*3595 Classification as a personal service corporation denied, upon the ground that petitioner's income can not be ascribed primarily to the activities of the principal stockholders.
*113 The respondent has determined deficiencies in income and excess-profits taxes in the following amounts:
| 1918 | $17,997.01 |
| 1919 | 23,513.39 |
| 1920 | 53,970.01 |
| 1921 | 4,526.54 |
| Total | 100,006.95 |
The deficiencies arise from the disallowance by the respondent of petitioner's claim for classification as a personal service corporation. The several petitions also allege that respondent committed error in reducing petitioner's invested capital for each of the years by eliminating therefrom amounts alleged as additional tax for prior years, and that having determined that petitioner was entitled to special assessment under sections 327 and 328 of the Revenue Act of 1918 for the years 1919 and 1920, respondent failed to compute the tax under section 328(a) of said Act by comparing petitioner only with representative corporations.
At the hearing*3596 no evidence was adduced in support of the last two allegations of error and they will be deemed to have been abandoned. The cases were consolidated for hearing and decision.
FINDINGS OF FACT.
The petitioner is a Missouri corporation, organized on December 12, 1900, and maintains its principal office and place of business in Kansas City, Mo. Throughout the taxable years it also had offices in Chicago, Ill., Joplin, Mo., Dallas, Tex., Wichita, Kans., Oklahoma City, Okla., Omaha, Nebr., Minneapolis and St. Paul, Minn., and Des Moines, Iowa. In addition it maintained offices during 1920 and 1921 in Milwaukee, Wis., New York City, and San Francisco, Calif.
During the taxable years petitioner was engaged in the wholesale grocery brokerage business, selling groceries to wholesalers and retail *114 chain-store organizations on behalf of various manufacturers, producers and canners, for which it received a broker's commission. The petitioner is one of the largest concerns of its kind in the United States. Its activities cover practically the entire country. Approximately 60 per cent of petitioner's gross revenue was derived from brokerage on sugar. It handled about 40*3597 per cent of the entire beet-sugar production of the United States. The brokerage rate on sugar was from 3 to 5 cents a bag. The rate was higher on resales. The rate of brokerage on general grocery lines was 2.25 per cent. To fill out carload lots, called in the business tail-ends, petitioner handled a small amount of merchandise in its own name, but seldom sold it at a profit other than the usual brokerage. It realized a loss on such goods in 1920 and 1921.
In addition to selling merchandise, petitioner also served its customers by giving advice on production, distribution, freight rates, credit standing of buyers, etc. For beet-sugar producers it published monthly a compilation of figures showing amounts of sales and stocks on hand from information furnished to Ariel Meinrath by practically the entire industry. From its Chicago and Kansas City offices it issued postings and advices to the trade as to market and crop conditions, prices, etc. It maintained an office in New York with a private wire to Chicago and Oklahoma City for the purpose of collecting and transmitting market information. The New York office did no selling.
The chief problems of petitioner's business*3598 were to secure offerings of merchandise from principals, to distribute the offerings efficiently with regard to freight charges and salability, and to sell the merchandise offered. It represented its principals under verbal contracts only. When a sale was made brokerage was paid by the principal only, the purchaser paying no part thereof.
When petitioner was organized in 1900 it took over the grocery brokerage business of the Meinrath Brothers, which had since 1880 been operated as a partnership, and issued in exchange for the partnership assets 300 shares of stock of a par value of $100 per share. The shares were issued as follows:
| Ariel Meinrath | 100 |
| Joseph Meinrath | 100 |
| Eli Meinrath | 99 |
| Charles Stewart (employee of partnership) | 1 |
By amendments to petitioner's charter, its authorized capital stock was increased to $150,000 in February, 1917, and to $200,000 in November, 1917. The entire amount of the additional stock authorized by these amendments was issued to the then stockholders in *115 proportion to their holdings. Surplus and undivided profits in an amount equal to the new issue was transferred on petitioner's books to the capital account. *3599 Petitioner received no money from the recipients of the new shares. From time to time stock was assigned by the majority stockholders to employees who had shown themselves to be qualified for active direction of petitioner's business. Payment to the selling stockholder was made by petitioner and dividends on the stock were retained by it until the purchase price had been equaled.
