
    Appeal of PEERLESS ENGRAVING CO.
    Docket No. 3626.
    Submitted October 20, 1926.
    Decided January 26, 1926.
    Taxpayer was not, during 1919 and 1920, a personal service corporation.
    
      Charles B. Lawson, Esq., for the taxpayer.
    
      J. Arthur Adams, Esq., for the Commissioner.
    Before James, LittletoN, Smith, and Trussell.
    This is an appeal from the determination of deficiencies in income and profits tax for the years 1919 and 1920 in the amounts of $6,154.20 and $5,104.07, respectively, arising from the refusal of the Commissioner to classify taxpayer as a personal service corporation.
    FINDINGS OF FACT.
    Taxpayer is a New York corporation, engaged in photo engraving, with principal office in New York City. It was organized in 1904 and, during the taxable years, its entire capital stock of the par value of $8,200 was owned by Henry J. Roes, president and treasurer, who, during the taxable years, devoted his entire time to the business. He determined the policies of the corporation and supervised the manufacture of its product. The taxpayer’s entire net income was derived from the manufacture of photo engravings, both halftone and line, upon orders secured by the principal stockholder and salesmen employed by taxpayer. The cost of all material and labor was borne by the taxpayer and the price charged customers for the engravings was determined by taxpayer upon completion of the work contracted for. Taxpayer leased the building in which it carried on its business and, in addition, had equipment consisting of cameras, lenses, and etching, routing, and blocking machines, and various tools.
    The gross income and deductions for the year 1919 were as follows:
    Gross income from operations_$139,642.28
    Interest- 544.14
    Gross income from other sources_ 5. 82
    Total_$140,192.24
    DEDUCTIONS.
    Ordinary and necessary expenses_$101,880. 62
    Compensation (H. J. Roes)_ 14,000.00
    Taxes___ 86. 95
    Bad debts_ 717.50
    Exhaustion, wear and tear_ 693. 79
    Total. 117,378.76
    Net income. 22, 813.48
    
      The item of ordinary and necessary expenses, amounting to $101,' 880.52, consisted of the following:
    Cost of materials_$16, 389.58
    Salaries:
    5 gallery employees:_ 10,225. 07
    3 negative turners_ 5, 549.68
    4 etchers_-i_ 7,249.70
    8 finishers- 21,087.11
    2 routers_ 6, 535. 04
    1 Ben Day employee_ 2,931. 52
    Factory rent_ 1, 840. 64
    Factory insurance_ 307.30
    Electric service_ 1, 266.36
    Plant expense- 155.01
    Compensation insurance_ 417. 59
    Gas-,_ 291. 73
    Water_ 109. 85
    Rent-,___ 460.00
    Office salaries, bookkeeper, and stenographers_ 9,369.99
    Office expense_ 272. 70
    Telephone- 309. 72
    Insurance_ 49.70
    Stationery and supplies_ 20. 00
    Repairs- 98.00
    Auditing and legal- 225. 00
    Advertising- 10. 00
    Salaries, 3 salesmen- 8,733.33
    Commissions to salesmen_ 1, 857. 50
    Management expense_ 4, 975.00
    Photo Board of Trade_ 1,144. 00
    Total-i- 101, 880. 52
    The gross income and deductions for the year 1920 were as follows:
    Gross income from operations_$144, 066.00
    Interest- 650. 51
    Gross income from other sources_ 503.14
    Total $145, 219.05
    DEDUCTIONS.
    Ordinary and necessary expenses_ 121, 618. 79
    Taxes- 1, 245. 87
    Bad debts- 421.97-
    Exhaustion, wear and tear_ 624.41
    Total 123,911.04
    Net income. 21, 308.61
    
      The item of ordinary and necessary expenses, amounting to $121,-618.79, consisted of the following:
    'Labor_$60, 2S4. 81
    Rent_,-. 2, 850. 04
    Insurance- 496.94
    Electric service_ 1,404.15
    Gas_ 438. 60
    Water_ 308. 71
    Repairs- 107.45
    Plant expense--- 464.10
    Office salaries_ 12, 421.06
    Office expense_ 659. 82
    Telephone_ 257. 92
    Stationery_ 123. 25
    Legal and auditing- 221.07
    Advertising_ 325. 00
    Light_ 42. 90
    Salesmen’s salaries and commission- 11, 083.00
    Photo Board of Trade_ 1,218.32
    Materials- 12, 911. 65
    Management expense_ 4, 500. 00
    Management salaries_ 11, 500. 00
    121, 618. 79
    The number of employees, their duties, and the wages paid them during 1920 were substantially the same as during 1919, and are included in the item of “ Labor ” in the above statement.
    The balance sheets at January 1 and December 31, 1919, and December 81, 1920, were as follows:
    
      
    
    DECISION.
    The determination of the .Commissioner is approved.
   OPINION.

Littleton:

From the evidence before ns, we are of the opinion that the taxpayer is not entitled to classification as a personal service corporation. It is true that the principal and only stockholder was regularly engaged in the active conduct of the business, but it can not be said that the taxpayer’s income was due primarily to his activities. Both capital and the activities of other employees were material income-producing factors.  