*2736 Petitioner not entitled to classification as a personal service corporation during any of the years in question.
*1054 The Commissioner determined deficiencies in income and profits tax of $2,553.22 for 1918, $3,255.82 for 1919, $4,549.35 for 1920, and $4,012.84 for 1921.
The cases were consolidated for hearing and decision.
The issue in each case is whether the petitioner should be classified as a personal service corporation.
FINDINGS OF FACT.
Petitioner is an Illinois corporation with its principal office in Chicago. The object for which it was formed, as indicated in its articles of incorporation, is * * * "to procure and distribute information relative to all applicants for insurance, and to collect and distribute all other information to customers; also to print, publish and distribute reports and information and to render service to clients." It is engaged in securing, compiling and furnishing confidential information for the underwriting department of life insurance companies and fraternal orders. This information relates to the*2737 medical history and in some cases with the financial and moral history of applicants for and holders of insurance policies. The data are procured from numerous sources, but originate primarily *1055 from the reports rendered to the petitioner by various life insurance companies which it serves. The reports are examined by the petitioner and records of defects or impairments are kept in such tabulated form as to be available for immediate disposition to life insurance companies who are the clients of petitioner. Full information on each particular individual is brought down to date and such information is listed on master cards in a filing and record system maintained by the petitioner. There are many thousands of such cards. When insurance companies desire to know the medical or other history of applicants for insurance, the petitioner furnishes a full report based on the information listed on the master cards. The companies to which petitioner furnishes information pay fees to the petitioner for information furnished. The master card records kept by petitioner are somewhat similar to the records maintained by abstract companies. They are the petitioner's principal asset, *2738 without which its business could not be carried on.
The sums expended by the petitioner from 1909 to 1917 on its record file of master cards aggregate $38,637.97. Little appeared to be invested in such assets as furniture and fixtures. The petitioner could not operate its business without its master cards.
During the taxable years petitioner's capital stock was $5,000, divided into 500 shares, having a par value of $10 each, and held as follows:
| Shares | |
| E. R. Carrington | 251 |
| Mrs. H. L. Giese | 41 |
| C. M. French | 84 |
| E. P. Kenyon | 83 |
| Estate of C. F. Newcomb | 41 |
The balance sheets attached to its returns show that on January 1, 1918, it had a surplus of $22,898.30; January 1, 1919, $16,401.34; January 1, 1920, $22,938.58, and January 1, 1921, $31,853.34.
From 1918 to 1922 E. P. Kenyon was president of the company; E. R. Carrington, vice president; A. R. Virden, secretary and treasurer, and F. E. Calkins, assistant secretary. Kenyon devoted all of his time to the business of petitioner, and was the only stockholder who did so. He received a salary. None of the other stockholders received a salary. Calkins had immediate charge of the master records system. *2739 Virden and Calkins were nonstockholders. Each received a salary for his services.
Carrington was vice president of the Thiel Detective Service Co. and spent much of his time traveling in the interest of said company. He spent part of his time in Montreal, Canada; had a summer home in New York, and during the period involved spent several winters in Kansas City and in California.
*1056 The petitioner corporation was organized largely because of the insurance companies' disinclination to obtain information desired from the Thiel Detective Service Co. on account of the term "detective," appearing in the name of the company; such term, "detective," being objectionable to those with whom it was desired to transact business. The Thiel Detective Service Co., however, operated along somewhat different lines from the petitioner. Both companies occupied adjoining offices in Chicago, Ill. Carrington spent approximately one week out of each month in the Chicago offices of the two companies. French was the president of the Thiel Detective Service Co. and was also engaged in the business of petitioner only a part of his time, approximately only one hour daily. The principal*2740 employee of the petitioner, other than A. R. Virden and F. E. Calkins, was G. S. Galloway (nonstockholder), whose principal duty was to interest others in the service maintained by petitioner. In addition, the petitioner had an office force of from 15 to 18 persons assiting Calkins in the discharge of his duties. Carrington, when away from Chicago, kept in close touch by correspondence with Kenyon, touching the business of petitioner. Carrington received approximately $125 a month from the petitioner towards meeting his traveling expenses. His services were in behalf of both companies, and from each he received expense money. He listened to the complaints of persons with whom petitioner dealt, consulted them with respect to their problems, assisted in solving difficulties, attended conventions and kept contracts of petitioner in force and maintained the friendly and confidential relations with the companies upon which the petitioner depended for its business. The petitioner had a contract with the American Life Convention which was secured through the instrumentality of Carrington, with the cooperation of French. It was petitioner's most profitable contract.
Kenyon attended*2741 conventions of life insurance companies, consulted with clients and kept in communication with Carrington concerning petitioner's affairs during all the years involved.
The bookkeeping and accounting work of the petitioner was largely done by Virden, who also performed a like service for the Thiel Detective Service Co., working in a dual capacity for the two companies and receiving compensation from each.
Calkins attended to the checking of the details of reports as they were received, comparing and preparing them for the printer, and in the discharge of his duties he had the assistance of from 15 to 18 other employees.
*1057 OPINION.