In order to prevent stock from falling into the hands of widows, orphans and other nonworkers, every certificate of stock issued bore thereon a contract signed by the petitioner and the stockholder, reading as follows:
IT IS AGREED by the Meinrath Brokerage Company, the seller of the certificate, and the undersigned buyer who is now in the employ of the meinrath brokerage Company, that this certificate can be sold or transferred only to the Meinrath Brokerage Company who will pay for it at its book value as shown on the books of the Meinrath Brokerage Company on the first day of the month in which the above mentioned buyer indicates to the Meinrath Brokerage Company at their Kansas City office, in writing, his desire to sell; but if by death, resignation, discharge, or any cause whatever, the above*3600 mentioned buyer is no longer in the employ of the Meinrath Brokerage Company, this certificate then reverts to the Meinrath Brokerage Company at once, they paying the above mentioned buyer, his heirs or assigns, the book value thereof, as shown on the books of the Meinrath Brokerage Company on the first day of the month in which he ceases to be their employee.
MEINRATH BROKERAGE COMPANY
Per CHAS. STEWART (Signed)
V.P.
C. F. BOWYER, (Signed)Buyer
During the taxable years petitioner's stock of a par value of $200,000 was held as follows:
| Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | |
| 1918 | 1919 | 1920 | 1921 | |
| Ariel Meinrath, president | 680 | 680 | 680 | 680 |
| Joseph Meinrath | 340 | 340 | 170 | |
| Chas. Stewart, first vice president | 334 | 357 | 378 | 400 |
| M. J. Bloch, second vice president | ||||
| and treasurer | 200 | 235 | 276 | 325 |
| L. W. Scott | 55 | 75 | 100 | 110 |
| Chas. S. Johnson | 33 | 38 | 42 | 45 |
| Harry Hamaker | 66 | 85 | 92 | 100 |
| Chas. M. Robinson | 33 | 40 | 45 | 53 |
| J. S. Meinrath | 20 | 40 | 60 | 70 |
| Milton S. Moore | 13 | 20 | 22 | 27 |
| Chas. D. Budd, Jr | 13 | 35 | 55 | 100 |
| Jas. R. Murphy | 13 | 25 | 35 | 35 |
| Jas. F. Ash | 13 | 20 | 30 | 40 |
| Thos W. Stanley | 10 | 15 | 15 | |
| 2,000 | 2,000 | 2,000 | 2,000 |
*3601 *116 The duties of the stockholders during the years involved were briefly as follows:
Ariel Meinrath was the directing head of the organization and had his office at Chicago. He was responsible for securing offerings of sugar, directing its distribution and publishing advices concerning production and sales. He was assisted in this work by Hamaker, Johnson, Robinson, Ash, and Budd.
Stewart was vice president, with his office in Kansas City. His duties were similar to those of Ariel Meinrath.
Bloch was treasurer and in addition to his duties as such he looked after sales in the Kansas City office, the securing of offerings and posting the trade on prices.
Scott was sales manager for the Kansas City territory. He kept in constant touch with branch offices and the trade.
Irving Meinrath was largely interested in securing offerings of canned goods, dried fruit and other grocery items, and in directing their distribution.
Moore was in charge of the Milwaukee office and secured offerings of canned goods for distribution over the petitioner's entire territory, specializing in Wisconsin products.
Murphy was in charge of selling canned goods in Chicago.
*3602 Budd was placed in charge of the New York office when it was opened.
All of the above stockholders were regularly engaged in the conduct of the business of petitioner during the years here involved and gave no part of their time to any other business. Temporarily Joseph Meinrath was not active in the business on account of illness and three of the younger members were in the military service in 1918.
When it was found that Joseph Meinrath was unable to continue in the business on account of illness he surrendered his stock and it was distributed to the other members. H. S. Sussman and Charles F. Bowyer, who were stockholders on December 31, 1917, died during the year 1918 and their stock reverted to the treasury of petitioner as of December 31, 1918, and was reissued to the other stockholders during the following year.
