*3260 1. Under the facts in this case, petitioner held to be entitled to assessment of profit taxes for 1917, under section 209 of the Revenue Act of 1917.
2. Petitioner held entitled to personal service classification for the years 1918 and 1920.
*353 These are proceedings for redetermination of deficiencies in income and profits taxes as follows: Docket No. 8618, deficiencies for the years 1917 and 1918 in the respective amounts of $1,388.09 and $2,984.32; Docket No. 21981, deficiency for the year 1920 in the amount of $2,808.24.
The petitioner alleges that the respondent erred:
(1) In refusing to assess its excess-profits taxes for the year 1917 under section 209 of the Revenue Act of 1917.
(2) In denying the petitioner classification as a personal service corporation for the years 1918 and 1920, under section 200 of the Revenue Act of 1918.
(3) In reducing petitioner's invested capital for the year 1920 (a) by $4,372.41, representing proposed additional taxes for the years 1917 and 1918, and*3261 (b) by $2,250.39, representing income and excess-profits taxes for the year 1919, prorated.
(4) In the use of improper comparatives in computing petitioner's profits taxes for the year 1920 under sections 327 and 328 of the Revenue Act of 1920.
No evidence was offered in support of assignments of error Nos. 3 and 4 above.
FINDINGS OF FACT.
The petitioner is an Illinois corporation with its principal office at Chicago. It was organized September 11, 1903, with an authorized capital stock of $50,000, divided into 5,000 shares of $10 par value. The object for which it was formed as stated in its charter is "to act as shippers' agent for the purpose of accumulating and forwarding household goods from and to all points in the United States and foreign countries, transferring and storing same."
For several years prior to May 25, 1915, the company had been operating at a loss. The owners and officers during those years were operators of warehouse and transfer companies on the Pacific coast and they lacked the experience in traffic management necessary in the conduct of the company's business.
*354 May 25, 1915, F. L. Bateman and W. L. Taylor, as parties of the second*3262 part, entered into a certain contract, the material portions of which may be summarized as:
1. Certain of the petitioner's stockholders agreed to sell and deliver to Bateman and Taylor on May 25, 1915, all of the capital stock of the Bekins Household Shipping Company and the American Forwarding Company, both Illinois corporations.
2. The purchase price agreed upon was $35,000 payable in installments of $5,000, the first payment to be completed on May 25, 1915, and subsequent payments to be made as follows: November 15, 1915, and May 15th of each of the years 1916 to 1920, inclusive. There was an unconditional obligation that the first $15,000 be paid but payment of the remaining $20,000 was contingent on the maintainence of freight rates at a named minimum rate per hundred weight between May 15, 1916, and May 15, 1920.
3. Bateman and Taylor were to receive on May 25, 1915, "The entire good will, corporation records, seals, charters, books of account, stationery, advertising matter, office furniture and equipment" of both corporations and all goods on hand held as bailee for shipping purposes, etc.
4. There was a provision for adjustment of accounts upon the Bekins Company's*3263 receipt of advances theretofore made by it for shippers.
5. The vendors were to save the companies free of existing liabilities except those arising from leases of offices and freight loading stations.
6. The vendors further agreed that they would refrain from engagement in the freight forwarding business within a prescribed territory and that they would extend their personal good will to the Bekins Company for a period of five years.
The $35,000 purchase price was paid in accordance with the contract. The only physical assets transferred consisted of office furniture of the Bekins Company of the value of $300.
The record contains no further mention of the American Forwarding Co.
Upon execution of the said contract certificates for all the outstanding stock of the Bekins Company were delivered to Bateman and Taylor, surrendered to the company, and canceled. Thereupon certificates for 2,464 1/2 shares were issued to each of the men named and a certificate for the remaining 71 shares was issued to Fred C. Bender. Bateman then became president, Bender vice president, and Taylor secretary-treasurer. The three men mentioned also became the directors of the corporation.
*3264 On October 31, 1917, Bender's certificate was canceled, and certificates for 35 1/2 shares each were issued to the wives of Bateman and Taylor, and, further, on January 17, 1916, the petitioner's authorized capital stock was reduced from $50,000 to $5,000, all outstanding stock certificates were canceled and Bateman and Taylor were then each issued a certificate for 24 1/2 shares and one F. C. Lancaster was issued a certificate for 1 share. Lancaster held his share merely to qualify as a corporate director. Par value of these shares was $100. *355 No other changes in stock ownership occurred during the years herein involved.
