Court Opinion

ID: 4610138
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:46:13.745911+00
Date Added: 2024-06-11T07:54:01.153707
License: Public Domain

APPEAL OF PEERLESS ENGRAVING CO.Peerless Engraving Co. v. CommissionerDocket No. 3626.United States Board of Tax Appeals3 B.T.A. 464; 1926 BTA LEXIS 2660; January 26, 1926, Decided Submitted October 20, 1925.  1926 BTA LEXIS 2660">*2660  Taxpayer was not, during 1919 and 1920, a personal service corporation.  Charles R. Lawson, Esq., for the taxpayer.  J. Arthur Adams, Esq., for the Commissioner.  LITTLETON3 B.T.A. 464">*464  Before JAMES, LITTLETON, SMITH, and TRUSSELL.  This is an appeal from the determination of deficiencies in income and profits tax for the years 1919 and 1920 in the amounts of $6,154.20 and $5,104.07, respectively, arising from the refusal of the Commissioner to classify taxpayer as a personal service corporation.  FINDINGS OF FACT.  Taxpayer is a New York corporation, engaged in photo engraving, with principal office in New York City.  It was organized in 1904 and, during the taxable years, its entire capital stock of the par value of $8,200 was owned by Henry J. Roes, president and treasurer, who, during the taxable years, devoted his entire time to the business.  He determined the policies of the corporation and supervised the manufacture of its product.  The taxpayer's entire net income was derived from the manufacture of photo engravings, both halftone and line, upon orders secured by the principal stockholder and salesmen employed by taxpayer.  The cost of1926 BTA LEXIS 2660">*2661  all material and labor was borne by the taxpayer and the price charged customers for the engravings was determined by taxpayer upon completion of the work contracted for.  Taxpayer leased the building in which it carried on its business and, in addition, had equipment consisting of cameras, lenses, and etching, routing, and blocking machines, and various tools.  The gross income and deductions for the year 1919 were as follows: Gross income from operations$139,642.28Interest544.14Gross income from other sources5.82Total$140,192.24DEDUCTIONS.Ordinary and necessary expenses$101,880.52Compensation (H. J. Roes)14,000.00Taxes86.95Bad debts717.50Exhaustion, wear and tear693.79Total117,378.76Net income22,813.483 B.T.A. 464">*465  The item of ordinary and necessary expenses, amounting to $101,880.52, consisted of the following: Cost of materials$16,389.58Salaries: 5 Gallery employees10,225.073 negative turners5,549.684 etchers7,249.708 finishers21,087.112 routers6,535.041 Ben Day employee2,931.52Factory rent1,840.64Factory insurance307.30Electric service1,266.36Plant expense155.01Compensation insurance417.59Gas291.73Water109.85Rent460.00Office salaries, bookkeeper, and stenographers9,369.99Office expense272.70Telephone309.72Insurance49.70Stationery and supplies20.00Repairs98.00Auditing and legal225.00Advertising10.00Salaries, 3 salesmen8,733.33Commissions to salesmen1,857.50Management expense4,975.00Photo Board of Trade1,144.00Total101,880.521926 BTA LEXIS 2660">*2662  The gross income and deductions for the year 1920 were as follows: Gross income from operations$144,066.00Interest650.51Gross income from other sources503.14Total$145,219.65DEDUCTIONS. Ordinary and necessary expenses121,618.79Taxes1,245.87Bad debts421.97Exhaustion, wear and tear624.41Total123,911.04Net income21,308.613 B.T.A. 464">*466  The item of ordinary and necessary expenses, amounting to $121,618.79, consisted of the following: Labor$60,284.81Rent2,850.04Insurance496.94Electric service1,404.15Gas438.60Water308.71Repairs107.45Plant expense464.10Office salaries12,421.06Office expense659.82Telephone257.92Stationery123.25Legal and auditing221.07Advertising325.00Light42.90Salesmen's salaries and commission11,083.00Photo Board of Trade1,218.32Materials12,911.65Management expense4,500.00Management salaries11,500.00121,618.79The number of employees, their duties, and the wages paid them during 1920 were substantially the same as during 1919, and are included in the item of "Labor" in the above statement.  The balance sheets1926 BTA LEXIS 2660">*2663  at January 1 and December 31, 1919, and December 31, 1920, were as follows: Dec. 31, 1918.Dec. 31, 1919.Dec. 31, 1920.ASSETS.Plant equipment$6,827.70$6,117.93$5,506.14Furniture and fixtures140.21126.19113.57Inventory500.00500.00500.00Accounts receivable10,073.0127,354.5913,455.92Bonds1,550.001,550.0030,400.00Cash19,554.0824,948.5623,229.49Unexpired insurance287.43277.12310.6738,932.4360,874.3973,515.79LIABILITIES AND CAPITAL.Capital stock8,200.008,200.008,200.00Surplus26,882.3048,917.7562,654.20Reserve for discounts778.03579.23Reserve for taxes892.65Accounts payable3,850.132,978.61889.7138,932.4360,874.3973,515.79DECISION.  The determination of the Commissioner is approved.  3 B.T.A. 464">*467  OPINION.  LITTLETON: From the evidence before us, we are of the opinion that the taxpayer is not entitled to classification as a personal service corporation.  It is true that the principal and only stockholder was regularly engaged in the active conduct of the business, but it can not be said that the taxpayer's income was due primarily to his activities. 1926 BTA LEXIS 2660">*2664  Both capital and the activities of other employees were material income-producing factors.