In order further to keep the stock of the petitioner in the hands of those conducting its business, an agreement was entered into between the Meinrath brothers at the time of incorporation, providing that in the event of death of either of them the stock of the decedent should go to the survivors at the book value at the time of death. When Eli Meinrath*3603 died in 1904 his stock was taken up by Ariel Meinrath and Joseph Meinrath and after a few months it was distributed to employees. *117 Subsequently, to protect the interest of the minority stockholders an agreement was entered into whereby the lives of the principal stockholders were insured at the expense of the minority stockholders in order to provide a fund for the purchase of the stock of the principal stockholders in the event of death of any or all of such majority stockholders.
Nonstockholders of petitioner had charge of 7 of the 10 offices during 1918; 8 of the 10 offices during 1919; and 9 of the 13 offices during 1920 and 1921. In addition to the 14 stockholders actively engaged in the business, petitioner employed the following number of persons in the capacities designated:
| 1918 | 1919 | 1920 | 1921 | |
| Office managers | 7 | 8 | 9 | 9 |
| Salesmen | 27 | 38 | 39 | 33 |
| General clerks | 27 | 36 | 50 | 53 |
| Stenographers, file clerks, etc | 19 | 25 | 37 | 38 |
| Miscellaneous | 9 | 6 | 1 | 7 |
| 89 | 113 | 136 | 140 |
Salaries were paid to stockholders and employees during each of the years, as follows:
| 1918 | 1919 | 1920 | 1921 | |
| Stockholders | ||||
| Ariel Meinrath | $40,000.00 | $38,200.00 | $21,000.00 | $21,000.00 |
| Joseph Meinrath | 18,000.00 | 18,500.00 | 5,448.20 | |
| Chas. Stewart | 20,000.00 | 21,535.00 | 12,000.00 | 12,000.00 |
| M. J. Bloch | 14,000.00 | 15,575.00 | 12,000.00 | 12,000.00 |
| L. W. Scott | 5,700.00 | 6,400.00 | 6,000.00 | 6,000.00 |
| Chas. S. Johnson | 8,300.00 | 5,725.00 | 4,000.00 | 4,000.00 |
| Harry Hamaker | 7,000.00 | 7,355.00 | 5,000.00 | 5,000.00 |
| Chas. M. Robinson | 4,500.00 | 4,815.00 | 4,000.00 | 4,000.00 |
| I. S. Meinrath | 3,289.02 | 4,800.00 | 4,500.00 | 4,500.00 |
| Milton S. Moore | 3,985.10 | 3,600.00 | 3,850.00 | 3,600.00 |
| Chas. D. Budd, Jr | 689.46 | 6,358.66 | 12,600.26 | 5,000.00 |
| Jas. R. Murphy | 4,700.00 | 4,739.98 | 4,500.00 | 4,500.00 |
| Jas. F. Ash | 2,900.00 | 3,715.00 | 3,500.00 | 3,500.00 |
| H. S. Sussman (deceased), | ||||
| secretary | 10,000.00 | |||
| Chas. F. Bowyer (deceased) | 2,591.60 | |||
| Thos. W. Stanley | 2,850.00 | 2,700.00 | 2,700.00 | |
| Total | 145,655.18 | 144,168.64 | 101.098.46 | 87,800.00 |
| Employees | ||||
| Office managers | 29,576.38 | 37,961.15 | 48,339.71 | 42,335.55 |
| Salesmen | 78,719.06 | 103,049.88 | 116,509.99 | 86,310.11 |
| General clerks | 35,594.31 | 58,561.81 | 98,818.72 | 101,394.22 |
| Stenographers, file clerks, | ||||
| etc | 20,812.08 | 30,854.38 | 52,756.18 | 52,287.13 |
| Miscellaneous | 9,497.96 | 9,963.13 | 1,944.96 | 13,572.36 |
| Total | 174,199.79 | 240,390.35 | 318,369.56 | 295,899.37 |
*3604 The salesmen were employed on a straight salary basis. The office managers received a salary plus a per cent of the net revenue of *118 their respective offices. During the years involved the employee office managers received the following compensation:
| 1918 | 1919 | 1920 | 1921 | |
| Joplin, Mo | $1,350.00 | $1,100.00 | $2,700.00 | $2,600.00 |
| Dallas, Tex | 6,722.80 | 4,080.45 | 5,335.19 | 4,666.24 |
| Wichita, Kans | 2,250.00 | 3,936.95 | 2,729.59 | 2,600.00 |
| Oklahoma City, Okla | 6,471.58 | 6,718.14 | 9,102.59 | 6,237.80 |
| Omaha, Nebr | 10,277.78 | 10,952.74 | 7,014.46 | |
| Minneapolis, Minn | 7,655.08 | 4,611.88 | 6,600.00 | 6,600.00 |
| St. Paul, Minn | 2,226.92 | 2,400.00 | 3,075.00 | 3,517.05 |
| Des Moines, Iowa | 2,900.00 | 4,835.95 | 6,242.15 | 4,100.00 |
| San Francisco, Calif | 1,602.45 | 5,000.00 |
Offerings of merchandise for sale were secured exclusively by stockholders and practically all contact with the principals was made by the stockholders through the Kansas City and Chicago offices. When offerings were secured they were allocated to the various territories and the territorial office managers were notified that they had been alloted a certain quantity of merchandise for sale*3605 at a stated price. At times when the market was quite active the Kansas City or Chicago offices would communicate with the branch office managers by telephone as many as ten or twelve times a day. Office managers directed their salesmen according to the instructions received from the Kansas City and Chicago offices.
