Real Estate Management Co. v. Commissioner

*165 The respondent has determined the following deficiencies in income and excess-profits taxes:

The only issue raised by the Real Estate Management Co. is whether it is entitled to personal service classification, and the single question raised by the Milano Co. is whether it is affiliated with the former. At the hearing, by agreement of counsel, the proceedings were consolidated for hearing and decision.

FINDINGS OF FACT.

The Real Estate Management Co., hereinafter referred to as the "Company," having its principal place of business at 230 West 99th Street, New York, N.Y., was organized in 1898 under the laws of the State of New York, by David J. McComb.

For many years prior to, and during, the taxable years, the business of the Company consisted of managing, as agent for the owner, real estate for fees based upon the amount of rents collected, and writing insurance on buildings and furniture on*2115 a commission basis. *166 It had no other source of income. The gross income of the Company in each of the taxable years was about $25,000. Of this amount approximately $1,200 per year was derived from the insurance branch of the business. No part of its income was derived from trading as a principal or from Government contracts.

The outstanding capital stock of the Company during the years 1920 and 1921 was owned as follows:

At some undisclosed time prior to 1916, Mr. McComb left New York City to reside in Dayton, Wyo., he having been prompted to take this action because of the physical condition of himself and his wife.

During the early part of 1916, McComb advised Anderson that due to his, and his wife's, ill health he would have to practically discontinue active business and live in the West the greater part of the time; that he was turning the Company's business over to him; that, because his stock was deposited at a bank as collateral for a loan, he could not assign it to*2116 him at that time, but would make the transfer as soon as he was able to do so, and that he would assist him to operate the business when necessary by returning to New York City or by otherwise giving helpful advice. In 1916 McComb definitely abandoned New York City as an active place of business.

From the time McComb went to Dayton to reside until after the taxable years, he never spent more than from three to five months each year in New York City. He was in New York City from the first of December, 1919, until about the first of April, 1920, and during the summer and fall of 1921. During his visits to New York City Anderson consulted him about the Company's business affairs, and while he was at Dayton Anderson corresponded with him concerning business matters. While in New York City McComb also interviewed many of the Company's clients concerning various things connected with the management of their properties by the Company.

Among the properties managed by the Company was the Milano Building owned by the Milano Company, a corporation organized by McComb. In 1916, McComb agreed to accept as compensation for services to be rendered by him to the Company in connection with*2117 the repair and rental of the building, a salary of $100 per month until the Company no longer managed the property. This salary was paid to McComb until June 1, 1920.

*167 E. T. Anderson entered the service of the Company in the year 1902. He devoted all of his time to the conduct of the Company's business, and had charge of all of its affairs. As compensation for his services he received a salary of $150 or $175 per month.

H. L. Warren was the Company's bookkeeper and cashier, and as such devoted all of his time to the affairs of the Company. As compensation for his services he received a salary of about $30 per week.

In addition to Warren and Anderson, the Company employed two men to collect rents and to render reports to Anderson on repairs needed by the various properties being managed; a girl to answer the telephone, and a girl to take care of the "renting desk" and do clerical work.

D. J. Culpepper, a nephew of McComb, was not actively engaged in the conduct of the Company's business.

In 1926 McComb donated $10,000, par value, of his stock to the Company, and with the exception of one share, which he retained, transferred the balance of his holdings*2118 to Anderson without consideration.

The pay roll of the Company in the year 1920 was $8,660.66.

None of the nonstockholding employees of the Company obtained any of its business. Such business as was not obtained through the medium of circular letters sent by the Company to prospective clients, was obtained through the solicitation of Anderson and McComb and the recommendations of their friends.

The Company has never paid any dividends.

In his audit of the returns of the Company for the taxable years the respondent declined to classify it as a personal service corporation. He also held that it was affiliated with the Milano Co. in the year 1920.

OPINION.

ARUNDELL: Section 200 of the Revenue Acts of 1918 and 1921 defines 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 has failed to prove that it comes within at least two of the essential requirements of the statute. In*2119 1916 David J. McComb, owner of about 85 per cent of the Company's stock, and consequently its principal stockholder, placed the active management of the business in the hands of Anderson, the holder of 10 per cent of the corporation's stock. After 1916, including the taxable years, McComb did not spend more than from three to five months *168 each year in New York City and we do not know how much of that time was devoted to the conduct of the affairs of the Company. Subsequent to 1916 Anderson had active charge of its affairs, and, to use his language, "was running the whole business." McComb was probably responsible for some of the Company's revenue, but the evidence is lacking in proof that during the taxable years its income was due primarily to his activities. Neither does the evidence establish that McComb was regularly engaged in the active conduct of the Company's business.

At the hearing counsel for the petitioners conceded that in the event we decide that the Company is not a personal service corporation, the petitioners should be affiliated for tax purposes. Accordingly, the determination of the respondent that the petitioners were affiliated during the year*2120 1920 is approved.

Decision will be entered for the respondent.