Court Opinion

ID: 4605080
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:35:34.606244+00
Date Added: 2024-06-11T07:59:29.270323
License: Public Domain

GENERAL MANAGEMENT CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.General Management Corp. v. CommissionerDocket No. 106487.United States Board of Tax Appeals46 B.T.A. 738; 1942 BTA LEXIS 825; March 24, 1942, Promulgated *825  1.  Income from contract between petitioner and another corporation, where the contract designates and officer of petitioner to perform services, held, to be personal holding company income under section 403(e) of the Revenue Act of 1938.  2.  Held, that a reimbursement for advances made by petitioner to a syndicate is not gross income to petitioner.  Kresge Department Stores, Inc.,44 B.T.A. 1210">44 B.T.A. 1210, and Andrew Jergens Co.,40 B.T.A. 868">40 B.T.A. 868, distinguished.  Harry Thom, Esq., and B. A. Ragir, Esq., for the petitioner.  G. W. Brooks, Esq., for the respondent.  ARUNDELL*738  The Commissioner determined deficiencies in petitioner's income tax and personal holding company surtax for the year 1938 in the amounts of $2.77 and $8,817.90, respectively, and a penalty in the amount of $2,204.48 for petitioner's failure to file a personal holding company return for the taxable year.  An overpayment in the sum of $100.01 is claimed by petitioner.  The sole issue before the Board is whether or not petitioner was liable to surtax as a personal holding company in the taxable year.  FINDINGS OF FACT.  Petitioner was*826  incorporated in 1929 under the laws of the State of Illinois, and has its principal office in Chicago, Illinois.  Petitioner's income and excess profits tax return for the taxable year was filed with the collector of internal revenue for the first district of Illinois.  Petitioner keeps its books and files its income tax returns on the accrual basis.  Petitioner was formed for the purpose of financially rehabilitating businesses the credit of which had become impaired, rendering budgetary and accounting services and general corporate financial planning.  During the years 1937 and 1938, there were 200 shares of $100 par value stock of petitioner outstanding, of which Grant Gillam, hereinafter referred to as Gillam, owned 100 shares; S. Margaret Gillam, Gillam's sister, owned 80 shares; and Marguerite Miller owned 20 shares.  Gillam, the owner of 50 percent of petitioner's stock, had a wide experience in corporate management and production.  Prior to the formation of petitioner, Gillam had acted as sales manager of a truck manufacturing company and later became president of the company.  Certain banks which were creditors of corporations unable to liquidate loans found that Gillam*827  was successful in arranging repayment *739  of such loans.  Gillam's services while he was still an employee of the truck company were loaned to other corporations which were indebted to the banks.  Gillam was equally successful in liquidating these debts.  After solving the financial and management problems of several corporations and in the belief that business could be obtained on the basis of his reputation and experience, Gillam caused petitioner to be formed.  Petitioner first became active in 1932, and, on February 1, 1932, acquired offices in Chicago, Illinois.  Gillam immediately made contact with the person with whom he had done business previously.  Gillam attempted to obtain for petitioner the type of business at which he and his associates had been successful, such as surveys of businesses, accounting reports, monthly analyses, and preparation of budgets.  At the time petitioner began active operation its staff consisted of Gillam, Miller, and A. K. Taber.  Miller is an experienced accountant skilled in the preparation of budget projects and had been in charge of the accounting department of the truck corporation of which Gillam had been president.  In 1926 the*828  truck corporation was purchased by another corporation and Miller became assistant treasurer of the corporation.  In 1927 Miller began to prepare accounting statements for the use of Gillam.  Taber was a qualified cost accountant.  During the year 1932 petitioner made surveys of businesses primarily for the Continental Illinois Bank & Trust Co.  In April or May 1932 petitioner, at the request of a bankers' committee representing seven banks, began a preliminary survey of the business and property of United Printers & Publishers, Inc., hereinafter referred to as United.  The bankers' committee instructed petitioner to inspect the operating divisions of United with the view of determining whether unsecured debts in the sum of $1,375,000 owed to the banks by United Might be reduced 25 percent.  Accordingly, petitioner prepared a survey for the banks.  The survey was made upon the verbal assurance of the bankers' committee that if the survey showed that the business of United might be continued the banks would recommend that petitioner be placed in charge of handling their interests in United.  