7 B.T.A. 95

Cuyahoga Abstract Title & Trust Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.

Docket No. 8937.

Promulgated May 26, 1927.

Ben Jenkins, Esq., for the petitioner.

Geo. G. Witter, Esq., for the respondent.

*97OPINION.

Tkammelh :

The Revenue Act of 1918 exempts personal service corporations from the taxation imposed upon ordinary business corporations, and provides in section 218 (e) that the individual stockholders shall be taxed in the same manner as tlie members of partnerships. In section 200 of the Act a personal service corporation is defined as one (a) whose income is to be ascribed primarily to the activities of the principal owners or stockholders, (b) who are themselves regularly engaged in the active conduct of the affairs of the corporation, and (c) in which capital (whether invested or borrowed) is not a material income-producing factor.

For each of the years 1918,1919, and 1920, petitioner filed an original corporation income and profits-tax return on Form 1120, and for the years 1919 and 1920 later filed amended returns on the same form. Under date of November 15, 1923, petitioner prepared and filed a personal service corporation return of income on Form' 1065, for each of said years, thereby claiming for the first time to be a personal service corporation. Petitioner now contends that it is entitled to classification as a personal service corporation, and as such is exempt from taxation under the provisions of the revenue act above mentioned. No error other than respondent’s refusal to allow such classification is alleged to have been committed in connection with *98his determination of the deficiencies involved in this proceeding. Respondent avers that petitioner is not entitled to classification as a personal service corporation for the reason that its income can not be ascribed primarily to the activities of its principal stockholders, and because capital was a material income-producing factor in its business. Thus, the sole issue presented is whether petitioner, during the years in question, possessed the qualifications of a personal service corporation as defined in section 200 of the Revenue Act of 1918.

Since petitioner is seeking to overturn the determination of respondent, the burden is upon it clearly to establish by competent and satisfactory evidence that it comes within the class of corporations referred to. As stated by the court in Matteson Co., v. Willcuts, 12 Fed. (2d) 447:

Every corporation has full control of its own activities. * * * If it does not fairly observe and keep within the requirements of the law, it should not claim the benefits which the law confers. To nearly comply with the law or to come within hailing distance thereof, is not enough.
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There is constant temptation to urge that particular corporations, with no right to such favor, be accorded classification as personal service corporations, and the requirements necessary thereto must be substantially observed.

Has petitioner discharged its burden and shown itself fairly to come within the definition of a personal service corporation? We think it has wholly failed to do this.

The evidence shows that petitioner at the time of its organization in 1900 issued its entire capital stock of the par value of $20,000 for a set of abstract books and records, which were accepted at that valuation, and that during the succeeding years up to 1920, it spent large sums of money amounting to between $200,000 and $300,000 by way of additions and betterments to its abstract plant in order to keep it up to date. It is immaterial that such expenditures were largely made from current earnings and charged to expense. Book entries are not conclusive of the nature of the expenditure. Doyle v. Mitchell Bros. Co., 247 U. S. 179-188. A taxpayer has no option to treat expense items as capital or capital expenditures as expenses. Appeal of Gilliam Mfg. Co., 1 B. T. A. 967. We are not here concerned with the question of what portion of the expenditures might properly be regarded as maintenance and hence be chargeable to expense, and what part represents a capital investment. It is sufficient to say that the expenditures in question raised the value of petitioner’s abstract plant from $20,000 in 1900 to several hundred thousand dollars in 1920, and to a very material extent constituted an investment of capital. The replacement value of the abstract plant is shown to be now approximately $500,000. Without the possession and use of such plant, petitioner could not successfully have conducted its business. On that point, J. V. Chapek, a witness for petitioner, *99and who has been its president for 26 years, testified at the hearing as follows:

Q. In other words, you think that you have got to have that investment in the business before you could perform that service to the public?
A. Yes.
Q. Before you could perform it efficiently?
A. Absolutely. You have got to have that. You have got to have all that stuff together. If you don’t have it you cannot do the work. Of course we could not do the work that we do, work on ten or fifteen jobs, if we had to go to the Court House and look up the records. That is something that we could not do night and day efficiently.
Q. In other words, that is where you make your money?
A. Yes.

In the light of this and the other evidence before ns, we are unable to agree with the contention of petitioner that the capital represented by its plant was not a material factor in producing its income. On the contrary, the evidence shows that it was the principal, factor. In the Appeal of Record Abstract Co., 2 B. T. A. 628, the facts were strikingly similar to those in the instant case. There we held that the abstract books of the taxpayer corporation represented a capital asset which was a material income-producing factor in its business, and precluded classification as a personal service corporation.

Having decided that capital ivas a material income-producing factor, the petitioner herein does not meet the requirements of a personal service corporation and a discussion of the other elements prescribed by the statute is not necessary.

Judgment will be entered for the respondent.

Cuyahoga Abstract Title & Trust Co. v. Commissioner
7 B.T.A. 95

Case Details

Name
Cuyahoga Abstract Title & Trust Co. v. Commissioner
Decision Date
May 26, 1927
Citations

7 B.T.A. 95

Jurisdiction
United States

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