Case Name: Lee Live Stock Commission Co., Petitioner, v. Commissioner of Internal Revenue, Respondent
Court: United States Board of Tax Appeals
Jurisdiction: United States
Decision Date: 1927-06-24
Citations: 7 B.T.A. 532
Docket Number: Docket No. 280
Parties: Lee Live Stock Commission Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
Judges: 
Reporter: Reports of the United States Board of Tax Appeals
Volume: 7
Pages: 532–539

Head Matter:
Lee Live Stock Commission Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
Docket No. 280.
Promulgated June 24, 1927.
Anan Raymond, Esq., for the petitioner.
John D. Foley, Esq., and L. 0. Mitchell, Esq., for the respondent.

Opinion:
OPINION.
Gkeen :
The respondent opposes the classification of the petitioner as a personal service corporation upon two grounds: First, that capital was a material income-producing factor; and, second, that one of the principal stockholders, namely,, Lee, was not regularly engaged in the active conduct of the affairs of the corporation. After a careful examination of all the evidence we are unable to find that the petitioner derived any material amount of income from the use of capital. It does appear that Smith and his mother used the corporation extensively in the conduct of their private loan business. It likewise appears that in some instances they used the credit of the corporation in the furtherance of their private business. But, inasmuch as the corporation derived no profit from the loan business of the Smiths for the use of the corporate credit in that connection, we perceive no reason therein for disallowing the classification. The second objection raised by the Commissioner would seem to have in it some merit. Lee owned approximately 27 per cent of the stock, and by virtue of such ownership must be held to be one of the principal stockholders. We can not from the record determine what proportion of his time Lee devoted to the petitioner corporation. In fact it would appear that an accurate determination of such proportion was well-nigh impossible inasmuch as Lee's activities seemed at all times to be directed towards the building up of all of the businesses in which he was interested, each of which was the commission house and each of which was likely to receive shipments of live stock from those with whom Lee came in contact. Except when Lee was actually participating in the buying and selling of live stock for one of the other houses at the yards in the city where the house was located, it would seem that he was working for the interest of all, and inasmuch as his activities were constantly producing results for the petitioner as well as the other commission houses, and inasmuch as his efforts were at all times, in part at least, directed towards the upbuilding of the petitioner's business, we are unable to hold that he was not regularly engaged in the active conduct of the affairs of the petitioner corporation, and we therefore conclude that the petitioner is entitled to be classified as a personal service corporation.
The respondent, both in his brief and in his argument, cited the case of Hubbard-Ragsdale Co. v. Dean, 15 Fed. (2d) 410, in support of his contention that the petitioner was not a personal service corporation. The facts in that case are to be distinguished from the facts in this case in some material respects. In that case the court found that the plaintiff did not render a personal service. Our conclusion, based of course on the record in this proceeding, is just the contrary. There the plaintiff purchased live stock for its customers with its own funds and shipped the live stock to the purchaser, attaching a sight draft for the purchase price to the bill of lading. The petitioner here extended credit to no one except the Smiths, and as the record shows, it earned a negligible income from this source. The court in the Hubbard-Ragsdale case, supra, based its opinion principally upon a set of facts the parallel of which is not found in this case. It is true that when the petitioner sold cattle (and such sales were all for "spot cash"), it, the same day, gave to the seller its check for the sale price, less commissions, when in some instances, if the sale was made after 2 p. m., it would not collect the purchase price until the next day. We do not regard this as such a use of capital as would warrant us in denying to the petitioner the classification as a personal service corporation. The respondent's contention in this regard was that the loans, above referred to, indicated that capital was a material income-producing factor.
The second allegation of error relates to the disallowance of certain deductions from income to which it is claimed the petitioner is entitled by reason of the fact that the salaries paid by it were smaller, than those paid to officers of other corporations rendering a like service and smaller than the petitioner's officers might have obtained from other corporations as compensation for similar services. It is admitted that no such salaries were authorized or paid, and there is no provision of the statute which permits the deduction of salaries which are neither paid nor incurred, nor accrued.
There seems to be little merit in the petitioner's contention that it is entitled to a deduction in the year 1919 of the amount which it paid out to Allison. The statute requires that the debt be ascertained to be worthless and charged off within the taxable year. The record is entirely silent as to a charge off, and while it does appear that Allison was in straitened financial circumstances, we can not conclude therefrom that the debt was worthless. The petitioner, even as late as 1924, made a collection on this account and there is nothing to indicate that at some time in the future the unpaid balance may not be recovered.
The fourth issue arises out of petitioner's claim that it is entitled to special assessment, and it is unnecessary to give consideration thereto since we have concluded that the petitioner is entitled to classification as a personal service corporation.
Judgment will 6e entered after 16 days' notice, under Rule 60.