*3521 The petitioner held to be a personal service corporation for the fiscal year ended August 31, 1920.
*476 This is a proceeding for the redetermination of a deficiency in income tax for the year ended August 31, 1920, in the amount of *477 $2,128.15. The question in issue is whether the petitioner was a personal service corporation for the fiscal year in question.
FINDINGS OF FACT.
The petitioner is a Georgia corporation, in process of liquidation, with its principal office in Savannah. It was incorporated in 1915 and was the continuation under corporate form of a partnership composed of W. W. Williamson and J. J. Rauers which existed from 1901 to 1915.
When the petitioner was incorporated in 1915 an agreement was entered into by the stockholders, Williamson and Reuers, that an equal division of the profits of the corporation would be made notwithstanding the unequal holdings of stock, which were Williamson 150 shares (30 per cent) and Rauers 350 shares (70 per cent). This agreement provided that the equal division of profits would*3522 cease upon the discontinuance of the active service to the corporation of either of the stockholders. The negotiation, sale or pledge of their stock by either stockholder was restricted.
For the capital stock of $50,000, Williamson and Rauers turned over to the corporation the following:
| 71 shares Propeller Tow Boat Co., at 90 | $6,390 |
| 4 bonds Chattahoochee & Gulf Railroad Co., at 1000 | 4,000 |
| 25 shares Southwestern R.R. Co., at 103 | 2,575 |
| 18 shares American Woolen Co., at 90 | 1,620 |
| 100 shares Bibb Mfg. Co. common, at 100 | 10,000 |
| Stevedore tools | 1,000 |
| Office furniture | 600 |
| Cash in banks | 23,815 |
| Total | 50,000 |
The stock ownership of the petitioner did not change until June 7, 1920, when each of the stockholders sold to Robert Perrin 20 per cent of their holdings; Williamson sold to Perrin 30 shares and Rauers sold to Perrin 70 shares.
When the sale of stock was made to Perrin a supplemental agreement was entered into modifying the original agreement to the extent that Perrin was to receive 20 per cent of the profits and the balance of the profits were to be divided equally between Williamson and Rauers.
The business of petitioner consisted in acting*3523 as agent for steamship companies and owners in the solicitation of freights and in the management of vessels. The compensation for these services consisted of commissions received from the owners for services in furnishing cargo; brokerage on freights secured and placed with other *478 agents; and fees paid by the United States Shipping Board for the management of vessels. The management of Shipping Board vessels consisted, in addition to supplying cargo, in the paying off of the crews, provisioning, repairs and other duties of agency.
The compensation of the petitioner was received by making deductions from freights collected for the accounts of the owners of the vessels. The net amount of freights after deduction of petitioner's commission was remitted to the owner, except in the case of Shipping Board vessels, where in some instances the petitioner's compensation was paid direct to the petitioner by special voucher from the Shipping Board officers in Washington, D.C.
The petitioner did not assume or accept any responsibility for the collection of freights due owners except in so far as properly to account to owners for such amounts as were collected; and petitioner*3524 was not responsible in any way for losses on uncollectible accounts.
The income of petitioner for the fiscal year 1920 was as follows:
| Commissions, brokerage, and management fees | $103,934.97 |
| Tarpaulin hire | 35.00 |
| 103,969.97 | |
| Commissions paid | 5,116.82 |
| Net commissions, etc | 98,853.15 |
| Interest received | 833.93 |
| Dividends | 4,686.86 |
| Profit on sale 71 shares stock, Propeller Tow Boat Co | 710.00 |
| Total income | 105,083.94 |
Of petitioner's total income almost 95 per cent represented commissions, brokerage and management fees. All but $35 of the balance of the income represented interest, dividends, and profits on stocks and bonds, the ownership of which was merely incidental to petitioner's business.
The petitioner did not require the use of any capital in its business. It did not buy or sell any commodities for its own account and did not carry inventories of any nature. It did not charter any vessels during the fiscal year 1920.
The Chatham Stevedoring Co. was incorporated under the laws of the State of Georgia in October, 1919. The capital stock was owned individually by Williamson, Rauers, and Perrin. The petitioner owned no stock in this corporation. *3525 Acting as agent for the steamship owners the petitioner employed the Chatham Stevedoring Co. to attend to the stevedoring of vessels for which it was agent and for these services paid them the full tariff rate as fixed by the Savannah Maritime Association. Petitioner received no commissions, *479 income or profits of any nature from the Chatham Stevedoring Co. during its fiscal year 1920.
The petitioner's capital stock was $50,000 and its surplus and undivided profits $5,855.47. This entire amount was invested in stocks and bonds, the ownership of which was not in any way necessary to petitioner's business but was merely incident thereto.
