Gardiner & Wells Co. v. Commissioner , 17 B.T.A. 723 ( 1929 )

GARDINER & WELLS CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Gardiner & Wells Co. v. Commissioner

Docket No. 16838.

United States Board of Tax Appeals

17 B.T.A. 723; 1929 BTA LEXIS 2252;

September 30, 1929, Promulgated

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Petitioner, an advertising agency, held not to have been a personal service corporation during the year 1921.

A. J. Wells, for the petitioner.

Harold Allen, Esq., for the respondent.

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MARQUETTE

This proceeding is for the redetermination of a deficiency in income and profits taxes asserted by the respondent for the year 1921 in the amount of $960.34. The only issue is whether the petitioner is entitled to classification as a personal service corporation.

FINDINGS OF FACT.

The petitioner is and was during the year 1921 a New York corporation with its office and place of business at New York City. Its capital stock of $100,000, divided into 1,000 shares of the par value of $100 each, had been issued for $10,000 cash and good will valued at $90,000, and was owned and held as follows:

	Shares.
William R. Gardiner	375
Adolphus J. Wells	375
Joseph H. Weinberg	250

Gardiner was president of the corporation, Wells was vice president, and Weinberg was treasurer and office manager.

The principal stockholders were actively and regularly engaged in the business of the petitioner. Gardiner had charge of the copy department and did some soliciting; Wells did most of the soliciting and some copywriting, and Weinberg had charge of the office and details of the business.

The business of the company was to prepare and place advertising with newspapers, magazines, booklets, and other advertising media, and to superintend the display of copy in these publications. Business was procured in various ways. Sometimes an advertiser called on the company and requested that a representative be sent to interview him. At other times information was received that an advertiser was dissatisfied with the results he was getting from his advertising and a representative of the company called to see him with a view of soliciting his business. If the business was procured, a survey of the field was made by one of the stockholders before any work was done on account. This survey consisted in finding out the conditions in the advertiser's particular line; what competition he had to meet; what the financial situation was in the field where the advertising was to go; and why the products of the advertiser were not selling. The company contracted with the publishers only for the space needed. It made no agreements to take a minimum amount of space for specified periods.

The copy was written by the stockholders or in accordance with their suggestions by some employee in the copy department. If the copy was written by one of the employees, it was edited by the stockholders. The company did not maintain art or mechanical departments, but contracted for such work with outside firms. When the copy was approved by the advertiser it was also sent to outside firms to be electrotyped and to have cuts and mats made.

In some cases the company was employed on a salary basis in the capacity of advertising counsel, but in most cases it was employed on a percentage basis. The charge was 15 per cent of the net amount of the bill to the advertiser. The taxpayer corporation was a recognized advertising agency and as such was entitled to certain discounts, ranging as high as 15 per cent plus 2 per cent for cash. If a discount was allowed, the benefit was passed to the advertiser. The company would compute the net amount the advertiser would have to pay for the advertising and to that amount would add a charge of 15 per cent. On bills for electrotyping and preparing cuts and mats a charge of 25 or 30 per cent was added. In the case of art and mechanical work the charge was at the rate of 15 per cent. In some instances no charge was made for art or mechanical work.

In 1921 the petitioner received a retainer as advertising counsel for Lord & Taylor in the men's department, for which it prepared but did not place the advertising.

The business of the petitioner occupied about 5,000 square feet of floor space. In this space the copy, rate, order, voucher, stenographic, forwarding and checking departments and the offices of the members were located. The furniture was valued at between $7,000 and $8,000. About sixteen employees were regularly employed in the business. These employees received salaries for 1921 of about $42,000. One of the employees in the copy department received a salary of not less than $10,000 per year. One of the employees in the rate department drew a salary of not less than $6,000 per year. None of the employees transacted any business on his own initiative or acted as assistant with reference to any copy, service or contracts with the advertiser.

The publishers always billed the petitioner for amounts due them for advertising space. The petitioner in turn computed the net amount of the bill, added a 15 per cent charge to this amount, and billed the advertiser. The bills were received from the publishers on or about the first of each month and were payable on the 10th to the 15th of the month. The amounts owing the petitioner by the advertisers were due and payable on the 1st of the month, and the petitioner always received payment in sufficient time to pay the publisher on the date payment was due to the publisher, and thereby procured for the advertiser the benefit of the discount for cash. The name of the advertiser always appeared on the bills received from the publishers.

The respondent, upon audit of the petitioner's return for the year 1921, determined that it is not entitled to classification as a personal service corporation, and that there is a deficiency in tax in the amount of $960.34.

OPINION.

MARQUETTE: In the case of , the petitioner herein sought personal service classification for the years 1919 and 1920, under the Revenue Act of 1918. This Board held that the petitioner was not, under the law and the facts, entitled to be classed as a personal service corporation.

The facts in the instant proceeding are substantially the same as in the case cited, and the definition of a personal service corporation is the same in both the Revenue Acts of 1918 and 1921. This case arises under the latter Act. We are of opinion that the petitioner has failed to establish that it comes within the meaning of the term "personal service corporation" as it is used in the Revenue Act of 1921, and our decision is in favor of the respondent.

Reviewed by the Board.

Judgment will be entered for the respondent.