Court Opinion

ID: 4628826
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:04:07.947742+00
Date Added: 2024-06-11T08:00:00.979287
License: Public Domain

SNITZLER-WARNER CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Snitzler-Warner Co. v. CommissionerDocket Nos. 12964, 19220.United States Board of Tax Appeals16 B.T.A. 342; 1929 BTA LEXIS 2600; May 2, 1929, Promulgated *2600  Petitioner, an advertising agency, held to have been a personal service corporation during the years 1920 and 1921.  Harold Dudley Greeley, Esq., for the petitioner.  J. L. Backstrom, Esq., for the respondent.  SIEFKIN*342  These are proceedings, duly consolidated for hearing and decision, for the redetermination of deficiencies in income and profits taxes for the calendar years 1920 and 1921 in the respective amounts of $9,897.54 and $17,167.16.  The petition under Docket No. 12964 alleges that the respondent erred in denying petitioner personal service classification for the year 1920 under the Revenue Act of 1918.  It also alleges error of the respondent in failing to compute petitioner's tax liability under sections 327 and 328 of the Revenue Act of 1918.  The petition under Docket No. 19220 alleges identical errors as to the year 1921 under the Revenue Act of 1921.  The hearing of the special assessment feature of the case was directed to a trial under subdivisions (a) and (b) of Rule 62.  FINDINGS OF FACT.  Petitioner is and always has been an Illinois corporation, although its name has been changed three times.  It was incorporated*2601  October 26, 1903, under the name of Snitzler & Bolte Advertising Co.  On March 1, 1905, petitioner's name was changed to Snitzler Advertising Co., which name it continued to use until January 1, 1920.  At that time petitioner's name was changed to Snitzler-Warner Co. which name it continued to use during the taxable years in question.  In 1925 petitioner's name was changed to the Mason Warner Co., which is its name today.  It is today and always has been engaged in business as a general advertising agency.  During the spring months of 1920 its principal and only office was at No. 58 East Washington Street, Chicago, Ill., and during the remainder of 1920 and all of 1921 its office was at No. 225 North Michigan Avenue, Chicago, Ill.  In 1925 petitioner moved its office to No. 360 North Michigan Avenue.  The stockholders of petitioner and the number of shares held by each were as follows: From Oct, 28,From Aug. 1From Oct. 1,1903, to Aug to Oct. 1, 1904, to Mar.1, 190419041, 1905Snitzler & Bolte Advertising Co.:SharesSharesSharesJohn H. Snitzler411241Anson L. Bolte83John T. Snitzler126126126James M. Snitzler123Total250250250*2602 From Mar. 1,From Jan. 2,From May 13,1905, to Jan.1906, to May1908, to Jan.2, 190613, 19081, 1920Snitzler Advertising Co.:SharesSharesSharesJohn H. Snitzler1John T. Snitzler126126James M. Snitzler123124186Ursula M. Snitzler1Sarah M. Snitzler1William C. Hanks37C. A. Transon25Total250250250From Jan. 1 toFrom Sept. 15,From Apr. 23 toSept. 15, 19201920, to Apr.Dec. 31, 192123, 1921Snitzler-Warner Co.:SharesSharesSharesMason Warner225500501James M. Snitzler255050Ursula M. Snitzler5050Mary C. Warner398398Mrs J. L. Boone1William C. Hanks1J. L. Boone1Total2501,0001,000*343  After Mason Warner had been with petitioner about 13 years, James M. Snitzler, who was then, in 1919, the principal stockholder, offered to sell Mason Warner and Mary C. Warner, his wife, 90 per cent of the outstanding stock of petitioner and Mason Warner and Mary C. Warner accepted the offer.  James M. Snitzler desired to confine his work to service for a few of petitioner's*2603  clients and he wished Mason Warner to assume general management of petitioner's affairs.  Mason Warner and Mary C. Warner gave five notes to James M. Snitzler covering the purchase price of $45,000, and James M. Snitzler was given the capital stock thus purchased to hold as collateral security for these notes.  The stock purchased was taken in the name of Mason Warner but it was intended at first that half of it was to be held for the benefit of Mary C. Warner.  Later, it was decided that Mason Warner should retain five-ninths of the total stock of the petitioner and hold four-ninths for Mary C. Warner.  The four-ninths held for the benefit of Mary C. Warner was an advance payment to her in lieu of salary.  The notes were paid off in 1922.  *344  On August 18, 1920, petitioner's stockholders in a special meeting voted to increase petitioner's capital stock from 250 shares of a total par value of $25,000 to 1,000 shares of a total par value of $100,000 The consideration for this increase of $75,000 was the creation of a good will account of $14,597.52 and the distribution of a reserve account of $5,000, a reserve account of $25,000, and a surplus account of $30,402.48.  No cash*2604  or property or consideration of any kind other than as stated in the preceding sentence was received by petitioner for this increase of $75,000 in its capital stock.  The service which petitioner rendered to a client-advertiser began with a consultation between the client and one of petitioner's stockholders to decide what produce was to be advertised, where and how the advertising was to be done, and the amount of money the advertiser should appropriate and spend.  The next step was the preparation of an estimate showing the publications or other media recommended and the cost of each.  Advertising copy or text was then written and submitted to the client-advertiser for his approval.  At the same time a rough lay-out was prepared to enable the client-advertiser to see how the finished advertisement, including pictures or other art work, would look.  After the rough lay-out, including preliminary sketches, had been approved by the client-advertiser, an artist not in petitioner's employ would be engaged to make the finished drawings or paintings to be used in the advertisement.  After the client-advertiser had approved the advertising copy or text and the art work, petitioner had*2605  the text set in type, had plates made of the advertisement as a whole, and sent them to the publishers in accordance with orders given to petitioner by the client-advertiser.  The finished drawings or paintings were given to the client-advertiser as his property.  Advertising space having already been reserved for the client-advertiser by petitioner, petitioner then sent insertion orders to the publishers.  The insertion of the advertisements was checked by petitioner, the petitioner billed the client-advertiser for the cost of the advertisement as charged by the publisher, the client-advertiser paid the petitioner, and petitioner paid the publisher.  Petitioner thereafter cooperated with the client-advertiser in ascer taining the results of the advertising.  Expert judgment was required in the selection of media.  While anyone could ascertain from rate cards which publication had the lowest rate, that information would have been of slight value in selecting effective advertising media.  Rates had to be compared with circulation and the circulation studied to determine the class of readers to whom the publication appealed.  It was important also to ascertain whether the circulation*2606  was secured by premium offers or whether the readers bought the publication because of its own merit *345  Whether the publication circulated chiefly in cities or in rural communities was a vital factor.  These were some of the points which were considered by petitioner's stockholders in making recommendations to client-advertisers as to the selection of media.  Petitioner frequently recommended the use of media of a lower cost than others which could have been recommended and frequently petitioner recommended reduced advertising expenditures, although both of these recommendations meant a reduction of commission income for petitioner.  An estimate was a written recommendation of advertising media which, in the opinion of petitioner, would best serve the client's interests.  The estimate would list newspapers, magazines, or other publications showing the territory covered by their circulation and their cost.  A stockholder would take the estimate to the client, discuss it with him, and then the client would decide upon the publications which he wanted to use.  After the client had decided upon the publications which he wanted to use he would give petitioner a written order*2607  specifying them and petitioner would give the client a written acknowledgment of the order.  The form for the client's order would usually be taken by a stockholder to the client for his final approval and signature but sometimes the form would be mailed.  