In making the preliminary survey of United, Gillam visited all the operating divisions of*829  the company and gathered information concerning possible increase of efficiency in operation, the reduction of expenses, and the amount of capital necessary for the year's operation.  Gillam examined the plant and production system of United and made suggestions for more efficient operation.  The investigation also showed the necessity of revising United's cost system.  From this information Miller, with the assistance of an auditor, prepared petitioner's report to the banks.  Petitioner's survey of United included *740  the projection of the entire year's operations upon a monthly basis.  The banks agreed to follow the plans suggested in petitioner's survey and petitioner thereafter made monthly statements of United's business which were compared with the monthly budget submitted in the survey.  In addition to the survey of United, petitioner made several other surveys in 1932 and submitted accounting reports for other clients.  During 1932 petitioner had no contract with United.  In the year 1933 petitioner again made a projection of budget for United for the forthcoming fiscal year of that corporation.  This projection was in considerable detail and included all expense*830  items of each division of the corporation on a monthly basis.  Petitioner also rendered miscellaneous services to others in 1933.  In 1934 petitioner continued to supply the same service to United and the banks.  Throughout the years 1932, 1933, and 1934 Taber devoted most of his time to the business of United and spent about 50 percent of his time at the various plants of United.  Under date of June 25, 1934, petitioner entered into a contract with the Magill-Weinsheimer Co., hereinafter referred to as Magill, in which petitioner agreed to have its organization study the operating management and sales problems of Magill and to submit recommendations for reduction of operating costs, increasing profit, and improving its financial position.  Petitioner also agreed to render assistance in placing in effect the program which it would recommend and to supervise the program.  Magill agreed to cooperate fully with petitioner and to follow its recommendations.  Magill agreed to pay petitioner the sum of $500 per month during the effective period of the contract plus 10 percent of the net earnings of the company.  No individual who might perform the services described in the contract between*831  petitioner and Magill was designated by name or by description in the contract.  No person other than petitioner had the right to designate by name or description the individual who was to perform services described in the contract.  In 1932 Magill was a subsidiary of United.  In 1932 or 1933 Gillam was elected to the board of directors of Magill and became comptroller.  Throughout the following years, including 1938, Gillam was a director and comptroller of Magill.  Gillam and Taber made several surveys of the Magill plant to determine the reason for Magill's difficulties.  Thereafter, Gillam, Taber, and Miller had a discussion concerning the best method of carrying out the assignment.  It was determined that the chief problem involved the making of agreements with trade creditors and they decided to engage the services of another employee to assist them in this connection.  Petitioner obtained the services of Richard Rothwell for this work.  Rothwell was an employee of petitioner and not of Magill, received his salary from petitioner, and was under the control *741  of and responsible to petitioner rather than Magill.  Rothwell worked for petitioner on the Magill assignment*832  until May 1936, at which time petitioner removed Rothwell from the work and replaced him with W. H. Roberts.  Rothwell had been successful in negotiating a composition agreement between Magill and its trade creditors and the problems of Magill thereafter ceased to be of a financial nature.  Magill had the opportunity at this time of acquiring a printing plant and petitioner hired Roberts, who was experienced in the operation of such plants, to perform services for petitioner under the Magill contract.  Magill made no request for Roberts' services and did not know him at the time he was employed by petitioner.  Under date of June 14, 1935, United, the bank creditors of United, and petitioner entered into a contract in which United agreed to reduce its outstanding debentures and debts to the banks.  The contract also contained the following: The Company [United] agrees that it will, for the period intervening between the date hereof and that date when the claims of the Bank Creditors shall have been paid in full, retain General Management Corporation in the same capacity as General Management Corporation has been serving since June 15, 1932, it being further understood that General*833  Management Corporation will continue to supply to the Company the services of Grant Gillam as Comptroller and that the Comptroller shall have all of the powers conferred upon him under the terms of Section 2(a) of that certain agreement dated June 15, 1932, by and between the Company and J. F. Craddock and others therein referred to as the "Bank Creditors Advisory Committee" and certain Bank Creditors of the Company who were parties to said agreement.  