During the years involved income was allocated to the various offices. Brokerage earned from sales was credited to the office operating in the territory where the sale was made, regardless of which office made the sale. Often sales were made by the Kansas City or Chicago offices and the brokerage thereon was credited to territorial offices, with the result that the production per office of income as shown on the books was not in conformity with the true facts. The Kansas City office was responsible for the production of a far greater amount of income than appears on the books. The offices are not independent income-producing units. The business is one complete organization.
The sources of gross income of the petitioner for the taxable years were as follows:
| 1918 | 1919 | 1920 | 1921 | |
| Gross sales - less returns | $41,544.69 | $44,341.51 | $41,891.14 | $15,041.51 |
| Less cost of goods sold | 41,436.39 | 42,058.87 | 42,262.26 | 15,041.51 |
| 108.30 | 2,282.64 | 371.12 | ||
| Brokerage | 513,452.63 | 647,580.55 | 873,106.83 | 687,324.82 |
| Taxable interest (U.S.) | 593.51 | 2,586.33 | 1,916.75 | |
| Other interest | 396.53 | 589.47 | 1,119.50 | 813.75 |
| Dividends | 896.00 | 846.00 | 846.50 | 724.71 |
| Collections against prior | ||||
| years' losses | 6,040.52 | |||
| 515,446.97 | 653,884.99 | 876,618.46 | 694,903.80 | |
| Insurance received on life of | ||||
| H. S. Sussman (less premiums | ||||
| paid) | 11,620.42 | |||
| 515,446.97 | 665,505.41 | 876,618.46 | 694,903.80 |
*3606 *119 Its gross income from operations for the years involved was as follows:
| 1918 | 1919 | 1920 | 1921 | |
| Brokerage - sugar | $195,153.10 | $259,249.00 | $602,470.52 | $483,678.18 |
| Brokerage - general lines | 318,309.63 | 388,331.55 | 270,636.31 | 203,646.64 |
| Semimerchandise sales | 108.30 | 2,282.64 | -371.12 | |
| Total from operations | 513,560.93 | 649,863.19 | 872,735.71 | 687,324.82 |
The following are the balance sheets of the petitioner as of the beginning and end of the taxable years:
| Beginning, 1918 | End, 1918 | End, 1919 | |
| ASSETS | |||
| Cash | $43,843.14 | $43,033.39 | $28,828.03 |
| Merchandise in ventory | 8,857.49 | 8,868.37 | 8,163.45 |
| Accounts receivable: | |||
| Brokerage | 143,129.54 | 102,716.10 | 155,996.62 |
| Freight, handling, miscellaneous | |||
| advances | 12,940.11 | 22,624.64 | 15,893.49 |
| Semimerchandise accounts | 8,023.05 | 4,614.70 | 544.14 |
| Sundry advances | 448.90 | 1,071.77 | 5,527.26 |
| Specialty salesmen's salary paid for | |||
| sellers | 2,934.40 | 10,359.58 | |
| Advances to stockholders | 15,805.22 | 4,565.44 | 8,075.69 |
| Sundry advances to employees | 4,315.38 | 9,643.95 | 10,696.05 |
| Advances to employees for Liberty bonds | 2,642.50 | 12,518.88 | |
| Consignment account - see Contra | 4,187.77 | 7,786.16 | 11,686.99 |
| Notes receivable: | |||
| Trade | 578.75 | 522,44 | 50.00 |
