*2920 A corporation, engaged in engineering business, only one of whose stockholders is actively engaged in the business, the nonactive stockholders owning 33 per cent and 28 per cent of the stock, and one such stockholder holding 12 per cent and 21 per cent of the stock, in the respective taxable years, and whose income is derived from land surveys, draft-making, blue-print making and land-clearing operations, the actual work, excluding supervision, being performed by salaried employees, or laborers, held, not a personal service corporation.
*90 This proceeding is for the redetermination of income and excessprofits taxes for the calendar years 1920 and 1921, as to which the Commissioner has determined deficiencies of $138.60 and $1,538.59, respectively. It is alleged that the Commissioner erred in denying the petitioner classification as a personal service corporation.
FINDINGS OF FACT.
Petitioner is a Florida corporation with principal offices at Miami, Fla., and is engaged in the business of civil engineering and surveying. It was incorporated*2921 in 1914 with an authorized capital of $10,000, divided into 100 shares of stock, par value $100 each. During the taxable years only 33 shares, par value $3,300, were issued and outstanding. The stockholders, and the number of shares held by each during the taxable years are as follows:
| Name | 1920 | 1921 |
| J. A. Moore | 22 | 24 |
| J. J. Bennett | 2 | 2 |
| E. E. Harvey | 4 | 7 |
| 1Mary Jane Harvey | 3 | |
| 2A. De Winkler | 2 | |
| 33 | 33 |
Moore was the only stockholder actively engaged in the conduct of the business during the taxable years. He was a civil engineer, licensed by the State of Florida, and has been engaged in the practice of engineering at Miami since 1913. He was well known in the city and State to real estate operators and others employing the services of civil engineers, and had an excellent reputation as an engineer *91 and a personal reputation of the highest character. He was an experienced draftsman and was thoroughly familiar with the making of blue prints. During the taxable years Moore devoted his entire time to the business and had charge of all*2922 service and work performed. He received a salary of $1,800 per year in 1920 and $2,400 per year in 1921.
Other than Moore no engineers were employed by the petitioner or engaged in its business. None of the other stockholders performed any work or services for the petitioner during the taxable years. No compensation and no dividends were paid to any of the other stockholders. Bennett, Harvey, and De Winkler were professional engineers, but during the taxable years they were employed by others on a salary. The petitioner received no income from the services performed by either or any of them and had no interest in the work upon which they were engaged.
Petitioner was engaged in the business of civil engineering and surveying. Its business consisted of consulting upon engineering projects, surveying lands, making maps and blue prints, laying out subdivisions, supervising improvements such as sidewalks, curbs, gutters, paving, and waterworks. Blue prints were made for others, as well as for itself in connection with engineering work. Blue-print making is a part of, and incidental to, the engineering business, but petitioner could have had its blue prints made elsewhere, *2923 if it had so desired. Petitioner did not perform construction work and did not engage in the business of buying or selling real estate.
In 1920 and 1921 petitioner contracted to clear 200 acres of land (cut down managrove and level for filling) at Miami Beach. About 30 laborers were employed on this work and one of petitioner's surveyors acted as foreman. No additional certified engineers were employed. No additional capital was required or obtained to carry out the contract, as weekly estimates were made and advanced to petitioner, with which it met its pay rolls. Petitioner had not done work of this kind before and has not performed any such work since this contract. It received approximately $25,000 for the job, paid out about $23,000 for labor and material, and realized a gross gain of approximately $2,000, exclusive of overhead charges and incidental losses.
In the conduct of its regular business during the taxable years, petitioner employed a maximum of six engineering parties for surveying lands, each party consisting of a transit man and two rod men. The cost of each party to petitioner was about $20 per day, exclusive of overhead expenses, and its customers were*2924 charged $30 per day for each party. One draftsman, who was employed upon a salary, made the maps from notes supplied by the surveyors. Two men were employed in making blue prints and were paid salaries for *92 their services. Petitioner charged its customers for maps and blue prints upon the basis of approximately 25 per cent profit over cost to it.
All work and service performed by the petitioner during the taxable years was directed and supervised by Moore. The surveying parties received their instructions from him each morning before going on the job and reported to him each evening what had been done. He checked over and passed upon all their reports from the filed. All surveyor's notes, as well as the maps prepared by the draftsman, were checked and passed upon by Moore. He likewise supervised all blue-print making, all office work, and the one contract in 1920 and 1921 for clearing land at Miami Beach.
