Court Opinion

ID: 4631345
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:09:26.148563+00
Date Added: 2024-06-11T07:57:42.291137
License: Public Domain

WILLMARK SERVICE SYSTEM, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Willmark Service System, Inc. v. CommissionerDocket No. 9402.United States Board of Tax Appeals9 B.T.A. 65; 1927 BTA LEXIS 2664; November 14, 1927, Promulgated *2664  Petitioner not entitled to classification as a peronal service corporation during 1920.  Mark Eisner, Esq., for the petitioner.  J. Arthur Adams, Esq., for the respondent.  LITTLETON*65  The Commissioner determined a deficiency in income and profits tax of $2,330.35 for the year 1920.  It is claimed that the Commissioner erred in denying petitioner personal service classification.  FINDINGS OF FACT.  The petitioner is a New York corporation with its principal office in the City of New York.  The corporation was originally organized on January 15, 1920, with a capital stock of $500, divided into five shares of par value of $100 each.  Petitioner was formed to take over part of the business of the Bernstein-Lehmann Detective Service, Inc., of New York.  Petitioner's stock was owned by Joseph Bernstein, father, and his two sons, Mark Bernstein and William Bernstein - the father *66  owning one share and each of the sons, two shares.  In May, 1920, after organization, the capital stock of petitioner was increased to $1,000, the entire stock continuing to be owned by the father and sons in the same proportion as formerly, two shares by*2665  the father and four shares each by the sons.  In 1920 William Bernstein was president and Mark Bernstein was secretary and treasurer and general manager of petitioner.  Joseph Bernstein, the father, who was a lawyer by profession, attended to legal matters of petitioner and looked after the bookkeeping and routine office work of petitioner.  The petitioner was classified under the laws of New York as a detective agency and was so licensed and bonded by the State.  Its operations, however, consisted mainly of checking up sales persons in retail stores as to their honesty in handling the proceeds of sales and as to their conduct and behavior while waiting on customers.  The work was performed by a number of men and women employed by petitioner, said employees being divided into crews, consisting of one man known as a crew manager and two or more women known as shoppers.  Such employees of petitioner are instructed and trained by petitioner in the discharge of their duties and work directly under petitioner's supervision and control.  The result of the investigation by a crew manager is reported to the main office of petitioner from which a report goes out to the owner of the store*2666  reported upon.  If the wrongdoing of a sales clerk should be of a very serious nature, the crew manager upon receipt of such information from the shopper, would enter the store and immediately report to the manager or owner of the store in order that an immediate investigation as to the misconduct of the person involved might be made.  Petitioner furnished moneys with which shoppers might make purchases from the various stores, the merchandise so purchased being later returned and the money paid therefor being refunded to petitioner.  Subscribers to petitioner's system have bills for services rendered presented to them on the last day of each month.  A number of visits or checkings during each month or a longer period is made by petitioner of the stores subscribing to its system.  The employees of petitioner are on weekly salaries and are to perform work wherever they are directed to do so, their traveling expenses being paid by petitioner and a daily allowance being made for hotel and board.  William Bernstein was president of petitioner in 1920.  His duties as such were to employ shoppers and crew managers and assist in training them in their work of making investigations, etc. *2667  Prior to and during 1920, he was employed by the United Cigar Stores Co.  *67  and rendered services as head of the service department of the same in the City of New York.  He received compensation from petitioner for services rendered it during 1920 in the sum of $425.  The evidence does not disclose what he received for his services rendered the United Cigar Stores Co. during 1920.  He devoted a portion of each day to the discharge of his duties to each of the companies mentioned, the greater portion of his time being devoted to petitioner's business.  Mark Bernstein as manager and secretary and treasurer of petitioner devoted all his time to his duties as such, supervising all the work to be performed by the crew managers and shoppers, assigning to them the stores they were to visit, and checking up each day in the city and on the road.  For his services as such during the year 1920 he received as compensation from petitioner $6,435.  Prior to the organization of petitioner, Mark Bernstein was employed by Reichart, Hagerman, a chain of drug stores, later absorbed by Liggett's Drug Stores.  Joseph Bernstein devoted the usual business hours of the day attending to his*2668  duties in the office of petitioner and received for his services during the year 1920, $5,050 as compensation therefor.  Gross income of petitioner from all sources for 1920 amounted to $111,243.94.  The amount of $88,368.40 was paid out to employees and to meet necessary expenses.  Only $11,910, went to the stockholders of petitioner.  The subscribers to petitioner's system were located in different sections of the country and for petitioner to render proper service to its subscribers, it was absolutely necessary to have a number of employees as crew managers and shoppers.  OPINION.  LITTLETON: The petitioner contends that the Commissioner erred in not classifying it as a personal service corporation.  Under section 200 of the Revenue Act of 1918 the requirements of a personal service corporation are as follows, to wit: 1.  The income of the corporation must be ascribed primarily to the activities of the principal owners or stockholders.  2.  Such principal owners or stockholders must themselves be regularly engaged in the active conduct of the affairs of the corporation.  3.  Capital (whether invested or borrowed) must not be a material income-producing factor.  *2669  A father and two sons owned all the stock of petitioner.  The father owned 20 per cent of the stock and each of the sons 40 per cent.  The evidence indicates that all three rendered service to the petitioner; the father and one son being regularly engaged in the *68  active conduct of the corporate business.  The other son rendered service also, but was regularly employed as head of the service department of the United Cigar Stores Co. of New York City.  As compensation for services rendered petitioner for the year 1920, the son employed by the United Cigar Stores Co. received $425.  The other son received for his services to petitioner for the same period $6,435 and the father as compensation for his services, $5,050.  The subscribers to petitioner's system were the owners of stores in various cities throughout the country and it was absolutely necessary in the conduct of petitioner's business to employ a number of persons to assist in acquiring the necessary information to enable petitioner to render satisfactory service to its subscribers.  It is not made clear how many employees in various capacities petitioner engaged, nor just what was paid each, though the secretary*2670  of petitioner, in response to inquiries made by the Commissioner, relative to the year 1920, stated: No separate classes or accounts were then kept for the entire year, but all our books show is that we paid in salaries and commission to all of the employees, consisting of shoppers, crew managers, stenographers and other office help, including traveling expenses, hotel bills, rents and all other expenses, such as stationery, printing, postage, advertising, etc., $88,368.40, as shown on our income return for that year.  It further appears from the evidence that the entire amount of salaries or compensation received by the stockholders in 1920 was only $11,910.  It also appears that some money was borrowed to advance for buying merchandise in the stores while checking up the sales clerks and for other expenses, such as railroad fares, salaries to employees, daily allowances for hotels and bills and other expenses which could only be paid in cash.  It is true that the crew managers and the shoppers employed by petitioner were all under the instructions and subject to the control of and reported to the officers of petitioner, the result of their investigations, but the evidence*2671  is not sufficient to convince the Board that the Commissioner made any error in denying personal service classification to petitioner.  As we said in : 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 such investigators and reporters was primarily due to the activities of the stockholders.  Judgment will be entered for the respondent.Considered by SMITH, TRUSSELL, and LOVE.