All of petitioner's stockholders were regularly engaged in the active conduct of the affairs of the corporation. Petitioner's income consisted principally of commissions on freights on cargoes obtained by direct solicitation by petitioner's stockholders at the Savannah Cotton Exchange and by personal connections and to a smaller extent to management fees on Shipping Board vessels for which it also obtained cargoes and received commissions on the amount of freights.
The petitioner employed seven persons for a part of the year ended*3526 August 31, 1920, in connection with the management of Shipping Board vessels. The total salaries and wages paid to these individuals for the fiscal year was $5,560.83. Petitioner also employed six other individuals in clerical capacities and paid them a total for the year of $10,166.42. It also employed J. T. Reid and furnished him desk room in London and paid for his desk room, cables, and general business expenses. His duties consisted of interviewing owners of vessels in connection with the consigning of them to the petitioner. It paid as "London Office Expense" for the fiscal year $7,513.34. It paid to its stockholding officers as salaries the following amounts:
| Robert Perrin | $12,050.20 |
| J. J. Rauers | 15,000.00 |
| W. W. Williamson | 15,000.00 |
| Total | 42,050.20 |
Its net profit for the year, after the deduction of all expenses including salaries to stockholding officers, as shown by its books of account was $27,860.97. Its balance sheet at September 1, 1919, showed as follows:
| ASSETS | ||
| Accounts receivable | $15,537.99 | |
| Cash and in bank | 6,483.01 | |
| Investments: | ||
| Third Liberty loan | $3,000.00 | |
| Other bonds | 2,000.00 | |
| Stock - Domestic corporations | 45,855.00 | |
| 50,855.00 | ||
| Loans to officers | 6,000.00 | |
| Office furniture | 928.27 | |
| 79,804.27 |
| LIABILITIES | ||
| Accounts payable: | ||
| Miscellaneous | $2,517.08 | |
| To officers | 21,431.72 | |
| 23,948.80 | ||
| Capital stock - Common | 50,000.00 | |
| Surplus and undivided profits | 5,855.47 | |
| 79,804.27 |
*480 Its books showed investments in stocks and bonds at September 1, 1919, and August 31, 1920, as follows:
| Sept. 1, 1919 | Aug. 31, 1920 | |||
| Bonds: | ||||
| 2 bonds Chatta. & Gulf R.R | $2,000.00 | $2,000.00 | ||
| 3 bonds 4th Liberty loan | 3,000.00 | 3,000.00 | ||
| $5,000.00 | $5,000.00 | |||
| 71 shs. Propeller Tow Boat Co | 6,390.00 | Sold. | ||
| 25 shs. Sou. Western R.R | 2,575.00 | 2,575.00 | ||
| 18 shs. Amer. Woolen Mills | 1,620.00 | 1,620.00 | ||
| 149 shs. Bibb Mfg. Co. common | 19,370.00 | 19,370.00 | ||
| 149 shs. Bibb Mfg. Co. | ||||
| common (stock div.) | 14,900.00 | 14,900.00 | ||
| 5 shs. Sou. Atl. Maritime Corp | 500.00 | 500.00 | ||
| 5 shs. Maritime Corp | 500.00 | 500.00 | ||
| 10 shs. S.A.M.C. common | 1.00 | |||
| 200 shs. Atlantic | ||||
| Towing Co. (pchd. | ||||
| July 29, 1920) | 20,000.00 | |||
| 45,855.00 | 59,466.00 | |||
| 50,855.00 | 64,466.00 |
The cost of the above stocks and bonds was $24,035 at August 31, 1919, and $37,646 at August 31, 1920.
OPINION.
SMITH: Petitioner claims that*3528 it was a personal service corporation for the fiscal year ended August 31, 1920. Section 200 of the Revenue Act of 1918 provides in part:
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 record of this action shows that the petitioner meets all the requirements of the above definition of a personal service corporation, unless it be that capital was a material income-producing factor. The total income for the year from commissions, brokerage, and management fees, including $35 for tarpaulin hire, was $103,969.97 and*3529 the commissions paid in earning such income were $5,116.82. The *481 gross income for the year was $105,083.94. Only $6,230.79 of this amount is ascribable to the use of capital. Four thousand six hundred and eighty-six dollars and eighty-six cents of the amount was received as dividends on the stock of domestic corporations, which is deductible from gross income in ascertaining the net taxable income of the petitioner. It is furthermore to be noted that investments of a corporation in the shares of stock of domestic corporations constitute inadmissible assets only a portion of which can be included in invested capital. See section 326(c) of the Revenue act of 1918.
The only part of the net income of the corporation liable to income tax ascribable to the use of capital is the item of interest received, $833.93, and profit on the sale of 71 shares Propeller Tow Boat Co. stock, $710. The sum of these two amounts constitutes only a negligible part of the total income of the corporation. We are therefore of the opinion that capital was not a material income-producing factor of the petitioner for the taxable year. Cf. *3530 .
Judgment of no deficiency will be entered for the petitioner.