Opinion
No. H-14.
June 1, 1931.
Suit by Bowring Co. against the United States.
Petition dismissed.
This is a suit for the recovery of income and profits taxes paid by plaintiff for the years 1918 and 1919. The sole issue involved is whether the plaintiff was, during the years in question, a "personal service corporation" within the meaning of section 200 of the Revenue Act of 1918.
The case having been heard by the Court of Claims, the court, upon the report of a commissioner and the evidence, makes the following special findings of fact:
1. Plaintiff was incorporated under the laws of the state of New York on the 20th day of June, 1902, and has been in existence and continuously engaged in business since that time, with its principal place of business at 17 Battery place, city of New York, state of New York.
2. Plaintiff duly filed with the collector of internal revenue its income and profits tax return for the calendar year 1918 on June 13, 1919, showing a total of income and profits taxes of $71,020.90. This amount was assessed and was paid in installments during 1919; the last payment being on December 30, 1919. Subsequently there was assessed against plaintiff an additional amount of $6,692.98, together with interest thereon in the sum of $287.23, totaling $6,980.21, which amount was paid on May 18, 1920. Thereafter the Commissioner of Internal Revenue issued a certificate of overassessment in the sum of $3,494.22, which amount was refunded, leaving a net tax paid for the year 1918, including the interest on the additional assessment, of $74,506.89.
3. Plaintiff duly filed with the collector of internal revenue its income and profits tax return for the calendar year 1919 on May 13, 1920, showing a total of income and profits taxes of $64,461.95. This amount was assessed and was paid in installments during 1920; the last payment being on December 15, 1920. Subsequently the Commissioner of Internal Revenue issued a certificate of overassessment in the sum of $15,388.72, which amount was refunded, leaving a net tax paid for 1919 of $49,073.23.
4. On October 20, 1923, plaintiff duly filed its claim for refund for $1,000, or such greater amount as was legally refundable, covering the years 1917, 1918, and 1919, on the grounds that its taxes for said years should be assessed on one of the following bases:
(1) As a personal service or partial personal service corporation.
(2) In the event that number 1, above, was denied, then the tax should be assessed under the provisions of section 210 of the Revenue Act of 1917 ( 40 Stat. 307), and sections 327 and 328 of the Revenue Act of 1918 ( 40 Stat. 1093).
Said claim for refund for the year 1919 was rejected within two years next preceding the commencement of this action.
5. During the years 1918 and 1919 plaintiff's capital stock, including qualifying shares of directors, which were indorsed over to C.T. Bowring Co., Limited, was all owned by C.T. Bowring Co., a British corporation of Liverpool, England. The capital stock of the plaintiff company from 1902 to 1919 was $250,000, divided into 2,500 shares, $100 par. In 1919 the capital was increased to $1,000,000, consisting of 10,000 shares of the same par value. The officers of plaintiff were F.C. Bowring, president; L.B. Stoddard, vice president; Charles W. Bowring, treasurer; Mr. Richards, secretary, each of whom was a director. Charles W. Bowring and L.B. Stoddard were the men actually in charge of active conduct of the affairs of the corporation. They each received $5,000 per year as director's fees and 5 per cent. on the net profits of plaintiff to cover the extra cost of their living in America. Said officers were also directors of C.T. Bowring Co., Limited (the parent company), and received from that company their principal compensation for conducting the business of plaintiff, viz., each one-thirtieth of the net profits of the parent company, after 5 per cent. had been paid on its capital stock. One other man, Mr. Richards, was a director and secretary of plaintiff. He was an employee of plaintiff, and received no compensation from the parent company. He received a director's fee from plaintiff. He was also in charge of the ship brokerage department of plaintiff's business, under the supervision of Mr. F.C. Bowring, Mr. Stoddard, and Mr. Charles Warren Bowring, for which he received compensation on a commission basis.
6. Plaintiff's business is described as follows: Ship broker, steamship agent, commission merchant, and export and import commission agent. Plaintiff also acted as agent in New York for the British Admiralty, to buy oil on commission. In that business plaintiff, on order from the British Admiralty, ordered the oil from the Gulf Refining Company, saw that the inspection and weighing and measuring took place, obtained the bills of lading from the refining company which had loaded the boats, collected the amount of the Gulf Refining Company's invoice from J.P. Morgan Co., representing the British Admiralty, and remitted the amount to the Gulf Refining Company, less 18 cents per ton agreed commission.