It is further understood that the Company commencing with the date of this agreement shall pay General Management Corporation for services rendered by it (including the services of said Grant Gillam, as Comptroller) the sum of $2,500.00 per month.  In the event that the said Grant Gillam shall die or shall become incapacitated to such an extent as to make it impossible for him to continue as Comptroller of the Company and General Management Corporation is within three months thereafter unable to supply an individual for Comptroller who is acceptable to the bank Creditors and to the Company, the agreement with General Management Corporation may, at the option of the Company, be terminated when a new Comptroller acceptable to the Bank*834  Creditors has been elected.  In 1935 and 1936 petitioner's principal activities consisted of rendering services under the Magill contract and of continuing its services to United.  Petitioner also performed miscellaneous accounting services for United.  Prior to February 1937 the services furnished by petitioner to United had been at the instigation of the bankers' committee.  The bank loans were retired in February 1937, and petitioner made its own arrangement with United.  Petitioner and United entered into a contract dated February 11, 1937, which provided in part as follows: The Corporation [United] agrees that it will for the period intervening between the date that the agreement dated June 14, 1935, between the Corporation, *742  certain of the Corporation's Bank Creditors and the Company does by its terms terminate and the date of March 1, 1940, employ the Company for services to be rendered by it, as hereinafter more specifically defined (including the services of said Grant Gillam as Comptroller), at the sum of $2,000.00 per month, payable semi-monthly.  It is understood and agreed that the Company will continue to furnish from data supplied to it by the Corporation*835  or its various divisions, monthly and annual statements, make up yearly budgets projecting the Corporation's operations, use its best efforts to negotiate such loans as the Corporation may from time to time require in the regular conduct of its business, check all requisitions and study in detail the Corporation's various operating, management and sales problems, and submit such suggestions as it may have for reducing operating cost and improving the Corporation's profit and financial position.  The Company will have general supervision over the Corporation's operations to the extent that the Corporation agrees to give the Company full cooperation and to follow recommendations made by the Company promptly and to give them a fair trial.  Grant Gillam, as Comptroller, shall continue to supervise the fiscal operations of the Corporation, its divisions and its subsidiaries, and no monies shall be borrowed by the Corporation, its divisions and its subsidiaries, and no payments shall be made to any of the Creditors of the Corporation, its divisions and its subsidiaries without the approval of such Comptroller.  The countersignature of such Comptroller or some person or persons designated*836  by him, shall be required on all checks, notes or obligations for the payment of money made or issued by the Corporation, its divisions or any of its subsidiaries.  The Corporation, however, reserves the right to pay its entire bank indebtedness at any time.  In the event that the said Grant Gillam shall die or shall become incapacitated to such extent as to make it compossible for him to continue as Comptroller of the Corporation and the Company is within three months thereafter unable to supply an individual for Comptroller who is acceptable to the Corporation, this agreement may, at the option of the Corporation, be terminated.  This agreement was to continue in effect up to and including February 29, 1940.  It was in effect throughout the taxable year 1938.  Petitioner's gross income for the year 1937 consisted of the following: Amounts received or due under United contract dated February 11, 1937$24,928.56Amounts received or due from Chicago Armored Car Co. for accounting services400.00Amounts received or due from Educational Projects Institute for accounting services350.00Amounts received or due from Railway Car & Equipment Co., for accounting services600.00Amounts received or due under Magill contract of June 25, 193420,154.60Amounts received or due from Magill for services in collecting certain accounts receivable4,239.21Interest1,770.71Capital gains3,066.00Dividends8,044.75Total63,553.83*837 *743  On its 1937 Federal income and excess profits tax return petitioner reported gross income in the sum of $44,856.74.  During the year 1938 the services performed by petitioner for United under the contract of February 11, 1937, were of two types, accounting and financial.  