*2556 Personal service classification denied.
*989 This proceeding is for the redetermination of a deficiency in income and profits tax for the calendar year 1920 amounting to $14,897.80.
Two issues were raised by the pleadings - (1) whether the petitioner is entitled to personal service classification; (2) in the alternative, whether the petitioner is entitled to special assessment under the provisions of sections 327 and 328 of the Revenue Act of 1918.
At the hearing no evidence was offered in support of the second issue and the petitioner did not refer to that issue in its brief.
FINDINGS OF FACT.
The petitioner was organized as a corporation under the laws of the State of Ohio during the summer of 1919 with an authorized capital stock of $50,000, each share having a par value of $100. T. J. Davis, C. B. Slemp, P. W. Slemp, and E. M. Radway each paid in to the petitioner $200 cash for stock. On December 31, 1919, additional cash was paid in by these four persons in equal portions, making the paid-up capital*2557 stock on that date $5,000. On January 1, 1920, each of these four stockholders subscribed for 7 1/2 additional shares of stock at $100 per share to be paid for at the rate of $400 per month.
*990 On January 1, 1920, the issued stock of the company was distributed as follows:
| Shares | |
| C. Bascom Slemp | 20 |
| T. J. Davis | 20 |
| P. W. Slemp | 20 |
| E. M. Radway | 19 |
| A. Speth | 1 |
The stock was held by the same persons and in the same amounts on December 31, 1920.
Thomas J. Davis, of Cincinnati, Ohio, and C. Bascom Slemp, of Virginia, had been associated in various business ventures for a number of years prior to 1919. One of their ventures had been the purchase, sale and development of coal lands and properties in eastern Kentucky. In 1918 the Elkhorn Junior Coal Co., a corporation in which Thomas J. Davis and C. B. Slemp were largely interested, opened a mine in the eastern Kentucky field. P. W. Slemp, a cousin of C. B. Slemp, was in charge of the field operations of this mine.
The petitioner was organized as a sales company in an attempt to capitalize the acquaintance of Thomas J. Davis and C. B. Slemp with the eastern Kentucky coal field and among the coal-mine*2558 operators there.
The officers of the petitioner in 1920 and their respective salaries were as follows:
| E. M. Radway, president | $5,400 |
| C. Bascom Slemp, vice president | 1,200 |
| T. J. Davis, vice president | 1,200 |
| P. W. Slemp, secretary and treasurer | 1,650 |
The company had no employees except two girls in the office.
The demand for coal in 1920 was unusual. The difficulty was not in obtaining buyers but in obtaining coal with which to fill orders received.
The petitioner's office was in the First National Bank Building at Cincinnati, Ohio. T. J. Davis was the executive vice president of the First National Bank. In his early manhood he had been cashier of a bank in the Big Sandy section of eastern Kentucky and had grown up with men who became active in banking circles in that region. He was a man of large affairs and during 1920 was connected in an advisory capicity with several financial institutions. During that year, however, he regularly devoted a considerable portion of his time to the petitioner's business. Through some of his friends in eastern Kentucky and through officers of the Pike County Bank, of which he was a large stockholder, he procured*2559 considerable amounts of coal for shipment to purchasers secured by the petitioner. He also passed on the credit of business concerns ordering coal from the petitioner. He was consulted daily and *991 sometimes several times a day with respect to the petitioner's business by E. M. Radway, the petitioner's president.
C. Bascom Slemp was a member of Congress from a district in Virginia adjacent to the eastern Kentucky field. In years prior to 1920 he had purchased much land in the eastern Kentucky coal fields and had been instrumental in making possible the operation of mines in the Kentucky River section by inducing the Louisville & Nashville Railroad Co. to extend its lines into that field. During 1920 he at various times attended conferences at Cincinnati relative to the petitioner's business and was in frequent telephonic communication with P. W. Slemp with respect to ways and means of obtaining coal from producers. He also visited the coal fields on several occasions on behalf of the petitioner and in addition obtained a valuable contract with the Louisville & Nashville Railroad Co. His name and influence were valuable assets to the petitioner.P. W. Slemp devoted*2560 at least 75 per cent of his time to the affairs of the petitioner. He was secretary and treasurer of the corporation, but his main duty was to obtain coal to be sold. He spent his time in the coal fields calling upon operators and by his own knowledge of the field and through the use of the names of T. J. Davis and C. B. Slemp obtained much of the producing companies' output for shipment to purchasers.
E. M. Radway, as president, devoted at least 90 per cent of his time to the petitioner's business and was in charge of its affairs at its office in Cincinnati, performing the duties of general manager.
The petitioner traded as a principal and also acted as sales agent. During the year 1920 the petitioner derived less than 50 per cent of its income from trading as a principal. More than 50 per cent of its income was derived from its commissions as sales agent for shippers of coal. None of the petitioner's income was derived from Government war contracts.
The resources and liabilities of petitioner as of the beginning and close of the taxable year were:
| Jan. 2, 1920 | Dec. 31, 1920 | |
| RESOURCES | ||
| Cash and other items | $2,112.62 | $860.53 |
| Accounts receivable | 59,962.76 | 89,260.81 |
| Notes receivable | 0 | 11,980.38 |
| Furniture and fixtures | 115.50 | 448.13 |
| Stock of the Jacks Creek Coal Co | 25,000.00 | |
| Total | 62,190.88 | 127,549.85 |
| LIABILITIES | ||
| Accounts payable | 48,429.82 | 54,378.82 |
| Notes payable | 5,000.00 | 15,000.00 |
| Capital stock | 8,000.00 | 8,000.00 |
| Surplus and undivided profits | 761.06 | 50,171.03 |
| Total | 62,190.88 | 127,549.85 |
*2561 *992 During 1920 there were times when, in order to obtain coal from some of the operators, it was necessary for the petitioner to advance money to such operators to cover their pay rolls or for other purposes. Commissions amounting to more than $8,000 were earned on transactions with producers to whom petitioner made advances.