Except in emergencies, petitioner never placed an order for a client until the client had given petitioner the client's own written authority evidenced by an order form.  In emergencies, as where an order to a publisher had to be placed by telegraph, it was the duty of one of the petitioner's stockholders to get a signed order from the client immediately thereafter.  Petitioner's uniform practice in procuring space for a client was first to give a publisher a contract reserving space in the name of the client-advertiser.  Without exception, the name of the advertiser was given in the contract and no contract ever was made until the petitioner had authorization from the client for it.  The contract reserved a quantity of space to be used at a specified rate within a specified time.  From time to time after the contract was given petitioner issued to the publishers insertion orders which were specific instructions to insert certain*2608  advertisements on specified dates.  All insertion orders specified the name of the client and, except in emergencies, no such order ever was given without the client's definite instruction and authorization.  If the client failed to use all of the space reserved under the contract, he would be obliged by most publishers to pay a rate per line higher than the rate specified in the contract.  That higher rate was known as a short rate, because the space used was short of the amount reserved.  When it became apparent that a client was not *346  ordering sufficient space to utilize all of the space reserved, one of petitioner's stockholders would go to the client and endeavor to secure orders for enough space to entitle the client to the rate specified in the contract.  On the other hand, if a client used sufficiently more space than the amount contracted for, he would become entitled to a rate per line lower than the rate specified in the contract.  Petitioner's income, except for service fees, consisted in commissions on the amount spent by the client for advertising, and thus it depended solely upon the amount of space used by the client and the rate charged by the publisher. *2609  Petitioner's income was not affected by short-rate charges by publishers except as those rates increased the client's advertising expenditures.  One of the petitioner's stockholders would keep in close contact with each client-advertiser to ascertain the results of advertising.  The client would disclose its confidential records of sales only to one of petitioner's stockholders and never to any of petitioner's employees.  Client-advertisers would instruct petitioner's stockholders not to disclose those confidential sales figures to petitioner's employees, and frequently petitioner's stockholders would not be permitted to take any record of sales figures away from the office of the client-advertiser.  Mason Warner personally attended weekly meetings of the managers of one of petitioner's principal clients and participated in the discussions on production, advertising, and sales problems as part of the service rendered by petitioner.  Mason Warner was continuously available for conference with clients at any time the clients wanted him.  The advertising manager of one of petitioner's principal clients consulted with Mason Warner at least seven times each month in connection with*2610  the advertising service rendered by petitioner.  It was only with Mason Warner personally that one of petitioner's principal clients consulted.  No copywriter or other employee of petitioner was consulted at any time.  All clients were procured by petitioner's stockholders except, possibly, clients whose expenditures were 1 per cent of the total advertising expenditures through petitioner during 1920 and one-half of 1 per cent during 1921.  There was no proof as to the persons producing the few clients whose expenditures were these small percentages of the totals during the two years.  The following list shows advertising expenditures representing 99 per cent of petitioner's total billings for 1920 and 99 1/2 per cent of said billings for 1921, made by clients whose accounts had been procured by and serviced by the stockholders designated in the list: Advertising expenditures through petitioners19201921Boston Jewelry Co$5,988.69$8,809.50Dearborn Supply Co28,695.48Elgin Motor Car Co137,527.4643,075.29Elgin Motor Car Sales Co3,000.001,775.00Foulds Milling Co11,143.793,617.83Illinois College of Photography5,211.155,261.87Markus Campbell Co40,047.1050,417.15Orars Apron Mfg. Co1,379.9723,268.61Olson Rug Co76,573.6984,903.23George H. Rundle Co2,087.252,281.68Geo. H. Rundle Sons Co1,291.401,935.98A. Stein & Co150.291.49232,091.35Bickford Laboratories Co817.34R. L. Watkins Co732,321.56776,121.66Sheffield Pharmacal Co76,214.6495,129.06Bauder Identification Co646.34Chicago Magic Co467.80442.35Premier Engraving Co475.00Southern Sweet Potato Exchange12,034.90Mother's Remedies Co8,855.198,141.35Davis Products Co1,444.20Johann Hoffmeister530.80Lexoid Co4,343.50O-Hon-O Co1,051.91Parker Belmont Co28,554.92Stafford Caloric Co519.25Tacoma Laboratories4,695.34American Laboratories520.71Armstrong Bur. of Related Ind3,218.80Total1 1,324.531.893 1,352.689.69Other clients2 14,155.854 6,820.64Total advertising expenditures1,338,687.741,359,510.33*2611 Secured by - Account serviced by - Boston Jewelry CoM. WarnerM. Warner.Dearborn Supply CoJ. M. SnitzlerDo.Elgin Motor Car CodoJ. M. Snitzler.Elgin Motor Car Sales CodoDo.Foulds Milling CoM. WarnerM. Warner.Illinois College of PhotographydoDo.Markus Campbell CodoDo.Orars Apron Mfg. CodoDo.Olson Rug CodoDo.George H. Rundle CodoDo.Geo. H. Rundle Sons CodoDo.A. Stein & CodoDo.Bickford Laboratories CoMary WarnerDo.R. L. Watkins CoJ. M. SnitzlerJ. M. Snitzler.Sheffield Pharmacal CodoDo.Bauder Identification CodoDo.Chicago Magic CoM. WarnerM. Warner.Premier Engraving CodoDo.Southern Sweet Potato ExchangedoDo.Mother's Remedies CoJ. M. SnitzlerDo.Davis Products CoMary WarnerDo.Johann HoffmeisterJ. M. SnitzlerDo.Lexoid CodoDo.O-Hon-O CoM. WarnerDo.Parker Belmont CoJ. M. SnitzlerDo.Stafford Caloric CodoDo.Tacoma LaboratoriesdoDo.American LaboratoriesdoDo.Armstrong Bur. of Related IndM. WarnerDo.TotalOther clientsTotal advertising expenditures*2612 *347  Petitioner did not pay any nonstockholder any commissions for getting any business for petitioner during either of the two years involved.  Prior to January 1, 1920, petitioner had employed solicitors but in December, 1919, when Mason Warner purchased control he discharged all of the solicitors, most of whom took with them many of the small clients whom they had procured.  After the discharge of the business-getting solicitors on December 31, 1919, no new business was placed for any clients whom they had procured, except in one or two instances where clients insisted upon retaining the petitioner as their advertising agent, notwithstanding the dismissal of the solicitor.  In other cases advertising previously contracted for was placed during 1920 and the former solicitor was given his commission on expenditures thereby incurred in accordance with the contract with the former solicitor.  No stockholder of petitioner during the years in question held his stock for the benefit of any person other than himself, except that Mason Warner held half of his stock from January 1, 1920, to September 15, 1920, for the benefit of his wife, Mary C. Warner.  The dividends declared*2613  during 1921, there having been no dividends in 1920, were paid to the stockholders of record.  *348  During the years in question petitioner had no officer who was not a stockholder.  During 1920 and 1921, James M. Snitzler was president and treasurer, Mason Warner was vice president, and W. C. Hanks was secretary until April, 1921, when he resigned and was succeeded by James L. Boone.  All of the stockholders of record during the two years in question devoted their entire time to the active conduct of petitioner's affairs, except Ursula M. Snitzler, who devoted the first two or three days of each month and about half a day a week to petitioner's affairs.  All of the stockholders were in constant consultation with the other stockholders of petitioner concerning features of service rendered to clients.  The work of each of petitioner's stockholders during the years in question was as follows: to confer with the clients, to decide upon where and how the advertising should be done, to prepare the copy, to supervise the mechanical preparation of the finished advertisement, routing it through the publications or on billboards, to examine the advertisements as they appeared*2614  to see that the client's orders had been carried out, to see to it that the client was billed in accordance with his order, and to keep a continuous contact with the client in checking the results of the advertising and recommending any changed which appeared to be advisable in order to secure better advertising results.  