The accounting services included a budget projection, analysis of monthly reports received from bookkeepers in the two operating divisions of United, and the consolidation of those figures into monthly reports submitted to United.  Petitioner's organization also prepared income tax and miscellaneous tax reports for United.  The financial services rendered by petitioner to United consisted of a budget of United's cash requirements for the forthcoming year and the arranging for working capital during the seasonal production period.  Petitioner arranged for all of United's loans and handled the cash receipts and disbursements of that corporation, including the payment of all the bank loans.  Copies of the budget prepared by petitioner's organization were given to department heads of United for purposes of guidance.  Petitioner controlled the cash of United.  All funds of United were kept in one account*838  from which nothing could be drawn except over the signature of Gillam, Taber, or Miller.  No audits of United were made except by petitioner.  Petitioner's audit reports were accepted by the banks which loaned United money.  In 1938 petitioner maintained a staff of eight individuals, including Gillam, Taber, and Miller.  During 1938 the employees of petitioner other than Gillam devoted approximately 75 percent of their time to the services performed for United.  Gillam devoted between 25 and 40 percent of his time to United in 1938.  About 75 percent of petitioner's overhead expenses, or $16,000, was allocated to the services rendered United in 1938.  In the year 1938 petitioner paid salaries other than to officers in the sum of $6,562.  In 1938 Gillam was president of petitioner and received a salary of $25,000, Miller was secretary-treasurer of petitioner and received a salary of $3,600, and Earl Lowe, vice president of petitioner, received a salary of $2,358.94.  On January 1, 1934, Gillam, his sister, and Miller organized a partnership or joint venture known as "Grant Gillam, et al. Syndicate", hereinafter referred to as the syndicate, for the purpose of handling the investment*839  of funds of those three individuals.  There was no written partnership agreement and the interests of the individual members varied with the amount of capital each contributed.  The syndicate had no full-time employees.  Miller kept the books and records of the syndicate and prepared its Federal tax returns.  During 1937 the syndicate expended considerable amounts of money in an attempt to finance a corporation, the Northern Capital Corporation, *744  to handle consolidations of other corporations.  The Northern Capital Corporation was dissolved in December 1937.  In December 1937 petitioner, the syndicate, and Earl Lowe, who had been handling consolidations for the Northern Capital Corporation, entered into a verbal agreement.  The understanding of the parties was that the syndicate should have first call on Lowe's time for the consolidation work and when he was not so engaged he would work for petitioner.  The profits from consolidation work were to be credited to a special account against which were to be charged all expenses relating thereto.  The profits, if any, from the consolidation work were to be divided, 76 percent to the syndicate and 24 percent to Lowe.  It was*840  agreed that the proportional working time of Lowe and his expenditures in connection with consolidation work should be charged to the special account.  The allocation of expenses to the special account was computed on the basis of time devoted by Lowe to consolidation activities.  Accurate timesheets for this purpose were kept by Lowe.  By the end of 1938, there had been no profits from consolidation work and only expenses had been entered in the special account.  These expenses had been advanced by petitioner.  The 76 percent of the expenses to be borne by the syndicate was reflected on petitioner's books by the following entry in its journal as of December 31, 1938: J. 1127 G.G. Syndicate$3,417.59Salaries$1,641.06Travelling745.97Rent912.00Financial118.56(To charge Syndicate with difference to make up 76% of the cost of E. Lowe's time spent on consolidations.  The memorandum of 12/20/37 outlining the procedure for handling of these expenditures and the sheet distributing the expenses is filed in N.C.C. file in blue folder "Conference Notes - Northern Capital Corporation.") Petitioner's administrative expense account was credited as*841  of December 31, 1938, as follows: ItemsFolioCreditsSalaries (adjst. on cons. expense)J. 1127$1,641.06Traveling (adjst. on cons. expense)J. 1127745.97Rent (adjst. on cons. expense)J. 1127912.00Financial (adjst. on cons. expense)J. 1127118.56Total3,417.59The sum of these expenses, $3,417.59, was entered in an account receivable owed by the syndicate to petitioner, which was a running account.  The balance of this account receivable was not paid in the taxable year but was liquidated prior to the date of hearing of this proceeding.  The syndicate, in its partnership return filed for the year 1938, *745  deducted from gross income the several items totaling $3,417.59 which represented its 76 percent share of the consolidation expenses as enumerated above.  