The gross income from, the costs and expenses of, and the net income from the several classes of work performed in the taxable years were as follows:
| January 1, 1920, to December 31, 1920 | ||
| Blue printing: | ||
| Gross fees | $ 6,199.81 | |
| Less: Labor, material and expense | 5,379.96 | |
| Net profit | $ 819.85 | |
| Clearing: | ||
| Gross fees | 634.46 | |
| Less: Labor, material and expense | 551.56 | |
| Net profit | 82.90 | |
| Drafting: | ||
| Gross fees | 2,614.74 | |
| Less: Labor, material and expense | 2,268.52 | |
| Net profit | 346.22 | |
| Engineering: | ||
| Gross fees | 16,176.36 | |
| Less: Labor, material and expense | 14,040.38 | |
| Net profit | 2,135.98 | |
| Net profit - all sources | 3,384.95 | |
| January 1, 1921, to December 31, 1921 | ||
| Blue printing: | ||
| Gross fees | $ 5,383.00 | |
| Less: Labor, material and expense | 4,136.03 | |
| Net profit | $ 1,246.97 | |
| Clearing: | ||
| Gross fees | 811.55 | |
| Less: Labor, material and expense | 333.29 | |
| Net profit | 478.26 | |
| Drafting: | ||
| Gross fees | 5,797.63 | |
| Less: Labor, material and expense | 4,362.72 | |
| Net profit | 1,434.91 | |
| Engineering: | ||
| Gross fees | $ 27,763.44 | |
| Less: Labor, material and expense | 22,785.76 | |
| Net profit | $ 4,977.68 | |
| Net profit - all sources | 8,137.82 |
*2925 *93 Capital of $ 3,300, invested entirely in engineering instruments, equipment, office furniture and the like, was employed in the business during the taxable years. The capital assets consisted of transits, levels, T-squares, triangles, rods, steel plates, blue-print machinery and accessories, drafting tables, office furniture and fixtures and general equipment for engineering work. Petitioner also held some real estate in these years which had been taken in payment for services performed. No borrowed capital was employed in the business except occasional small amounts borrowed for short periods from the bank for pay-roll purposes when customers failed to pay promptly for work performed.
The assets and liabilities of petitioner for the taxable years were:
| For December 31, 1920 | |||
| Assets | Liabilities | ||
| Cash on hand | $ 174.32 | Notes payable (bank) | $ 1,000.00 |
| Trade accounts | 8,038.28 | Accounts payable | 2,230.24 |
| Plant and machinery | 4,283.50 | Capital (com.) | 3,000.00 |
| (inventory) | |||
| Real estate | 605.00 | Surplus and profits | 6,870.86 |
| $ 13,101.10 | $ 13,101.10 |
| For December 31, 1921 | ||||
| Assets | Liabilities | |||
| Cash at banks | $1,686.19 | Accounts payable | $1,946.82 | |
| Real estate | 3,124.00 | Bills payable | 2,400.00 | |
| Accounts receivable | 9,077.40 | Reserve for depreciation | 667.02 | |
| Bills receivable | 4,639.93 | Capital stock | $10,000 | |
| Equipment (inventory) | 4,495.00 | Less unissued | 7,000 | 3,000.00 |
| 23,022.52 | Surplus Jan. 1, 1921 | 6,870.86 | ||
| Earnings for 1921 | 8,137.02 | 15,008.68 | ||
| $23,022.52 |
*2926 "Trade accounts" anc "accounts receivable" represent money due and owing to the petitioner at the end of the year for engineering work performed. The "real estate" was taken in by petitioner from different subdivisions in payment for work done. "Plant and equipment" represents blue-print machinery and accessories, engineering instruments and equipment, office furniture and fixtures, etc. The "accounts payable" represent amounts owed by petitioner for blue-print supplies, office supplies and back payments due on instruments *94 and equipment bought upon the installment basis. The "bills payable" represent three loans obtained by the petitioner - $1,100 from one Colb, $700 from the bank, and $600 from Harvey. The $1,100 loan from Colb, who was a surveyor for the petitioner, was obtained for the purpose of purchasing a lot, which petitioner had to buy because of an error in a survey made by Colb.
OPINION.