Clients seldom came to petitioner's office, because petitioner's stockholders usually went to the offices of the clients, except that out-of-town clients, of whom there were eight, would call at petitioner's office whenever they happened to be in Chicago.  No employee was allowed to or did have any consultation with clients who called at petitioner's office.  If no stockholder happened to be in at the time the client called, the client was obliged to wait until a stockholder could be reached.  No employee was given authority to advise a client with regard to his advertising.  Mason Warner exercised the general management of the affairs of the petitioner, he served as solicitor (director of service) for a number of clients, and passed finally upon all of the advertising copy prepared by other stockholders.  Mason Warner personally wrote most of the advertising*2615  copy for the clients whose accounts he was serving, and he supervised the writing of copy for other clients.  Mason Warner personally examined and criticised advertising copy written by the clients and made suggestions as to changes in it.  In 1899 Mason Warner had joined the Theodore McManus Agency, which was a general advertising agency in Toledo, Ohio.  From 1903 to 1906 he was advertising manager for Reid, Murdoch & Co., *349  wholesale grocers in Chicago.  In 1906 he joined the petitioner, which at that time was the Snitzler Advertising Co., as copywriter and as a solicitor.  A "solicitor" is one generally known as service assistant, account executive, or contact man.  The work was not confined to a person who procured accounts through solicitation, but it designated a person who was in entire charge of the advertising service for a client.  Mary C. Warner during the years in question wrote copy and conferred with clients, devoting herself primarily to clients who were advertising food products, women's wearing apparel and other things in which the copy appeal was directed to women.  She was a specialist in the writing of copy appealing primarily to women.  During*2616  a portion of these two years she was a member of the board of directors of petitioner.  She was the wife of Mason Warner and they maintained a home during those two years, but neither of them devoted any time to the management of it, that function being in charge of a housekeeper in their employ.  Mary C. Warner had had advertising experience prior to January 1, 1920, sufficient to qualify her as "a competent advertising woman." She had written copy, planned campaigns, written recipes for food products, and contributed valuable suggestions on art work for such products as appealed to women and to home use.  Prior to January 1, 1920, she had not had any direct interest in the corporation which preceded the organization of petitioner but after January 1, 1920, she devoted her entire time to the active conduct of petitioner's business.  During the two years in question she alone procured certain clients and helped to procure others.  She did practically all of the copywriting for clients handling food products such as the Southern Sweet Potato Exchange and Foulds Milling Co.  She had charge of the service on the accounts of the Illinois College of Photography and the Bickford Laboratories. *2617  She was very active in the service for the R. L. Watkins Cocoanut Oil account, particularly in connection with the art work so far as it concerned mother and child pictures.  She was active also in the service of Mother's Remedies Co. and the Armstrong Bureau of Related Industries, the latter being an association of macaroni manufacturers.  Mary C. Warner during her experience prior to 1920 had selected and drilled a crew of 40 demonstrators for the Toledo Coffee & Spice Co.  She had written and prepared recipes for Yacht Club Salad Dressing.  She had written special articles for newspapers.  Mary C. Warner received stock in lieu of salary, but as soon as the stock was paid for she began to draw a salary.  As a stockholder she received her share of the dividends which were declared, but she received only the portion to which her stock entitled her.  *350  James M. Snitzler devoted his entire time to the active conduct of petitioner's affairs during the two years in question.  He did not receive a salary, but he was paid a commission, consisting of one-third of the commissions on certain of the large accounts.  He was a part owner of the Sheffield Pharmacal Co., but the*2618  work which he did for that company was concerned only with its sales and advertising and thus what he did for it was done also for petitioner.  The Sheffield Pharmacal Co. had a manager who was in charge of the production, with which James M. Snitzler was not concerned.  James M. Snitzler, in addition to looking after the financial affairs of petitioner in the matter of collections from clients and transmittal of funds to publishers, devoted his time to conferences with clients concerning the preparation and placing of their advertising.  James M. Snitzler received his commissions on only three accounts, although he had contributed other accounts and serviced other accounts.  He was open to consultation at any time on any service matters for any client.  The three accounts upon which Mr. Snitzler received commissions were the R. L. Watkins Co., the Elgin Motor Corporation, and the Sheffield Pharmacal Co.  Mrs. J. L. Boone was Mason Warner's daughter.  She was actively engaged during the two years as a stenographer in petitioner's organization.  William C. Hanks was actively engaged, while he was a stockholder, as bookkeeper, auditor, and secretary of petitioner, having general*2619  charge of the finances under Mr. Snitzler.  J. L. Boone was actively engaged, while he was a stockholder, in handling the work formerly done by William C. Hanks, whom J. L. Boone succeeded.  Ursula M. Snitzler, the wife of James M. Snitzler, devoted about one-tenth of her time to the affairs of petitioner.  She obtained no new clients, but she participated in the servicing of the Sheffield Pharmacal Co. and the R. L. Watkins Mulsified Cocoanut Oil account.  Ursula M. Snitzler worked chiefly in preparing estimates and writing copy for the Sheffield Pharmacal Co., which was advertising toilet goods, but she worked also with the other stockholders on other accounts.  She rendered service to clients in checking the sales in different territories against the advertising expenditures and making recommendations as to changes in advertising in order to increase sales.  She watched, for example, the sales of "Delatone" and made recommendations as to featuring it at summer resorts.  She was a part owner of the Sheffield Pharmacal Co., but her entire work with *351  that company was in connection with its advertising, and thus what she did for that company she did also for petitioner. *2620  During the year 1920, 37 persons, not stockholders, were employed by petitioner at different times.  Of these 37, only 10 remained throughout the entire year, 27 having been in petitioner's employ on an average of four months.  The number who remained during part of the year was equivalent to 9 employees during the entire year, and the average therefor was 19 employees.  Total salaries paid to nonstockholding employees amounted to $25,305.02, in 1920.   Petitioner's employees during 1920 filled the positions and received the salaries shown in the following tabulation: NamePositionDates of employmentSamson, MissStenographerJan. 1 to July 31Hults, MissBill checkerJan. 1 to Aug. 31Pryor, MissdoJan. 1 to Dec. 31Kelly, MissStenographerdoWeinzimmer, MissdoJan. 1 to Jan. 31Beyer, MissdodoRuthling, MissAd checkerJan. 1 to Mar. 31Stewart, MissCheck writerJan. 1 to Dec. 31Bolland, MissBill checkerJan. 1 to Apr. 15Morris, MissdodoGannon, MissdoJan. 1 to Jan. 31Westerberg, MissPhone operatorJan. 1 to Dec. 31Brousseau, MissdoJan. 1 to Mar. 31Donohue, MissBill checkerJan. 1 to Jan. 15 Linroth, MissRate clerkJan. 1 to Sept. 30Smith, F. C. (SchmidtAd checkerJan. 1 to Dec. 31Ratz, AldoJan. 1 to Mar. 31Deneen, FrankdodoGawronski, MissdoJan. 1 to Dec. 31Fous, JosephOffice boyJan. 1 to Mar. 31Coates, MissAd checkerJan. 1 to Dec. 31Smogalski, DanielOffice boydoNewman, P.HOffice managerdoCollins, Chas. CBookkeeperdoMartin, MissAd checkerJan. 1 to Jan. 31O'Connor, MissRate clerkJan. 15 to Dec. 31Johnston, MrsBill checkerdoWarner, Miss VivianStenographerJan. 15 to July 31Snyder, A.HJan. 1 to Jan. 31Heth, H.H.Copy writerOct. 