There is no explanation of the apparent discrepancies as to stock ownership.
Upon acquiring ownership of its stock, Bateman and Taylor reorganized the petitioner's business. The offices were moved to a building in which were located other of Bateman's and Taylor's business interests, expenses were reduced by decreasing the number of employees, and methods of conducting the business were adopted to effect efficiency and economies. Branch offices were discontinued except one at Buffalo, N.Y.
On May 28, 1915, Bateman and Taylor paid into the*3265 company $2,000, which was credited to them in a joint partnership account. Fifteen hundred dollars was withdrawn and charged to the same account on July 1, 1916, and a similar withdrawal of $3,000 was made December 6, 1915. These withdrawals, totaling $4,500, represent all advances made to and profits earned by the company to the date last mentioned.
May 28, 1915, Bender was credited with $500 on account of money paid into the petitioner by him. January 1, 1918, this amount was charged to Bender and credited in equal shares to Bateman and Taylor.
No advances were made to the petitioner by Bateman or Taylor nor did petitioner borrow any money from banks during the years 1917, 1918, and 1920.
F. L. Bateman's experience in the freight-forwarding business began in 1900, after seven years of executive experience in freight departments of various railroads. His railroad experience included supervision of freight claim and traffic departments, and of special "fast freight" lines which rendered a service comparable to that of the petitioner.
W. L. Taylor's experience in the freight-forwarding business dates from 1904, prior to which he had been with various railroads as a freight*3266 and ticket agent, rate clerk and soliciting freight agent, and with a large manufacturing concern at Chicago as traffic manager.
At times prior to and during the years involved Bateman had been affiliated with and had held office in many trade organizations. Among them were the Illinois Furniture Warehousemen's Association, which he served as president and vice president; the Traffic Club of Chicago, president, vice president and director; Chicago Association of Commerce, vice president and director; Illinois Manufacturers Association; Chicago Furniture Manufacturers Association; and the American Warehousemen's Association. He was one of the organizers, a director, and the first president of the National Furniture *356 Warehousemen's Association and a member of the committee which framed the uniform Warehouse Receipts Act adopted by 44 States.
Taylor was a member of substantially the same trade organizations as those to which Bateman belonged.
Through his extensive and prominent connections in the freight-forwarding business and in associated trade lines Bateman had acquired wide personal contacts and a reputation for skill, effeciency and reliability among the persons*3267 and concerns which constituted the main sources of the petitioner's business.
Taylor had a wide acquaintance in manufacturing circles and these contacts made certain sources of business available to petitioner. It requires a large box car to load a minimum of 20,000 pounds of household furniture because such articles are bulky. Taylor's influence among railroad officials was particularly useful during the war years herein involved in securing suitable cars despite shortages thereof.
For many years prior to 1915, Bateman and Taylor were interested in the Transcontinental Freight Co., which was engaged in a business similar to petitioner's, but specializing in a different class of freight. The Transcontinental Co. was chiefly a forwarder of machinery, automobiles, etc., while the petitioner's business was concerned with household furniture. The Transcontinental Co. had shipping space in the freight sheds of the Union Pacific Railroad. Bateman and Taylor desired to acquire the petitioner, among other reasons, because it shipped via the Santa Fe, and they considered it advisable to supply tonnage to each of these transcontinental lines in order to retain their good will.
*3268 The business of the petitioner is predicated upon a differential in freight rates on carload and less than carload lots. A minimum of 20,000 pounds is required to secure the carload rate which averages much lower than the per hundredweight rate on less than carload lots. The petitioner would assemble small lots from various consignors and ship in carloads. The advantage of the carload rate would then be secured by the petitioner, and it could apportion rates among the consignors at a price per hundredweight considerably lower than the less than carload rate of the carrier but aggregating sufficient to allow the petitioner a profit to the extent that the total received on a car exceeded the carload rate charged by the carrier. Freight is classified by character for rate-making purposes and a carload must be all of the same character to secure the carload rate. It is for this reason that the petitioner specialized in forwarding household furniture.
