Court Opinion

ID: 4605548
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:36:37.054277+00
Date Added: 2024-06-11T07:53:13.458111
License: Public Domain

JAMES A. CLAYTON & COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.James A. Clayton & Co. v. CommissionerDocket Nos. 4320, 11088.United States Board of Tax Appeals4 B.T.A. 1017; 1926 BTA LEXIS 2092; September 25, 1926, Decided 1926 BTA LEXIS 2092">*2092  Under the conditions of fact existing in this proceeding the petitioner is not entitled to classification as a personal service corporation.  H. H. Tooley, C.P.A., for the petitioner.  George E. Adams, Esq., for the respondent.  ARUNDELL4 B.T.A. 1017">*1018  ARUNDELL: This is a proceeding for the redetermination of deficiencies in income and profits taxes for the years 1919 and 1920 in the amounts of $7,564.63 and $8,809.01, respectively.  The question involved is the right of the petitioner to report its income on a personal service basis.  By agreement of counsel the proceedings have been consolidated.  FINDINGS OF FACT.  Petitioner was organized under the laws of California during the year 1903, and since that date has been engaged in the general real estate business in San Jose.  During the taxable years there was outstanding capital stock of the par value of $51,000, which was owned as follows: SharesF. O. Reed150James A. Clayton180Ethel Clayton179W. S. Clayton1The employees of petitioner consisted of one bookkeeper, two stenographers, one rent clerk, one insurance clerk, one general clerk, and five salesmen.  The1926 BTA LEXIS 2092">*2093  salaries paid to employees during the year 1919, other than to the salesmen who were employed purely on a commission basis, amounted to $6,794.25; during the year 1920 the salaries to employees, other than salesmen, amounted to $8,431.80.  The returns disclose that the following salaries were paid to the officers of the corporation during the years 1919 and 1920: 19191920Frazier O. Reed, president$3,000$3,000Ethel Clayton, vice president600550W. S. Clayton, secretary900900J. B. Clayton, stockholder1,2001,200During the years 1919 and 1920, petitioner's income as shown by its returns was received almost entirely from the following sources: 19191920Commissions on sales of real estate for others, etc$72,719.04$63,189.24Interest on Liberty bonds876.751,295.60Interest received from loans, other than Liberty bond interest1,662.003,377.69Rentals977.861,196.24Dividends received from corporations1,029.301,654.50Profit on sale of real estate on own account and on collection of note25,764.2512,756.254 B.T.A. 1017">*1019  The commissions set forth in the tabulation were primarily earned in the1926 BTA LEXIS 2092">*2094  sale of real estate for others.  It also covered sums earned in writing insurance on the property sold and for making loans.  The petitioner owns stock in seven companies, including banks, abstract companies and the San Jose Water Works, and the dividends listed in the foregoing tabulation were received from these companies.  The major expense items as set forth in the returns for the years 1919 and 1920, together with other deductions, were as follows: 19191920Wages of employees$6,794.25$8,431.80Salaries of officers and members of corporation5,700.005,650.00Advertising$2,032.272,441.20Maintenance of automobiles3,879.223,840.08Interest511.55105.63Taxes on real estate1,067.571,287.39Bad debts820.451,131.00Depreciation on real estate and automobiles1,426.551,109.69Loss on sale of real estate on own account15,056.54Loss on sale of hay accepted in payment of commission5,423.39Loss on sale of shares of stock held for investment5,160.00Ordinary expenses4,749.407,041.32The balance sheets submitted with petitioner's returns disclose the following: Dec. 31, 1919Dec. 31, 1920ASSETSCash on hand and in bank$7,916.59$4,546.72Accounts receivable42,559.0767,535.96Investment shares26,063.1021,913.10Loans, bills receivable69,795.7055,766.70Real estate28,278.58Land15,354.19Improvements5,520.00Books out of balance1,043.111.15Auto purchase account792.201,061.77Furniture and fixtures955.06845.06Municipal bonds8,160.00Liberty bonds:Third6,000.006,000.00Fourth18,000.0019,500.00Fifth50.00550.00Second1,000.00War stamps838.00838.00Suspense account702.94202,291.41209,295.59LIABILITIESAccounts payable92,618.17113,013.41Overdrafts1,779.27Commissions from incompleted sales9,249.652,288.75Capital51,000.0051,000.00Undivided profits5,551.345,551.34Profit and loss41,793.5137,442.09Suspense account299.47202,291.41209,295.591926 BTA LEXIS 2092">*2095  The bills receivable represent, in part, commissions not collected in cash and loans to clients to complete purchases.  The accounts receivable represent, in part, money advanced by petitioner in floating loans to be thereafter sold.  It was the practice of petitioner at 4 B.T.A. 1017">*1020  times to use money left with it for investment with which to purchase loans in cases where it was assured that another customer would, within a few days, repurchase the loans from it.  The accounts payable reflected the money left on deposit with petitioner for investment and on this money no interest was ever paid.  Judgment for the Commissioner.