[949]*949OI'INION.
Ivins :
The taxpayer makes a preliminary point that its net income for 1920 should be reduced by $2,160.26, the amount disallowed as a 1919 deduction, on the ground that it belonged in 1920, but not [950]*950added to 1920 deductions. It is correct in this, and the tax for 1920 should be recomputed accordingly.
The taxpayer makes four other contentions:
(1) That it is a personal service corporation within the definition in section 200 of the Revenue Act of 1918, and entitled to be taxed as such.
(2) That it is entitled to a deduction for depreciation on the “ contract ” for which it issued $4,000 of stock.
(3) That, if not entitled to personal service classification, it should be allowed as a deduction in each year a sum amounting to 90 per cent of its profits which it obligated itself to pay for the “ contract.”
(4) That, if not classified as a personal service corporation, it is entitled to special assessment under the provisions of sections 327 and 328 of the Revenue Act of 1918.
We shall discuss these contentions in the order indicated.
(1) Was the taxpayer a personal service corporation? In order to come within the definition in section 200 of the Revenue Act of 1918, it must satisfy three requirements — the income must be primarily attributable to the activities of the principal stockholders; the principal stockholders must be regularly engaged in the active conduct of its business; and capital must not be a material income-producing factor. Appeal of Bryant & Stratton Commercial School, Inc., 1 B. T. A. 32. If it fails to meet any one of these tests, it is not entitled to classification as a personal service corporation. Let us apply the first test. What was the source to which the taxpayer’s income was primarily attributable? What did the public pay its money for ? It was not to see the latest production staged by William Morris, but to hear the inimitable Harry. There is no doubt that Morris’ showmanship and salesmanship greatly enhanced the success of the enterprise, and Mrs. Morris’ “ Scotch teas ” probably helped, too. But it was the Lauder act, not the Morris production, that really drew the crowds.
The purpose of the statute was to grant a privilege to certain corporations whose activities consisted of the rendition of personal services, by its stockholders, for money. Presumably the services were to be rendered to those who paid the money. Counsel took the position that Lauder employed the taxpayer to render services to him — -that, he retained, through it, the professional services of the Morrises — rather than that the taxpayer hired him to act in its show. But we can find nothing in the evidence to justify such a conclusion. The arrangement did not differ from that between Barnum and the white whale except in that Lauder was to be paid a part of the profits if any were earned. If the show had been a failure, Lauder wo'uld have lost his time, but the taxpayer would have lost the money it had to pay out for advertising, traveling expenses, salaries of vaudeville actors, manager, etc. At the utmost, it was a joint venture between Lauder and the taxpayer, not an employment of the taxpayer by Lauder. Lauder was under no obligation to pay the taxpaj^er anything in any circumstances.
If services were rendered to anybody they were rendered to the paying public. And for whose services did the public pay ? When [951]*951a client goes to a lawyer, a doctor, or an engineer, he retains his services. It may be that a large part of the work done under the retainer will be performed by a clerk, a nurse, or a draftsman in the employ of the professional man, but it is Ms ability, skill, or judgment that is desired, whether exercised directly or by way of supervision. It is Ms reputation that attracts patrons. It is he who will be held responsible for the quality of the services rendered. In the case before us it was the other way. If Lauder’s voice had failed, the taxpayer could not have hired a substitute, as the professional man could readily get a new clerk, nurse or draftsman. Lauder could easily find more managers — perhaps not so clever, but with sufficient ability to make his act a paying proposition. But where could Morris find another Lauder ?
We are satisfied that, while the ability of William Morris undoubtedly contributed to increased receipts, the profits of the taxpayer were principally attributable not to his activities, but to Lauder, the reputation of Lauder, the activities of Lauder (who was not a stockholder in the taxpayer corporation), or possibly to the “ contract,” if one can call it such, or the friendship between Morris and Lauder.
It is not necessary to go into the question of whether the “contract” or friendship was capital — it certainly was not a personal activity of the Morrises, and it (or Lauder’s activities) certainly constituted the principal source of the taxpayer’s revenue. The taxpayer, having failed to meet the first test provided in the definition, must be denied classification as a personal service corporation.
