Barton & Willson, Inc. v. Commissioner ( 1928 )

BARTON & WILLSON, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Barton & Willson, Inc. v. Commissioner

Docket No. 11913.

United States Board of Tax Appeals

13 B.T.A. 971; 1928 BTA LEXIS 3132;

October 12, 1928, Promulgated

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Petitioner, an interior decorating firm, held entitled to personal service classification.

Albert E. James, Esq., and Thomas W. Byrnes, Esq., for the petitioner.

W. F. Gibbs, Esq., for the respondent.

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ARUNDELL

The respondent determined a deficiency in income and profits taxes for the year 1919 in the amount of $7,246.62, which petitioner contests, claiming the right to personal service classification.

FINDINGS OF FACT.

Petitioner is a New York corporation organized January 22, 1919. Its capital stock, of a par value of $100 per share, was issued as follows:

Certificate No.	Issued to -	Date	Shares
1	William O. Barton	Jan. 22, 1919	54
2	Charles M. Willson	do	54
3	Evangeline Barton	do	1
4	Edith M. Willson	do	1
5	Charles M. Willson	Apr. 1, 1919	10
6	William O. Barton	do	10
	Total shares		130

Edith M. Willson was the sister of Charles M. Willson and Evangeline Barton was the wife of William O. Barton. The two shares held by them were issued solely as qualifying shares and were paid for by Willson and Barton. Cash in the amount of $10,000 and a leasehold on the premises occupied by petitioner at the value of $3,000 were paid in by Willson and Barton, the cash being paid in equal amounts by the two. The cash capital was used in decorating and furnishing petitioner's premises, which consisted of two consulting rooms and combination library and office.

The business of the petitioner is that of decorating the interiors of residences. Prior to its organization, Barton and Willson had been employed for a number of years as consulting decorators by W. & J. Sloane, who dealt in house furnishings. During the taxable year Barton and Willson devoted all their time to the business of petitioner. During the early part of the year petitioner's only employee was a man serving in the double capacity of bookkeeper and stenographer at a salary of $15 per week, which was later increased to $25. About the middle of the year a draftsman at a salary of $25 per week, and in the latter part of the year a stenographer at a salary of $15 per week, were employed. These were the only employees petitioner had in that year and the total payroll amounted to $1,913. No agents or solicitors were employed and no commissions were paid.

All of petitioner's business resulted from the efforts of Barton and Willson and came to it largely through recommendations and introductions by clients whom they had served. We give here two cases which are representative of petitioner's method of operation.

Prior to 1919, while Willson was engaged in decorating a home, the owner introduced him to a man who shortly afterward asked Willson to decorate an apartment for him. Later this man became the owner of a large country home of some 30 or more rooms, and in 1919, after the organization of the petitioner, he invited Willson out to the place and directed him to find suitable artistic, but practicable, furnishings for the large hall. At that time the hall contained only one or two pieces of dilapidated furniture. Willson, drawing upon his knowledge of what was required to properly furnish the hall, set about searching the market for suitable pieces. His search led him to Boston and other cities. Here and there he picked up a piece of furniture or tapestry to harmonize with the decorative scheme planned. Some of the chairs were specially designed and made up and covered with rare velvets and tapestry, some of which dated back to the sixteenth century. Some of the pieces of furniture were antiques of the sixteenth and seventeenth centuries. Harmonizing antique tapestries were found and hung on wall panels beside the doorways and a rare piece of tapestry of unusual proportions was selected to cover the wall space beside a wide ornamental staircase leading from the hall. Willson designed and had made hangings for the doorways opening into the dining and living rooms. Rugs of harmonizing colors and proper sizes were secured from an importer.

In another case Barton was called in to inspect an apartment by a prospective tenant for advice as to whether it could be made "home like" and a proper setting for furniture imported from France. Barton studied the situation for 3 or 4 days, then sketched a rough draft of his ideas which he turned over to the draftsman who worked out the plan in minute detail. The completed plan was submitted to the client and Barton then proceeded to have the place remodeled in accordance with his plan. He had the old plaster torn out in the reception room, some of the openings closed up, a false fireplace built in what had been an alcove, had mirrors installed, new door and window trim put in, supplied a crystal chandelier, and had the room painted so as to harmonize with the client's furniture. A similar procedure was followed with respect to the other rooms in the apartment.