The ship brokerage part of the business consisted of chartering steamers for shippers; the compensation consisting of commissions on the freight, paid by the shipowners.
The steamship agency part of the business consisted of representing the New York, Newfoundland Halifax Company, known as the Red Cross Line, as general agents in New York; also of representing the Bibby Line and the Henderson Line in the same capacity. The compensation for this service was commissions on the freight and on the passengers. Plaintiff received the freight and passage money of the Red Cross Line, and sent their accounts to the managers of the line, which, in this case, was C.T. Bowring Co., Limited. Plaintiff had to pay the expenses of the boats of the Red Cross Line, such as paying the crews, buying fuel, ship stores, victualing, and general expenses of a boat operating in New York away from home. For this purpose it always had funds as agents of the Red Cross Line, either in money received from C.T. Bowring Co. or else in prepaid freight and collect passage money or prepaid passage money.
Another part of the business consisted of buying goods for foreign customers, and shipping them, receiving commissions for so doing. This is generally known as "indent" business. Plaintiff bought the goods in plaintiff's name, guaranteed to the seller the price thereof, and arranged for their shipment, and invoiced to the customers the cost of goods and shipment, adding an amount varying from 2½ per cent. to 10 per cent. as commission for services to the people who had ordered the goods in the foreign countries. Plaintiff also, in some instances, bought goods for foreign customers, quoting a price known as a c.i.f. price, which included plaintiff's commission and the expenses, and gave a price for the goods ex ship at the foreign port. Almost the whole of plaintiff's income was earned as an agent.
Plaintiff received payment for all services in its import and export business by selling drafts on its customers to banks; such drafts including the cost of the goods, plus plaintiff's commission and all charges. Plaintiff would receive payment the same day it delivered the documents to the bank, or very rarely later than the next day. Plaintiff paid for goods bought for customers by its own check, on the due date. The usual terms were 2 per cent. for cash in ten days or net 30 days. Plaintiff took advantage of all cash discounts, and passed this advantage on to its customers.
7. The exporting and importing department of the business was the least profitable; there being a small profit from it in 1918 and a loss in 1919. In that branch of the business plaintiff was liable for the payment of the purchase price, but the goods were purchased for the accounts of clients, and in many cases the orders went direct from the purchasers to the suppliers, and were confirmed to the suppliers by plaintiff. The suppliers always knew the goods purchased were not for plaintiff but for its client.
8. Of the items of income, shown on the return of plaintiff for the year 1918, the item by liner department, $54,802.80, consisted entirely of commissions as New York agents for steamship lines; the item by shipping brokerage, $144,056.94, consisted entirely of commissions for securing charters of ships for shippers; the item by oil commissions, $82,393.91, consisted entirely of commissions for purchasing oil for the British Admiralty; the item by export and import department, $299,871.88, consisted almost entirely of commissions as agents for foreign buyers; the item by general commissions, $3,088.88, consisted of brokerages on insurance, $1,277.15, and custom house brokerage fees, $1,629.55; the item by insurance brokerage, $378.66, consisted of insurance commissions, not included under the item by general commissions; the item directors' fees, $150, consisted of fees earned by one of the directors of plaintiff, acting as a director of another company. These items constituted all of the income of plaintiff for the year 1918.
9. For the year 1919, of the items of income shown on the return, the item by liner department, $68,024.33, consisted entirely of commissions earned as New York agents of certain steamship lines; the item by ship brokerage, $245,745.03, consisted entirely of commissions for securing charters for shippers; the item by export and import department, $343,866.53, consisted almost entirely of commissions for buying goods for foreign customers; the item by oil commissions, $21,969.86, consisted entirely of commissions for buying oil for the British Admiralty; the item by general commissions, $1,914.01, consisted of miscellaneous commissions for services; the item by insurance brokerage, $2,222.24, consisted of commissions for insurance.
10. During the years 1918 and 1919 plaintiff's income was to be ascribed primarily to the activities of the principal owner or stockholder, namely, C.T. Bowring Company, (Limited), a foreign corporation, which acted through its officers and agents, and was regularly engaged in the active conduct of affairs of the plaintiff corporation; plaintiff is not and was not a foreign corporation during said years; less than 50 per cent. of the profit of the gross income was derived from trading as a principal; none of the gain, profit, commissions, or other income of the plaintiff during said years was derived from a government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive; plaintiff's capital in 1918 and 1919 was $250,000, divided into 2,500 shares of $100 par. In 1919 the capital was increased to $1,000,000, consisting of 10,000 shares of same par value; $150,000 thereof represented good will.