The syndicate deducted the sum of $1,641.06 as a part of its deduction for salaries and wages; it deducted the sum of $745.97 as traveling expense and the sum of $118.56 as financial expense under the heading "Other deductions authorized by law"; and it deducted rent in the sum of $912 as a part of its deduction for rent.  These items were allowed as deductions to the syndicate*842  upon audit of the syndicate's partnership return by a revenue agent.  On its books and on its income and excess profits tax return for 1938, petitioner did not deduct the above items aggregating $3,417.59 from gross income, nor did it include a like sum as income due it from the syndicate.  The deduction of those items by the syndicate and their treatment on the books of petitioner were in accordance with the understanding between petitioner and the syndicate that 76 percent of the consolidation expenses was that of the syndicate and should be borne by it.  Petitioner's gross income for the year 1938 consisted of the following: Amounts received or due under United contract dated February 11, 1937$24,000.00Amounts received under Magill contract dated June 25, 193410,398.42Amounts received from Consolidated Biscuit Co. as directors' fees450.00Interest received1,091.57Capital gains on shares of stock14,931.00Dividends6,223.00Amounts received on final liquidation of Chicago Armored Car Co3,745.44Total60,839.43On its income and excess profits tax return for the year 1938, petitioner reported gross income in the amount of $48,162.31.  *843  OPINION.  ARUNDELL: The only issue before us is whether or not petitioner was a personal holding company in the taxable year within the purview of section 402 of the Revenue Act of 1938. 1 Another issue *746  relating to the deduction of personal property taxes, which was raised by the pleadings, was abandoned by petitioner at the hearing.  *844  There is no dispute concerning the ownership of stock of petitioner.  During the taxable year petitioner's entire outstanding stock was owned by three individuals.  The stock ownership requirement of section 402(a) is therefore met and petitioner must be deemed to be a personal holding company unless it has proved that less than the statutory percentage of its gross income in the taxable year was personal holding company income.  It is clear that if 80 percent of petitioner's gross income consists of personal holding company income, petitioner is a personal holding company.  The amount of petitioner's gross income for the taxable year has been vigorously disputed by petitioner and respondent.  Respondent contends that the sum of $48,162.31, the amount shown as gross income on petitioner's income and excess profits tax return for the taxable year, is the gross income of petitioner for the taxable year.  Petitioner argues that the amount reported on the return must be increased by certain amounts which petitioner erroneously excluded from gross income.  We have found as a fact that petitioner's gross income for the taxable year aggregated $60,839.43.  Petitioner claims that two of*845  the items comprising the gross income of petitioner, namely, the sum of $24,000 accrued under the United contract and the sum of $10,398.42 accrued under the Magill contract, were not personal holding company income as defined by section 403 of the Revenue Act of 1938.  Respondent argues that these amounts were received from personal service contracts as defined by section 403(e) of the Revenue Act of 1938. 2 Since the sum of these two amounts exceeds 50 percent of petitioner's gross income for the taxable year, we shall examine each of these items to determine whether either comes within the statutory definition of personal holding company income.  *846  We are of the opinion that the amounts accrued by petitioner for services rendered under the United contract constitute personal holding company income.  Section 403(e) provides that amounts received under contracts to furnish personal service are personal holding company income where some person other than the taxpayer corporation has the right to designate, by name or description, the individual *747  who is to perform the services or where the individual who is to perform the services is designated by name or description in the contract.  This provision applies only where the individual who may be or is so designated owns 25 percent or more of the outstanding stock of the taxpayer corporation.  Gillam owned more than 25 percent of the stock of petitioner and was specifically designated in the contract between petitioner and United, dated February 11, 1937, as a person to perform personal services.  