Tifft, Layer & Co. v. Commissioner

*481 This is a proceeding for the redetermination of a deficiency in income and profits tax for 1921 in the amount of $538.83. The question in issue is the right of the petitioner to be classed as a personal service corporation for 1921. The deficiency was determined upon a net income reported of $4,567.24. At the hearing of this proceeding the petitioner admitted an error on the computation of the net profit for 1921 and admitted that the same was $6,243.04. The respondent moved to increase the deficiency in so far as such error affected the tax liability.

FINDINGS OF FACT.

The petitioner is a Pennsylvania corporation organized November 11, 1920, for the purpose as stated in its certificate of incorporation *482 of "acting as agent or broker in the business of marine, fire, life, accident and fidelity insurance, and each of them, and any other kind, or class of insurance in all its branches." It was incorporated with an authorized capital stock of 50 shares of*3523 a par value of $100 each, aggregating $5,000, of which there was issued and outstanding during the whole of the year 1921, ten shares only of the par value of $1,000. Of the ten shares of stock so issued and outstanding five were issued for cash and the remaining five were issued for property consisting of office furniture, furnishings, and supplies assigned to the corporation by J. Alden Tifft. The stock was issued as follows: John Alden Tifft, 1 share; John J. Layer, 1 share; J. Alden Tifft and John J. Layer, trustees, 7 shares; and one share was issued to the attorney for the petitioner, who immediately endorsed the certificate over to the two other stockholders as trustees for themselves.

The purpose of the trust agreement was primarily to create a vehicle through which the dividends declared on the stock might be distributed to John Alden Tifft and John J. Layer on the basis of the business contributed to the company and respectively handled by J. Alden Tifft and John J. Layer. The trust agreement provided in part:

4. After the payment of said salaries and other necessary expenses of the corporation or corporations, the annual profits applicable to the stock held in trust*3524 hereunder, whether paid out in the form of dividends or retained by the corporation or corporations as surplus or undivided profits, and the annual losses, shall be credited, paid or charged, as the case may be, to the parties as follows: Accounts shall be kept by the trustees separate and apart from the corporate accounts, in which the annual corporate profits or losses applicable to the stock held in trust hereunder shall be credited or charged to the parties respectively in proportions as follows: Of the first year's profits or losses three-fourths thereof shall be credited or charged to TIFFT and one-fourth thereof to LAYER; the profits or losses of each of the succeeding years shall be credited or charged to the parties hereto in proportion to the business controlled or secured by each of the said parties respectively during said year until the business controlled or secured by LAYER shall in any one year equal or exceed that secured or controlled by TIFFT, after which time for the life of this agreement the said net profits or losses of the corporation or corporations shall be credited or charged in equal shares to each party. Layer shall not, however, receive or be credited*3525 with less than one-fourth of such annual profits nor charged with less than one-fourth of such annual losses. For the purpose of ascertaining the amount of business controlled or secured as aforesaid by each of the parties and until they are on an equal basis as to profits as hereinbefore provided they shall keep or cause to be kept by the corporation or corporations accounts showing the amount of business secured or controlled by said TIFFT and that secured or controlled by said LAYER respectively. All business which cannot be justly claimed by either of the parties hereto shall be equally divided.

Dividends when received by the Trustees shall be first applied to the payment of the first year's profits and distributed to the parties in the proportions of three-fourths to TIFFT and one-fourth to LAYER until the entire first year's *483 profits as credited have been distributed, thereafter dividends shall be distributed and applied to the payment of the second year's profits in the proportions in which the second year's profits were credited to the parties respectively until such second year's profits have been distributed in full and so on from year to year.

Nothing*3526 in this agreement contained shall be construed as inposing upon either of the parties or their estate any liability to third persons or to the corporation or corporations to be formed for losses of such corporation or corporations, and such losses shall be charged in the accounts to be kept by the trustees only for the purposes of determining the respective distributive interests of the parties under this agreement.

Prior to the incorporation of the petitioner Tifft and Layer had been associated together as insurance brokers and agents and the corporations so formed took over and acquired the business and good will previously carried on individually bt Tifft and Layer.

