Illinois Tel. News Co. v. Commissioner , 3 B.T.A. 1222 ( 1926 )

APPEAL OF ILLINOIS TELEGRAPH NEWS CO.

Illinois Tel. News Co. v. Commissioner

Docket No. 4443.

United States Board of Tax Appeals

3 B.T.A. 1222; 1926 BTA LEXIS 2441;

April 16, 1926, Decided Submitted October 10, 1925.

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James J. O'Byrne and B. L. Jennings, Esqs., for the taxpayer.

J. Arthur Adams, Esq., for the Commissioner.

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Before MARQUETTE, GREEN, and LOVE.

This is an appeal from the determination of a deficiency for the calendar year 1920 in the sum of $3,261.87. The deficiency arose from the refusal of the Commissioner to classify the taxpayer as a personal service corporation.

FINDINGS OF FACT.

The taxpayer is an Illinois corporation, organized in 1916, with its principal place of business at Chicago. It had a capital stock of $200,000, divided into 2,000 shares of the par value of $100 per share.

The business of the taxpayer consisted of gathering and disseminating current financial and grain news to individual subscribers. A ticker was installed in the office of each subscriber and this ticker was connected with a master transmitter from the taxpayer's office, which sent out the same stock quotations and news items to all of its subscribers. In case the tickers were out of order by reason of storm or mechanical defects the news was sent by messenger. In some instances special news services were sent by messenger. The subscribers could not use the tickers for any other purpose. For the service and use of the tickers the taxpayer charged from $40 to $60 per month. With the exception of a small amount received from bank deposits, the taxpayer's sole source of income was from subscriptions to its service.

The taxpayer made no profit until the year 1919, at which time one G. D. Rose, formerly a minority stockholder, purchased the capital stock and reorganized the business on a successful basis. He sold small blocks of this stock to the most active employees, allowing them to pay for the same out of dividends and bonus payments. Practically all the stockholders were actively engaged in the business of the taxpayer. All the employees, with the exception of some messengers and short-time reporters, were stockholders. The amount of the stock held, the salaries, bonuses, and dividends paid, and the character of the employment of the employees for the year 1920, were as follows:

Name.	Shares of stock.	Salary.
Bonus.	Dividends.	Character of employment.
G. D. Rose	1,340	$3,000.00
$400.00	$9,835.00	Manager.
Stanley Suchwalko	130	1,750.00
350.00	910.00	Supervisor, grain and financial news.
Harry Grotjohann	120	1,897.50
350.00	840.00	Chief electrician
Ella Gavin	10	372.00
	105.00	Statistician and relief operator.
C. S. Michaels	50	1,820.00
350.00	280.00	Grain news editor.
E. L. Girard	40	1,717.50
350.00	280.00	Assistant electrician.
H. Whilevman	150	600.00
50.00	1,050.00	Part-time employee.
Chas. Brady	50
	350.00	Not in employ.
Marie McMahon	30	1,106.00
200.00	157.50	Ticker operator.
F. W. Derby	10	Fees.
	70.00	Local attorney.
L. P. Gersch	30	992.00
200.00	52.50	Financial reporter.
H. Bairstow	20	1,106.00
200.00	35.00	Ticker operator.
S. M. Raymond	20
	35.00	Grain news operator.
F. Schmaus		1,120.00
200.00		Ticker repairman.
C. Zalkowski		1,120.00
200.00		Do.
Edna C. Sikes		457.00
100.00		Ticker operator.
Laddie Hornick		192.00
50.00		Messenger.
T. Garrison		420.00
		Part-time reporter.
F. Summers		180.00
		Do.
A. Stewart		180.00
		Do.
Hanley Murphy	78.00
	Messenger, assistant reporter.
Fred Murphy		40.00
G. Ryan		40.00
		U.S. Department of Agriculture.
Total	2,000	18,188,00
3,000.00	14,000.00

The assets and liabilities of the taxpayer as they appear on its books as of December 31, 1919, were as follows:

	Dec. 31, 1919.	Dec. 31, 1920.
ASSETS.
Cash	$1,422.29	$2,960.91
Accounts receivable	3,570.00	4,275.00
Supplies	500.00	500.00
Investments	1,000.00	5,960.00
Investment bonds, switchboards, tickers, generators, cables and transmitters, less depreciation	18,375.08	16,832.44
Furniture and fixtures	162.25	121.85
Franchises and good will	180.000.00	180,000.00
Total assets	205.029.62	210,650.20
LIABILITIES.
Capital stock	200,000.00	200,000.00
Surplus	5,029.62	10,650.20
Total liabilities	205.029.62	210,650.20

A statement of the income and operating expenses of the taxpayer for the year 1920 is as follows:

INCOME.
News Serivce - as per tax return	$58,210.49
Less: Amount included which represents rental charge
paid by Ill. Tel. News Co. of Delaware to Ill. Co.which is a subsidiary	2,400.00
		$55,810.49
Interest on bank deposits		96.34
Total income		55,906.83

OPERATING EXPENSES.
Salaries and bonus to officers and employees who are
stockholders		16,811.99
Other salaries and bonus		4,377.00
Duct rentals		575.52
Leased wires		265.83
News collection expense	$2,174.25
Less: Salaries and bonus included	750.97
		1,423.28
Operating power		527.80
Office rent		895.81
Royalities on patents paid to president, who is large stockholder		999.96
Rentals paid to subsidiary eliminated in consolidation	$2,400.00
Office expenses		261.98
Telephone and telegraph service		225.67
Repair parts		3,723.27
Paper for tickers		1,967.34
Taxes		708.58
Depreciation		1,583.04
Franchise fees		1,000.00
			35,346.08
Net income			20,560.75

Capital was a material income-producing factor.

Order of redetermination will be entered on 15 days' notice, under Rule 50.