1 to Dec. 31Allum, R. DdoApr. 1 to Dec. 31Jauch, MrsBill checkerOct. 1 to Dec. 31Bower, MissAd checkerSept. 15 to Oct. 15Reich, MissdoJuly 15 to Aug. 15Diederich, MrsRate clerkSept. 15 to Dec. 31Jurs, MrsAuditorAug. 1 to Dec. 31Hillyer, MissStenographerAug. 1 to Aug. 15UnidentifiedNov. 1 to Dec. 31Total*2621 NameTime employedRate per yearTotal wages paidSamson, Miss7 months$1,800.00$1,050.00Hults, Miss8 months1,500.00923.01Pryor, Miss12 months1,300.001,335.84Kelly, Missdo1,400.001,365.00Weinzimmer, Miss1 month800.0066.00Beyer, Missdo700.0053.00Ruthling, Miss3 months850.00231.00Stewart, Miss12 months850.00852.35Bolland, Miss3 1/2 months900.00213.25Morris, Missdo600.00191.25Gannon, Miss1 month700.0042.50Westerberg, Miss12 months800.00834.75Brousseau, Miss3 months700.00187.50Donohue, Miss1/2 month500.0017.50Linroth, Miss9 months850.00519.25Smith, F. C. (Schmidt12 months1,500.001,457.50Ratz, Al3 months1,000.00198.92Deneen, Frankdo850.00212.50Gawronski, Miss12 months900.00903.17Fous, Joseph3 months750.00182.50Coates, Miss12 months750.00758.25Smogalski, Danieldo600.00600.00Newman, P.Hdo2,500.002,455.00Collins, Chas. Cdo1,700.001,723.00Martin, Miss1 month700.0042.00O'Connor, Miss11 1/2 months1,600.001,540.25Johnston, Mrsdo900.00883.92Warner, Miss Vivian6 1/2 months1,200.00540.67Snyder, A.H1 month1,800.00150.00Heth, H.H.3 months2,100.00525.00Allum, R. D9 months3,600.002,751.66Jauch, Mrs3 months900.00221.66Bower, Miss1 month600.0054.00Reich, Missdo900.0075.00Diederich, Mrs3 1/2 months850.00244.76Jurs, Mrs5 months1,800.00770.00Hillyer, Miss2 1/2 months1,200.00270.00Unidentified863.06Total25,305.02*2622  During the year 1921, 33 persons, not stockholders, were employed by petitioner at different times.  Of these 33, only 9 remained throughout the entire year, 24 having been in petitioner's employ on an average of 4 months and 3 days.  The number who remained during part of the year was equivalent to 8 employees during the entire year and the average, therefore, was 17 employees.  *352  Petitioner's employees during 1921 filled the positions and received the salaries shown in the following tabulation: NamePositionDates of employmentTime employedJurs, MrsAuditorJan. 1 to Dec. 3112 monthsO'Connor, MissRate clerkJan. 1 to Mar. 313 monthsPryor, MissBill checkerdo12 monthsKelly, MissStenographerJan. 1 to Feb. 282 monthsBoone, MrsdoMay 1 to Dec. 318 monthsStewart, MissAd checkerJan. 1 to May 154 1/2 monthsJohnston, MrsBill checkerJan. 1 to Dec. 3112 monthsWesterberg, MissAd checkerJan. 1 to Jan. 151/2 monthDiederich, MrsdoJan. 1 to July 317 monthsSmith, F. CdoJan. 1 to Dec. 3112 monthsGawronski, MissdoJan. 1 to Jan. 311 monthCoates, MissdoJan. 1 to Dec. 3112 monthsSmogalski, DanielOffice boyJan. 1 to Apr. 153 1/2 monthsHillyer, MissStenographerJan. 1 to Dec. 3112 monthsNewman, P.H.Office managerJan. 1 to May 154 1/2 monthsAllum, R.D.Copy writerJan. 1 to Dec. 3112 monthsCollins, Charles CBookkeeperJan. 1 to Feb. 282 monthsHeth, H. HCopy writerdodoJauch, MrsBill checkerJan. 1 to Dec. 3112 monthsLane, MissPhone operatorJan. 15 to Mar. 152 monthsChapman, MissBill checkerJanuary1 weekThompson, MissAd checkerFeb. 1 to Oct. 319 monthsBlackburn, T. FCopy writerFeb. 15 to Apr. 302 1/2 monthsBoone, J. LAuditorMar. 1 to Apr. 30doAstrom, MissPhone operatorMar. 15 to Dec. 319 1/2 monthsWarner, M. MAd checkerdodoMcNeill, HobertOffice boyApr. 15 to May 151 monthPurtell, MissBookkeeperMay 1 to Dec. 318 monthsLevinsonOffice boyMay 15 to Dec. 317 1/2 monthsSmith, H. ECopy writerAug. 1 to Dec. 315 monthsLill, EleanorStenographerAug. 7 to Sept. 71 monthHutchinson, R. ECopy writerSept. 15 to Dec. 313 1/2 monthsWarner, D. DArt. mechJan. 1 to Dec. 3112 monthsUnidentifiedTotal*2623 NameRate per yearTotal wages paidJurs, Mrs$2,000.00$2,091.00O'Connor, Miss1,600.00396.00Pryor, Miss1,300.001,262.50Kelly, Miss1,320.00220.00Boone, Mrs1,500.001,007.50Stewart, Miss970.00363.00Johnston, Mrs1,150.001,158.00Westerberg, Miss720.0030.25Diederich, Mrs850.00467.50Smith, F. C1,560.002,090.00Gawronski, Miss1,350.00113.00Coates, Miss850.00895.75Smogalski, Daniel570.00168.00Hillyer, Miss1,250.001,229.19Newman, P.H.2,900.001,075.00Allum, R.D.4,500.004,561.45Collins, Charles C1,680.00280.00Heth, H. H1,500.00245.00Jauch, Mrs1,050.001,036.10Lane, Miss730.00122.37Chapman, Miss850.0016.67Thompson, Miss1,040.00796.67Blackburn, T. F3,000.00630.00Boone, J. L1,800.00309.17Astrom, Miss900.00715.50Warner, M. M1,800.001,415.00McNeill, Hobert700.0067.67Purtell, Miss1,560.001,050.00Levinson725.00477.60Smith, H. E2,400.001,035.00Lill, Eleanor1,300.00110.00Hutchinson, R. E3,600.001,040.00Warner, D. D2,080.002,073.35Unidentified1.13Total28,549.37Employees were shifted*2624  about indiscriminately from work of one kind to work of any other for which they were qualified.  Stenographers would act as bill checkers and as advertising checkers and other employees would be shifted from the checking of bills to the checking of advertisements.  Employees carried out the details of placing advertisements.  All employees were hired by a stockholder, their compensation was fixed by a stockholder, and their work was supervised by a stockholder.  No employee ever handled service work for a client alone.  Employees handled details under the supervision of a stockholder.  An account executive was the person who was responsible for the service on the advertising for the client, the person who maintained the contact with the client through consultations.  No employees of petitioner acted as an account executive.  That work was done for petitioner in every instance by one of its stockholders.  The nonstockholding employees of petitioner consisted of stenographers, bill checkers, advertising checkers, phone operators, rate clerks, office boys, office manager, copy writers, auditor, bookkeeper, and art and mechanical employees.  *353  A bill checker examined*2625  bills from publishers, comparing them with petitioner's records, and approved the publishers' bills.  An advertising checker examined published advertisements, measured them, and ascertained whether or not the publisher had complied with instructions.  A rate clerk kept the files of publishers' rate cards and assisted a stockholder in the preparation of estimates showing the cost of proposed advertising.  Publishers issued rate cards which showed the rate to be charged for the advertising, the rate of commission to be allowed to the advertising agent, the rate of cash discount, the publication's circulation, the mechanical requirements of the publication, and any other information necessary in the preparation or placing of advertisements in that publication.  Rate cards were issued from time to time and were available not only to advertising agents, but also to the general public.  In petitioner's organization, the rate clerks kept these rate cards so filed that they would be readily available for use by petitioner's stockholders.  A rate clerk's job was to keep informed as to all facts concerning publications which would aid a stockholder in making recommendations to client*2626  advertisers concerning media to be used.  The rate clerks were required to keep all of this information readily available so that it could be used whenever a stockholder desired to make a recommendation to a client.  The rate clerk's information file had to be kept up to date to show not only the rates, but also the general merits of the publications, including their circulation.  As a general rule the rate clerks secured this information from the publishers through the publishers' solicitors or representatives, or through letters and other circular matter issued by publishers, but all unusual features were taken up by the publishers' representatives directly with a stockholder.  P. H. Newman, the office manager during 1920 and part of 1921, was not a stockholder.  He had nothing to do with procuring clients or with servicing them.  He never talked to a client about copy or making up an estimate or any other feature of the service which petitioner rendered.  He had had no previous experience in advertising and he was confined to office management.  His task was to see that the office clerical work was done on scheduled time.  Employees did not report to Mr. Newman.  He exercised*2627  no authority in the servicing of petitioner's clients, but he acted as secretary to Mason Warner in seeing to it that the office routine work was handled expeditiously and in collecting information from time to time concerning financial transactions with clients and publishers as shown in petitioner's books of account.  He also attended to certain routine details connected with the preparation of art and mechanical work.  *354  A copywriter wrote advertisements in accordance with instructions given him by a stockholder.  A stockholder usually wrote the first advertisement in a series.  At no time did petitioner have more than three copywriters and during the first three months of 1921 it had none.  At least 90 per cent of the advertisements were written without anyone except a stockholder having any contact with the client-advertiser.  Sometimes a copywriter would accompany a stockholder into a conference with a client in order to get information first hand and thus save the stockholder's time.  No copywriter ever went alone to a client and no client ever requested petitioner to send a copywriter to see the client.  A stockholder set the keynote or style of each advertisement. *2628  All of the important advertisements were written personally by a stockholder.  All advertising copy was submitted by a stockholder to the client-advertiser for the latter's approval.  All copy written by any employee copywriter was approved by a stockholder before the stockholder submitted it to a client-advertiser.  No copy written by a stockholder was submitted to any employee for the latter's approval.  No employee copywriter ever submitted copy to a client-advertiser.  Copywriters were paid an average of $250 per month.  Petitioner hired them from time to time and never had any difficulty in procuring one or more when needed.  A visualizer is a person who makes a rough sketch or lay-out giving form to the advertising idea to be presented.  Petitioner employed no visualizers, but its stockholders did that work, although no stockholder was an artist, commercial or otherwise.  Petitioner had no artists in its employ but would engage an independent or free lance artist to make any required drawing or other art work.  Petitioner would select the artist it thought would be most satisfactory to the client-advertiser.  The underlying or basic idea of the drawing or other art work was*2629  always conceived by a stockholder or by the client-advertiser.  Drawings and other art work were frequently returned to the artists to be changed or remade, because they did not fit into the basic advertising plan which the stockholder in charge had conceived.  Drawings and other art work were paid for by the client-advertiser, petitioner's practice being to bill the client-advertiser and to pay the artist after the client-advertiser had paid petitioner.  Petitioner usually charged the client-advertiser a commission of 15 per cent of the artist's charge.  About 10 per cent of petitioner's total billings represented charges for art and mechanical work.  All finished drawings and other art or mechanical work of any value were given to the client-advertiser.  Petitioner never carried any inventory or stock of such material.  It would have been of no value to anyone except the client-advertiser for whom it had been prepared.  *355  Artists were engaged for special art work in connection with advertisements either by the client or by a stockholder of petitioner.  Artists rendered their bills directly to the client when the client had engaged the artists, but it was usual for petitioner*2630  to audit those bills for the client.  When artists were engaged by petitioner, the artists rendered their bills to petitioner.  All art work and all other mechanical work such as electrotyping was ordered by the client.  Petitioner usually charged the client a commission for service rendered amounting to 15 per cent of the net amount charged by the artist or craftsman after his bill had been reduced by all trade and cash discounts.  Petitioner, in order to facilitate its office work, endeavored to collect from clients all sums due to artists and craftsmen a few days prior to the date when artists and craftsmen were to be paid by petitioner.  Some bills to artists or craftsmen were paid in advance of the time when petitioner received funds from the advertiser.  An art and mechanical employee routed the preparation of advertisements from the rough sketch to the delivery of plates to the publisher.  He looked after the details of ordering and purchasing art and mechanical material in accordance with instructions given him by stockholders.  Electrotypes and other mechanical work were not ordered by petitioner until petitioner had secured the approval of the client-advertiser for whom*2631  petitioner ordered them.  The practice of electrotypers and other vendors of mechanical service and material with regard to billing was the same as that of the independent artists.  Petitioner's financial condition at the beginning and at the end of each of the two years in question was as follows: Jan. 1, 1920Jan. 1, 1921Dec. 31, 1921ASSETSAccounts receivable, clients'$246,466.32$205,844.24$112,781.11Accounts receivable, miscellaneous4,028.871,422.34Furniture and fixtures2,080.342,824.514,825.69Cash in hand and on deposit11,667.3917,655.1849,165.23Notes receivable6,358.4931,368.12Good will14,597.52Automobile2,121.06Liberty bonds and Canadian bonds32,886.08Prepaid insurance391.50Total264,242.92248,702.28233,538.79LIABILITIES AND CAPITALAccounts payable, publishers'133,815.44101,447.6681,937.17Accounts payable, miscellaneous14,437.5227,605.888,192.57Notes payable38,500.00Capital stock25,000.00100,000.00100.000.00Reserve23,032.621,227.47Surplus29,457.3419,648.7442,181.58Total264,242.92248,702.28233,538.79*356  Petitioner's*2632  accounts receivable from clients at January 1, 1920, were $246,466.32, which included charges for commissions of $36,969.95, leaving a balance of $209,496.37.  This balance represented the portion of funds to be received from clients which was to be transmitted to publishers.  Petitioner's accounts payable to publishers as stated on its books at January 1, 1920, were $133,815.44.  At that date petitioner's checks to publishers entered upon petitioner's books of account but not charged by the bank against petitioner's account amounted to $24,531.10.  This amount has been subtracted from the accounts payable and the above statement of assets and liabilities shows this amount as having been paid to publishers.  Petitioner's accounts receivable from clients at January 1, 1921, were $205,844.24, which included charges for commissions of $30,876.64, leaving a balance of $174,967.60.  This balance represented the portion of funds to be received from clients which was to be transmitted to publishers.  Petitioner's accounts payable to publishers as stated on its books at January 1, 1921, were $101,447.66.  At that date petitioner's checks to publishers entered upon petitioner's books of account*2633  but not charged by the bank against petitioner's account amounted to $25,472.82.  This amount has been subtracted from accounts payable and the above statement of assets and liabilities shows this amount as having been paid to publishers.  Petitioner's accounts receivable from clients at December 31, 1921, were $112,781.11, which included charges for commissions of $16,917.15, leaving a balance of $95,863.96.  This balance represented the portion of funds to be received from clients which was to be transmitted to publishers.  Petitioner's accounts payable to publishers as stated on its books at December 31, 1921, were $81,937.17.  At that date petitioner's checks to publishers entered upon petitioner's books of account but not charged by the bank against petitioner's account amounted to $24,349.89.  This amount has been subtracted from the accounts payable and the above statement of assets and liabilities shows this amount as having been paid to publishers.  Including in accounts payable the amount of outstanding checks to publishers at the end of each month, and subtracting from accounts receivable the amount of petitioner's commissions, the excess of accounts receivable from*2634  clients over the accounts payable to publishers at the end of each month during the year 1920 averaged $66,030.22, and the average excess of accounts receivable over accounts payable to publishers throughout the year 1921 was $35,504.86.  Publishers who had furnished space to advertisers in accordance with petitioner's orders rendered bills for the space.  These bills usually were sent by the publishers to the petitioner as agent for the *357  advertisers.  Petitioner's regular practice was to bill its clients in time so that the clients could send funds to petitioner before the bills from the publishers were due.  When a client did not send funds to the petitioner in time for the petitioner to pay the publishers' bills on discount dates, petitioner ordinarily did not pay the publishers' bills on those dates and the clients lost the cash discounts.  Petitioner lost nothing through this delay but the client lost the cash discount.  