Peerless Engraving Co. v. Commissioner ( 1926 )

APPEAL OF PEERLESS ENGRAVING CO.

Peerless Engraving Co. v. Commissioner

Docket No. 3626.

United States Board of Tax Appeals

3 B.T.A. 464; 1926 BTA LEXIS 2660;

January 26, 1926, Decided Submitted October 20, 1925.

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">*2660 Taxpayer was not, during 1919 and 1920, a personal service corporation.

Charles R. Lawson, Esq., for the taxpayer.

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

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LITTLETON

">*464 Before JAMES, LITTLETON, SMITH, and TRUSSELL.

This is an appeal from the determination of deficiencies in income and profits tax for the years 1919 and 1920 in the amounts of $6,154.20 and $5,104.07, respectively, arising from the refusal of the Commissioner to classify taxpayer as a personal service corporation.

FINDINGS OF FACT.

Taxpayer is a New York corporation, engaged in photo engraving, with principal office in New York City. It was organized in 1904 and, during the taxable years, its entire capital stock of the par value of $8,200 was owned by Henry J. Roes, president and treasurer, who, during the taxable years, devoted his entire time to the business. He determined the policies of the corporation and supervised the manufacture of its product. The taxpayer's entire net income was derived from the manufacture of photo engravings, both halftone and line, upon orders secured by the principal stockholder and salesmen employed by taxpayer. The cost of">*2661 all material and labor was borne by the taxpayer and the price charged customers for the engravings was determined by taxpayer upon completion of the work contracted for. Taxpayer leased the building in which it carried on its business and, in addition, had equipment consisting of cameras, lenses, and etching, routing, and blocking machines, and various tools.

The gross income and deductions for the year 1919 were as follows:

Gross income from operations	$139,642.28
Interest	544.14
Gross income from other sources	5.82
Total		$140,192.24
DEDUCTIONS.
Ordinary and necessary expenses	$101,880.52
Compensation (H. J. Roes)	14,000.00
Taxes	86.95
Bad debts	717.50
Exhaustion, wear and tear	693.79
Total		117,378.76
Net income		22,813.48

">*465 The item of ordinary and necessary expenses, amounting to $101,880.52, consisted of the following:

Cost of materials	$16,389.58
Salaries:
5 Gallery employees	10,225.07
3 negative turners	5,549.68
4 etchers	7,249.70
8 finishers	21,087.11
2 routers	6,535.04
1 Ben Day employee	2,931.52
Factory rent	1,840.64
Factory insurance	307.30
Electric service	1,266.36
Plant expense	155.01
Compensation insurance	417.59
Gas	291.73
Water	109.85
Rent	460.00
Office salaries, bookkeeper, and stenographers	9,369.99
Office expense	272.70
Telephone	309.72
Insurance	49.70
Stationery and supplies	20.00
Repairs	98.00
Auditing and legal	225.00
Advertising	10.00
Salaries, 3 salesmen	8,733.33
Commissions to salesmen	1,857.50
Management expense	4,975.00
Photo Board of Trade	1,144.00
Total	101,880.52

">*2662 The gross income and deductions for the year 1920 were as follows:

Gross income from operations	$144,066.00
Interest	650.51
Gross income from other sources	503.14
Total		$145,219.65
DEDUCTIONS.
Ordinary and necessary expenses	121,618.79
Taxes	1,245.87
Bad debts	421.97
Exhaustion, wear and tear	624.41
Total		123,911.04
Net income		21,308.61

">*466 The item of ordinary and necessary expenses, amounting to $121,618.79, consisted of the following:

Labor	$60,284.81
Rent	2,850.04
Insurance	496.94
Electric service	1,404.15
Gas	438.60
Water	308.71
Repairs	107.45
Plant expense	464.10
Office salaries	12,421.06
Office expense	659.82
Telephone	257.92
Stationery	123.25
Legal and auditing	221.07
Advertising	325.00
Light	42.90
Salesmen's salaries and commission	11,083.00
Photo Board of Trade	1,218.32
Materials	12,911.65
Management expense	4,500.00
Management salaries	11,500.00
	121,618.79

The number of employees, their duties, and the wages paid them during 1920 were substantially the same as during 1919, and are included in the item of "Labor" in the above statement.

The balance sheets">*2663 at January 1 and December 31, 1919, and December 31, 1920, were as follows:

	Dec. 31, 1918.	Dec. 31, 1919.	Dec. 31, 1920.
ASSETS.
Plant equipment	$6,827.70	$6,117.93	$5,506.14
Furniture and fixtures	140.21	126.19	113.57
Inventory	500.00	500.00	500.00
Accounts receivable	10,073.01	27,354.59	13,455.92
Bonds	1,550.00	1,550.00	30,400.00
Cash	19,554.08	24,948.56	23,229.49
Unexpired insurance	287.43	277.12	310.67
	38,932.43	60,874.39	73,515.79
LIABILITIES AND CAPITAL.
Capital stock	8,200.00	8,200.00	8,200.00
Surplus	26,882.30	48,917.75	62,654.20
Reserve for discounts		778.03	579.23
Reserve for taxes			892.65
Accounts payable	3,850.13	2,978.61	889.71
	38,932.43	60,874.39	73,515.79

DECISION.

The determination of the Commissioner is approved.

">*467 OPINION.

LITTLETON: From the evidence before us, we are of the opinion that the taxpayer is not entitled to classification as a personal service corporation. It is true that the principal and only stockholder was regularly engaged in the active conduct of the business, but it can not be said that the taxpayer's income was due primarily to his activities. ">*2664 Both capital and the activities of other employees were material income-producing factors.