The principal portion of the petitioner's business was in the forwarding of shipments to the west coast and intermediate points. *357 Business was acquired largely through warehouse and transfer concerns, through traffic managers*3269 of manufacturing plants, etc., who had charge of the shipment of the household goods of employees transferred to coast points, through solicitation of persons whom railroad freight and ticket agents advised the petitioner were contemplating migration to coast points, and from furniture manufacturers.
The reference of business and sources of business to the petitioner by warehousemen and transfer concerns was due to the reputations of Bateman and Taylor for satisfactory service in the forwarding of goods and to their wide acquaintance and prominent positions among persons having influence or control over such sources of business. Business and information of sources of business came to the petitioner through the attribution of the same qualities to Taylor, by his acquaintances among traffic managers, furniture manufacturers, etc.
Railroad employees referred business or information of sources of prospective business to the petitioner with the view of shipments going out over the lines of their employers.
Immediately upon acquiring the stock of the petitioner Bateman and Taylor caused announcement thereof to be disseminated among business sources. The petitioner's volume of*3270 business reflected this announcement by an immediate substantial increase.
The conduct of the business required a knowledge and understanding of the principles of railroad freight rate structures, freight traffic, and consolidation of freight shipments. Knowledge of freight rate structures and freight traffic was necessary in order that the petitioner might compute its rates for consignors, determine the most advantageous routings, etc. Bateman and Taylor were both acquainted with the principles of freight rate structure, freight traffic, and consolidation of freight, and each was competent to compute the rates charged by the petitioner. Schedules of the petitioner's rates were prepared by them and were available to the petitioner's employees in the conduct of the business. In some instances copies of such schedules were furnished warehousemen, transfer concerns, etc., to enable them to quote the petitioner's rates. Changes in such schedules were also prepared by the stockholders mentioned when necessitated by changes in railroad freight rates.
Bateman and Taylor endeavored to secure business contacts and engaged in solicitation for the petitioner. Each traveled to a considerable*3271 extent, taking advantage while so doing of such opportunities as arose to further the petitioner's interests. These business trips were also in the interest of other concerns in which they were active. By an agreement between them, one or the other was always in Chicago and available for consultation and direction of the business. Each of them, in fact, personally conducted a portion of the petitioner's business transactions.
*358 No capital stock account appears on the books of the company until November, 1918, when $5,000 was set up, showing an intent of dating the entries as of January 1, 1918.
From November, 1918, until 1920, the books showed a number of journal entries and a number of correcting journal entries to offset them. The final result of these numerous journal entries, after eliminating the correction entries is as follows:
| Dr. | Cr. | |
| Good will | $34,700.00 | |
| Furniture and fixtures | 300.00 | |
| W. L. Taylor | $15,000.00 | |
| F. L. Bateman | 15,000.00 | |
| Capital Stock a/c | 5,000.00 | |
| 35,000.00 | 35,000.00 |
Some of the above mentioned journal entries set up notes payable amounting to $15,000. These notes also appear upon the balance sheets: *3272 $10,000 at December 31, 1918, and $5,000 at December 31, 1919.
These notes were personal obligations of Bateman and Taylor carried through the petitioner's books. They were later charged off through other journal entries. When paid with checks of the company they were charged equally to the accounts of Bateman and Taylor.
The company at no time during the years 1917 to 1920, inclusive, had any notes payable outstanding.