LITTLETON: A claim for personal service classification with its special method of tax must be clearly proved and can not be loosely granted. . Since the petitioner is seeking to overturn the determination of the Commissioner, the burden is upon it clearly to establish by competent and satisfactory evidence that it comes within the class of corporations referred to. *2742 .
To entitle a corporation to be classified as a personal service corporation, the income thereof must be ascribed primarily to the activities of the principal owners or stockholders, such principal owners or stockholders must themselves be regularly engaged in the active conduct of the affairs of the corporation, and capital (whether invested or borrowed) must not be a material income-producing factor.
Failure to come within any one of the requirements of these is fatal to the claim that a corporation is a personal service corporation. It is not necessary, therefore, to consider whether the petitioner fails to meet all the requirements of the statute, if the evidence shows that any one of them has not been met.
The only stockholder who devoted all his time to the business of the company was its president, E. P. Kenyon, and under cross-examination he testified as follows:
Q. Now, in your income tax report for the year 1917 you state that these master cards are the principal asset of your business; is that a fact?
A. We regard them so; we could not do business without them; if they were to become lost, we would not*2743 know where to look for the origin of our records.
Q. Well, are they pretty costly?A. Not necessarily costly, but the maintenance of them, the value that you place on them is the result of them being the only record that you have leading to a logical source of information.
In his testimony he compared the master card record system and the rendering of reports from information contained on such cards to the work of an abstractor in preparing his records and serving his clients.
Calkins, the assistant secretary and a nonstockholder, appears to have been responsible for the keeping of the card record system, as is indicated by the testimony of Kenyon, the president of petitioner, which was as follows:
Q. You used those cards all during this period? A. Yes. Q. And prepared them each year?A. They are prepared right along; we probably have got a million of them.
Q. And that is the work that Calkins does?A. He supervises that; it is a department that he is responsible for.
*1058 The total sum expended or invested in the card system from 1909 to 1917 was $38,637.97. Other sums were, after 1917, spent on or in connection with the master card*2744 system. The master cards, continually added to and kept current, constituted an important if not the main asset of the business.
In , we stated:
It is clear that the abstract records constituting its plant were capital. While we do not know the amount invested in such assets, we do know that they were used by the petitioner is producing its income. They had been built up over a long period of years. It was necessary to keep them posted from day to day from the public records. .
The amount of capital used in the business is not important if what was used was a material factor in producing the income. We think that the records and books of the petitioner which it used in making its abstracts of title were a material factor in the production of the income. It was testified that the same service could not have been rendered without them; that petitioner could not have made as much money and that without these records it would have taken at least 25 per cent longer time to prepare the abstracts. Even if it be conceded that it was not necessary to use*2745 these records in carrying on the business, the fact is they were actually used with great advantage. The saving of 25 per cent of time by their use is itself a material element of advantage and was a material income-producing factor. The fact also appears that the same service could not have been rendered without them.
There is no doubt but that the card records, on which so much had been expended and which were utilized so constantly, were a material income-producing factor and these records were very important in the carrying on of petitioner's business. The evidence shows the business could not have been carried on without them.
The facts of this case are similar to those in the case of the , in which the Board stated:
* * * It is shown in the evidence that the files and "Red Book" described were used by petitioner and were necessary to enable it to render the services from which it received its income. While the investigators and reporters were subject to the instructions of the officers of the corporation who were stockholders, it can not be said that the income of the petitioner resulting from the services of*2746 such investigators and reporters was primarily due to the activities of the stockholders.
The Board is of the opinion that during the taxable years the capital invested by petitioner was a material income-producing factor and also that the income of petitioner cannot be ascribed primarily to the activities of the principal stockholders who were regularly engaged in the active conduct of its business affairs. ; ; ; ; .
The case of , in which the Board denied personal service, was affirmed by the Court of Appeals of the District of Columbia, in which the court stated:
* * * The *1059 abstract plant which was maintained at the office of the corporation was indispensable in the operation of its business. In the making of the abstract the data relative to a title would be obtained from the corporation's records by competent employees, *2747 and the abstract when completed would be passed upon by one of the principal stockholders of the company, or under his inspection.
* * * The other persons employed in producing the output of the plant greatly outnumbered the principal stockholders and were paid annually an aggregate sum three to five times as much as the principal stockholders. Moreover these employees were as indispensable to the operation of the plant as were the principal stockholders themselves. See .
We think it equally certain that the corporation was not one in which invested capital was not a material income-producing factor. The plant above described constituted a productive investment capital without which the corporation's business could not be operated. * * *
In our opinion capital in the instant case was a material income-producing factor in the petitioner's business, which could not have been carried on but for the master card system and there was, therefore, no error committed in denying personal service classification to petitioner. We think also that it can not be said that the income of the petitioner may be ascribed*2748 primarily to the activities of the principal stockholder and, such being true, petitioner does not come within the scope of section 200 of the Revenue Acts of 1918 and 1921. An alternative claim for special assessment for 1919, 1920, and 1921 was waived at the hearing.
Judgment will be entered for the respondent.