In connection with the above advances the corporation borrowed money, its notes being endorsed by T. J. Davis. The daily average by months of the amounts of money so borrowed during 1920 is as follows:
| January | $7,000.00 |
| February | 1,300.00 |
| March | 1,000.00 |
| April | 2,500.00 |
| May | 10,858.33 |
| June | 38,234.91 |
| July | 25,743.26 |
| August | $13,300.00 |
| September | 28,733.37 |
| October | 13,333.33 |
| November | 0 |
| December | 500.00 |
| Average | 11,875.26 |
The petitioner paid the shippers for all coal sold by it either as principal or agent and the customer paid the petitioner for the coal purchased. A very substantial amount of the coal sold by petitioner was not paid for by the customers until from 30 to 60 days. In some cases the account was not paid to petitioner until 90 days after sale.
The petitioner's average cash on hand during the taxable*2562 year was $2,747.06, varying from an apparent deficit or overdraft in August, 1920, of $19,346.32 to a balance of $28,890.08 in October, 1920.
The average of accounts receivable was $100,249.68, varying from $21,675.99 in March, 1920, to $217,124.18 in September, 1920. The average of notes receivable representing advances made to producers was $13,368.43, varying from $3,666.66 in March, 1920, to $33,480 in July, 1920. The average of accounts payable was $86,031.78, varying from $17,951.51 in March, 1920, to $190,976.74 in September, 1920. Notes payable varied from nothing in November to $38,234.91 in June, with a monthly average of $11,875.28.
In June, 1920, the petitioner began acquiring stock in the Jacks Creek Coal Co., a producing company, the product of which was sold by the petitioner, and by the end of October, 1920, had acquired such stock to the par value of $25,000.
The petitioner's surplus and undivided profits for the several respective months of 1920 were as follows:
| January | $761.06 |
| February | 1,879.58 |
| March | 1,278.30 |
| April | 4,371.02 |
| May | 9,662.00 |
| June | 14,794.51 |
| July | $22,806.25 |
| August | 28,836.06 |
| September | 40,307.14 |
| October | 44,200.07 |
| November | 49,536.12 |
| December | 50,171.03 |
*2563 *993 The gross sales made by petitioner in 1920 both as agent and as principal amounted to $1,017,903.66, and its gross income, consisting of profit and commissions, amounted to $65,092.73.
Capital, either invested or borrowed, was a material income-producing factor in petitioner's business.
In its income and profits return for 1920 the petitioner claimed it should be taxed as a personal service corporation and computed the amount of its tax accordingly. The Commissioner disallowed the claim and determined a deficiency in tax for 1920 in the sum of $14,897.80.
OPINION.
VAN FOSSAN: The principal question for our consideration is whether or not petitioner is entitled to classification as a personal service corporation under section 200 of the Revenue Act of 1918.
The Act specifies, among other things, three essential elements which must concur to constitute a corporation one of personal service - (1) the principal owners or stockholders must be regularly engaged in the active conduct of the affairs of the corporation; (2) its income must be ascribed primarily to their activities; and (3) capital (invested or borrowed) must not be a material income-producing factor. *2564 If any one of these elements is absent a claim for personal service classification must be denied. The statute also expressly excludes any corporation 50 per cent or more of whose income is derived from trading as a principal or from Government war contracts.
We have found as facts that less than 50 per cent of the petitioner's income for 1920 was derived from trading as a principal and that none of its income was derived from Government war contracts. We think it is clear that its income is to be ascribed primarily to the activities of its four principal stockholders, namely, T. J. Davis, C. Bascom Slemp, P. W. Slemp, and E. M. Radway. There may be some question, however, as to whether or not all of the four principal stockholders were regularly engaged in the active conduct of the affairs of petitioner in conformity with the provisions of the statute, but, by reason of our view as to petitioner's employment of capital, we consider it unnecessary either to discuss or to decide that question.
During the year 1920 petitioner's surplus and undivided profits increased from $761.06, the amount in January, 1920, to $50,171.03, the amount on December 31, 1920. In August, 1920, *2565 surplus and undivided profits amounted to $28,836.06; in September, 1920, to $40,307.14. Each of the remaining months of the year showed an increase over the preceding month. The petitioner's capital was $8,000. It borrowed money in considerable amounts. It used both capital funds and borrowed money in furtherance of its business. It *994 extended credit of from 30 to 90 days to purchasers. It made advances to some of the producers of coal whose products it sold as agent. For example, the record shows that between March 8, 1920, and June 19, 1920, it advanced $15,000 to the Montgomery Creek Coal Co., the product of which petitioner sold on Commission. At the end of 1920 a balance of $11,980.38 of this advance was still unpaid. During 1920 petitioner's earned commission on shipments made by the montgomery Creek Coal Co. amounted to $2,914.32. Advances of money were also made to other shippers and a total of commissions amounting to $8,000 and upwards is shown by the records to have been earned on the shipments made by producers to whom such advances were made. The record also shows that some of such advances were necessary in order to help producers meet pay rolls. *2566 Whatever the use to which they were applied, the advances were made in order to assist these producers in the production and shipment of coal, the sale of which enabled the petitioner to earn commissions in a substantial amount. Under these circumstances it can not be said that capital was not a material income-producing factor. Consequently, in view of the provisions of section 200 of the Revenue Act of 1918, petitioner must be denied personal service classification. ; ; ; ; ; affd. ; ; .
No evidence was presented in support of the second issue and the record as made does not justify the claim for special assessment.
Decision will be entered for the respondent.