Publishers' bills were rendered to the petitioner, but they indicated the name of the advertiser.  Publishers did not have a uniform practice of billing, some of them billing the rate for the space without regard to petitioner's commission, and*2635  others billing the net amount after deduction of petitioner's commission.  It was petitioner's general practice to collect from the advertiser before paying the publisher, although in some cases publishers were paid a short time in advance of the collection from clients.  The principal clients of petitioner paid promptly.  On magazine advertising petitioner billed its clients in advance of the receipt of bills from publishers.  It billed its clients from schedules in its own office and it did not wait to receive bills from publishers.  Petitioner's clients did not ask petitioner to prepay the clients' bills to publishers or to extend credit to the clients.  Petitioner never offered to prepay bills or to extend credit to clients.  Clients took advantage of cash discounts and satisfied themselves that petitioner gave them the benefit of such discounts.  Petitioner did not ordinarily give its clients statements or other information concerning petitioner's financial condition.  It was not the general practice of petitioner, during either of the two years in question, to extend credit to advertisers.  Sometimes petitioner accepted notes, but only when clients specifically requested*2636  it in some such way as "Will it make any difference to you if I do not give you cash; would you just as leave take our note and discount it?" Notes of this sort were immediately discounted by petitioner.  Petitioner never, at any time, offered to take notes in order to induce clients to retain it, and no client or prospective client ever asked petitioner to accept notes as a condition of continuing the service for the clients.  No client or prospective client ever asked petitioner to prepay any bills for it and no publisher ever asked petitioner to prepay a client's bill or to extend credit to a client.  During 1920 notes were taken from eight clients, namely: R. L. Watkins.  Elgin Motor Car Co.  Southern Stores, Inc.  Universal Tire Co.Markus Campbell Co.  Olson Rug Co.F. W. Scarff Co.  Foulds Milling Co.*358  There notes, with a few exceptions, were immediately discounted by petitioner.  During the year 1920 petitioner held a note for $250 for about a month and one for $375 for about four months.  At December 31, 1920, petitioner held two notes from clients, one for $500 from the Universal Tire Co., and one for $3,772.45 from the Southern Stores, Inc. *2637  The $500 note from the Universal Tire Co. was due on December 24, 1920, and thus was past due at December 31, 1920; but the note from the Southern Stores, Inc., was not due until June 10, 1921.  The only past-due note from a client held by petitioner at December 31, 1920, was the Universal Tire Co. note of $500.  Included among notes receivable listed as an asset on petitioner's books at December 31, 1920, was one for $2,200 made by Mason Warner.  The average monthly balance of undiscounted notes payable to petitioner from clients was about $2,522.  During 1921 petitioner's books of account showed as an asset notes receivable of $31,368.12.  Not one of these notes was overdue at that date.  They included notes from four clients, namely: Markus Campbell Co.  Elgin Motor Car Co.  Caras Apron Co.  Bickford Laboratories.  The average monthly balance of undiscounted notes and trade acceptance payable to petitioner from clients was about $38,143.  No client told petitioner that if petitioner did not discount the client's note, the client would sever its relationship with petitioner.  Clients did tell petitioner, during those two years, when clients asked petitioner to discount*2638  the clients' notes, that the clients would have discounted their own notes if petitioner had refused to discount them.  Petitioner did not carry credit indemnity insurance.  The petitioner's statement of profit and loss for the year 1920 showed the following: Income:Commissions on advertising in UnitedStates$ 179,579.22Commissions on foreign advertising2,329.69Net income from interest and discount390.46Collection of accounts previouslywritten off270.25182,569.62Expense:Rent$6,775.00Salaries to stockholders53,101.37Salaries to nonstockholders25,305.02Commission allowances - A. Stein & Co$8,026.85Olson Rug Co3,551.59Paul O. Richmond20,364.52P. J. Kelly3,558.14C. A. Transom$461.41E. R. Maloney133.46W. Ward63.27$36,159.24Depreciation313.83General expense745.42Postage705.05Light95.70Ice water and towels192.00Telephone and telegraph451.54Traveling expense1,172.37Office expense1,352.96Printing and stationery914.98Memberships1,481.71Legal and auditing3,268.74Insurance2,347.15Taxes250.78Old accounts written off20,385.50$155,018.36Not profit27,551.26*2639 *359  The petitioner's statement of profit and loss for the year 1921 showed the following: Income:Commissions on advertising in UnitedStates$207,580.19Commissions on foreign advertising1,719.58Net income from interest and discount2,132.27Collection of accounts previouslywritten off306.29Total211,738.33Expense:Rent$6,300.00Salaries to stockholders58,869.29Salaries to nonstockholders34,049.37Commission allowances - A Stein & Co$13,007.16Olson Rug Co1,472.49Paul O. Richmond26,805.48P. J. Kelly1,591.42Miscellaneous23.9142,900.46Depreciation682.49General expense552.47Postage761.22Light102.05Ice water and towels183.40Telephone and telegraph639.99Traveling expense2,502.98Office expense1,689.73Printing and stationery1,544.69Memberships2,092.15Legal and auditing$3,043.20Insurance1,500.30Taxes374.36Old accounts written off8,133.91Donations60.00Automobile expense1,052.82Total$167,034.88Net income44,703.45*360  Petitioner charged for its service either a commission*2640  or a flat rate fee, a stockholder in each case determining which method of charge was to be adopted for each client.  The commission when charged was the commission allowed by the publication in which the advertisement appeared.  Petitioner would bill the client in accordance with the publisher's rate shown on the publisher's rate card, and after collection from the client would pay the publisher the net amount determined by deducting the commission which petitioner retained.  Cash discounts were passed on to the client.  Recognition is a technical term meaning that a publisher has satisfied itself that the advertising agent to whom recognition has been granted has the necessary skill and professional standing to guide an advertiser in his advertising expenditures and to render effective advertising service to clients.  An advertising agent is not entitled to a commission unless he has been granted recognition.  Petitioner had been granted recognition by all of the publishers to whom petitioner sent advertisements for clients during the two years in question.  Petitioner received no income at any time from any contracts with the United States Government made at any time.  The*2641  1921 salaries to nonstockholders, $34,049.37, included bonuses to the following persons: DateNonstockholderBonusesMay 28, 1921M. M. Warner$1,000DoMrs. J. L. Boone1,000Dec. 13, 1921D. D. Warner2,500DoM. M. Warner1,000Total5,500These bonuses were paid for extra work in excess of what could reasonably have been expected in return for the salaries paid.  Petitioner's organization included Mason Warner's two sons, two daughters and a son-in-law.  These persons were paid modest salaries.  Petitioner's work was uncertain in its nature and petitioner did not *361  wish to increase its fixed charges.  In lieu of increasing salaries, petitioner paid bonuses during periods of prosperity.  All of petitioner's small group of employees worked night and day in handling the details of the advertising, chiefly in newspapers, that petitioner placed.  The item of expense shown on petitioner's statements of profit and loss for each year as "commission allowances" represented, with a few insignificant exceptions, allowances to clients for advertising service work which had been done by the clients, although it was the kind of work ordinarily*2642  done by an advertising agent.  Such work included the ordering and routing of electrotypes and other art and mechanical material and the writing of advertising copy.  Some of petitioner's clients did a considerable portion of such work in their own advertising departments and to such clients petitioner made an allowance in consideration of its being relieved of those features of the service.  Sometimes this allowance took the form of cash payments equivalent to salary made to an executive of the client, as in the case of Paul O. Richmond.  