C. J. Swift Co. v. Commissioner

C. J. SWIFT CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

C. J. Swift Co. v. Commissioner

Docket No. 12315.

United States Board of Tax Appeals

12 B.T.A. 974; 1928 BTA LEXIS 3414;

June 29, 1928, Promulgated

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Personal service classification granted.

Evert L. Bono, Esq., for the petitioner.

Alva C. Baird, Esq., for the respondent.

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ARUNDELL

This proceeding involves the redetermination of deficiencies in income and profits taxes for the years 1920 and 1921 in the respective amounts of $867.62 and $815.58. The sole question raised by the pleadings is whether the petitioner is entitled to personal service classification.

FINDINGS OF FACT.

The petitioner is, and was during the years 1920 and 1921, an Ohio corporation with principal offices in Cleveland, and engaged in the general insurance business, excepting life insurance. It was incorporated in the year 1916 with a capital stock of $10,000, consisting of 100 shares of a par value of $100 each, for the purpose of taking over the general insurance business of C. J. Swift, trading under the name of C. J. Swift & Co.

All of petitioner's stock, except four qualifying shares, was in the name of and held by C. J. Swift until March 15, 1920, when all of the outstanding stock certificates, except one in the name of H. M. Stowe for one share, were surrendered to the petitioner and reissued. For the remainder of 1920, and during 1921, the record holders of petitioner's stock were:

Name	Shares
C. J. Swift	1
H. M. Stowe	1
R. H. Modroo	1
Alice S. Warner (daughter of C. J. Swift)	20
J. W. Warner, jr. (husband of Alice S.)	22
C. P. Swift (wife of C. J. Swift)	55

No consideration was paid to C. J. Swift by the stockholder for the stock issued to them, and immediately upon the issuance of the stock all of them except Alice S. Warner indorsed their certificates in blank and delivered them to C. J. Swift. Alice S. Warner, by indorsement, assigned her certificate to her mother, C. P. Swift. All of the certificates have at all times been kept by C. J. Swift in his safedeposit box. Alice S. Warner died in August, 1920. The stock standing in her name was not administered as a part of her estate, but was recognized as being the property of C. J. Swift.

C. J. Swift, president, R. H. Modroo, secretary, and J. W. Warner, Jr., treasurer, were regularly engaged in the conduct of petitioner's business. C. J. Swift and J. W. Warner, Jr., devoted their entire time attending to the insurance business of clients, inspecting risks, soliciting business and making collections. R. H. Modroo managed the office. Aside from its officer, the petitioner had five employees who did general clerical work in its office.

Petitioner's territory as agent for several large insurance companies extended throughout Cuyahoga County, Ohio, with the exception of three or four cities in the county. About 80 per cnet of petitioner's income consisted of commissions on insurance obtained directly by C. J. Swift or C. J. Swift and J. W. Warner, Jr., together. J. W. Warner, Jr., was Swift's son-in-law and worked under Swift's direction. The balance of the income consisted of commissions on business turned in to petitioner by a few insurance agents and by solicitors who numbered from 40 to 43 in the taxable years. Insurance solicitors in the State of Ohio are required to be licensed and for that license they pay a fee of $2 per year. The solicitors who turned in business to the petitioner were for the most part real estate agents who solicited insurance as a side line. They received a commission for getting the business and the petitioner's income from such insurance consisted of an overwriting commission of 10 per cent. It cost the petitioner about 7 1/2 per cent to handle that kind of business, so that it was not considered profitable. The only reason petitioner accepted insurance from the solicitors was to keep up its insurance to the volume required by some of the large insurance companies in order to permit the petitioner to retain the agency. With the exception of H. M. Stowe and R. H. Modroo, to whom small commissions were paid for policies written by them, none of the solicitors or agents had desk room in the office of the petitioner.

The petitioner's returns for the years 1920 and 1921, filed as a personal service corporation, show gross income, deductions and net income as follows:

	1920	1921
Gross income:
Commissions from insurance companies	$39,052.59	$37,714.27
Deductions:
Expenses	20,171.31	18,016.81
Salaries and commissions to officers	12,737.65	13,964.83
Interest	148.08	132.00
Taxes	254.04	45.00
Bad debts	111.06	512.08
Depreciation	900.00	1,200.00
Net income	4,730.45	3,945.55

Of the amount deducted each year as "Expenses," $11,136.47 in 1920 and $8,831.51 in 1921 was paid to agents and solicitors as commissions on business obtained by them for the petitioner.

The petitioner has never paid any dividends. Its profits for 1920 and 1921 were allowed to remain in the business to carry outstanding accounts receivable.

The personal income-tax return of C. J. Swift for the year 1921 did not include any of the profits of the petitioner.

OPINION.

ARUNDELL: The respondent does not contend in this case that capital was a material income-producing factor. It is our opinion that C. J. Swift must be regarded as the actual owner of all the stock of the petitioner in 1920 and 1921. Although the stock record book of the corporation shows stock outstanding in the names of persons other than Swift during those years, the certificates for all but 20 per cent of the stock were immediately after issue indorsed in blank and handed to Swift, who thereafter kept them in his possession. The other 20 per cent was represented by a certificate issued to Swift's daughter without consideration. The daughter immediately indorsed the stock over to her mother, who in turn delivered it to Swift, and it remained in his possession throughout the years 1920 and 1921. None of these record stockholders ever regarded the stock as their property, but, on the contrary, considered that all of the stock belonged to Swift. Since Swift was actively engaged in the business of the corporation, the only element we have left to consider is whether the income was primarily ascribable to his activities. Concerning this there is little doubt. Of the corporate income 80 per cent was produced either by Swift or by Swift and his son-in-law, Warner, working together. The income from business secured by solicitors was a minor factor as far as income was concerned and was handled only to keep the agency for certain large companies. The agency had been obtained by Swift and the income was largely due to his efforts in securing business under this agency. Cf. , and .

Reviewed by the Board.

Judgment will be entered for the petitioner.