The opinion
WHEELER, KELLY & HAGNY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Wheeler, Kelly & Hagny Co. v. Commissioner
Docket No. 10688.
United States Board of Tax Appeals
11 B.T.A. 656 ; 1928 BTA LEXIS 3746 ;
April 18, 1928 , Promulgated
*3746 Petitioner conducted a fire and tornado insurance agency and loaned money, partly from its own funds and partly with funds of certain life insurance companies, on improved real estate. Fire and tornado insurance on the improvements was a prerequisite to securing a loan and a large part of its insurance contracts resulted from the loan business. Held, that petitioner is not entitled to part personal service classification under section 303 of the Revenue Act of 1918.
Stanley Spurrier, C.P.A., for the petitioner.
L. A. Luce, Esq., and P. M. Clark, Esq., for the respondent.
LANSDON
*656 The respondent has asserted a deficiency in income and profits taxes for the year 1919 in the amount of $4,018.65. Only that part of the deficiency is in controversy which arises from the refusal of the respondent to grant partial personal service classification under section 303 of the Revenue Act of 1918.
FINDINGS OF FACT.
The petitioner is a Kansas corporation, organized in 1916 and maintaining its principal office at Wichita. During the taxable year it conducted an insurance agency, placed loans on real estate for its own account and acted *3747 as agent in making loans on real estate for certain life insurance companies.
Two sets of accounting records were kept, one for the "Loan Department" and one for the "Insurance Department." Salaries, expenses and profit were allocated as accurately as possible to the proper set of books. A common bank account was maintained for both departments. Both sets of books were kept by the same bookkeeper, whose salary was divided between the departments.
On January 1, 1919, $83,400 of the $119,600 capital stock outstanding was owned by parties actively engaged in the business. Their respective holdings, the salaries received by them, and the department to which their services were allocated, appear in the following table: Salaries.
Individual. Capital stock. Loan department. Insurance department.
H. V. Wheeler $24,000.00 $7,880.00
J. C. Kelly 25,000.00 $7,880.00
R. G. Hagny 12,500.00 4,620.00
H. J. Hagny 1 12,500.00
H. L. Edwards 500.00 1,553.75
A. R. Brasted 2,000.00 3,175.00
H. E. Zangker 500.00 537.50 537.50
E. R. Lindsey 400.00 1,312.50
C. F. Parker 5,000.00 2,638.75
Emily Casford 500.00 1,242.25
Mae Smithson 500.00 1,440.25
*3748
*657 During 1919 the total capital stock outstanding was increased to $125,000 by a sale to others than the stockholders listed above. This additional capital was used in making loans on real estate.
Salaries aggregating $36,761.74 were paid during the taxable year, of which $32,817.50 was paid to the stockholders. Of the amount paid to stockholders, $18,358.75 was paid to persons rendering service to the "Insurance Department" and $14,415.75 was paid to persons rendering service to the "Loan Department."
The following is a summary of petitioner's balance statement of December 31, 1919: Assets.
Accounts receivable $104,323.24
Cash, stocks, bonds, etc 228,167.26
Loans and discounts 111,208.30
Real estate 33,643.34
Furniture, fixtures, good will 40,663.26
Total 518,005.40
Liabilities.
Accounts payable $69,522.00
Personal accounts 296,589.11
Suspense account 9.65
Capital stock 125,000.00
Surplus 4,000.00
Undivided profits 22,884.64
Total 518,005.40
*3749 On January 1, 1919, there were insurance accounts receivable of $55,681.38 and insurance accounts payable of $57,152.15. On December 31, 1919, the insurance accounts receivable totaled $76,536.30 and the insurance accounts payable amounts to $69,522. The premiums on the insurance sold were due within 30 days, while remittance to the insurance company was made on a basis of 45 days.
Petitioner's net taxable profit for the year 1919 totaled $42,230.85. Of this amount $31,705.12 has been allocated to the "Insurance Department" and $10,525.73 to the "Loan Department."
H. V. Wheeler, president of petitioner, was general manager of the loan department, J. C. Kelly, vice president of petitioner, was the general manager of the insurance department. Both departments occupied the same office, consisting of one floor which was unpartitioned.
*658 Before a loan could be closed, the improvements upon the property to be mortgaged had to be insured. H. L. Edwards, who was Wheeler's secretary, and A. R. Brasted secured this insurance business at the time the loan was closed. Both were employees of the "Loan Department." The policy was written by the insurance department and *3750 the commission was credited to its account.
OPINION.
LANSDON: The petitioner contends that its tax liability should be computed under section 303 of the Revenue Act of 1918, which provides as follows:
SEC. 303. 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: Provided, That the tax upon such second part shall in no case be less than 20 per *3751 centum thereof, unless the tax upon the entire net income, if computed without benefit of this section, would constitute less than 20 per centum of such entire net income, in which event the tax shall be determined upon the entire net income, without reference to this section, as other taxes are determined under this title. The total tax computed under this section shall be subject to the limitations provided in section 302.
Before a corporation may be granted partial personal service classification it must be established that at least 30 per cent of its net income is derived from a separate trade or business or a distinctly separate branch of the trade or business. The petitioner conducted a fire and tornado insurance agency, and placed loans on improved real estate, both for its own account and on behalf of certain life insurance companies. Before placing the loan petitioner required that the improvements be insured against fire and torando. These insurance contracts were secured at the time the loan was closed by Edwards and Brasted, whose salaries were paid by the loav department. The evidence does not indicate what portion of the insurance premiums thus resulted from the *3752 operation of the loan department, but consideration of the amount of money loaned discloses that a substantial portion might have thus resulted.
In , where a corporation which conducted an insurance agency and financed, partly with its *659 own funds and partly with funds of a trust company, the purchase of automobiles upon which it wrote insurance, the Board held:
The evidence indicates clearly enough that the activities of petitioner are so closely related one to the other and each to the whole that there is neither a separate trade or business nor a distinctly separate branch of the trade or business. As an automobile insurance agent it found a means of increasing its business by financing the purchase of the automobiles upon which it negotiated insurance, and as a further step in this financing it arranged to place loans for the trust company. No one of these was distinct. The costs of the entire business were undividedly applicable to all and the attempt of petitioner's accounting representative to segregate and allocate expenses was not satisfactory.
Without regard to the division into departments, petitioner *3753 occupied a one-room office where the fixed assets were used by the entire business organization. Though salaries have been allocated between the departments, the employees served where there was work to be done.
We are of the opinion that the insurance department was not a distinctly separate branch of the business, and that the petitioner is not entitled to partial personal service classification.
Reviewed by the Board.
Judgment will be entered for the respondent.
Footnotes
1. H. J. Hagny was not actively employed because of poor health during most of the taxable year and received no salary. He was a part of the business organization. ↩