*3044 Petitioner, an advertising agency, held to have been a personal service corporation in 1919.
*19 This is a proceeding for the redetermination of a deficiency in income and profits taxes for the calendar year 1919 in the amount of $2,742.89.
The error alleged is the refusal of the respondent to classify the petitioner as a personal service corporation for the year 1919.
FINDINGS OF FACT.
The petitioner in 1919 was a corporation, organized under the laws of Maine, with its principal office at Chicago, Ill. It maintained an office in Portland, Me., to comply with the laws of that State, but no business was transacted there. During 1919 it was engaged in general advertising and trade promotion or trade extension. At the time of its organization petitioner issued 1,000 shares of stock at a par value of $100 each. J. B. Crosby received $80,000 of stock and T. J. Swanson received $20,000 of stock. Crosby and Swanson transferred to the corporation assets consisting of contracts, good will, and furniture of their respective advertising agencies.
*3045 The stockholders and their holdings during 1919 were as follows:
| Shares | |
| John Beamer Crosby, president | 641 1/2 |
| Alene Johnson Crosby (wife) | 1 |
| Alice Crosby (sister) | 2 |
| R. E. Barrett, secretary to president | 10 |
| Percy E. Hawkins, vice president | 223 |
| J. J. Rockwell, vice president | 3 |
R. E. Barrett was given 10 shares of stock by Crosby, which stock reverted to him when he severed connections with the company. Rockwell held stock to qualify him as a director.
Crosby devoted all of his time to the business, as did Barrett and Hawkins. Mrs. Crosby and Alice Crosby devoted no time to the business. Rockwell devoted no time to the business except for counsel.
*20 The nonstockholding employees of the petitioner in 1919 and their salaries are set forth below:
| Salary | |
| Murray Springer, contact and publicity man | $6,870.00 |
| John H. Krause, office manager | 3,190.00 |
| Ralph J. Schumacher, auditor | 2,035.00 |
| Thomas J. Van Derslice, production clerk | 1,560.70 |
| Mary Hinman Chapman, order and general clerk | 1,089.99 |
| Vera M. Parsons, typist and general clerk | 936.00 |
| Dorothy Kleasse, switchboard operator | 832.10 |
| Mary Considine (part time only) stenographer | 132.50 |
| Beatrice Curnim (part time only), stenographer | 217.00 |
| Tom Sullivan, office boy | 220.50 |
| 17,083.79 |
*3046 Springer was employed by the petitioner in the latter part of February, 1919, to learn to be a publicity and contact man. He did no important work in 1919.
Krause, who was engaged as office manager, took care of the details of the office such as employing clerks and keeping books for the petitioner.
Van Derslice was the production clerk who ordered all the mechanical requirements, the printing, engraying, electrotyping, and proofing that was required. He worked entirely under the instructions of Crosby.
Chapman wrote orders to publications on instructions from Crosby or Hawkins. The typists, general clerk, switchboard operator, and office boy performed no duties other than general office work.
The balance sheet of petitioner at December 31, 1918, and 1919, was as follows:
| 1918 | 1919 | |
| ASSETS | ||
| Cash | $3,448.98 | $2,853.50 |
| Notes receivable | 2,393.93 | 2,393.93 |
| Accounts receivable, trade | 6,723.09 | 41,441.86 |
| Accounts receivable, officers | 10,736.65 | 13,115.26 |
| Sundry accounts | 1,372.21 | |
| Liberty bonds | 1,420.00 | 2,851.02 |
| Furniture and fixtures | 1,970.00 | 2,532.58 |
| Advertising contracts | 100,000.00 | 100,000.00 |
| Treasury stock | 11,950.00 | 11,950.00 |
| 138,642.65 | 178,510.36 | |
| LIABILITIES | ||
| Notes payable | 4,000.00 | |
| Accounts payable | 14,579.17 | 37,069.33 |
| Sundry accounts | 1,102.83 | |
| Reserve for depreciation | 197.00 | 394.00 |
| Capital stock | 100,000.00 | 100,000.00 |
| Earned in surplus | 11,916.48 | 23,994.20 |
| Paid-in surplus, treasury stock | 11,950.00 | 11,950.00 |
| 138,642.65 | 178,510.36 |
*3047 *21 The items "accounts receivable" and "accounts payable" were current items, with the exception for the account of the Automatic Devices Co., which was an account due petitioner for printing or the preparation of printing. It does not represent any expenditure for advertising space. All accounts, with this one exception, were currently paid.
The item "notes payable" represents two notes of $2,000 each which petitioner made in favor of the bank. Crosby's policy was to borrow money from the bank to keep his credit good.
"Paid in surplus" was a bookkeeping entry made to off-set the entry of "treasury stock," which latter represented a reversion of 15 per cent of the stock to the petitioner upon stock transfers.
