C. N. Merritt & Bro., Inc. v. Commissioner , 1 B.T.A. 927 ( 1925 )

Appeal of C. N. MERRITT & BROTHER, INC.

C. N. Merritt & Bro., Inc. v. Commissioner

Docket No. 1758.

United States Board of Tax Appeals

1 B.T.A. 927; 1925 BTA LEXIS 2739;

April 6, 1925, decided Submitted March 18, 1925.

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Edgar T. Wagner, C. P. A., for the taxpayer.

E. C. Lake, Esq., for the Commissioner.

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Before LANSDON, LITTLETON, and SMITH.

This appeal is from a deficiency in income and profits taxes for 1918 in the amount of $4,721.52. The only question in issue is whether the taxpayer is entitled to classification as a personal service corporation for the year 1918.

FINDINGS OF FACT.

1. C. N. Merritt began business in 1873, as a sole proprietor. Subsequently a partnership was formed with a brother, A. I. Merritt. On or about December 20, 1911, the business carried on by the partnership was incorporated under the laws of the State of Delaware with a capital stock of $15,000, par value of each share $100. On or about March 28, 1917, the business was reincorporated under the laws of the State of Maryland with a capital stock of $25,000, par value of each share $100. The last-named incorporation is the taxpayer in this appeal.

2. During the year 1918, the capital stock of the taxpayer was held as follows:

	Shares.
C. N. Merritt	120
A. I. Merritt	120
Guy R. Merritt	5
Martin H. Merritt	5
Total	250

The capital stock was issued for cash at par. The business of the taxpayer is that of selling farm produce on a 5 per cent commission basis. The taxpayer also acts as agent for a fertilizer company and receives commission upon sales of fertilizer to truck gardeners through its instrumentality. It also purchases baskets and sells them to the market gardeners and receives a small profit from this source. It does not act as principal in the sale of farm produce.

3. All of the stockholders were regularly engaged in the active conduct of the taxpayer's business during the year 1918, with the exception of Martin H. Merritt, who was in the military service from May, 1918, to the close of the year.

4. The services rendered by the corporation consisted of making contracts between growers of produce and canners, selling produce delivered in the market on the spot to canners and packers, collecting from canners and packers for produce sold to them and remitting such collections to the growers less commissions allowed. The purchasers of the produce ordinarily paid for the produce weekly. It was customary for the purchasers to pay not later than Friday of each week for deliveries of produce made during the preceding week. Practically 95 per cent of the produce was paid for thus promptly. The taxpayer ordinarily paid the growers for the produce delivered at the end of each month, although the produce was paid for more promptly if the growers demanded it. Furthermore, if the growers in good standing desired to borrow money the taxpayer accommodated them, generally charging interest upon such advances at the rate of 6 per cent per annum. The amounts advanced to a grower seldom exceeded $250, although a great many advances were made during the year. The taxpayer did not ordinarily require the grower to enter into a written contract that the produce raised by him should be sold through the taxpayer. There was an understanding, however, on the part of the grower that he was to sell his produce through the taxpayer. During the year 1918 the taxpayer received $1,492.09 interest on advances made to farmers. The amount which at 6 per cent would yield $1,492.09 interest is $24,868.17. The advances to farmers during a part of the year were much in excess of the last-named amount.

5. The balance sheets of the taxpayer at January 1 and December 31, 1918, read as follows:

JANUARY 1, 1918.
ASSETS.
Cash	$20,046.68
Bills receivable	19,004.93
Liberty loan bonds	2,000.00
Accounts receivable	8,273.41
Office fixtures and machine	1,000.00
	50.325.02
LIABILITIES.
Accounts payable	$7,679.44
Capital stock	25,000.00
Surplus	17,645.58
	50,325.02

DECEMBER 31, 1918.
ASSETS.
Cash	$20,783.48
Bills receivable	21,744.46
Liberty loan bonds	5,000.00
Accounts receivable	2,357.68
Office fixtures	200.00
	50,085.62
LIABILITIES.
Accounts payable	$3,633.30
Capital stock	25,000.00
Surplus	21,452.32
	50,085.62

The taxpayer's income-tax return for 1918 shows:

Gross income from operations		$38,147.44
Interest on notes and accounts		2,283.79
Total		40,431.23
DEDUCTIONS.
Ordinary and necessary expenses	$7,868.39
Salaries of stockholders	16,420.00
Worthless debts	1,159.71
		$25,448.10
Net income		14,983.13

The sales of produce during the year were approximately $720,000, and the commissions earned slightly in excess of $36,000.

DECISION.

The determination of the Commissioner is approved.