Court Opinion

ID: 4499414
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:16:26.723153+00
Date Added: 2024-06-11T08:00:25.998951
License: Public Domain

*462OPINION.
Murdock:
A personal service corporation is one “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,” and which meets certain other requirements of the statute. The obvious intent of Congress was to exempt those corporations from taxation as corporations whose profits were due primarily to personal service rendered by the principal owners or stockholders, provided they meet all of the other requirements of the definition in section 200 of the Revenue Acts. Do the facts in this case qualify the petitioner for personal service classification ?
This corporation had a very small amount of capital and, so far as the record discloses, it never borrowed any money on its paper. But it retained a considerable surplus in the business; materials and supplies were purchased on credit, and the steamship lines occasionally advanced money for payrolls. We must consider these things when we are called upon to decide whether capital, invested or borrowed, was a material income-producing factor.
R. A. Warriner, who owned one-sixth of the stock, gave none of his time to the conduct of the corporation’s affairs. The other stockholders were somewhat active in the business. They chose an able superintendent and they may have had a part in obtaining good workmen and favorable prices for supplies and in seeing that the books were properly kept, but aside from these things, which are not determinative, there was no satisfactory evidence to show, and we are unable to see, just what LeBlanc, Sanders, and Matthew Warriner did as stockholders, from which we might decide that they were regularly engaged in the active conduct of the affairs of the corporation.
LeBlanc testified that he directed the shipwright work on the Harrison Line steamers, that Sanders did the same for the Leyland *463Line vessels and that Matthew Warriner performed a like service for the Elder-Dempster Line boats. But he did not tell us in what way he directed this work and he failed to mention any new duties which he took on as a stockholder which he did not already have as agent. He said that the shipwright work which he did as stockholder he would have done in any event as agent — that he could not separate the one from the other. He also said that after the plan for loading a vessel had been adopted it was only necessary to tell the foreman to fit up the boat in conformity with the rules. We fail to see any personal element in this service.
Sanders’ testimony was to the same effect. It indicated that a large part of his work was done by assistants and that he personally might not go to the wharf once in a month. He said that his duties before and after the petitioner was incorporated differed very little.
A corporation, to qualify for personal service classification, must prove that its income is to be ascribed primarily to the activities of its principal stockholders. In the present case the ability and judgment of four of the stockholders undoubtedly played a part in the production of the petitioner’s income, but in respect to the activities of three of these men the evidence leaves us in doubt, as we have already indicated.
Demand for the petitioner’s services arose because the agents for three important steamship lines were numbered among its stockholders. The same situation was favorable to the success of the petitioner in other ways. For instance, because of it, bills were promptly paid and bad debts were avoided. As a result of the large volume of business which came to the petitioner from these three steamship lines, it could obtain favorable prices for lumber and supplies and could maintain a permanent force both for superintendence and for clerical work. See Appeal of Medbury-Wilson Co., 1 B. T. A. 963; and Appeal of Citizens Underwriters Agency, 2 B. T. A. 1116.
The petitioner received income because if was able to furnish completed shipwright work, satisfactory in workmanship and price. Before selling this finished product it took some of the risks of a manufacturer. Fire, accident, or negligence might have caused a loss to the petitioner. It was paid for taking this chance and some of the income must be ascribed to its acceptance of these risks.
We have carefully considered not only the facts above discussed, but also all other facts in this case; we have had in mind that failure to meet any one of the tests of the definition is fatal to the contention of the petitioner, and we are of the opinion that the *464petitioner, during tire years in question, was not a personal service corporation as defined by section 200 of the Revenue Acts of 1918 and 1921.

Judgment will be entered for the Commissioner.