| Employees | 1,800.00 | 1,800.00 | 1,800.00 |
| Loan | 10,000.00 | ||
| Seat, New York Coffee & Sugar Exchange | |||
| - in name of chas. Stewart | |||
| Stocks | 14,328.62 | 25,128.62 | 25,128,62 |
| Liberty bonds | 16,250.00 | 29,275.50 | 43,244.35 |
| Furniture and fixtures | 6,942.98 | 10,480.67 | 14,145.93 |
| Improvements | 8,633.18 | 8,633.18 | 8,633.18 |
| Cashvalue of life insurance | 4,190.20 | 9,968.00 | 11,461.00 |
| Treasury stock | 19,612.73 | ||
| 296,916.83 | 335,798.94 | 360,234.38 | |
| LIABILITIES AND CAPITAL | |||
| Accounts payable: | |||
| Brokerage | 13,069.77 | 11,962.64 | 15,169.99 |
| Sundry | 5,411.00 | 7,516.76 | 10,402.99 |
| Stockholders | 23,911.76 | 69,113.08 | 46,007.67 |
| Employees | 19,177.69 | 14,250.00 | 3,867.76 |
| Consignment account - see Contra | 5,051.07 | 6,529.02 | 6,703.46 |
| Reserve for taxes | 14,719.38 | ||
| Reserve for depreciation, furniture, | |||
| and fixtures | 2,450.15 | 5,224.80 | 8,366.03 |
| Capital stock | 200,000.00 | 200,000.00 | 200,000.00 |
| Surplus - earned | 13,126.01 | 21,202.64 | 69,716.48 |
| 296,916.83 | 335,798.94 | 360,234.38 |
| End, 1920 | End, 1921 | |
| ASSETS | ||
| Cash | $51,844.12 | $21,646.82 |
| Merchandise in ventory | 1,990.02 | |
| Accounts receivable: | ||
| Brokerage | 91,253.82 | 113,244.68 |
| Freight, handling, miscellaneous advances | 22,070.94 | 11,101.47 |
| Semimerchandise accounts | 4,512.84 | |
| Sundry advances | 9,441.71 | 1,617.75 |
| Specialty salesmen's salary paid for sellers | ||
| Advances to stockholders | 122,727.22 | 139,806.55 |
| Sundry advances to employees | 20,417.17 | 8,623.31 |
| Advances to employees for Liberty bonds | (306.66) | |
| Consignment account - see Contra | 9,957.69 | 6,115.21 |
| Notes receivable: | ||
| Trade | 50.00 | 50.00 |
| Employees | 1,800.00 | 1,800.00 |
| Loan | ||
| Seat, New York Coffee & Sugar Exchange - in name of | ||
| chas. Stewart | 7,500.00 | 7,500.00 |
| Stocks | 44,333.66 | 41,421.24 |
| Liberty bonds | 45,200.00 | 43,433.87 |
| Furniture and fixtures | 19,829.09 | 19,829.09 |
| Improvements | 8,633.18 | 8,633.18 |
| Cashvalue of life insurance | 12,567.40 | 17,042.10 |
| Treasury stock | ||
| 469,309.36 | 446,378.11 | |
| LIABILITIES AND CAPITAL | ||
| Accounts payable: | ||
| Brokerage | 8,386.04 | 7,707.84 |
| Sundry | 3,622.15 | 1,746.64 |
| Stockholders | ||
| Employees | 22,849.46 | |
| Consignment account - see Contra | 7,210.08 | 3,868.62 |
| Reserve for taxes | ||
| Reserve for depreciation, furniture, and fixtures | 12,075.58 | 14,921.80 |
| Capital stock | 200,000.00 | 200,000.00 |
| Surplus - earned | 215,166.05 | 168,133.21 |
| 469,309.36 | 446,378.11 |
*3608 The item "merchandise inventory" represents "tail ends" of cars purchased when some office would sell a little less than a carload lot and it was impossible to complete the car immediately. Buyers of pooled car shipments usually want prompt delivery.
