De Martini-Zerega Agency Co. v. Commissioner ( 1926 )

APPEAL OF DE MARTINI-ZEREGA AGENCY CO.

De Martini-Zerega Agency Co. v. Commissioner

Docket No. 4562.

United States Board of Tax Appeals

3 B.T.A. 620; 1926 BTA LEXIS 2602;

February 9, 1926, Decided Submitted October 15, 1925.

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T. Francis Campbell, C.P.A., for the taxpayer.

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

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Before MARQUETTE and LOVE.

This is an appeal from the determination of deficiencies in income and profits taxes for the calendar years 1919, 1920, and 1921, in the total amount of $4,367.62.

The question is whether the taxpayer is entitled to classification as a personal service corporation.

FINDINGS OF FACT.

The taxpayer is a Missouri corporation, with principal office in St. Louis.

It was organized in September, 1915, with capital stock of $5,000, consisting of 100 shares of $50 par value each, which were owned as follows:

	Shares.
James J. De Martini	51
Louis Zerega	44
Victor Zerega	5

All three of the stockholders were employed as officers of the taxpayer and devoted all of their time to its activities. The only other employee was a woman bookkeeper-stenographer.

De Martini worked in the office most of the time, Making contracts for loans and insurance, buying real estate for clients, soliciting insurance and selling property. The two Zeregas attended to the collecting of rents, soliciting insurance, and selling real estate, and also attended to repairs for clients. For the last-mentioned, the commission received was 10 per cent of the bill.

The income of the taxpayer was derived from commissions on insurance, on sales of real estate, on the collecting of rents, on the making of loans, and on the making of repairs, and from the gain on the sale of real estate and from interest on loans.

The actual income for the years in question was:

	1919	1920	1921
Commissions:
Real estate (including commissions on loans)	$5,872.94	$10,469.83	$7,757.22
Insurance	4,437.43	6,326.75	6,953.08
Rent	634.93	1,253.95	1,885.13
Repairs	384.49	310.33	296.13
Special	229.13	60.16	294.67
Notary fees	48.75	87.50	75.25
Profit on real estate sales	1,471.35	2,249.80	311.87
Interest	1,284.79	1,804.87	2,500.45
Total income	14,363.81	22,563.19	20,073.80

The expenses for the years in question were:

	1919	1920	1921
Officers salaries	$5,455.00	$7,507.54	$7,143.86
Other salaries	855.00	1,020.66	1,260.00
Office rent	448.00	577.50	870.00
Telephone and advertising	360.30	202.94	200.00
Interest paid	1,457.07	1,625.72	1,783.05
Depreciation of furniture and fixtures	54.11	56.01	68.70
Miscellaneous expenses	568.25	674.51	1,050.11
Total	9,197.73	11,664.88	12,375.72

The balance sheets of the taxpayer at the closing of each calendar year showed:

	1918	1919	1920	1921
ASSETS.
Cash	$892.64	$4,422.20	$3,628.36	$3,101.22
Liberty Bonds	190.20
War Savings stamps	21.06	21.06	21.06	21.06
U.S. Revenue Stamps	3.62	39.06	.97	3.65
Real-estate loan account	17,350.00	19,950.00	19,450.00	15,575.00
Deeds of trust	3,675.00	8,135.00	9,090.00	4,435.00
Accounts receivable	6,684.70	7,988.85	6,484.10	9,052.06
Real estate	2,744.52
Furniture and fixtures	522.13	560.13	560.13	813.95
Due from officers				1,780.98
Total	32,083.87	41,116.30	39,234.62	34,782.92
LIABILITIES.
Capital stock	2,291.09	5,000.00	5,000.00	5,000.00
Surplus or deficit	(533.92)	(311.55)	(1,008.18)	(3,388.41)
Allowance for depreciation	146.07	200.18	256.19	324.89
Notes payable	11,500.00		10,700.00	6,500.00
Accounts payable	17,415.32	34,772.02	16,303.05	23,394.29
Due officers	1,265.31	1,455.65	7,342.94
Income tax liability			640.62	2,952.15
Total	32,083.87	41,116.30	39,234.62	34,782.92

In making loans to clients, the taxpayer either used its own funds, used the funds of other clients, who advanced the money to the taxpayer for the purpose, or borrowed the necessary money from banks. It charged commissions for arranging loans of funds other than its own. The largest amount owed by the taxpayer to banks at any one time during 1919 was from $3,000 to $4,000. In its insurance business, the taxpayer paid the insurance companies the premiums monthly, whether collected or not.

The sales of real estate in which the taxpayer participated on its own account during the years in question were:

Sale No.	Date sold.	Sale price.	Rent collected
1	March, 1919	$6,462.61	0
2	June, 1919	2,275.10	0
3	April, 1919	900.00	0
4	September, 1919	2,284.60	$79.50
5	December, 1919	1,973.55	228.60
6	September, 1920	15,812.93	1,227.50
7	July, 1921	4,765.96	115.00

Sale No.	Date bought.	Cost.	Profit.
1	March, 1919	$6,085.00	$377.61
2	November, 1918	2,197.75	77.35
3	December, 1917	676.95	223.05
4	April, 1919	2,190.20	173.90
5	February, 1919	1,582.71	619.44
6	March, 1920	14,790.63	2,249.80
7	April, 1921	4,569.09	311.87

Capital, invested and borrowed, was a material income-producing factor.

DECISION.

The determination of the Commissioner is approved.