1929 BTA LEXIS 2906">*2906 PERSONAL SERVICE CORPORATION. - Upon the facts, held that the petitioner was a personal service corporation in 1921.
15 B.T.A. 161">*161 This proceeding results from the determination of a deficiency in income and profits taxes for 1921 amounting to $2,695.84.
The petitioner alleges error in the failure to consider the petitioner to be a personal service corporation.
FINDINGS OF FACT.
The petitioner is a Georgia corporation with its principal office at Elberton.
15 B.T.A. 161">*162 The petitioner was organized in 1910 for the purpose of taking over and continuing the engineering business of H. S. Jaudon previously conducted in his individual capacity. Capital stock of a par value of $10,000 was issued to Jaudon in consideration of equipment valued at about $2,000 and of four or five contracts for jobs then under way which were valued on a basis of the expected profits from them. Three thousand dollars par value capital stock was subsequently issued to a man named Camp. Jaudon afterwards purchased this stock from Camp. The remainder of the capital stock, 1929 BTA LEXIS 2906">*2907 par value $2,000, was issued as a stock dividend of surplus which had been accumulated. Five shares of the stock were given to the wife of Jaudon at incorporation for the purpose of qualifying her as a director of the petitioner. Mrs. Jaudon is not an engineer and took practically no part in the affairs of the petitioner. During 1921, 150 shares of capital stock were outstanding, of which H. S. Jaudon held 145 shares and his wife 5 shares.
The charter of the petitioner authorizes a general engineering business in all its branches including construction work, general contracting, manufacturing and the buying and selling of real estate and personal property.
The petitioner is actually engaged in the business of providing engineering services to municipalities and counties, acting as supervising engineers in construction projects, incidentally furnishing resident engineers for superintendence where they are desired. The services of the petitioner are offered to its clients in competition with others at proposed rates per centum of the cost of the work. The rates are higher where resident supervisors are furnished. The petitioner prepares the necessary plans and specifications, 1929 BTA LEXIS 2906">*2908 advertises for bids in the name and at the expense of the clients, opens and considers the bids, makes recommendations to the clients, and after the letting of the contract, the job is given general engineering supervision until completed. The compensation to the petitioner is payable in installments usually at an agreed percentage of the expected cost when the plans and specifications are finished, and thereafter in monthly payments based upon the estimated amount of work completed on the contract. Ordinarily the payments upon completion of the plans and specifications are sufficient in amount to finance the expenses of the petitioner incident to the further operations. The petitioner does not undertake to supply materials or supplies and did not sell any commodities during 1921. In carrying on the business of the petitioner it is necessary to provide surveying instruments, drafting tools and automobiles for the use of the employee engineers and inspectors. Three automobiles were in use in 1921. It is the practice of the petitioner to employ a few engineers regularly and to 15 B.T.A. 161">*163 employ temporarily other engineers and/or inspectors if necessary. No solicitors of work1929 BTA LEXIS 2906">*2909 or salesmen are employed.
Where resident engineers were employed on the work, they were expected to prepare the monthly estimates of work completed, and these estimates were gone over by Jaudon in conference with the resident engineers. For final estimates Jaudon checked the results in detail.
In connection with contracts involving improvement of streets the petitioner assumed, by agreement, the task of preparing an assessment list showing the portion of the cost chargeable to each owner of abutting property to the end that assessment certificates might be issued.
The contracts between the clients of the petitioner and the parties who undertook to do the work specified a time in which the work should be completed, provided for liquidated damages in event of delay, including the cost of engineering and inspection, and the clients of the petitioner agreed to endeavor to collect the damages and turn them over to the petitioner in addition to the fees agreed upon, it being understood that any expenses involved in the collection of the damages would be borne by the petitioner.
H. S. Jaudon was of good reputation as an engineer. He was the president and general manager of the1929 BTA LEXIS 2906">*2910 petitioner. He devoted all of his time to the affairs of the petitioner. He was charged with the duty of obtaining all of the work secured by the petitioner. He personally closed all of the contracts for the work. He had personal supervision over the preparation of the plans and specifications for the work, the actual drafting being done by employees, usually by the men who also acted as resident superintendents. He visited the various jobs as often as necessary to keep in close touch with the work and he personally authorized any changes from the routine carrying on of any contract. It was understood with the clients of the petitioner that all of the work would be under the personal supervision of Jaudon. Jaudon had never been particular about the amount of his salary because of his interest through his stockholdings, and his compensation for 1921 was reported as $6,000, a figure which he would have been unwilling to accept from outside sources.