Usually the allowance was made by a reduction of the commission charged to the client.  A part of these allowances was erroneously reported by petitioner in its tax returns as solicitors' commissions and salesmen's and agents' commissions.  They were not solicitors' commissions in the sense in which that term would ordinarily be understood.  During 1920 and 1921 petitioner employed no business-getting solicitors on commission or on any other basis.  The payment to Paul O. Richmond, the president of the R. L. Watkins Co., was made to him as an individual as compensation for personally supervising certain portions of advertising agency service which*2643  otherwise would have been done by petitioner.  It was not a commission to him for procuring the Watkins Co. as a client or for continuing the retention of petitioner as an advertising agent.  A salary at a fixed amount per month was paid him during the first six months of 1920, but thereafter his compensation was a commission at the rate of 3 1/2 per cent of the advertising expenditures of the Watkins Co.  The arrangement with Richmond had been made prior to January 1, 1920.  Petitioner's books of account for the year 1920 indicated that old accounts were written off in the amount of $20,385.50, and this amount is so stated in the statement of income and expenses for 1920.  All of the items were disputed amounts which had arisen prior to January 1, 1920, when Mason Warner acquired control of the petitioner and its name was changed to Snitzler-Warner Co.  All of the items represented transactions not of petitioner but of the preceding Snitzler-Advertising Co.  No part of this amount of $20,385.50 represented *362  a bad debt incurred by petitioner through the expenditure of funds on behalf of a client.  The balances standing in clients' accounts which were written off as uncollectible*2644  during both years included amounts for commissions or fees charged by petitioner.  Petitioner made no written contract with any client during the two years in question covering the service it was to render.  Because of the confidential nature of petitioner's service it never served clients who were competitors of other clients.  At the termination of its relationship with the client, petitioner gave to the client all electrotypes, plates, drawings, and other material which were of any value and transferred either to the client or to a new advertising agent all contracts for unused space.  When petitioner was replaced by another advertising agent, petitioner was not called upon by anyone to do anything further with regard to the advertising for the client who had thus changed agents.  When petitioner replaced another agent, all outstanding contracts with newspapers, magazines, and other publications were transferred to petitioner.  Petitioner did not make new contracts with publishers to cover unused space on contracts previously made by the former agent.  The advertiser sometimes was represented by more than one agent, each agent handling different parts of the client's advertising. *2645  When more than one of these agents placed advertising for the same client in one publication, the rate charged by the publications to the advertiser was based upon the total amount of space used by the advertiser through all of his agents.  It was not computed upon the amount of space ordered through each agent.  But when petitioner as agent placed advertisements in one publication for more than one advertiser, the rate charged by the publication to each advertiser was based upon the amount of space used by each advertiser and not upon the total amount of space placed by the petitioner for all advertisers.  Publishers of newspapers and magazines usually guaranteed to advertisers who bought space that the publication would have a specified circulation.  If the publication failed for any reason to secure the guaranteed circulation, the publisher made a refund to the advertiser to compensate him for the circulation that was not secured.  These refunds were made by publishers' checks drawn to the order of the advertisers and sent to the advertisers usually through petitioner as the advertiser's agent.  Such refunds did not affect petitioner's commission income in any way.  Advertisers*2646  sometimes paid publishers directly instead of through petitioner as agent, but this method of payment did not affect petitioner's income.  *363  Petitioner as agent for the advertiser audited or checked the correctness of publishers' bills.  Petitioner kept its books of account in such a manner as to make it possible for any client to audit petitioner's records as far as they concerned transactions for that client.  Petitioner held its books open for such audits at all times.  Publishers exercised no control over advertisements placed by petitioner for its clients, except in cases where certain publications would not accept certain types of advertising.  Petitioner knew those general rules and never offered advertising which would not be in accordance with the publishers' general rules.  Petitioner's success depended in no way upon its satisfying publishers, but entirely upon its satisfying the advertisers who were its clients.  Publishers usually allowed cash discounts, and when such discounts were allowed, petitioner as agent for the advertiser passed the publishers' discounts on to the advertiser.  Cash discounts did not affect petitioner's income in any way.  Petitioner*2647  never at any time bought space in bulk for the use of advertisers.  Whenever space was ordered for any advertiser the name of the advertiser was specified in the order.  Petitioner never bought or sold space or any other thing on its own account.  Space was never ordered by petitioner without the client's authorization and the clients approved of all advertisements before they were inserted.  The mere ordering of space was a routine job after the selection of the media had been made.  It was only with a stockholder that a client conferred on any feature of an advertising campaign except routine matters, such as the correctness of computations in a bill.  If an advertiser for whom petitioner had reserved space in a publication did not use all of the space, the publisher billed the advertiser only for the space used.  There was no obligation on the part of the advertiser for unused space which had been reserved.  The publisher did not bill either the advertiser or the petitioner for such unused space.  Bills rendered by publishers for space which had been used were rendered at the rate specified in the contract reserving the space, and any necessary adjustments due to the fact that*2648  the advertiser used more or less space than reserved were made by separate bills at the end of the advertising campaign.  Petitioner never purchased any art or mechanical work or any other article used in connection with a client's advertising, without securing the client-advertiser's approval in advance.  All such articles which had any value were given by petitioner to the client-advertiser after they had been used in the advertising.  All of them were paid for by the client-advertiser, usually through petitioner as agent for the client-advertiser.  *364  Some clients maintained their own art departments and ordered directly from artists and other vendors such art work as they themselves could not produce instead of ordering it through petitioner.  Clients were continuously being solicited directly by publishers and craftsmen.  Except for such art work as the clients would order directly, the clients would refer the solicitors to petitioner.  Mason Warner's salary during 1920 and 1921 was $15,000 per year.  In June, 1919, he was offered $25,000 per year to work for another agency.  Petitioner's liability on notes payable at January 1, 1920, was $38,500.  This indebtedness*2649  was paid off as follows: Date paid offAmountJan. 16, 1920$16,500Mar. 1, 192010,000Mar. 15, 192010,000Apr. 20, 19202,000Total38,500During 1920 petitioner borrowed other amounts, all of which were repaid before the end of the year.  The amounts borrowed and the dates when borrowed and repaid are shown below: Date borrowedDate repaidAmount borrowedAmount repaidJan. 16, 1920May 15, 1920$16,500$16,500Mar. 1, 1920July 1, 192020,00020,000Mar. 15, 1920July 15, 19209,0009,000Aug. 16, 192012,00010,000May 17, 1920Sept. 15, 19202,000July 1, 1920Oct. 1, 192018,00018,000July 15, 1920Nov. 15, 19205,0005,000Oct. 1, 1920Nov. 30, 192015,0005,000Dec. 30, 192010,00095,50095,500The approximate average borrowed money on hand throughout the year 1920 was, therefore, as follows: January$ 38,500February38,500March48,000April46,833May42,750June41,000July37,000August30,000September$24,000October20,000November17,500December10,000394,083Average for year 192032,840Petitioner had no liability*2650  on notes payable at either the beginning or end of 1921, but during that year it borrowed $10,000 on two occasions.  