The gross income of the corporation for the calendar year 1921 aggregating $19,639.82 was derived as follows:

Of the $15,969.23 commissions upon insurance placed and*3527 written through the personal efforts of J. Alden Tifft and John J. Layer $10,968.31 or 68.7 per cent of the total were ascribable to the efforts of J. Alden Tifft, and $5,000.92 or 31.3 per cent of the total were ascribable to the efforts of John J. Layer. The life insurance commissions in the amount of $1,032.04 accrued to the corporation in general.

During 1921 J. Alden Tifft, as president, received a salary of $3,659.69, and John J. Layer, as secretary and treasurer, a salary of $3,026.81. The only additional salaries paid during the year, aggregating $3,933.33, were paid to office help consisting of stenographers, bookkeepers and filing clerks.

For the purpose of advertising the business of the new concern Tifft issued monthly bulletins which were distributed to business people and prospective clients. Insurance agencies in other cities became interested in the bulletin and wished to purchase copies thereof for distribution to their own clientele. From the sales of such copies the petitioner during 1921, derived an income of $2,566.72.

The insurance commissions received during the year, amounting to more than 86 per cent of the gross income of the petitioner, were*3528 commissions paid by various insurance companies based upon the premiums charged with respect to fire, casualty and life insurance *484 written through the personal efforts, solicitation and responsibility of Tifft and Layer. The corporation received no insurance through subagents or employees. The commissions paid to the petitioner were paid to it as a broker and not as an agent of the insurance companies. Tifft and Layer were during 1921 regularly engaged in the active conduct of the affairs of the petitioner, each having given all of his time thereto and neither of them being otherwise employed.

Only about $1,000 was paid into the corporation in exchange for the shares of stock issued in 1920, and at the beginning of 1921 the petitioner had net assets, including cash, of only a few thousand dollars. The balance sheet of the company at December 31, 1921, showed as follows:

*3529 The petitioner borrowed no money from banks and paid no adjustment losses for insurance companies during 1921.

The notes receivable appearing in the balance sheet of the petitioner, aggregating $1,550, represented a note of Tifft's to the company *485 for $1,000 and one of Layer's to the company for $550, which notes were given for money advanced to them by the petitioner.

The item of accounts payable shown in the balance sheet, $8,166.01, represented premiums collected by the petitioner from various assureds and not yet remitted to the insurance agents with whom the business was placed for the reason that the time for such remittance under the usual course of business between the petitioner, as broker, and the various agents with respect to such premiums had not arrived upon the date when the books were closed for the purpose of making up said balance sheet. The accounts payable shown, aggregating $1,154.83, represented a note of the company to Tifft for $500 and a note due Tifft, Layer & Co. (a New Jersey corporation) for $654.83, the moneys represented by the notes having been obtained and used by the petitioner for the payment of rents and office salaries.

OPINION.

*3530 SMITH: The evidence of record in this case shows that the petitioner meets all the requirements of a personal service corporation, as defined in section 200 of the Revenue Act of 1921. The deficiency notice from which the petitioner appealed to this Board shows that the respondent denied personal service corporation classification upon the ground that the income is not primarily due to the personal services of the principal owners. The evidence clearly refutes this contention. All or substantially all of the income of the petitioner was clearly ascribable to the individual efforts of Tifft and Layer. Cf. .

Section 218(d) of the Revenue Act of 1918 provides in part as follows:

The net income of the partnership shall be computed in the same manner and on the same basis as provided in section 212 except that the deduction provided in paragraph (11) of subdivision (a) of section 214 shall not be allowed.

The fact that the net income of the corporation is not distributable to the stockholders equally or according to the shareholdings of Tifft and Layer does not operate to bar the petitioner from personal service corporation classification. *3531 The requirement of the statute is simply that the profits shall be distributed in accordance with their "respective shares." As we interpret the statute the profits may be divided among the respective stockholders upon any basis which may be agreed upon between them. Under the trust agreement entered into between Tifft and Layer three-fourths of the net income of the petitioner for the year 1921 belonged to Tifft and one-fourth to Layer.

Judgment of no deficiency will be entered for the petitioner.