During 1921 the petitioner had under way eight jobs, from which income was derived, and, in addition, collections of income were made and reported in the return from three jobs which were completed prior to 1921. Four men were permanently1929 BTA LEXIS 2906">*2911 employed by names of Cobb, Brotchie, Gilbert, and Stringfellow. Of these, three were graduate engineers and the other was a "self-made" engineer. These men had no part in the soliciting of work, but, in addition to acting as resident engineering supervisors on contracts, they were called into headquarters when necessary to assist in the preparation 15 B.T.A. 161">*164 of plans and specifications, including doing the drafting work involved. Cobb was employed for a compensation of a fixed salary of $250 per month and in addition 10 per cent of the profits on all jobs in which he participated. In 1921 Cobb did not participate in any share of the collections which were made for work done in prior years. Stringfellow was a resident of Polk County, Florida. In that vicinity Jaudon and Stringfellow were well and favorably known, due to their personal services in 1915 and 1916 in supervising work which had cost the clients about $1,500,000, and on which they had derived fees at a rate of 3 3/4 per cent of the cost. Work was done for the same clients in 1921 on several contracts. Stringfellow was unable to secure the work on his individual responsibility and reputation, but agreements were1929 BTA LEXIS 2906">*2912 negotiated with the clients upon the assurance that Jaudon would give the work his personal general supervision. Stringfellow was a party to these agreements, as were either Jaudon, acting in his individual capacity, or the petitioner. In addition to his salary Stringfellow participated in the profits derived from this work.
During 1921 the petitioner derived no income from (1) trading as a principal or (2) from a Government contract made between April 6, 1917, and November 11, 1918, inclusive.
Details relative to the several jobs in 1921 follow:
| Job | Services | Services | Amount of |
| resident | income | ||
| engineer in | derived | ||
| 1921 | in 1921 | ||
| Brunswick Co., N.C | Rendered in rpior year | None | $ 3,052.00 |
| Bartow, Fla | Consulting advice only | do | 500.00 |
| Chester, S.C | Rendered in prior year | do | 350.00 |
| Cook Co., Ga | Rendered in 1921 | Dentham, 1 month | 5,500.00 |
| Elberton, Ga | Consulting advice only | None | 3,967.22 |
| Perry, Fla | Rendered in 1921 | Gilbert, part time; | 8,684.94 |
| St. John, part time | |||
| Polk Co., Fla. | Partly in a prior year and | Stringfellow | 11,821.61 |
| (several jobs). | partly from August to December, 1921 | ||
| Seneca, S.C | July to December, 1921 | Gilbert | 5,050.00 |
| Springstein Mills | January to April, 1921 | do | 1,113.41 |
| Washington, Ga | Rendered in prior year | None | 461.02 |
| Wilkes Co., Ga | Yes | Brotchie | 6,142.05 |
| Total | 46,615.25 |
1929 BTA LEXIS 2906">*2913 For 1921 the petitioner filed a return as a personal service corporation computing net income as follows:
| Gross income from services | $ 46,615.25 | |
| Deductions: | ||
| Expenses | $ 26,259.79 | |
| Compensation of stockholder | 6,000.00 | |
| Interest | 332.48 | |
| Taxes | 237.60 | |
| Exhaustion, wear and tear | 514.50 | |
| 1 34,344.37 | ||
| Net income | 12,270.88 |
15 B.T.A. 161">*165 The expenses included salaries to employees as follows:
| Permanent employees: | |
| Cobb, engineer | $ 3,119.66 |
| Stringfellow, engineer | 2,917.72 |
| Brotchie, engineer | 2,400.00 |
| Gilbert, engineer | 2,100.00 |
| Tate, bookkeeper and stenographer | 60.00 |
| Haslett, bookkeeper and stenographer | 715.00 |
| Williams, porter in office | 36.00 |
| Seigling, colored messenger | 12.00 |
| Temporary employees: | |
| Wells, inspector | 900.00 |
| Coburn, inspector | 775.00 |
| St. John, inspector | 1,260.03 |
| Sledge, inspector | 682.75 |
| Denton, inspector | 175.00 |
| 15,153.16 |
Interest was paid on money borrowed from the bank. All of the borrowed money was turned over to H. S. Jaudon for his personal use in operations incident to a farm he owned. The taxes were state taxes for carrying on business and taxes1929 BTA LEXIS 2906">*2914 on the automobiles owned by the petitioner.
The following balance sheets were filed with the return:
| December 31, 1920 | December 31, 1921 | |
| ASSETS | ||
| Cash in bank | $1,295.77 | $1,527.95 |
| Bills receivable | 90.00 | 50.00 |
| Accounts receivable | 18,611.01 | 28,274.79 |
| Equipment | 4,171.50 | 2,727.00 |
| Totals shown | 24,169.18 | 32,579.74 |
| LIABILITIES AND CAPITAL | ||
| Notes payable (proceeds to Jaudon) | 5,107.15 | 2,000.00 |
| Accounts payable | 566.77 | |
| Capital stock | 15,000.00 | 15,000.00 |
| Profit and loss account | 3,495.26 | 15,579.74 |
| Totals shown | 24,169.18 | 32,579.74 |
| DETAIL OF ACCOUNTS RECEIVABLE | ||
| H. S. Jaudon, withdrawals | 17,636.93 | 27,806.68 |
| Mrs. Jaudon, loan | 495.54 | 99.97 |
| Brotchie, loan | 444.95 | |
| Cobb, loan | 33.59 | 5.34 |
| Stringfellow, loan | 362.80 | |
| Totals | 18,611.01 | 28,274.79 |
In determining the deficiency the respondent has based his computation of the tax upon the amount of $12,270.88 of net income reported in the return, and the excess-profits tax has been computed under the limitation provided in section 302 of the Revenue Act of 1921.
