Penn-Yale Corp. v. Commissioner

*1229. OPINION.

The Revenue Acts of 1918 and 1921 define a personal service corporation as one “ whose income is to be ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material income-producing factor * *

The petitioner was engaged in the buying and selling of real estate, the borrowing of money, the renting of property until a sale could be made, making repairs, alterations, etc. Capital, both invested and borrowed, was used in the business. The fact that Wood, the sole stockholder of the corporation, saw fit to dispense with the usual corporate formality and to treat the business as if it were his own and to appropriate the profits of the corporation without awaiting the formal declaration of a dividend, can not change the situation. In the eyes of the law a corporation is a separate and distinct entity from its stockholders and we can not disregard the fact. E. C. Huffman, 1 B. T. A. 52, and cases there cited. Petitioner is in no different situation from that in which many similar businesses found themselves under the taxing statutes. In order to save themselves from unlimited liability and to reap other advantages which come with corporate organization, many small businesses which would have otherwise operated as sole proprietorships or partnerships took the corporate- form. That there are burdens that come with such i an organization can not change the essential fact that the corpora*1230tion is a separate entity. Capital was a material income-proclueing factor and it follows that personal service classification must be denied. Kossar & Co., 4 B. T. A. 1164; Seaboard Mills, Inc., 5 B. T. A. 575. While we may concede that Wood was entitled to a salary of $5,000 per annum for his services, still he made no charge to the corporation and no liability existed, and in fact, no salary was paid. There was nothing to deduct under such circumstances. Columbia Textile Co., 2 B. T. A. 472; American Central Fruit Auction Co., 3 B. T. A. 199; Williamson Milling Co., 5 B. T. A. 814.

Judgment will be entered for the resyondent.