Balance sheets of the petitioner as per the books and as amended are as follows:
| December 31, 1916 | |||
| As per books | Amended | ||
| Assets: | |||
| Accounts receivable | $3,906.04 | $3,906.04 | |
| Cash | 1,841.35 | 1,841.35 | |
| J. Bekins | 141.81 | 141.81 | |
| Office furniture | |||
| F. L. Bateman | 1,250.00 | ||
| W. L. Taylor | 1,250.00 | ||
| Total | 8,389.20 | 6,189.20 | |
| Liabilities: | |||
| Accounts payable | 2,202.82 | 2,202.82 | |
| Trans-Continental Freight Co | 1,400.25 | 1,400.25 | |
| F. C. Bender | 500.00 | 500.00 | |
| C. O. Pick | 43.25 | 43.25 | |
| Capital stock | 5,000.00 | ||
| Less: Capital impairment | 4,700.00 | 300.00 | |
| Earned surplus | 4,242.88 | 1,742.88 | |
| Total | 8,389.20 | 6,189.20 |
| December 31, 1917 | |||
| As per books | Amended | ||
| Assets: | |||
| Accounts receivable | $7,008.34 | $7,008.34 | |
| Cash | 385.08 | 385.08 | |
| F. L. Bateman | 3,750.00 | ||
| W. L. Taylor | 3,750.00 | ||
| J. Bekins | 142.66 | 142.66 | |
| Office furniture | 300.00 | ||
| Total | 15,036.08 | 7,836.08 | |
| Liabilities: | |||
| Accounts payable | 1,002.54 | 1,002.54 | |
| Trans-Continental Freight Co | 2,376.61 | 2,376.61 | |
| Accounts payable - Miscellaneous | 777.68 | 777.68 | |
| Capital stock | 5,000.00 | ||
| Less: Capital impairment | 4,700.00 | 300.00 | |
| Earned surplus | 10,879.25 | 3,379.25 | |
| Total | 15,036.08 | 7,836.08 |
| December 31, 1918 | |||
| As per books | Amended | ||
| Assets: | |||
| Cash | $2,820.54 | $2,820.54 | |
| Accounts receivable | 10,810.05 | 10,810.05 | |
| Office furniture | 300.00 | 300.00 | |
| Good will | 34,700.00 | ||
| Total | 48,630.59 | 13,930.59 | |
| Liabilities: | |||
| Notes payable | 10,000.00 | ||
| Accounts payable | 2,465.63 | 2,465.63 | |
| F. L. Bateman | 4,000.00 | ||
| W. L. Taylor | 4,000.00 | ||
| Trans-Continental Freight Co | 2,580.16 | 2,580.16 | |
| Capital stock | 5,000.00 | 5,000.00 | |
| Less: Capital impairment | 4,700.00 | 300.00 | |
| Earned surplus | 20,584.80 | 8,584.80 | |
| Total | 48,630.59 | 13,930.59 |
| December 31, 1919 | |||
| As per book | Amended | ||
| Assets: | |||
| Cash | $5,152.95 | $5,152.95 | |
| Accounts receivable | 16,910.51 | 16,910.51 | |
| Trans-Continental Freight Co | 5,865.81 | 5,865.81 | |
| Office furniture | 412.70 | 412.70 | |
| Good will purchased | 34,700.00 | ||
| Total | 63,041.97 | 28,341.97 | |
| Liabilities: | |||
| Notes payable | 5,000.00 | ||
| Accounts payable - general | 3,414.44 | 3,414.44 | |
| F. L. Bateman | 4,000.00 | ||
| W. L. Taylor | 4,000.00 | ||
| Capital stock | 5,000.00 | 5,000.00 | |
| Less: Capital impairment | 4,700.00 | ||
| 300.00 | |||
| Earned surplus | 41,627.53 | 24,627.53 | |
| Total | 63,041.97 | 28,341.97 |
| December 31, 1920 | |||
| As per book | Amended | ||
| Assets: | |||
| Cash | $6,184.45 | $6,184.45 | |
| Accounts receivable | 11,021.79 | 11,021.79 | |
| Trans-Continental Freight Co | 4,439.23 | 4,439.23 | |
| United States bonds | 10,000.00 | 10,000.00 | |
| Office furniture | 379.70 | 379.70 | |
| Deferred interest | 44.16 | 44.16 | |
| Good will purchased | 34,700.00 | ||
| F. L. Bateman | 1,500.00 | ||
| W. L. Taylor | 1,500.00 | ||
| Total | 69,769.33 | 32,069.33 | |
| Liabilities: | |||
| Accounts payable | 2,877.34 | 2,877.34 | |
| Capital stock | 5,000.00 | 5,000.00 | |
| Less: Capital impairment | 4,700.00 | ||
| 300.00 | |||
| Earned surplus | 61,891.99 | 28,891.99 | |
| Total | 69,769.33 | 32,069.33 |
*3274 *360 Liabilities due Bateman and Taylor on certain of the above balance sheets result from crediting them with $15,000 each, as shown in the journal entries, charging the same to good will and reducing the said credits by withdrawals.