15 B.T.A. 161">*166 OPINION.
TRUSSELL: The petitioner contends that it is a personal service corporation subject to the provisions of section1929 BTA LEXIS 2906">*2915 218(d) of the Revenue Act of 1921, taxing the individual stockholders thereof after the manner of members of partnerships.
Personal service corporations are defined in section 200(5) of the Revenue Act of 1921. Three of the statutory requirements are material here: (1) the income of the corporation must be ascribed primarily to the activities of the principal owners or stockholders; (2) such principal owners or stockholders must be themselves regularly engaged in the active conduct of the affairs of the corporation; and (3) capital, whether invested or borrowed, must not be a material income-producing factor.
During the taxable year the petitioner was engaged in the business of furnishing engineering service to its clients. This service was purely personal and professional; materials and supplies were not furnished or traded in; financial obligations were not incurred for the accounts of clients; the petitioner was not a contractor for construction work.
The amount of capital employed in the business was trifling, being the cost of surveying instruments and drafting tools together with a few automobiles. The balance sheets reported with the return reflected no large amount1929 BTA LEXIS 2906">*2916 of capital. Accounts receivable, the largest item, were made up entirely of charges for cash withdrawals by H. S. Jaudon and his wife, and of a few small loans to employees for their personal needs. The item of notes payable was entirely for money borrowed from the bank for the sole purpose of turning it over to Jaudon so that he might conveniently finance operations in connection with a farm which he owned and operated in his individual capacity.
All of the outstanding capital stock, save five shares, was owned by the president and general manager, H. S. Jaudon. The five shares were owned by his wife and were given her in order to qualify her as a director of the petitioner. She is not an engineer and took no active part in the affairs of the petitioner. Jaudon was the sole representative of the petitioner in the transactions with its clients. He gave all of his time to the affairs of the petitioner. He secured all of the work handled by the petitioner and he had full direction and control of the technical details of the work from inception to accomplishment. A few technical assistants were permanently employed. They did not solicit work and were at all times subordinate1929 BTA LEXIS 2906">*2917 to Jaudon. Additional employees were temporarily utilized when needed, mainly as inspectors. In the headquarters' office were employed a stenographer-bookkeeper and a porter. A colored messenger 15 B.T.A. 161">*167 was hired for a small amount of part-time service in connection with the handling of the mail.
Upon consideration of these facts we do not see that there is the slightest basis for ascribing any income whatever to the use of capital, and it is apparent that the statutory condition is met that the principal stockholders must be themselves regularly engaged in the active conduct of the affairs of the petitioner. The real question for decision is whether the income is ascribable primarily to the activities of the principal stockholders. The respondent contends that certain of the employees rendered services which were primarily productive of income. This could not be in their responsibilities for they were strictly subordinates. Jaudon's was the responsibility and ability relied upon by the clients. His was the initiative. The employees performed their duties under his constant supervision and direction.
1929 BTA LEXIS 2906">*2918 We do not attach significance to the possibility of a small amount of income probably reflected in the fees of the petitioner where the subordinates were availed of upon request of the client and the additional expense was paid for by the client. In the case of , a personal service status was allowed even though there were a number of employees, where, as in the instant case, we were of the opinion that the services of such employees were of a subordinate character not productive of income primarily. See also ; ; ; ; .
The instant case is distinguishable from , where the labor employed by that petitioner in manufacturing operations was directly productive of income. See also 1929 BTA LEXIS 2906">*2919 , where one-half of the income was ascribable to the activities of subagents.
In the case of , we had under consideration the factor of employment of others, and we said:
We do not mean to hold that personal service classification must be denied in all cases where there are employees under the supervision of stockholders, but where, as here, employees so greatly outnumber the stockholders and there is no evidence of the character of the service performed by most of them * * * we can not find that the income is to be ascribed primarily to the activities of the stockholders.
We are under no disability of lack of evidence in the instant case.
Two of the employees participated in the profits derived from the work on which they were engaged. The respondent contends that this is evidence of their productive capacities to produce income. In 15 B.T.A. 161">*168 any case in which the amount of total compensation derived was relatively large it might have that significance, but we do not find it material in the instant case, where not one of the employees drew an amount of compensation1929 BTA LEXIS 2906">*2920 which we could designate as of the slightest consequence. One of the employees of the petitioner was a party to the agreements with the clients for the work in Florida and he shared in the profits, but it appears that he lacked the personal qualifications and standing to acquire this work individually and we believe that the income derived by the petitioner from this work was none the less primarily attributable to the personal influence, reputation, and activity of Jaudon, petitioner's principal stockholder.
We conclude that the petitioner's action in filing a personal service return was correct.
Judgment of no deficiency will be entered for the petitioner.
Footnotes
1. Discrepancy of $ 1,000 not explained. ↩