VAN FOSSAN: Section 200, paragraph 4, of the Revenue Act of 1918 and section 200(5) of the Revenue Act of 1921, define a personal service corporation. Three essential elements are prescribed; viz, (1) the principal stockholders must be regularly engaged in the active*2927 conduct of the business; (2) the income must be primarily attributable to their activities, and (3) capital must not be a material income-producing factor. Corporations 50 per cent of whose income is derived from trading as a principal or from Government contracts are expressly excluded from the classification. (; .) Any corporation claiming personal service classification must satisfy all these requirements, and the absence of any one of them is fatal to the claim. Such a claim seeks -
* * * The benefit of an exception to the general method and extent of taxing corporations. The burden is upon the plaintiff to show that it clearly comes within the terms of such exception. "In such cases, a reasonable doubt is fatal to the claim. Prima facie every presumption is against it. It is only when the terms of the concession are too explicit to admit fairly of any other construction that the proposition can be supported." *2928 ) * * *. .
* * *
Every corporation has full control of its own activities. It knows what the requirements of a personal service corporation are. It may comply therewith and easily keep within the limits thereof if it so chooses, or it may not if it otherwise prefers. If it does not fairly observe and keep within the requirements of the law, it should not claim the benefits which the law confers. To nearly comply with the law, or to come within hailing distance thereof, is not enough. (. - Italics ours.)
While it is evident that J. A. Moore owned a majority of the outstanding stock during the taxable years, it does not follow that he was the only stockholder to be classed as a principal stockholder, within the meaning of that term as employed in the statutory definition of a personal service corporation.
* * * It is necessary, not only that the income of the corporation shall be derived from personal service, but also that it shall be derived primarily*2929 from the activities of those who principally are to share in that income, and therefore in the benefits of the law. If this were not so, the personal service *95 in such cases might be rendered by one or two, or a few only, and others largely interested in the corporation, but rendering no service, might be capitalizing the efforts of these few and realizing a profit therefrom.
To approximate the situation where similar service is rendered by copartnerships, it is necessary that those who, principally, are to have the benefit of the law, must be engaged in a substantial way in rendering the personal service which the corporation claims to provide. Any substantial departure from this rule would be extending the law in such manner as to create a favored class, and would be wholly without justification. It is not necessary under the law that each stockholder shall be engaged in rendering the personal service, but the letter and the spirit of the law both require that the great body of the stock shall be in the hands of those who are rendering this service. (*2930 )
It is not sufficient that the majority stockholders be regularly engaged in the active conduct of the business. The statute requires that the "principal stockholders" be so engaged, and that the income derived be attributable primarily to their activities. Addressing ourselves to the question of who were the principal stockholders, it is noted that in the respective taxable years the holders of approximately 33 per cent and 28 per cent of the outstanding stock were not engaged in the conduct of the business and rendered no service for the production of petitioner's income. Only 33 shares of stock were outstanding, of which number Moore held 22 in 1920, and 24 in 1921. Of the remaining shares E. E. Harvey held 4 shares, or 12 per cent, in 1920, and 7 shares, or 21 per cent, in 1921. Were a decision on this point necessary to this decision, it might well be questioned whether the ownership by Harvey of 12 per cent in 1920 and 21 per cent in 1921 did not constitute him one of the principal stockholders in the corporation.
The record in this case, however, reveals other infirmities in petitioner's case which are undoubtedly*2931 fatal. Petitioner derived its income from land surveys, map making, blue-print making and land-clearing contracts. All the work in these activities was performed by salaried employees or laborers. Out of a total gross income for the years 1920 and 1921 of $65,480.89, petitioner paid some $22,000 for ordinary labor engaged in clearing mangrove from a tract of land and in grading and developing the same. Moore supervised this work but his supervision does not appear to have been any different from that generally exercised by the active executive of any corporation, nor have we any evidence that any special abilities of Moore induced the placing of this contract. The charges made by petitioner to its customers for work done were based upon the services performed by its employees. In arriving at the amount to be charged, apparently the petitioner simply added its profit to the cost of these services to it. In such a situation the services of the surveyors, the draftsman and the blue-print operatives, and the labor employed on the land-clearing job were a primary factor in the production of petitioner's income. *96 It would seem clear from this record that petitioner's income*2932 is not attributable primarily to the principal stockholders, regularly engaged in the active conduct of the business. .
In view of the above conclusion it is unnecessary to consider whether or not capital was a material income-producing factor, but we may point out that petitioner found it necessary at times to borrow funds with which to meet its pay rolls. It would appear, therefore, that at times borrowed capital played an important part in the conduct of this business.
Petitioner has failed to establish a compliance with the requirements of the Acts and is not entitled to classification as a personal service corporation.
Judgment will be entered for the respondent.