5) unless Drumheller, Cabell and Beury were not "regularly" engaged in the conduct of the corporation's affairs. The word "regularly" should not be so limited in meaning as to defeat the purpose of the statute. Bryant & Stratton Commercial School,1 B.T.A. 32">1 B.T.A. 32. The main purpose of the Congress in taxing this peculiar class of corporations was to exempt from profits taxes those whose income was not materially derived from capital, but was the result of personal services on the part of the stockholders. Mitchell Advertising Agency,10 B.T.A. 1311">10 B.T.A. 1311; *2318 Fuller & Smith v. Routzahn, supra.We are not prepared to say that under the facts of this proceeding, where every stockholder was a producer, the ownership of 75 per cent of the stock by the all-time stockholders was not sufficient; but when we add to these the stockholdings of Drumheller, Cabell, and Beury, each of whom apparently "regularly" produced business in large amounts, and thus bring the total shares of the "principal" stockholders up to over 86 per cent, and consider that all of the other stockholders were active in producing business, we are of the opinion that respondent erred in refusing the corporation personal service status.
Decision will be entered for the petitioner.