Court Opinion

ID: 4500091
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:16:46.006279+00
Date Added: 2024-06-11T14:54:17.789093
License: Public Domain

*386OPINION.
LittletoN :
The petitioner contends that its income for the years 1920 and 1921 is ascribable primarily to the activities of its principal stockholders who were regularly engaged in the active conduct of its affairs; that the capital employed in its business is not a mate*387rial income-producing factor and that it is, therefore, entitled to classification as a personal service corporation and to exemption as such, certainly from and after September 23, 1920.
Respondent claims that this contention is not well founded for the reason that petitioner’s income can not be ascribed primarily to the activities of its principal stockholders and because capital was a material income-producing factor.
No error other than respondent’s refusal to allow such classification is alleged to have been committed in connection with his determination of the deficiencies involved in this proceeding.
Failure to comply with any one of the requirements of the statute, section 200, Acts of 1918 and 1921, is fatal to a claim that a corporation is a personal service corporation.
Since the petitioner is seeking to overturn the determination of respondent, the burden is upon it clearly to establish by competent and satisfactory evidence that it comes within the class of corporations referred to. As stated by the court in Matteson Co. v. Willcuts, 12 Fed. (2d) 447:
There is constant temptation to urge that particular corporations, with no right to such favor, be accorded classification as personal service corporations, and the requirements necessary thereto must be substantially observed.
* * * * * * a
Every corporation has full control of its own activities. * * * If it does not fairly observe and keep within the requirements of the law, it should not claim the benefits which the law confers. To nearly comply with the law, or to come within hailing distance thereof, is not enough.
In this case, the evidence indicates that during the taxable years in question only two stockholders were active in the business affairs of petitioner. During 1920, such stockholders owned less than 50 per cent of its outstanding stock and in 1921, 70 per cent thereof. From 16 to 25 employees, clerks and reporters, rendered very valuable services to petitioner in the carrying on of its business; they did so much of its work and work of such a character, that the income of petitioner was very materially increased thereby. The reporters employed by petitioner procured practically all the information embraced in the special reports and these reports furnished customers, produced in 1920 and in 1921, slightly more than one-half of the entire gross income of petitioner in each of those years.
The assets acquired from the two credit companies consolidated, and for which $27,000 par value of stock was issued by petitioner, were very valuable and were a substantial factor in producing the income of petitioner. The rating or “ Red Book ” and the right to continue publishing the same, acquired from the Consumers Mercantile Agency, Inc., and the names of the customers and the files of the *388Pennsylvania Credit Co., Ltd., secured by petitioner, were very valuable and undoubtedly, from the nature of petitioner’s business, continued to be valuable and material income-producing factors in petitioner’s business.
In the preface to the “ Ned Book ” leased to customers in 1920 and 1921, substantially the same as the “ Ned Book ” used in 1922, and in evidence, it is stated:
We herewith present the 1922 Edition of the Red Book of Individual Ratings, upon which we have spent considerable more time and money than any other publication we have ever issued.
Since the last issue a capable corps of compilers and reporters has been steadily engaged in gathering information on new risks, obtaining lists of credit customers and 'experience from many merchants and revising former ratings, enabling us to present the most complete book of Individual Ratings Eve» Published.
During each of the years 1920 and 1921, the petitioner served approximately 500 customers by leasing them the “ Ned Book ” or furnishing them credit information reports, and the large income derived therefrom indicates their income-producing character.
The president of petitioner had been connected with the Pennsylvania Credit Co., Ltd., and the evidence indicates no different method of conducting petitioner’s business from that of the Pennsylvania Credit Co., Ltd.; neither is there any evidence indicating that there was any change made in the forms used by petitioner from those prepared and used by the Pennsylvania Credit Co., Ltd. It is shown in the evidence that the files and “ Ned 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 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 can not be ascribed primarily to the activities of the principal stockholders who were regularly engaged in the active conduct of its business affairs. Matteson Co. v. Willcuts, 12 Fed. (2d) 447; Record Abstract Co., 2 B. T. A. 628; Home Insurance Agency, 5 B. T. A. 1020; Patterson-Andress Co., 6 B. T. A. 392; Cuyahoga Abstract Title & Trust Co., 7 B. T. A. 95.

Judgment will be entered for the respondent.