Neither the petitioner nor Willson or Barton had written contracts with their clients. The manual labor connected with their work, such as plastering and painting, and the making of furniture, was not performed by Willson and Barton, but by artisans whom they employed. In some cases, but not all, advances were obtained from clients before the work of decorating was begun. As a rule dealers knew for whom goods were being ordered and in some cases the dealers made delivery directly to petitioner's clients.

Petitioner's income consisted of a so-called differential between the prices billed to it and the amounts it charged clients. That is, when for example, a piece of furniture was secured for a client, it was billed by the dealer to the petitioner and the petitioner in turn billed it to the client at a higher figure than the dealer's. Similiarly with labor charges petitioner charged the client more than the amount charged by the laborer. Willson and Barton made no specific charges to clients for their services as such, their charge being included in the so-called differential.

A typical account showing charges made to a client for furnishing a suite of offices includes the following items:

1 rug cleaned and repaired	$6
Conference room table	140
Bookcase	226
Table	74
Costumer	60
Desk	400
Settee	265
Recovering 19 chairs	615

In practically all cases petitioner billed and received payment from clients before making payment to dealers who supplied materials and workmen who furnished the labor, and where a dealer allowed a discount for prompt payment it was the practice of petitioner to take advantage of such discount for its own benefit. Almost invariably petitioner received prompt payment from clients. Only very small sums were paid to dealers and workmen before payment was received from the client.

Petitioner's letterheads carried in the center its name, address, and telephone number, in the upper right-hand corner the names of the officers, and in the upper left-hand corner the following words: "Furniture, Wood Paneling, Carpets-Rugs, Wall Coverings, Draperies, Painting." Petitioner, however, did not carry any stock of merchandise for sale. It did during the year occasionally sell pieces of its studio or office furnishings to which clients took a fancy. Such sales amounted to approximately $5,000.

The gross amount billed to clients, including excise tax, amounted in the year to $221,716.90. The excise tax amounted to $28.20 and returns and allowances were $11,479.50, leaving gross income in the amount of $210,209.20.

Three dividends of 50 per cent each, in the amounts of $6,500, were paid by petitioner during the year.

OPINION.

ARUNDELL: The respondent in his brief concedes that the principal stockholders were regularly engaged in the active conduct of the affairs of petitioner and states that he does not contest that the income of petitioner was due primarily to the activities of Messrs. Barton and Willson.

The record leaves no doubt in our minds that capital was not a material income-producing factor. All of petitioner's capital was invested in its studio and office. It had no capital available for use in carrying on its business and had no need for it as its accounts receivable were liquidated before the accounts payable were due. In fact its receivables were collected in sufficient time to enable it to take advantage of discounts on its payable.

The only point presenting any controversial aspect is the extent to which petitioner's income was derived from trading as a principal. It is conceded by the petitioner that as to those few articles comprising its studio furnishings which it sold, it did trade as a principal. But the gross income of not over $5,000 from those transactions is too small in comparison with the gross income of over $200,000 to play any serious part in the final outcome of the case. The bulk of petitioner's income consisted of the difference between the amounts charged clients and the amounts petitioner paid to dealers and laborers for furnishings and labor supplied to the clients. It is quite clear that petitioner carried no stock in trade, nor was it representing anyone who did. Before an order was placed for any article of furniture petitioner had a place for it. No capital of petitioner's was involved in handling these goods. The increase in the amounts charged over dealers' prices and laborers' charges was not a profit on its capital invested; nor was it a profit for handling the furniture or procuring the labor which the client could have saved by dealing direct; it represented solely petitioner's fee for the time, services, and skill of its stockholders in procuring articles and labor that the client knew not how or where to obtain, and producing a finished product that was beyond the skill of the client. In carrying out a client's wishes Barton and Willson were acting only as agents. They did not buy material and labor for themselves but for their principal. Had they turned over to their clients furnishings and labor at cost and then charged a specific fee for their time and services, there would be no question but that such fee was for services. It should not affect the decision that the fee was covered up by being given another name. It is our opinion that petitioner can not be said to have been trading as a principal, and it therefore meets all the elements necessary to entitle it to classification as a personal service corporation.

Judgment of no deficiency will be entered.