Appeals of Hanley-Ried & Co.

2 B.T.A. 315

• Court: United States Board of Tax Appeals
• Decided: July 11, 1925
• Docket: Docket Nos. 1395, 3020
• Status: Published

Opinion

OPINION.

Ivins:

While it is apparent that the income of this corporation is attributable to the activities of its stockholders as a whole, there is cause for serious doubt that such income is to be primarily ascribed to the activities of the principal stockholders. However, since our opinion is to turn upon another point, a further discussion of this one is unnecessary.

In determining this appeal the Board has been presented with a basic principle involving the classification of a corporation as a personal service corporation. Can a corporation, the principal stockholder of which is not itself a personal service corporation, be itself a personal service corporation ?

Under section 200 of the Revenue Act of 1918 it is essential among the , attributes of a personal service corporation that it be “a corporation 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.” (Italics ours.)

Congress recognized the fact that there are many business enterprises which, although nominally corporations, are in a real sense partnerships, in that the income of the enterprise is derived from the personal efforts of the stockholders rather than from the employment of the capital invested in the business. In a real sense the earnings of the corporation are the individual earnings of a group of individuals composing it.

The imposition on such enterprises of the high brackets of taxation designed to reach the earnings of corporations generally was sought to be avoided, since it would tax the personal earnings of such individuals operating in corporate form and they would be taxed again (at surtax though not normal rates) upon their dividends. It was accordingly provided that such corporations should be taxed as partnerships.

The concept underlying the whole theory of personal service corporations was to give relief to those corporations, the income of which was primarily attributable to the personal and individual activities of the principal stockholders.

We think Congress intended that the activities be personal in the sense of being individual. Without question a corporation can not be said’ to have individual activities. It is an artificial entity, the activities of which are necessarily vicarious and not individual.

It is unnecessary to discuss our views on a situation where the corporate stockholder is shown to be itself a personal service corporation. That point must be reserved for a state of facts upon which to predicate it.

To the objection that the stock held by Willcox, Peck & Hughes, Inc., might well have been held by individuals, as was that of the Corroon interests, there is the sufficient answer that it was not so held and that we must decide on the facts as they actually existed.

We conclude, therefore, that the taxpayer is not entitled to classification as a personal service corporation.