The amendments to the balance sheets consist (1) in the elimination of $34,700 set up for good will in 1918; (2) elimination of $15,000, notes payable; (3) elimination of credits of $15,000 each to Bateman and Taylor, transferring what would otherwise appear on the books as debit balances of Bateman and Taylor to surplus account; (4) setting up an asset account of $300 for furniture and fixtures; (5) setting up a capital stock liability of $5,000, and (6) setting up an impaired capital account of $4,700.
Comparative income and profit and loss statements of the petitioner follows:
| Comparative income and profit and loss statements, 1917-1920 | ||||
| 1917 | 1918 | 1919 | 1920 | |
| INCOME | ||||
| Westbound freight department | (1) | $24,979.36 | $37,916.00 | $54,450.21 |
| Storage | (1) | 795.13 | 989.00 | 626.30 |
| Interest on bank balance | (1) | 78.09 | ||
| Miscellaneous | 569.00 | |||
| Gross income | $21,008.83 | 25,780.18 | 38,905.00 | 55,154.60 |
| ORDINARY AND NECESSARY EXPENSES | ||||
| Salaries, wages, and commissions | 11,206.81 | 11,218.45 | 13,836.05 | 22,108.54 |
| Rent | 772.91 | 836.55 | 540.00 | |
| Teaming | 207.99 | 819.73 | 656.40 | 554.62 |
| Buffalo office expense | 697.50 | 613.25 | ||
| Postage | 380.61 | 362.23 | 332.61 | 360.29 |
| Warehouse rent | 725.00 | |||
| Taxes | 39.06 | 151.70 | ||
| Miscellaneous | 2,525.25 | 1,411.12 | 1,464.12 | 2,710.46 |
| Advertising and association dues | 508.30 | 586.60 | ||
| Officers' salaries | 1,200.00 | |||
| 14,320.66 | 15,321.00 | 17,634.03 | 29,550.46 | |
| Net income reported | 6,688.17 | 10,459.18 | 21,270.97 | 25,604.14 |
| Add: Adjustment account of | ||||
| unreported cars Dec. 31, 1920 | 8,675.41 | |||
| Net taxable income | 6,688.17 | 10,459.18 | 21,270.97 | 34,279.55 |
*361 The item of $8,675.41 added to 1920 income is an adjustment for cars unreported on December 31, 1920, and should be allocated to west-bound freight shipments.
The amounts expended and charged on the books as "commissions" during the years 1917, 1918, and 1920 were $1,695.49, $1,956.40, and $4,273.77, respectively. These "commissions" were paid to a large number of persons and firms in amounts ranging from one to five dollars.
Accounts receivable were:
| Month | 1917 | 1918 | 1920 |
| January | $20.72 | $607.46 | |
| February | 93.31 | 616.59 | |
| March | 26.72 | 1,442.52 | |
| April | 26.72 | 877.35 | |
| May | 26.72 | 1,111.85 | |
| June | 482.54 | 531.96 | |
| July | $514.09 | $1,222.22 | |
| August | 709.11 | 1,851.23 | |
| September | 474.70 | 2,007.62 | |
| October | 244.12 | 1,924.98 | |
| November | 228.22 | 1,981.58 | |
| December | $4,582.81 | 6,100.07 | 3,675.02 |
Monthly salaries of employees were:
| Employee | 1917 | 1 1918 | 1920 |
| F. C. Bender | $150 | ||
| J. H. Ring | 125 | $200 | |
| F. C. Lancaster | 115 | 200 | |
| F. Byrne | 60 | 125 | |
| J. White | 90 | 165 | |
| S. White | $65 | $135 | |
| G. Pearson | 75 | ||
| M. Keyes | 117 | ||
| E. Haskins | 90 |
*3276 In addition to the above there were expenditures averaging slightly less than $20 per month during 1917 and averaging approximately $500 per month during 1920, for overtime, expenses and extra manual labor.