The item "brokerage" under "Accounts Receivable" represents brokerage earned but unpaid at the end of the year. Brokerage *120 earned was set up on the books as soon as the sale was confirmed and it was paid after goods were shipped by the principals.
The item "freight, handling, miscellaneous advances" under "Accounts receivable" represents advances on account of pool car shipments. This came about where there were a number of customers ordering part car lots and was done to relieve the customers of handling the distribution of the contents of the cars and collecting the freight from one another. In such cases petitioner had the cars consigned to it as agent of the shipper and paid the freight, collecting the proportionate amount from the various purchasers. Collection was made immediately after payment.
The item "loan" under "notes receivable" was a loan made to a personal friend of the firm. It did not draw interest.
*3609 Petitioner borrowed no money in 1918 and only small amounts in 1919. In 1920 and 1921 there was a business slump which necessitated the borrowing of $50,000 by petitioner to pay its expenses pending the collection of some of its slow commissions.
The income-tax returns filed by petitioner show, inter alia, the following:
| 1918 | 1919 | 1920 | 1921 | |
| Gross income | $515,446.97 | $653,884.99 | $876,618.46 | $694,903.80 |
| Total deductions | 461,663.14 | 577,441.22 | 728,454.99 | 657,192.44 |
| Deductions for ordinary | ||||
| and necessary expenses | ||||
| (exclusive of compensa- | ||||
| tion of stockholders): | ||||
| Travel | 34,058.27 | 37,669.43 | 67,410.96 | 50,377.24 |
| Rent, light, and heat | 15,693.54 | 18,295.17 | 26,239.15 | 36,048.24 |
| Postage | 9,162.35 | 9,591.44 | 13,281.60 | 13,913.37 |
| Telegraph | 15,620.21 | 24,248.35 | 48,956.83 | 60,550.46 |
| Telephone | 21,965.41 | 29,232.15 | 53,099.72 | 50,427.75 |
| Salaries, bonus | 174,199.79 | 240,390.35 | 318,369.56 | 295,899.37 |
| Stationery, supplies, | ||||
| printing | 6,206.73 | 9,229.89 | 30,805.47 | 18,870.96 |
| Miscellaneous | 36,407.59 | 49,434.55 | 50,237.21 | 36,836.48 |
| Total | 313,203.89 | 418,081.33 | 608,400.50 | 562,923.87 |
The respondent has allowed invested capital in*3610 the following amounts:
| 1918 | 1919 | 1920 | 1921 |
| $197,210.68 | $175,654.92 | $195,649.83 | $298,941.58 |
The petitioner had no gains, profits, commissions or other income derived from Government contracts made between April 6, 1917, and November 11, 1918.
OPINION.
LANSDON: The only question to be determined is whether petitioner is entitled to classification as a personal service corporation for the taxable years. Section 200 of the Revenue Act of 1918 defines a personal service corporation as follows:
*121 SEC. 200. That when used in this title -
* * *
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*3611 from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive.
In order to bring itself within the definition, petitioner must establish: (1) That it is engaged in rendering personal service as distinguished from trading, merchandising or manufacturing; (2) that the principal stockholders are regularly engaged in the active conduct of the business; (3) that capital, whether invested or borrowed, is not a material income-producing factor; and (4) that the income may be ascribed primarily to the activities of the principal stockholders. Failure to come within any one of the conditions is fatal to the claim for personal service classification.
The respondent admits that petitioner meets conditions (1) and (2), the contends that capital, both invested and borrowed, was a material income-producing factor, and that petitioner's income during the years involved can not be ascribed primarily to the activities of its principal stockholders.