That contract provided that the compensation of $2,000 per month should include the services of Gillam as comptroller, that Gillam as comptroller should continue to supervise the fiscal operations of United, and that "In the event that the said Grant Gillam shall die or shall*847  become incapacitated to such extent as to make it impossible for him to continue as Comptroller of the Corporation and the Company is within three months thereafter unable to supply an individual for Comptroller who is acceptable to the Corporation, this agreement may, at the option of the Corporation, be terminated." While the contract provides that petitioner furnish monthly statements to United, prepare budgets, and submit suggestions for improvement of United's profit and financial position, the record leaves us in no doubt that the person for whose services United was paying so large a sum was Gillam.  In spite of the testimony of the secretary-treasurer of petitioner to the effect that a large portion of the services furnished by petitioner was not performed by Gillam, we believe that his services were the important ones so far as United was concerned.  Gillam, together with his sister, who was not active in petitioner's operation, owned 90 percent of petitioner's stock during the taxable year.  He received a salary of $25,000 a year from petitioner, whereas the total of all other salaries paid by petitioner in the taxable year, including those paid to petitioner's other officers, *848  was $12,520.94.  The wide disparity between Gillam's and the others' salaries, the fact that Gillam's services as comptroller are specifically designated in the United contract, and the provision of the United contract allowing termination of the contract by United in the event of Gillam's death and the failure of petitioner to find another individual satisfactory to United, are clearly indicative that United entered into the contract so that it might receive Gillam's services.  We hold that the United contract was a personal service contract within the meaning of section 403(e) and that amounts accrued thereunder in the taxable year constitute personal holding company income.  The evidence as to the nature of the Magill contract leads us to the conclusion that the income received thereunder is not personal holding company income within the meaning of the statute.  But the *748  determination of this point in petitioner's favor still leaves more than 80 percent in what the statute defines as personal holding company income.  The items of interest in the sum of $1,091.57, capital gains in the sum of $14,931, dividends in the sum of $6,223, directors' fees in the sum of $450, *849  and amounts received on final liquidation of the Chicago Armored Car Co. in the sum of $3,745.44 are of the types of personal holding company income enumerated in section 403 of the Revenue Act of 1938, and petitioner made no claim in its briefs to the contrary.  The sum of these amounts and that received by petitioner under the United contract aggregates $50,441.01, or 82.85+percent of the total gross income of petitioner.  Petitioner, therefore, was a personal holding company in the taxable year.  Petitioner contends, however, that its gross income for the taxable year includes the sum of $3,417.59 which, it claims, constitutes reimbursement for services and facilities furnished by petitioner to the syndicate in accordance with an agreement between petitioner, the syndicate, and Earl Lowe.  Petitioner argues that a reimbursement for the use of facilities has been held to be gross income by us in the cases of , and . The record discloses that petitioner did not stand to gain, directly or indirectly, from the arrangement for Lowe's services.  The agreement, the entries*850  in petitioner's books, and the deduction of the syndicate's 76 percent of the consolidation expenses on the syndicate's 1938 return indicate that the traveling expenses, rent, salary, and financial expenses, aggregating $3,417.59, were the expenses of the syndicate.  As the presiding Member indicated at the hearing, petitioner has attempted to rewrite its books in the light of the later knowledge that a deficiency has been determined.  We are of the opinion that there is no justification for such rewriting.  The manner in which the petitioner and the syndicate handled these entries would seem to be entirely consonant with the understanding of the parties.  Mere advances partake of the nature of loans and the amounts received in reimbursement therefor are not includible in gross income.  . Indeed, if we had here the question of a tax on gross income, we doubt if anyone would seriously contend that the reimbursement of these items would fall within that category.  Nor do we think Andrew Jergens Co. and *851 , compel a contrary treatment.  In the former case, Jergens' wholly owned subsidiary employed the parent company to manufacture various products in the plant of the parent company and with the latter's personnel.  For this work it paid the amount agreed upon.  It is true that the amount to be paid was based on an allocation *749  of cost, but it nevertheless appeared that the payment was for the performance of work done by the Jergens Co.  In the Kresge case the taxpayer corporation acted as a purchasing agent for various companies and in the performance thereof used its own staff and did the job in its own way.  In each of the cited cases the fact that the taxpayer rendering the services was not directly to profit was not thought determinative.  