*53 Before GRAUPNER, TRAMMELL, and PHILLIPS.
This is an appeal from the determination of a deficiency in income and profits taxes for the calendar years 1919, 1920, and 1921 in the *54 amount of $995.51. The deficiency arose from the refusal of the Commissioner to classify the taxpayer as a personal-service corporation.
FINDINGS OF FACT.
The taxpayer was incorporated in December, 1915, with its principal place of business at Pittsburgh, Pa., and was engaged in the insurance-agency business. The original incorporators were Lloyd V. Watkins, Oliver C. Hurst, and one Anthony. Watkins had been in the insurance business in Pittsburgh about 10 years, Anthony 7 years, and Hurst 14 years. Each of them had an extensive business acquaintance and a large number of policy holders and clients. The corporation was organized with a capital stock of $25,000, divided into 250 shares of the par value of $100 each. Two hundred and twenty-five shares were immediately issued to the incorporators, each receiving 75 shares. The balance was issued one-third to each on January 1, 1918. *2052 The three incorporators each paid in $1,875 in cash and turned over their businesses, which were valued at $5,625 each. Watkins, on account of a severe accident, retired from the firm in 1919. The corporation bought the stock of Watkins and placed it in its treasury. All the stockholders devoted all their time to the business and actively solicited insurance.
The taxpayer represented a number of insurance companies, including fire, auto, casualty, plate glass, etc. The taxpayer collected the insurance premiums for the insurance companies for which it acted as agent and paid these premiums to the various companies, less its commission. In the case of casualty companies, it paid on the 10th day of the second month succeeding the date of the policy. For other companies it remitted on the last day of the third month succeeding the date of the policy. Some of its customers paid in advance, some paid when due and still others were delinquent. Frequently, taxpayer paid the premiums on behalf of delinquent clients. It was customary for the taxpayer to remit the premiums, less commissions, when due, so premiums paid in advance were used to pay for the premiums that were delinquent. *2053 On some occasions it was necessary to borrow money or issue checks to be paid when funds were available in order to remit for its delinquent customers.
The office force of the taxpayer consisted of nine employees, as follows: One telephone operator, two bookkeepers, two policy writers for casualty and auto insurance, two policy writers for fire insurance, one reporter of losses, and one general bookkeeper. The taxpayer also used 30 to 40 subagents who were paid commissions.
The assets and liabilities of the taxpayer for the years in question were as follows:
| Dec. 31, 1919. | Dec. 31, 1920. | Dec. 31, 1921. | |
| ASSETS | |||
| Cash | $2,636.92 | $4,376.19 | $7,210.66 |
| Accounts receivable | 46,586.40 | 65,961.02 | 57,885.07 |
| Liberty bonds | 5,185.86 | 4,485.86 | 4,485.86 |
| Investment | 1,000.00 | 1,000.00 | 3,535.26 |
| Withdrawal by stockholders | 14,066.40 | 13,355.04 | 21,159.35 |
| Furniture and fixtures | 1,000.00 | 800.00 | 1,100.00 |
| Balance account purchase, L. V. Watkins | 4,000.00 | 2,000.00 | |
| Total | 74,475.58 | 91,978.11 | 95,346.20 |
| CAPITAL AND LIABILITIES | |||
| Notes payable | 1 7,000.00 | 2 7,038.93 | 3 6,200.00 |
| Accounts payable | 48,204.12 | 63,886.14 | 66,550.72 |
| Unpaid commissions | 309.91 | 1,243.78 | 2,757.37 |
| Employees' Liberty bond account | 322.50 | ||
| Capital stock | 16,666.67 | 16,666.67 | 16,666.67 |
| Surplus | 1,972.38 | 3,142.59 | 3,171.44 |
| Total | 74,475.58 | 91,978.11 | 95,346.20 |
*55 The gross sales, net income, and expenses for the years in question were as follows:
| 1919 | 1920 | 1921 | |
| Gross sales | $27,822.97 | $41,520.56 | $37,749.86 |
| Other income | 351.97 | 484.58 | 173.05 |
| 28,174.94 | 42,005.14 | 37,922.91 | |
| DEDUCTIONS | |||
| Ordinary and necessary expense | 15,907.13 | 21,849.94 | 23,325.91 |
| Officers' salaries | 8,181.28 | 14,404.79 | 10,058.66 |
| Miscellaneous expenses | 386.16 | 580.20 | 703.72 |
| 24,474.57 | 36,834.93 | 34,088.29 | |
| Net income | 3,700.37 | 5,170.21 | 3,834.62 |
The itemized statement of ordinary and necessary expenses set forth above is as follows:
| 1919 | 1920 | 1921 | |
| To balance books | $288.93 | ||
| Purchases | 877.48 | $1,071.91 | |
| Legal expenses | 581.61 | ||
| Advertising | $3,956.26 | 301.75 | 463.35 |
| Auto expense | 630.27 | 447.00 | |
| Telephone, telegraph, stationery and printing | 3,315.03 | 2,713.88 | |
| Postage | 540.00 | 522.31 | |
| Rent | 1,605.00 | 1,825.00 | 2,040.00 |
| Salaries of clerks, stenographers, and bookkeepers | 10,345.87 | 13,489.87 | 16,067.46 |
| 15,907.13 | 21,849.94 | 23,325.91 |
*2055 The income derived from the personal solicitation of the stockholders and its subagents for the years in question was as follows:
| 1919 | 1920 | 1921 | |
| Direct solicitation | $22,918.90 | $32,852.90 | $26,434.47 |
| Subagents | 4,754.07 | 8,667.81 | 11,040.08 |
| 46.80 | |||
| Other sources | 150.00 | 228.51 | |
| 27,822.97 | 41,520.56 | 37,749.86 |
*56 The above amounts represent the taxpayer's portion of the commissions and not the total premiums.
DECISION.
The determination of the Commissioner is approved. .
Footnotes
1. $4,000 notes to pay Watkins for his capital stock, $3,000 from bank to purchase Liberty bonds. ↩
2. $750 notes to pay Watkins for his capital stock, $3,888.93 trade acceptance discounted at bank, $2,400 balance due bank on purchase of Liberty bonds. ↩
3. $3,800 balance of trade acceptance at bank, $2,400 balance in bank on purchase of Liberty bonds. ↩