The total amounts expended and charged for salaries during 1917, 1918, and 1920 were $8,391.92, $9,262.05, and $17,834.77, respectively. For 1920 the amount given is exclusive of salaries of $50 per month each paid to Bateman and Taylor and totaling $1,200 for the year. Neither of these men had theretofore drawn salaries from the petitioner, but they had each made withdrawals as follows:
| May 16, 1917 | $2,500 |
| May 18, 1918 | 2,500 |
| May 15, 1919 | 2,500 |
| Jan. 2, 1920 | 1,500 |
| Jan. 27, 1920 | $2,000 |
| July 1, 1920 | 1,000 |
| Sept. 28, 1920 | 1,000 |
F. C. Bender was office manager for the petitioner until he sold his small stockholdings to Bateman and Taylor. Lancaster succeeded Bender as office manager. Bender's salary was $150 per month during the entire period of his employment. He made no withdrawals.
Joseph H. Ring was a solicitor. Occasionally he would supervise the assembly of a car or perform clerical work. When information of a prospective shipper came*3277 to the petitioner, Ring would be detailed *362 to solicit the business, explain the method of handling the freight, etc. Bateman and Taylor also established contracts for Ring through introductions, references, etc. Ring personally initiated little business in the sense of securing it without leads, or contacts furnished by the principal stockholders personally or furnished to the petitioner by railroad employees, etc. However, he developed "considerable" business from leads furnished him, and apparently from sources with which he had been dealing prior to May 25, 1915. Ring had been employed by the petitioner for approximately three years preceding the date mentioned.
Joseph White was a car-loading foreman. He was stationed in the Santa Fe freight sheds, where the petitioner had freight space sufficient for the assembly of approximately one and one-half cars of freight. When sufficient freight was assembled, White, on instruction from the office, would order a car, engage two or three of the casual laborers available in the vicinity and superintend their loading of the freight. The allotment of specific articles to a car, i.e., the consolidation of freight, was directed*3278 by the office employees. Joseph White also received and unloaded such cars as came consigned to the petitioner which are herein designated as "east bound."
Lancaster and Ring had each been in the freight-forwarding business for about five years prior to those herein involved.
S. White was an assistant of Joseph White. The remainder of the employees were stenographers, etc., in the office. Various ones among them computed petitioner's charges from the schedules, arranged the consolidation of freight and the routing of cars. To an extent not revealed by the record, Bateman and Taylor performed or directed these services. They determined the petitioner's policies in all such matters.
The petitioner leased space in the freight sheds of the Santa Fe railroad, where it assembled shipments until sufficient for a carload was ready. The rental of this space was approximately $50 per month. All of petitioner's business went out over the Santa Fe, which switched the cars to other lines when necessary.
Computations of charges to shippers were made in the petitioner's office and forwarded to the warehouse or transfer firms to whom petitioner consigned its cars. Appropriate papers*3279 were forwarded to such consignees and collection was made by them. The consignees paid the freight charges, deducted payment for their services and remitted the petitioner's share of the proceeds to it. If goods were unclaimed and their subsequent sale price proved insufficient to cover freight charges, etc., the consignees bore the loss in accordance with trade practice.
More than 50 per cent by volume of the goods handled by the petitioner was west-bound freight. Such east-bound shipments as it *363 received were from correspondents at coast points. There was very little, if any, profit to the petitioner on east-bound shipments but they were handled as a convenience to west-coast correspondents and because of the possibility that the shippers would sometime transmit goods west and made use of the petitioner's services in doing so. Business of such correspondents could have been retained even if the petitioner refused to handle east-bound shipments. In some instances the petitioner advanced freight charges on shipments received from its west-coast correspondents. In a majority of such cases these freight charges were collected from the consignees before payment was*3280 made to the carrier.
Freight charges were advanced by the petitioner on east-bound shipments in four instances during 1917, the total being $1,307.78; in four instances during 1918, totaling $1,359.18; and in two instances in 1920, totaling $910.91.
The petitioner's office at Buffalo was in charge of a man named Bayer, who worked on a commission basis. Bayer's duties were substantially similar to those of Lancaster in the Chicago office, and in addition he solicited business. After acquiring control of the petitioner, Bateman and Taylor, when visiting Buffalo, introduced Bayer to warehousemen, etc., in that territory. Subsequently there was an increase in business of the Buffalo office. Amounts paid Bayer averaged approximately $250 per month. During 1920, Bayer also represented the Transcontinental Co. at Buffalo. Bateman or Taylor spent approximately four days per month in Buffalo.