Inspection of petitioner's balance sheets for the taxable years discloses that it had available a very large amount of capital. In addition to its paid-up capital of $200,000, it had earned surplus*3612 of $13,126.01 for 1918; $21,202.64 for 1919; $69,716.48 for 1920; and $215,166.05 for 1921. The decisions of the Board and of the courts have been uniform that it is not the presence of capital but its use which determines whether or not it is a material income-producing factor. ; ; ; . The evidence is clear that for the most part this capital was used to meet current expenses pending the collection of brokerage. Expenses, excluding compensation of stockholders, amounted to $313,203.89 for 1918, $418,081.33 for 1919, $608,400.50 for 1920, and $562,923.87 for 1921. The payment of salaries, office rent, supplies and incidental expenses of operation does not constitute the use of capital as a material income-producing factor. ; *122 *3613 . Petitioner's income from all other sources than brokerage earned, when compared to its total gross income, amounts to approximately .4 per cent for 1918, .9 per cent for 1919, .4 per cent for 1920, and 1 per cent for 1921. The balance sheets disclose that a large portion of petitioner's assets had been advanced to stockholders and employees and invested in Liberty bonds, stocks, furniture and fixtures, and life insurance. That portion of petitioner's capital was not used in the business and therefore could not be a material income-producing factor. ; We are of the opinion that capital was not a material income-producing factor within the meaning of section 200 of Revenue Act.
It remains for us to determine whether petitioner's income may be ascribed primarily to the activities of the principal stockholders. During the years herein involved petitioner had from 89 to 140 employees. Of this number from 7 to 90 were office managers who received compensation ranging from $1,100*3614 to $10,952.74, and from 27 to 39 were salesmen whose compensation ranged from $1,000 to $6,000. The remaining number of employees were general clerks, file clerks, stenographers, etc. The employees outnumbered the stockholders from 6 to 10 times. The salesmen and office managers outnumbered the stockholders from 2 to 3 times. Total salaries paid to employees far exceeded total salaries paid to stockholders. In 1920 salaries were paid to employees in an amount 3 times that paid to stockholders. In , we stated:
* * * 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 outnumbered the stockholders and there is no evidence of the character of the service performed by most of them and they receive substantially one-half of the earnings over the expenses other than salary, we can not find that the income is to be ascribed primarily to the activities of the stockholders. In our opinion this clause means more than that the stockholders shall obtain the clients and supervise the work, *3615 or that clients shall look to their experience; it means, among other things, that the corporation may not rely upon non-stockholders to do a substantial amount of the work which produces the income whether such work be detailed or supervisory. Just as another clause excludes from personal service classification those corporations where capital contributes materially to the income, so does this clause exclude corporations where the services of employees so contribute.
See also .
*123 The discussion of the Circuit Court of Appeals in , is particularly applicable in the instant case:
If this were a prosperous manufacturing corporation, employing many skilled workmen and capable foremen, salesmen, and the like, it could not be said that the corporate income was primarily attributable to the activities of the few others who, in managerial capacity, successfully planned and dominated the corporate affairs. The absolute indispensability of a competent working force would be too apparent to ascribe to management primacy*3616 of influence in producing corporate income.
The teaching body is here a skilled working force, without which the income would have been restricted to such as would arise from a student body which these three men alone might handle. Stenographers, messengers, and others serving them in personal capacity, might well be said to be incidental to the management, and such service would not prevent the conclusion that the personal activities of the managing stockholders were a primary factor in producing the income. * * *
Probably petitioner's very success is ascribable largely to wisdom in the choice of competent teachers; at least it may be safely said that the petitioner would be the first to resent the imputation that its teachers were mere rubber stamps or talking machines.
Petitioner contends that its income results primarily from the activities of the stockholders in securing offerings of merchandise and distributing same for sale, and that selling was less difficult and of secondary importance. We are not inclined to agree with this contention. A very attractive factor of petitioner's business was its capable selling organization, which was no doubt influential in causing*3617 principals to market their products through petitioner's agency.
The stockholders of petitioner exercised supervision over the office managers and salesmen. When offerings of merchandise were received and allocated to the various territories, one of the executive stockholders would telephone its territorial office manager and inform him that he should sell a certain quantity of merchandise at a certain price. Market information and sales arguments were also thus dispensed and transmitted to the salemen. It remained necessary, however, for the salesmen to call on the trade and sell the offerings, and undoubtedly petitioner's volume of sales depended largely upon the ability and industry of its salesmen.
We are of the opinion that petitioner's income can not be ascribed primarily to the activities of the principal stockholders, and that classification as a personal service corporation should, therefore, be denied. .
Reviewed by the Board.
Judgment will be entered for the respondent.