F. C. WEST CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent

F. C. WEST CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Docket No. 6872. Decided July 31, 1926. 1. Personal service classification denied. 2. Upon the evidence, held, that $7,500 was reasonable compensation of petitioner’s president for 1920. F. G. West for the petitioner. L. G. Mitehell, Esq., for the respondent. Before Steenhagen, Littleton, and Trttssell. The petitioner claims that the Commissioner erred in refusing to classify it as a personal service corporation and determining accordingly a deficiency of $1,012.19 for the calendar year 1920. The alternative claim is made that should it be held that petitioner ■ is not entitled to classification as a personal service corporation, -the deduction for compensation of its president, as allowed by the Commissioner, should be increased. FINDINGS OF FACT. The petitioner is an Illinois corporation with principal office at Chicago, its business being that of general sales agent for various manufacturers of automobile accessories on the commission basis. Since the time of its organization in November, 1918, its outstanding capital stock has consisted of 57 shares of the par value of $100 each. During the year 1920, F. C. West, president and treasurer, owned 55 shares; M. F. Chase, vice president, 1 share; and C. H. Scribner, secretary, 1 share. At the time of incorporation and throughout the taxable year, it was provided, by contract between the corporation and its stockholders, that the net commission received should be divided between the three stockholders upon the percentage basis. The percentages during the year 1920 were as follows: F. C. West, 50 per cent; M. F. Chase, 25 per cent; C. H. Scribner, 25 per cent. The Commissioner allowed a deduction of $6,257.82 as reasonable compensation for- each of the three officers. As general sales agent for various manufacturers, the petitioner made sales throughout the United States. Its three stockholders were regularly engaged in the active conduct of its business. They each acted as salesman and spent the greater portion of their time on the road. F. C. West controlled the policies of the corporation and had charge of all of its affairs. He supervised the work performed by other salesmen and secured all contracts in which the company was to act as sales agent. He also selected various local salesmen and made contracts with them as to their territory and the commission which they were to receive on sales made in such territory. The three stockholders did not coniine their activities entirely to any particular territory but spent considerable' time working with and assisting local salesmen. They were not, however, credited by the corporation with any commissions received on sales made in any territory in which the company had a local agent. In addition to making sales throughout the territory covered by contracts with manufacturers, F. C. West devoted a great deal of time working with local agents and instructing them in the matter of making sales. During the year 1920, the petitioner had sales agreements with eleven local salesmen, which agreements, for the most part, provided that such salesmen should receive a commission of 6 per cent on all sales in the territory covered by such contract. The.usual commission received by the petitioner from manufacturers for which-it acted as agent was 12 per cent. During the year commissions in the amount of $20,860.15 were credited to local salesmen. Occasionally, small advances were made to certain of the local salesmen and charged against their commissions as earned. The gross income and deductions, as shown by the return for the taxable year, were as follows: Commissions---$49,768.49 Income from other sources_ 260. 40 Total_' 50,023.89 Ordinary and necessary expenses-$24, 882. 52 Exhaustion, wear and tear_ 110. 09 - 24, 992. 61 Net income- 25, 031. 28 The balance sheets at the beginning and end of the year were as follows: BALANCE SHEET. E. C. West Corporation. Assets: January 1, 1920. Current assets— Cash in bank_ $962. .31, Cash' on hand_ 23.19 , Commissions due and receivable_1_ 14,606. 90 - $15, 592.40 Fixed assets — ■ Furniture and fixtures_$S47. 29 Less: Allowance for depreciation_ 72.44 774. 85 Samples-219.00 Contracts (paid in for stock) 3,000. 00 -. 3, 993.85 Deferred charges to expense— Advanced commissions_ 3,397.02 22, 983. 27 Liabilities : ~ Current liabilities— Notes payable (borrowed money)_ 3,600.00 Accrued payroll_,_ 54. 50 Accrued interest_._ 48. 75 ■ Commissions payable_ 99.34 - 3, 702. 59 Deferred credits to income— Advance payments on commissions receivable_ 2,469.40 Capital— Capital stock_$10, 000. 00 Less: Unissued stock_ 4, 300. 00 5, 700. 00 Liabilities — Continued. Brought forward_ $6, 700.00 $6,171. 99 Stockholders accounts_$4, 250. 58 Deficit__ 1, 307. 31 ■-- 5, 557. 89 •- $142. 11 Undivided profits_ 16, 669. 17 - 16, 811. 28 22, 983. 27 BALANCE SHEET. F. C. West Coepoeation. December 31, 1920. Assets : Current assets— Cash in bank_ $706. 03 Cash on hand__ 50. 00 Commissions due and receivable_ 19, 814. 37 Notes receivable less_$7, 650. 20 Notes receivable discounted___ 3, 298. 65 4, 351. 55 Samples_ 369. 67 Thomas-Andrews Corp. Escro Acct. 626. 26 $25, 917. 88 Fixed assets — • Furniture ánd fixtures_$1, 376. 53 less, Allowance for depreciation_ 182. 53 - 1, 194. 00 Contracts_ 3, 000. 00 Deferred charges to expense— 4, 194. 00 Advance commissions_ 6, 397. 96 Stockholders accounts_ 4, 758. 42 41, 268. 26 Liabilities : Current liabilities— Accounts payable_ $5, 725. 10 Commissions payable. 756. 13 Notes payable plus_ $3,800.00 -:- 6, 481. 23 Accrued interest_ 255. 75 Capital— 4, 055. 75 4, 055. 75 Capital stock less_ 10, 000. 00 Unissued stock_ 4, 300. 00 5, 700. 00 5, 700. 00 Undivided profits 25, 031. 28 25, 031. 28 41, 268. 26 Fifty per cent of’ petitioner’s income was derived from sales by its three stockholders in territory in which it had no local salesmen, and 80 per cent represented sales made by its stockholders in the territory covered by contracts with manufacturers, including the territory in which there were local salesmen. [MAJORITY — Littleton:] OPINION. Littleton: In view of the evidence, petitioner’s income can not be ascribed primarily to the activities of the stockholders. We are of the opinion, however, from the evidence, that the petitioner should have been allowed a deduction of $7,500 as reasonable compensation for F. C. West, president. Order of redetermination will be entered on 15 days’ notice, under Bule 50.