There is set forth below a list of clients of petitioner during 1919 and the gross profits derived therefrom:
| Clients | Profits derived |
| American Hardwood Manufacturers Association (oak division) | $2,519.90 |
| American Hardwood Manufacturers Association (gun division) | 3,725.11 |
| American Walnut Manufacturers Association | 3,571.68 |
| Colemand Feed Roller Co | 462.17 |
| Bogalusa Paper Co | 207.03 |
| Great Southern Lumber Co | 5,243.84 |
| Associated Cooperate Industries | 3,264.58 |
| Indiana Limestone Quarrymen's Association | 6,665.88 |
| Consumer's Service Station | 55.20 |
| Northern Hemlock & Hardwood Manufacturers Association | 4,079.24 |
| Birch Manufacturers Association | 3,720.37 |
| Oak Flooring Manufacturers | $7,150.04 |
| O'Connor & Goldberg | 2,470.43 |
| Charles Scribners' Sons | 735.73 |
| Southern Cypress Manufacturers Association | 11,954.13 |
| Tupelo Manufacturers Association | 663.13 |
| Reserve Trust Co | 12.50 |
| Metropolitan Paving Brick Manufacturers | 276.66 |
| National Lumber Inter. Insurance Association | 20.00 |
| Slack Cooperage Industries | 1,050.00 |
| National Paving Brick Manufacturers | 5,776.30 |
| Total | 63,623.92 |
*3048 Clients of petitioner were located in widely separated districts. Fourteen of them were trade associations. Most of them were in the lumber business. All but two, the Consumers' Service Station and the Reserve Trust Co., were obtained by Crosby. Petitioner employed no solicitors.
Crosby, who was widely known as an authority on lumber advertising, solicited the business for petitioner, and written contracts were entered into in all cases. Hawkins or Crosby then would hold a conference with the client and discuss the policy of production, type of advertising, the amount the client wished to spend, and other matters. Crosby would submit an estimate to the client for approval, after which he would prepare the copy and again submit it in the rough to the client. When approved by the client, reservation orders were sent by petitioner to publishing or other concerns in the name of the client. The publishers did not allow petitioner to transfer the space from one client to another. Petitioner did not employ any *22 copywriters. The drawings for advertisements were prepared by various artists under Crosby's personal guidance. Crosby would sometimes make rough sketches*3049 for the artists to follow.
The gross income of petitioner in 1919 was $64,700.80, and was derived as follows:
| Service fees on space | $44,503.21 |
| Service fees on materials | 18,292.24 |
| Interest earned | 112.10 |
| Discount | 291.18 |
| Rebates | 11.16 |
| Sales of waste paper | 50.67 |
| Commissions | 1,440.24 |
| $64,700.80 |
The item of "Commissions $1,440.24" was for handling the account of Charles Scribners' Sons in the Chicago district.
The item "service fees on space" was a fixed percentage of the amount expended for advertising space in publications.
The item "service fees on materials" also represents a percentage fixed by contract on the amount expended, and this percentage varied from 15 per cent to 50 per cent, depending on the type of work or the amount of time and effort required for the particular piece of work.
The petitioner always rendered bills to its clients so that payment would be received before petitioner had to pay the publishers.
The publishers usually allowed a commission of 15 per cent to trade agencies although this percentage varied. A discount of 2 per cent was also usually allowed for cash. Petitioner's bills to its clients were in three*3050 parts: (1) a bill for the gross amount charged by publications and other companies for space and material, etc., (2) a credit slip for all commissions and discounts allowed by the publications and other companies, and (3) a bill for petitioner's service fees. The fee which petitioner charged was covered by agreement and was a fixed percentage of the client's total expenditure for space, the percentage ranging from 15 per cent to 25 per cent. In no case in 1919 did a client of petitioner fail to pay before petitioner had to pay the publishers.
Petitioner, during the year 1919, had no bad debts and never made any loans or advances to clients. It had no Government contracts.
OPINION.
SIEFKIN: The error assigned is the holding of the respondent that the petitioner, during the year 1919, was not a personal service corporation.
Section 200 of the Revenue Act of 1918 provides in part:
*23 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*3051 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.
John B. Crosby and Percy E. Hawkins, holders, during 1919, of approximately 72 per cent and 25 per cent, respectively, of stock of the petitioner, were regularly engaged in the active conduct of the business of the petitioner and the income of the petitioner was ascribable primarily to their activities, particularly to the activities of Crosby, who was widely known as an authority on lumber advertising. These two stockholders did all the responsible work and the nonstockholding employees did only general office work.
About 97 per cent of the income of the petitioner in 1919 was derived from commissions charged its clients based upon the gross billing of advertising space petitioner had reserved for the clients and upon the amount of material bills. *3052 Petitioner billed its clients so that payment might be received before petitioner paid the publishing concerns which carried the advertisements, or the other concerns which furnished materials. No client of the petitioner in 1919 failed to pay petitioner before the date the bills to the petitioner were due. The petitioner never made advances or loans to its clients. Capital was not a material income-producing factor.
The petitioner, having met all the requirements of section 200 of the Revenue Act of 1918, is entitled to personal service classification for the year 1919. See , and .
Reviewed by the Board.
Judgment will be entered for the petitioner.