*2337 1. Personal service classification denied where capital is a material income-producing factor, even though that portion of the business as to which capital is essential may have resulted in no net income, a substantial amount being earned as gross income. Denver Live Stock Commission, 29 Fed.(2d) 543, followed.
2. Special assessment denied for lack of evidence of abnormality.
*202 This is a proceeding for the redetermination of a deficiency in income and profits taxes for the fiscal year ended November 30, 1920, in the amount of $365.14. The petition alleges that there is no deficiency and that all of the $21,860.79 tax paid should be refunded, with interest. It is alleged that the petitioner was a personal service corporation and, in the alternative, that its taxes should be computed under the special assessment provisions.
FINDINGS OF FACT.
The petitioner is an Illinois corporation, with its principal office in Chicago. It is a continuation of the partnership of Jenkins, Kreer & Co., which was organized about 1884*2338 by T. R. Jenkins, S. C. Downs and J. J. Kreer as a continuance of the partnership of Clapp, Jenkins & Co. Before that partnership was organized Jenkins, Downs, and Kreer were with Marshall Field & Co., before the Chicago fire. When the partnership of Clapp, Jenkins & Co. was organized its business was selling goods on commission for mills, and some converting. During the fiscal year ended November 30, 1920, the stockholders of the petitioner and the number of shares held by each were as follows:
| Shares | |
| T. R. Jenkins | 236 |
| S. C. Downs | 10 |
| J. F. Field | 236 |
| C. C. French | 236 |
| W. E. Robinson | 236 |
| W. H. Toates | 236 |
| J. B. Fowler | 10 |
| W. B. Hardwick | 40 |
| R. P. Lewis | 10 |
During the taxable year in question S. C. Downs had a desk in the office of the corporation, attended regularly at the office, and was consulted as to different corporate affairs. He devoted approximately one-fourth of his time to the petitioner's business. All of the other stockholders devoted their entire time to the business. In addition *203 to the common stock above listed, there were about 500 shares of preferred stock of the par value of $100 each, of which S. C. Downs owned 400*2339 shares and T. R. Jenkins owned 100 shares. The holders of preferred stock were not entitled to voting powers in the corporation except on default of dividends.
During the taxable year in question T. R. Jenkins was president of the company and was engaged in the general supervision of the business and the usual duties of an active president of a company He did some of the purchasing and some of the general managing. J. F. Field was vice president, with charge of the sales organization, and assisted in the general conduct of the business. W. H. Toates was secretary and treasurer, kept the records, looked after the credits and had charge of the office. C. C. French, W. E. Robinson, and W. B. Hardwick were salesmen. The salary of T. R. Jenkins was $10,700, and those of Field, Toates, French, and Robinson were $9,500. Hardwick received $7,200. Fowler and Lewis were traveling salesmen selling on commission.
During the fiscal year ended November 30, 1920, the petitioner had made commission sales in the total amount of $6,010,488.50. The total salaries paid during that year, outside of compensation of officers, was $41,438.96. The only salesmen employed by the company outside*2340 of the stockholders was one Crooks, who received $1,276 during the year in question. Employees other than stockholders consisted of office clerks, bookkeepers, stenographers, a switchboard operator and a shipping clerk. The shipping clerk's duties had to do with trade sales. The services of the other employees, stenographers, bookkeepers, etc., were devoted approximately 95 per cent to trade sales and 5 per cent to commission sales. On commission sales the salesmen solicited orders and transmitted the orders to the petitioner, who transmitted them direct to the mills, and when the orders were accepted the mills paid the petitioner immediately the amount of commission, without waiting for payment on the goods which were shipped from the mills. Traveling expenses during the year were $7,292.01, and were entirely sales expenses. Rent was $1,500, insurance $376.51, expenses of the New York office were $3,030.19, and the petitioner paid commissions on the trading portion of its business during the year in question of $633.11. During the same year the compensation of officers was $29,700, of which $8,838.52 was segregated by the petitioner as sales expenses and $20,861.48 was allocated*2341 to general expenses. During the year in question the petitioner paid $858.28 interest in connection with its trading business, taxes of $1,350.62, and sustained depreciation on its furniture and fixtures of $250. According to its books, it sales expenses during the year in question amounted to $48,989.01. It also had sundry expenses of $6,584.86 which it listed as a part of its general expense.
