Frank H. Buck Co. v. Commissioner

*1060 This is a proceeding for the redetermination of a deficiency in income and profits taxes for 1918 in the amount of $10,820.66. The question involved is whether the petitioner should be taxed under section 303 of the Revenue Act of 1918 as a corporation whose income is derived (1) from a trade or business (or a branch of a trade or business) in which the employment of capital is necessary, and (2) a part (constituting not less than 30 per cent of its total net income) is derived from a separate trade or business (or a distinctly separate branch of the trade or business) which if constituting the sole trade or business would bring it within the class of "personal service corporations" within the meaning of section 200. It was alleged in the petition that if the tax should not be assessed under section 303, it should be assessed under section 328.

FINDINGS OF FACT.

The petitioner is a corporation organized under*4317 the laws of California, with its principal place of business at San Francisco. The petitioner owns and leases ranches and sells the fruit grown thereon as a principal. In addition to this business it acts as a broker in selling fruit for others upon a commission basis. The grower brings his fruit to the petitioner's shed and the petitioner ships it and sells it for him on a commission basis. It comes to the petitioner's shed packed and ready for shipment. The transportation is paid by the person, firm or corporation to whom the fruit is shipped and is deducted from the returns which are sent to the petitioner. The greatest portion of the fruit is sold in the auction markets in the larger States. The petitioner did not assume any risk such as market fluctuation, bad debts, or failure of the purchasers to accept shipments, nor did it guarantee the accounts of the purchasers. The petitioner was not responsible for the payment of the purchase price.

The petitioner's net income from all sources was $30,639.56. The gross commissions on the sales for others earned by the petitioner during the year involved were approximately $31,000. There was no separate account kept of the*4318 expenses which were incurred or paid in connection with selling the fruit on commission, but the petitioner estimated and allocated a certain part of the total expense to the commission sales. More than 30 per cent of the total net income of the petitioner was derived from selling fruit on a commission basis for others.

A statement of the stockholders of the petitioner corporation together with the amount of stock owned by each is as follows:

*1061 Frank H. Buck was president of the corporation, its active head, and was regularly engaged in the active conduct of the business. Annie S. Buck, his mother, Leonard W. Buck, his brother, and Zayda Buck, his wife, were not regularly engaged in the active conduct of the affairs of the corporation. Wright was an employee of the company and McNulty was his attorney. Each held one share of stock in order to enable them to qualify as directors.

OPINION.

TRAMMELL: The question involved here is whether the petitioner comes within the provisions of section 303 of the Revenue*4319 Act of 1918, the pertinent portions of which are as follows:

That if part of the net income of a corporation is derived (1) from a trade or business (or a branch of a trade or business) in which the employment of capital is necessary, and (2) a part (constituting not less than 30 per centum of its total net income) is derived from a separate trade or business (or a distinctly separate branch of the trade or business) which if constituting the sole trade or business would bring it within the class of "personal service corporations," then (under regulations prescribed by the Commissioner with the approval of the Secretary) the tax upon the first part of such net income shall be separately computed (allowing in such computation only the same proportionate part of the credits authorized in sections 311 and 312), and the tax upon the second part shall be the same percentage thereof as the tax so computed upon the first part is of such first part. * * *

If that part of the business which consisted of the selling of fruit on a commission basis was a distinctly separate branch of the petition's trade or business which if constituting the sole trade or business would bring it within the*4320 scope of section 200 of the Revenue Act of 1918, then the petitioner is entitled to have its tax assessed under section 303. There is no serious controversy that an amount in excess of 30 per cent of the petitioner's total net income was derived from selling fruit on a commission basis.

We will discuss first the question as to whether that part of the business which consisted of selling fruit on a commission basis would, if it constituted a sole trade or business, constitute the petitioner a personal service corporation. If it did not, then it becomes unnecessary to determine whether it was a distinctly separate branch of a trade or business within the meaning of section 303.

*1062 We find from the evidence that Frank H. Buck owned 531 shares of a total of 1000 outstanding shares. He was the only person who could fairly be said, from the evidence, to have been regularly engaged in the active conduct of the affairs of the corporation. This leaves 469 shares of the outstanding capital stock in the hands of persons who were not regularly engaged in the active conduct of the business. Under this state of facts, in our opinion, the provisions of section 200 of the Revenue*4321 Act of 1918 have not been met. The principal stockholders are not regularly engaged in the active conduct of the business as contemplated by that section. This being true, the petitioner, if it had been engaged solely in carrying on business on a commission basis, would not be classified as a personal service corporation. It therefore does not meet the test prescribed by section 303 and could not be taxed under the provisions of that section. The petitioner contended that if it was not entitled to be taxed under the provisions of section 303, then in the alternative it was entitled to the benefit of section 328 of the Revenue Act of 1918 in that there were abnormalities affecting its income or capital. We have no evidence relating to the invested capital of the petitioner, nor have we any evidence from which we could conclude that there were abnormalities affecting its income. We, therefore, approve the action of the Commissioner in assessing the tax under the provisions of section 301.

Judgment will be entered on 15 days' notice, under Rule 50.

Considered by MORRIS, MURDOCK, and SIEFKIN.