(2) Should the taxpayer be allowed a deduction for “depreciation ” of its contract with Lauder? We are not at all sure there was a contract. The letter quoted in the findings could hardly have constituted the basis for an action had Lauder decided not to go on tour, or for an injunction if he had decided to take another manager. Morris did testify that Lauder had once told him, sixteen or seventeen years ago, that he would never let anybody else manage him in America, but that statement was hardly an assignable asset. Morris’ testimony also rather negatived his counsel’s contention that “We will prove that it was a contract for a definite period, for a definite life. We will prove its value and use that in support of the deduction.” It was, in part, as follows:
Q. Did you enter into a contract with Lauder on or about May, 1919, to tour him in this country?
A. ’Well, when you say a contract, we have really never had a contract. He would either cable me or write a letter and sometimes a postal card.
Q. Will you tell the Board what your custom was with respect to a contract with Lauder?
A. Yes. Why, he would write me, or cable me, or state “ Will, I will open with you on such and such a day, and I think I can play so many weeks. You better go ahead and route the tour,” or something of the kind.
Q. That would be all?
A. That is about all.
Q. Either his letter or cable stated the terms upon which he employed you?
A. I don’t just remember. I don’t think so. I think he would usually say, “ I can open ” or “ get ready to book the tour,” commencing at such and such a day, “ terms and conditions same as before.” I think that is the way we did business right along. There may have been an original contract 16 or 17 years ago.
[952]*952Q. Did you ever consider it necessary to ask for a written contract?
A. NO.
Q. For your protection?
A. No.
Q. Lauder never asked you for a written contract?
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[949]*949OI'INION.
Ivins :
The taxpayer makes a preliminary point that its net income for 1920 should be reduced by $2,160.26, the amount disallowed as a 1919 deduction, on the ground that it belonged in 1920, but not [950]*950added to 1920 deductions. It is correct in this, and the tax for 1920 should be recomputed accordingly.
The taxpayer makes four other contentions:
(1) That it is a personal service corporation within the definition in section 200 of the Revenue Act of 1918, and entitled to be taxed as such.
(2) That it is entitled to a deduction for depreciation on the “ contract ” for which it issued $4,000 of stock.
(3) That, if not entitled to personal service classification, it should be allowed as a deduction in each year a sum amounting to 90 per cent of its profits which it obligated itself to pay for the “ contract.”
(4) That, if not classified as a personal service corporation, it is entitled to special assessment under the provisions of sections 327 and 328 of the Revenue Act of 1918.
We shall discuss these contentions in the order indicated.
(1) Was the taxpayer a personal service corporation? In order to come within the definition in section 200 of the Revenue Act of 1918, it must satisfy three requirements — the income must be primarily attributable to the activities of the principal stockholders; the principal stockholders must be regularly engaged in the active conduct of its business; and capital must not be a material income-producing factor. Appeal of Bryant & Stratton Commercial School, Inc., 1 B. T. A. 32. If it fails to meet any one of these tests, it is not entitled to classification as a personal service corporation. Let us apply the first test. What was the source to which the taxpayer’s income was primarily attributable? What did the public pay its money for ? It was not to see the latest production staged by William Morris, but to hear the inimitable Harry. There is no doubt that Morris’ showmanship and salesmanship greatly enhanced the success of the enterprise, and Mrs. Morris’ “ Scotch teas ” probably helped, too. But it was the Lauder act, not the Morris production, that really drew the crowds.
The purpose of the statute was to grant a privilege to certain corporations whose activities consisted of the rendition of personal services, by its stockholders, for money. Presumably the services were to be rendered to those who paid the money. Counsel took the position that Lauder employed the taxpayer to render services to him — -that, he retained, through it, the professional services of the Morrises — rather than that the taxpayer hired him to act in its show. But we can find nothing in the evidence to justify such a conclusion. The arrangement did not differ from that between Barnum and the white whale except in that Lauder was to be paid a part of the profits if any were earned. If the show had been a failure, Lauder wo'uld have lost his time, but the taxpayer would have lost the money it had to pay out for advertising, traveling expenses, salaries of vaudeville actors, manager, etc. At the utmost, it was a joint venture between Lauder and the taxpayer, not an employment of the taxpayer by Lauder. Lauder was under no obligation to pay the taxpaj^er anything in any circumstances.
If services were rendered to anybody they were rendered to the paying public. And for whose services did the public pay ? When [951]*951a client goes to a lawyer, a doctor, or an engineer, he retains his services. It may be that a large part of the work done under the retainer will be performed by a clerk, a nurse, or a draftsman in the employ of the professional man, but it is Ms ability, skill, or judgment that is desired, whether exercised directly or by way of supervision. It is Ms reputation that attracts patrons. It is he who will be held responsible for the quality of the services rendered. In the case before us it was the other way. If Lauder’s voice had failed, the taxpayer could not have hired a substitute, as the professional man could readily get a new clerk, nurse or draftsman. Lauder could easily find more managers — perhaps not so clever, but with sufficient ability to make his act a paying proposition. But where could Morris find another Lauder ?