11. Plaintiff has at all times borne true allegiance to the government of the United States, and has not in any way aided, abetted, or given encouragement to its enemies or aided in rebellion against the government. Plaintiff is the sole owner of the claim set forth herein, and has not assigned the same or any part thereof.
Donald Horne, of Washington, D.C., for plaintiff.
George H. Foster, of Washington, D.C., and Chas. B. Rugg, Asst. Atty. Gen., for the United States.
Before BOOTH, Chief Justice, and WILLIAMS, WHALEY, LITTLETON, and GREEN, Judges.
This is a case in which the plaintiff seeks a refund of income and excess profits taxes paid for the years 1918 and 1919, with interest thereon as provided by law.
The basis of the plaintiff's claim is that it was a personal service corporation during the years in question, as defined in section 200 of the Revenue Act of 1918 ( 40 Stat. 1058), and as such was exempt from income and profits taxes.
The case was referred by the court to a commissioner to take the testimony of the parties and report the facts. Neither the plaintiff nor the defendant has filed exceptions to the report of the commissioner, and the facts as reported by him have been adopted by the court as the facts herein. The findings disclose that the plaintiff was during the years in question a domestic corporation, and that its entire capital stock, which was $250,000 for 1918, and $1,000,000 for the year 1919, was owned by C.T. Bowring Co., a British corporation.
The plaintiff's income upon which the taxes sought to be recovered were imposed was primarily ascribed to the activities of the principal owner, C.T. Bowring Company, less than 50 per cent. of such income being derived from trading as a principal and none from government contracts.
The pertinent provisions of the Revenue Act of 1918 as are follows:
"Sec. 200. That when used in this title — * * *
"The term `personal service corporation' means 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 and in which capital (whether invested or borrowed) is not a material income-producing factor; but does not include any foreign corporation, nor any corporation 50 per centum or more whose gross income consists either (1) of gains, profits or income derived from trading as a principal or (2) of gains, profits, commissions, or other income derived from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive. * * *"
"Sec. 218 * * * (e). Personal service corporations shall not be subject to taxation under this title, but the individual stockholders thereof shall be taxed in the same manner as the members of partnerships. All the provisions of this title relating to partnerships and the members thereof shall so far as practicable apply to personal service corporations and the stockholders thereof: Provided, That for the purpose of this subdivision amounts distributed by a personal service corporation during its taxable year shall be accounted for by the distributees; and any portion of the net income remaining undistributed at the close of its taxable year shall be accounted for by the stockholders of such corporation at the close of its taxable year in proportion to their respective shares." 40 Stat. 1070.
Article 1524 of Regulations 45 and 62, as originally promulgated, provided:
"A corporation can not be considered a personal-service corporation when another corporation (not itself a personal-service corporation) owns or controls substantially all of its stock, or when substantially all of its stock and of the stock of another corporation (not itself a personal-service corporation) forming part of the same business enterprise is owned or controlled by the same interests. See section 240 of the statute ( 40 Stat. 1081), and articles 631-638."
This language was subsequently, on April 30, 1927, stricken from article 1524, and the following was substituted in lieu thereof:
"A corporation can not be considered a personal-service corporation when another corporation is one of its principal owners or stockholders. (See Cumulative Bulletin VI-I, p. 161.)"
The Commissioner of Internal Revenue, in denying to plaintiff a personal service classification, followed the foregoing regulation. We think the regulation is a reasonable interpretation of the provisions of the statutes above quoted defining personal service corporations and that the action of the commissioner was correct. Jute Industries v. United States, 44 F.2d 452, 70 Ct. Cl. 492.
The statute provides the term "personal-service corporation" means 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. The sole owner and stockholder of the plaintiff was another corporation. From the very nature of the thing required by the statute — that the principal owners or stockholders "must be regularly engaged in the active conduct of the affairs of the corporation" — the British corporation could not and did not perform personal services for the plaintiff. The affairs of the plaintiff company were conducted, not by persons owning stock in the plaintiff company, but by officers of another corporation. The law clearly and unquestionably, we think, contemplates that the stockholders or owners of a corporation seeking a personal service classification must themselves have been actively engaged in conducting the affairs of such corporation. The character of services required cannot be performed by officers of another corporation which happens to be the principal or the sole owner of the corporation asking for such classification.
Obviously, the plaintiff fails to bring itself within the requirements of the statute, and the petition must be dismissed. It is so ordered.