What the taxpayer received, however, was for services rendered by it.  Moreover, in both the Jergens and Kresge cases it was found that the taxpayer received certain indirect benefits by their undertakings.  This does not appear to be true here.  The profit was to go to the Gillam Syndicate and to Lowe and none was to go to petitioner.  No doubt the reason that petitioner*852  does not share in the profits is the fact that it performs none of the work on the so-called "consolidation deals." As substantially the same interests appear in the syndicate and in petitioner, if it had been desirable for petitioner to become a party to this particular work it would no doubt have been so arranged.  But the parties have always been careful to keep the activities of the syndicate and those of petitioner separate.  Thus it must remain.  Even should we accept petitioner's general theory that what we have here is a reimbursement of expenses that should be treated as gross income, it does not follow that such income is of a nonpersonal holding company type.  Nine hundred and twelve dollars was for rent.  Section 403(g) of the Revenue Act of 1938 contains a new subsection which provides that rents, unless they constitute 50 percent or more of gross income, are personal holding company income.  "Rents" for the purpose of section 403(g) means "compensation, however designated, for the use of, or right to use, property * * *." Thus this part of the reimbursement only serves to increase petitioner's personal holding company income.  A small item of $118.56 is listed without*853  explanation other than the designation on the books "financial." We can not, in the circumstances here, on a rewriting of the books treat this small amount as not being personal holding company income.  The sum of the amounts received under the Magill contract, $10,398.42 and $2,387.03 (the amount of $3,417.59 reduced by the amount of rent, $912, and the amount referred to as financial expense, $118.56) constitutes less than 20 percent of petitioner's gross income for the taxable year.  Thus even should we treat the so-called reimbursement for salaries and expenses as income of a nonpersonal holding company character, it would be found by mathematical calculation that over 80 percent of petitioner's income falls within the statutory definition of personal holding company income.  Petitioner has not shown that its failure to file a personal holding company return was due to reasonable cause and not due to willful *750  neglect.  Respondent's determination of a 25 percent penalty for petitioner's failure to file a personal holding company return is accordingly sustained.  It is never quite satisfactory to decide a case of this character without the testimony of the most important*854  witness, namely, Gillam, or the testimony of officers of the companies with whom the petitioner made its contracts.  In this case it was petitioner's burden.  The testimony offered fails to satisfy us that less than 80 percent of petitioner's income was of a personal holding company nature as defined in the statute.  It follows that respondent must be sustained.  Decision will be entered under Rule 50.Footnotes1. SEC. 402.  DEFINITION OF PERSONAL HOLDING COMPANY.  (a) GENERAL RULE. - For the purposes of this title, and Title I, the term "personal holding company" means any corporation if - (1) GROSS INCOME REQUIREMENT. - At least 80 per centum of its gross income for the taxable year is personal holding company income as defined in section 403; but if the corporation is a personal holding company with respect to any taxable year beginning after December 31, 1936, then, for each subsequent taxable year, the minimum percentage shall be 70 per centum in lieu of 80 per centum, until a taxable year during the whole of the last half of which the stock ownership required by paragraph (2) does not exist, or until the expiration of three consecutive taxable years in each of which less than 70 per centum of the gross income is personal holding company income; and (2) STOCK OWNERSHIP REQUIREMENT. - At any time during the last half of the taxable year more than 50 per centum in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals.  * * * ↩2. (e) PERSONAL SERVICE CONTRACTS. - (1) Amounts received under a contract under which the corporation is to furnish personal services; if some person other than the corporation has the right to designate (by name or by description) the individual who is to perform the services, or if the individual who is to perform the services is designated (by name or by description) in the contract; and (2) amounts received from the sale or other disposition of such a contract.  This subsection shall apply with respect to amounts received for services under a particular contract only if at some time during the taxable year 25 per centum or more in value of the outstanding stock of the corporation is owned, directly or indirectly, by or for the individual who has performed, is to perform, or may be designated (by name or by description) as the one to perform, such services. ↩