The following shows the dates the money was borrowed and the dates of repayment: Date borrowedDate repaidAmount borrowedAmount repaidJan. 3, 1921Apr. 4, 1921$10,000$10,000Feb. 7, 1921June 7, 192110,00010,000*365  The approximate average borrowed money on hand throughout the year 1921 was, therefore, as follows: January$ 10,000February17,500March20,000April10,000May10,000June$2,500Remainder of year70,000Average for year 19215,833The petitioner's return for the year 1920 shows gross sales of $1,338,687.74, upon which the petitioner's gross commissions amounted to $183,527.80, and net income of $29,949.12.  The net income as adjusted by the respondent was $30,951.17.  The petitioner's return for the year 1921 showed gross sales of $1,359,510.33 and gross commissions from this source of $206,308.35.  This return also shows that there was received in 1921 taxable interest in the amount of $3,382.13 and income from other sources in the amount of $25,691.17.  The net income*2651  shown was $47,556.15.  The respondent accepted this net income as correct.  The income from other sources included discount received in the amount of $24,488.23.  Of this amount $22,408.36 was paid to clients.  OPINION.  SIEFKIN: The petitioner contends that during the years 1920 and 1921 it was a personal service corporation and was exempt from taxation.  In the alternative, it contends that its tax should be computed as provided in section 328 of the Revenue Acts of 1918 and 1921.  Section 218(e) of the Revenue Act of 1918 and section 218(d) of the Revenue Act of 1921 provide that personal service corporations shall not be subject to taxation.  Section 200 of the Revenue Acts of 1918 and 1921 defines a personal service corporation as follows: 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; but does not include any foreign corporation, nor any corporation 50 per centum or more*2652  of whose gross income consists either (1) of gains, profits, or income derived from trading as a principal, or (2) of gains, profits, commissions, or other income, derived from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive.  *366  The petitioner during the years in controversy was not a foreign corporation, nor did 50 per centum or more of its gross income consist of gains, profits, commissions, or other income derived from a Government contract or contracts made between April 6, 1917, and November 11, 1918.  The petitioner's business was that of a general advertising agency.  It reserved advertising space in advertising media for clients and gave advice on advertising in general.  Its income was not derived from trading as a principal.  During the years 1920 and 1921 all of its seven stockholders were regularly engaged in the active conduct of the affairs of the corporation except Ursula M. Snitzler, who owned 5 per cent of the stock of petitioner from September 15, 1920, to December 31, 1921.  She devoted about one-tenth of her time to the affairs of the petitioner.  However, the principal stockholders of petitioner*2653  were engaged in the active conduct of the affairs of petitioner.  The statute provides that in order to entitle a corporation to personal service classification its income must be ascribable primarily to the activities of its principal stockholders.  During the year 1920 petitioner employed 37 persons who were not stockholders of petitioner.  Only 10 of these remained throughout the year.  The number who remained during a part of the year was equivalent to 9 persons employed for the whole year.  The average was therefore 19 employees.  In 1921 petitioner had 33 nonstockholding employees of which number only 9 remained throughout the year.  The number who remained during part of the year was equivalent to 8 persons employed for the whole year.  The average number of employees in 1921 was, therefore, 17.  The most of these were engaged in general office duties.  During 1920 petitioner employed 3 copy writers, none of whom remained during the full year.  During the year 1921 there was 1 copy writer employed during the whole year and 4 others who worked only a part of the year.  In 1920 there was a period of 3 months when petitioner was without the services of a copy writer.  No*2654  employee of petitioner ever secured new business for petitioner.  The stockholders alone solicited business.  No nonstockholding employee ever held a conference with a client of petitioner concerning the client's advertising, although sometimes a copy writer would accompany a stockholder at a conference in order to better understand the type of work desired.  The basic idea of an advertisement was evolved by conference between a stockholder and the client and all details of carrying out the advertising plan were either done or supervised by a stockholder.  The retention of clients or the acquisition of new clients was not attributable to the nonstockholding employees of petitioner.  The particular employees of petitioner were not essential to the business.  This is evidenced by the fact that there *367  was a turnover of about three-fourths of petitioner's employees in each of the years 1920 and 1921.  We find that the income of petitioner during the years 1920 and 1921 was ascribable primarily to the activities of the principal stockholders.  To be entitled to personal service classification petitioner must meet another requirement of the statute.  Capital (whether invested*2655  or borrowed) must not have been a material income-producing factor.  The balance sheets of the petitioner for the years in question indicate very clearly that there was present in the business considerable capital, both invested and borrowed.  The question for decision is whether this capital was a material income-producing factor.  The fact that a business has capital, or in certain contingencies might require capital, is not sufficient to deny personal service classification, if, in fact, capital is not a material income-producing factor.  . The general practice of the petitioner was to pay bills to publishers after receiving payment from clients.  However, in some cases, the petitioner did pay publishers amounts due from clients before the clients paid petitioner.  The evidence discloses that throughout the year 1920 the average amount petitioner expended to pay publishers' bills, before receiving payments, either by notes or cash, from clients was $66,030.22 and that during the year 1921 this amount was $35,504.86.  In addition to this the petitioner, in the year 1920, received notes from its clients and advanced money to*2656  the publishers.  The average credit extended by this means to clients throughout the year was about $2,522.  In 1921 it received both notes and trade acceptances.  The average credit extended by this means to clients throughout the year was about $38,143.  The total average capital used, therefore, to extend credit to clients was about $68,522.22 in 1920, and about $73,647.86 in 1921.  Did the payment of publishers' bills by petitioner to the extent set forth above affect the volume of petitioner's business in such manner that it might be said that capital was a material income-producing factor?  We believe not, when we consider that the gross income of the petitioner for the years 1920 and 1921 was $183,527.80 and $235,381.65, respectively, and that the gross billings for space for the years 1920 and 1921 amounted to $1,338,687.74 and $1,359,510.33, respectively.  During the year 1920 petitioner received no income directly from the use of capital.  During the year 1921 it received taxable interest *368  in the amount of $3,382.13, and it retained $2,079.87 of the cash discounts allowed for payment of clients' bills to publishers at the due dates.  However, this income*2657  which is attributable directly to the use of capital is small when compared to the gross income for the year 1921.  The petitioner also took notes from clients instead of cash, and discounted them, but this does not constitute an income-producing use of capital.  We conclude that capital was not a material income-producing factor in petitioner's business during the years in question.  The petitioner is entitled to personal service classification for each of the years 1920 and 1921.  Reviewed by the Board.  Judgment will be entered for the petitioner.Footnotes1. 99 per cent.  ↩3. 99.5 per cent.  ↩2. 1 per cent.  ↩4. 0.5 per cent. ↩