The petitioner's Chicago offices were in the same duilding and adjoined those of the Transcontinental Freight Co. and the Chicago Forwarding Co., in each of which Bateman and Taylor were the principal stockholders. The two companies mentioned each did a larger volume of business than the*3281 petitioner, and each required a larger percentage of the time of Bateman and Taylor. The companies maintained separate office forces. Business was sometimes diverted from one of the companies to another to effectuate service. During the years herein involved it was the custom of both Bateman and Taylor to devote from 10 to 14 hours per working day in Chicago to the affairs of these three companies.
In each of the concerns listed below Bateman and Taylor held stock interests and were officers, and each received salaries as follows:
| Office | Salary | ||||
| Company | Bateman | Taylor | 1917 | 1918 | 1920 |
| Bekins, H.S., Co | President | Secretary-treasurer | $600 | ||
| Transcontinental | |||||
| Freight Co | do | do | $18,000 | $25,000 | 30,000 |
| Chicago Ford Co | Secretary | Not shown | 5,000 | 5,000 | 9,000 |
| Chicago T. W. Co | Not shown | Secretary-treasurer | 1,040 |
*364 No part of the petitioner's income during the years 1918 and 1920 was derived from trading as a principal.
OPINION.
LOVE: Section 209 of the Revenue Act of 1917 provides for a profits tax of 8 per cent "in the case of a trade or business having no invested capital or not more than a nominal capital. *3282 "
The petitioner contends that in 1917, it had only a nominal capital, and hence is entitled to assessment under section 209 of the Revenue Act of 1917. The respondent contends to the contrary.
The corporation, from the date of its charter in 1903, to January 17, 1916, had outstanding capital stock of the par value of $50,000. What the consideration paid in for that stock was is not disclosed.
On January 17, 1916, the capital stock was reduced to $5,000 and all the old certificates were called in and canceled. The value of the tangible assets at that date was $300. If it had any other assets, they were intangible. The Commissioner determined that it did have intangible assets, and determined their value at $34,700. As above indicated, the record is silent as to what those intangible assets, if any, consisted of, otherwise than being designated as good will, and what their value, if any they had, was; and as Bateman and Taylor in 1915 paid $35,000 for all the capital stock, and as there were $300 worth of tangible assets, the Commissioner took the difference, $34,700, and allocated that amount to good will.
Regardless of the nature of those intangible assets, and their*3283 market value, the capital stock in 1916 was reduced to $5,000; hence in 1917 there was only $5,000 par value of stock outstanding. Section 207 of the Revenue Act of 1917 provides a limitation for invested capital purposes on such intangible assets as good will, limiting the same to 20 per cent of the total capital stock. The capital stock being $5,000 in 1917, its statutory invested capital for that year was $1,300. There is nothing in the record to indicate that the so-called good will assets had any actual value, at most, in excess of the amount at which it was limited by statute. And there is nothing in the record to indicate that petitioner in 1917 had any substantial amount of revenue-producing capital in excess of its statutory invested capital. The $1,300 invested capital for the corporation here involved, doing the amount of business which the record discloses it did, is but a nominal capital and entitles is to assessment under section 209 of the Revenue Act of 1917.
The next problem for solution is to decide whether or not petitioner, for the years 1918 and 1920, is entitled to personal service classification under section 200 of the Revenue Act of 1918.
*365 *3284 In the instant case the record discloses that much of the income was the direct result of personal solicitation by persons, other than the principal stockholders, and much of the actual physical work incident to the harvesting of that income was performed by persons other than stockholders. Still, the record clearly shows that the large volume of business transacted by the petitioner flowed to it by reason of the extended range of acquaintanceship on the part of Bateman and Taylor, the two principal stockholders, carrying throughtout that range of acquaintanceship the prestige, good will, and knowledge on the part of customers of the integrity, business ability, and efficiency of service known to exist in those two men. The whole record bears out the conclusion that without those two men acting as the directing and responsible head of the business, its profits would have been negligible and it probably would have suffered a loss, as it did prior to its being taken over by Bateman and Taylor.
Under the facts of this case petitioner is held entitled to personal service classification for the years 1918 and 1920.
Reviewed by the Board.
Judgment will be entered under Rule 50.*3285