We are satisfied that, while the ability of William Morris undoubtedly contributed to increased receipts, the profits of the taxpayer were principally attributable not to his activities, but to Lauder, the reputation of Lauder, the activities of Lauder (who was not a stockholder in the taxpayer corporation), or possibly to the “ contract,” if one can call it such, or the friendship between Morris and Lauder.
It is not necessary to go into the question of whether the “contract” or friendship was capital — it certainly was not a personal activity of the Morrises, and it (or Lauder’s activities) certainly constituted the principal source of the taxpayer’s revenue. The taxpayer, having failed to meet the first test provided in the definition, must be denied classification as a personal service corporation.
(2) Should the taxpayer be allowed a deduction for “depreciation ” of its contract with Lauder? We are not at all sure there was a contract. The letter quoted in the findings could hardly have constituted the basis for an action had Lauder decided not to go on tour, or for an injunction if he had decided to take another manager. Morris did testify that Lauder had once told him, sixteen or seventeen years ago, that he would never let anybody else manage him in America, but that statement was hardly an assignable asset. Morris’ testimony also rather negatived his counsel’s contention that “We will prove that it was a contract for a definite period, for a definite life. We will prove its value and use that in support of the deduction.” It was, in part, as follows:
Q. Did you enter into a contract with Lauder on or about May, 1919, to tour him in this country?
A. ’Well, when you say a contract, we have really never had a contract. He would either cable me or write a letter and sometimes a postal card.
Q. Will you tell the Board what your custom was with respect to a contract with Lauder?
A. Yes. Why, he would write me, or cable me, or state “ Will, I will open with you on such and such a day, and I think I can play so many weeks. You better go ahead and route the tour,” or something of the kind.
Q. That would be all?
A. That is about all.
Q. Either his letter or cable stated the terms upon which he employed you?
A. I don’t just remember. I don’t think so. I think he would usually say, “ I can open ” or “ get ready to book the tour,” commencing at such and such a day, “ terms and conditions same as before.” I think that is the way we did business right along. There may have been an original contract 16 or 17 years ago.
[952]*952Q. Did you ever consider it necessary to ask for a written contract?
A. NO.
Q. For your protection?
A. No.
Q. Lauder never asked you for a written contract?
A. No.
And we have no evidence of the value of the alleged “ contract” that was assigned to the taxpayer. Morris did say when asked what, in his opinion, it was worth: “Well, the profit of it, whatever that might be.” This hardly constitutes a definite enough basis for the setting up and writing off of an asset on the books of a corporation. The taxpayer issued $4,000 of stock for this “ contract,” but there is no evidence of the value of that stock. The fact that $1,000 was paid for the other ten shares of stock indicates nothing, for it was paid by the same interests that turned in the “ contract ” and held all the stock — it was not an arm’s length transaction nor a transaction in open market. Morris put in the “ contract ” and the money for all the stock of a corporation he was himself creating. We can find no basis for allowing any depreciation on this “ contract.”
(3) Should the taxpayer be permitted a deduction amounting to 90 per cent of its profits, on the theory that it paid this much (in addition to 40 shares of stock) for the right to operate under the contract? It does not appear that it ever paid any part of such consideration. The profits of the corporation were all divided ratably among its stockholders. There is no evidence that Morris ever assigned any interest in his right to receive 90 per cent of the profits to his wife or son. What they received was by way of dividends, attributable to their stockholdings. There is no evidence that Morris waived his right to proportionate distribution, so presumably what he took was also by way of dividends — the exact ratable distribution indicates as much. The corporation kept no minutes (except of the first meetings and one bank resolution), but the stockholders certainly were in a position, by unanimous consent coupled with acquiescence on the part of Morris, to abrogate that part of the taxpayer’s agreement that called for a payment to Morris of 90 per cent of the profits, and to distribute the entire profits as dividends, and this is apparently what they did. The fact that they might not have done so, had they known the taxpayer would be refused personal service classification, can not constitute a basis for allowing a deduction for a payment never made.
(4) Is the taxpayer entitled to special assessment under the provisions of sections 327 and 328 of the Revenue Act of 1918 ? It contends that the computation of its tax under section 302 will work excessive hardship as compared with taxes imposed on representative corporations in similar businesses. But it has adduced no evidence of any abnormality of invested capital or income, for the purpose of testing its right under section 327. Its claim must be rejected.