*204 In connection with its trade sales the petitioner converted gray goods into a different sort of cloth by printing, dyeing, or bleaching. The goods which it sold for factories or mills were printed goods which had been finished by the mills. Its trade sales cost approximately three times as much to make as its commission sales on the same volume of sales. The petitioner received from 1 to 2 1/2 per cent on its commission sales. Its trade sales were approximately $1,400,000 and its commission sales were approximately $6,000,000. The petitioner's total sales expenses were allocated by it as $6,549.83 for its trade accounts, and $42,439.18 for its commission accounts. Petitioner had a gross profit of $25,226.20 on its trade sales during the year in question. The expenses*2342 of the New York office were attributable entirely to the trading portion of the petitioner's business. At least 75 per cent of its general expenses were attributable to the trading end of the petitioner's business and the remainder to the commission business.
During the year ended November 30, 1920, the petitioner purchased goods amounting to $1,258,951.23, for sale or conversion, paid freight and cartage of $2,389.28, and had an inventory as of December 1, 1919, of $217,982.77, and on November 30, 1920, of $108,578.67. The commissions received by it on sales for other concerns during the year aggregated $146,689.86. On November 30, 1919, it had on hand an item of cash of $7,378.59 and on November 30, 1920, $35,835.99. At the end of the year 1919 it had trade accounts and notes receivable of $234,214.52 and a year later, of $206,949, resulting from goods sold as a principal. It had investments in war saving stamps and Liberty Loan bonds of $7,923 in 1919, and the same amount a year later. It also carried on its books an item called "brands, labels and good will," in the amount of $20,000, being its estimate of the value of certain nationally known trade brands which it handled*2343 as a principal. On November 30, 1919, it had notes payable of $30,000, money borrowed for merchandising goods traded in as a principal, and it had accounts payable on the same date of $90,027.80, representing goods bought for resale. A year later the same items aggregated $16,546.37 and $15,723.05.
The total capital stock of the petitioner outstanding on November 30, 1920, was $165,000. On November 30, 1919, its surplus and undivided profits were $57,091.66 and a year later were $100,951.15.
In handling its commission sales petitioner never advanced any money to its customers.
The respondent denied the petitioner's claim for personal service classification and determined the deficiency here in question.
OPINION.
SIEFKIN: The contention of the petitioner is that its business was divided into two parts, and that its income and expenses can be *205 segregated by sales made on its own account as principal and commission sales made for mills. Its position is, further, that a proper segregation of its expenses for the taxable year in question indicates that it had no net income from that portion of its business devoted to trade sales as a principal, and that its*2344 entire business resulting in net income consisted of income from commission sales. Reasoning from this position, the petitioner contends that it is entitled to classification as a personal service corporation, on the theory that section 200 of the Revenue Act of 1921, in defining personal service corporations and in using the word "income," relates to net income rather than to gross income. Stated in another manner, the position of the petitioner is that although capital played an important part in its business (as we think must be conceded from an examination of the foregoing findings of fact), yet, unless that capital results in net income, the petitioner may still be entitled to personal service classification.
This contention has been denied both by this Board and by the Circuit Court of Appeals for the Eighth Circuit. See . Cf. ; ; and *2345 . These decisions are binding on us and we must hold that the petitioner is not entitled to classification as a personal service corporation.
Nor are we satisfied that the petitioner is entitled to computation of its tax under the special assessment provisions under the Revenue Act of 1921. We have no evidence even tending to show that the situation, as it existed with the petitioner during the year in question, created an abnormal condition either as to capital or income in that year.
Reviewed by the Board.
Judgment will be entered for the respondent.