F. C. West Corp. v. Commissioner

*629 Before STERNHAGEN, LITTLETON, and TRUSSELL.

The petitioner claims that the Commissioner erred in refusing to classify it as a personal service corporation and determining accordingly a deficiency of $1,012.19 for the calendar year 1920. The alternative claim is made that should it be held that peititioner is not entitled to classification as a personal service corporation, the deduction for compensation of its president, as allowed by the Commissioner, should be increased.

*630 FINDINGS OF FACT.

The petitioner is an Illinois corporation with principal office at Chicago, its business being that of general sales agent for various manufacturers of automobile accessories on the commission basis.

Since the time of its organization in November, 1918, its outstanding capital stock has consisted of 57 shares of the par value of $100 each. During the year 1920, F. C. West, president and treasurer, *2235 owned 55 shares; M. F. Chase, vice president, 1 share; and C. H. Scribner, secretary, 1 share. At the time of incorporation and throughout the taxable year, it was provided, by contract between the corporation and its stockholders, that the net commission received should be divided between the three stockholders upon the percentage basis. The percentages during the year 1920 were as follows: F. C. West, 50 per cent; M. F. Chase, 25 per cent; C. H. Scribner, 25 per cent. The Commissioner allowed a deduction of $6,257.82 as reasonable compensation for each of the three officers.

As general sales agent for various manufacturers, the petitioner made sales throughout the United States. Its three stockholders were regularly engaged in the active conduct of its business. They each acted as salesman and spent the greater portion of their time on the road. F. C. West controlled the policies of the corporation and had charge of all of its affairs. He supervised the work performed by other salesmen and secured all contracts in which the company was to act as sales agent. He also selected various local salesmen and made contracts with them as to their territory and the commission which*2236 they were to receive on sales made in such territory. The three stockholders did not confine their activities entirely to any particular territory but spent considerable time working with and assisting local salesmen. They were not, however, credited by the corporation with any commissions received on sales made in any territory in which the company had a local agent. In addition to making sales throughout the territory covered by contracts with manufacturers, F. C. West devoted a great deal of time working with local agents and instructing them in the matter of making sales.

During the year 1920, the petitioner had sales agreements with eleven local salesmen, which agreements, for the most part, provided that such salesmen should receive a commission of 6 per cent on all sales in the territory covered by such contract. The usual commission received by the petitioner from manufacturers for which it acted as agent was 12 per cent. During the year commissions in the amount of $20,860.45 were credited to local salesmen. Occasionally, small advances were made to certain of the local salesmen and charged against their commissions as earned.

*631 The gross income and deductions, *2237 as shown by the return for the taxable year, were as follows:

The balance sheets at the beginning and end of the year were as follows:

*632 Fifty per cent of petitioner's income was derived from sales by its three stockholders in territory in which it had no local salesmen, and 80 per cent represented sales made by its stockholders*2239 in the territory covered by contracts with manufacturers, including the territory in which there were local salesmen.

*633 OPINION.

LITTLETON: In view of the evidence, petitioner's income can not be ascribed primarily to the activities of the stockholders. We are of the opinion, however, from the evidence, that the petitioner should have been allowed a deduction of $7,500 as reasonable compensation for F. C. West, president.

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