Court Opinion

ID: 4598427
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:21:15.745213+00
Date Added: 2024-06-11T07:51:58.104875
License: Public Domain

CHAPLINE CONSTRUCTION CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Chapline Constr. Co. v. CommissionerDocket No. 4176.United States Board of Tax Appeals12 B.T.A. 1377; 1928 BTA LEXIS 3345; July 17, 1928, Promulgated *3345  Personal service classification denied petitioner for years 1919 and 1920, since it was not shown that during those years its income was to be ascribed primarily to the activities of the principal stockholders, or that capital was not a material income-producing factor.  Thomas H. Cobbs, Esq., for the petitioner.  J. E. Marshall, Esq., for the respondent.  SIEFKIN*1377  This is a proceeding for the redetermination of deficiencies in income and profits taxes in the amount of $980.15, for the year 1919, and $1,401.39 for the year 1920.  The error assigned is the failure of the respondent to allow the petitioner classification as a personal service corporation during the years in controversy.  FINDINGS OF FACT.  The petitioner is a Missouri corporation having its office at St. Louis, Mo.In 1919 and 1920 the stockholders of the petitioner were George G. Chapline, Byrdie J. Chapline and Louis R. Masek.  The stock of the petitioner had a par value of $100 per share and was owned as follows: George G. Chapline, 25 shares; Byrdie J. Chapline, wife of George G. Chapline, 4 1/2 shares; and Louis R. Masek, 20 1/2 shares.  During the years 1919*3346  and 1920, George G. Chapline was president of petitioner and Louis R. Masek was secretary.  Both devoted all their time to the business of petitioner during those years.  The business of the petitioner during 1919 and 1920, consisted of making alterations to untenantable buildings in order to make the building more profitable, in constructing new buildings and in advising landlords and property owners as to repairs and alterations.  In most cases the petitioner submitted an estimate of the cost of the particular job to the owner of the premises.  The petitioner usually received 10 per cent of the cost of labor and materials involved, but in some cases the petitioner was paid a stipulated amount.  In most cases the contracts were oral but in some cases they were written.  The contract entered into between the petitioner and Hammar Brothers White Lead Co., which was typical of the contracts executed by petitioner, provided in part: *1378  In consideration of the performance of the contract, the Owner agrees to pay the Contractor, in current funds, as compensation for his services hereunder, a profit of ten (10) per cent to the total expenditures, or final cost of all labor, *3347  materials, etc., which shall be paid as follows: Five (5) per cent monthly to be added to the total of each statement rendered, and the balance of five (5) per cent, Thirty (30) days after final statement is rendered.  The petitioner sometimes paid for labor and materials before it received payment from the owner of the premises under repair.  The labor bill had to be paid by petitioner each week but the material bills were usually paid monthly, after receiving payment from the owners of the premises.  The petitioner keeps no record of the number of men employed, but on a job like the Hammar Brothers White Lead Co. job, which was undertaken by the petitioner in 1920, between 40 and 50 men were used.  This job lasted about a year.  On some of the jobs the owner of the premises made contracts with subcontractors.  Payment was made each month by the owner to the petitioner and the petitioner in turn paid the subcontractor in the same proportion that the petitioner was paid.  The payments to the petitioner included payments for all of the materials received for the job during the month.  Sometimes the petitioner paid for both labor and materials before receiving payment from the*3348  owner, in order to retain the good will of the owner.  While it was not compulsory, the petitioner during 1919 and 1920, on small jobs, paid its workmen prior to receiving payment from the owner.  The petitioner paid its men in cash which was drawn from its bank account.  This was in order to simplify the bookkeeping.  No discounts were taken by the petitioner.  The owners received the benefit of any discounts.  In 1919, the petitioner had three or four foremen in charge of its different branches of work.  Louis R. Masek looked after the smaller jobs.  Skilled labor was employed on all jobs in 1919 and 1920.  Draftsmen were also often employed.  Men were hired as needed on the different jobs and their compensation was charged to the particular job.  The petitioner has been in existence since 1897, and during this time has acquired certain equipment and secondhand lumber and building material which it carries in its inventory from year to year.  Petitioner would purchase equipment for certain jobs and at the completion of a job, if the owner had no need for the same, it would be sold to petitioner.  If the equipment owned by petitioner were used on a job, the owner was charged for*3349  the use and repair of same.  *1379  The following is a list of jobs during 1919 and 1920: NameLaborMaterials,1919 commissionsAmount ofetc.receivedbillHouser Real Estate Co$5,758.51$67,549.13$10,788.57$84,096.21Laclede Iron Works29.8529.2559.10St. Louis Transfer Co67.75211.7562.11341.61Mercantile Library Ass'n24.659.2025.8559.70Roettger-Masek Realty Co180.52269.90230.77681.19Linde Air Products Co61.75100.3633.84195.95Louis R. Masek28.1238.6566.77Roettger-Masek Realty Co139.151,004.161,021.692,165.00Thos. G. Rutledge, et al47.25325.47252.28625.00Chapline & Masek657.985,188.835,846.81Chapline & Masek95.28368.84464.12Bradbury Marble Co3.003.00Continental Portland Cement Co1.101.10Geo. G. Chapline92.7492.74Hugh H. Stewart25.8017.6221.7465.16James Kearney & Co30.5411.4642.00Mr. F. X. Walsh675.012,971.131,067.284,713.42Louis R. Masek24.3563.4587.80Geo. B. Gilmore124.00123.7445.44202.30Jost Miller Real Estate Co30.5226.3329.6486.49Union Biscuit Co45.471.55202.98250.00Mr. F. X. Walsh1.856.158.00St. Louis Smelting & Refining Works1,762.126,288.061,458.369,508.54Missouri Portland Cement Co10.9510.95Hunkins-Willis L. & C. Co1.951.95Pulitzer Publishing Co16.0016.00Ganahl Lumber Co20.20104.02124.22John Prost50.002.2552.25P. Gruner & Bros. Lbr. Co42.0042.00Mrs. Emma Bauer37.609.4047.00Bradbury Marble Co29.7529.75Ganahl Lumber Co50.0050.009,780.6284,894.9215,360.59110,036.131920National Lead Co9,158.3716,048.174,882.7530,089.29Chapline & Masek709.734,467.295,177.02Hammar Bros. White Lead Co49,510.50130,604.7217,951.26198,066.48Geo. G. Chapline21.4944.6866.17Louis R. Masek9.69182.52192.21P. Gruner & Bros. Lbr. Co20.0020.00Linde Air Products Co39.5015.5055.00Mr. E. C. Lowe15.6215.621553 S. Grand Ave.63.63Roettger-Masek Realty Co25.6212.4541.1079.17Mrs. Emma Bauer113.4510.55124.0059,451.65151,532.7822,901.16233,885.59*3350  George G. Chapline is a practical carpenter, and Louis R. Masek was trained in the iron construction business.  Byrdie Chapline devoted practically no time to the business.  Balance sheets of the petitioner were as follows: Assets:January, 1919Cash on hand$7,419.43Equipment10,550.93Accounts receivable4,133.0822,103.44Liabilities:Capital5,000.00Surplus and undivided profits14,624.79Accounts payable190.10Uncompleted work2,288.5522,103.44Assets:January 1, 1920Cash on hand$11,799.02Equipment10,297.35Accounts receivable3,671.8325,768.20Liabilities:Capital5,000.00Surplus & undivided profits20,768.2025,768.20Assets:January 1, 1921Cash on hand$3,698.65Notes receivable22,081.11Equipment6,129.95Accounts receivable1,155.2733,064.98Liabilities:Capital$5,000.00Surplus & undivided profits28,064.9833,064.98*1380  In 1919 the amount of completed contracts was $110,036.13.  The cost of executing these was $94,675.54 and the profit from this source was $15,360.59.  Other income received during 1919 was as follows: Interest on bank deposits$132.55Interest on notes151.48248.03*3351  Overhead expenses during 1919 were as follows: Office rent$480.00Clerk salary782.75Telephones133.90Miscellaneous office expense331.81Auto and warehouse expense741.21Insurance and water license105.302,574.97The amount of $6,600 was paid as compensation to the members.  In 1920, the amount of completed contracts was $233,885.59, the cost of executing these was $210,984.43, and the profit from contracting was $22,901.16.  Other income received during 1920 was interest on bank deposits in the amount of $134.25.  Overhead expenses during 1920 was as follows: Office rent$480.00Clerk salaries1,301.50Telephones144.52Miscellaneous office expenses6,061.15Warehouse rent420.00Miscellaneous auto and warehouse expense458.12Insurance and water license116.27Officers' expense account2,400.005,926.56*1381  Interest and stamps on notes during 1920 cost the petitioner $112.33.  Compensation of members amounted to $7,200 during 1920.  OPINION.  SIEFKIN: The sole question to be decided in this proceeding is whether the petitioner, during the years 1919 and 1920, was a personal service corporation*3352  within the meaning of section 200 of the Revenue Act of 1918, which provides: The term "personal service corporation" means a corporation whose income is to be ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material income-producing factor; * * * In the instant proceeding, it was shown that the principal stockholders were regularly engaged in the active conduct of the business during the years 1919 and 1920, but it was not shown how many employees the petitioner had during those years.  The testimony was to the effect that on some jobs the number of men employed varied from 2 to 50, and that in some cases, subcontractors were employed to do the work.  From all of the evidence adduced we are of the opinion that the petitioner has failed to show that its income during the years in controversy was to be ascribed primarily to the activities of the principal stockholders.  Nor has the petitioner shown that capital was not a material income-producing factor.  The evidence discloses that in numerous instances*3353  payments of both material and labor bills were made by the petitioner before it received payment from the owner of the premises under alteration or construction.  The amounts involved in such payments are not shown.  We must hold that the petitioner, during the years 1919 and 1920, was not a personal service corporation within the meaning of section 200 of the Revenue Act of 1918.  Judgment will be entered for the respondent.