The following is a table of salaries, commissions, and bonuses credited to the three officers during 1918, 1919, and 1920, together with the amounts allowed and disallowed by the Commissioner: In 1919 and 1920 the taxpayer took as deductions on its incometax returns $1,333.32 as salary to Reidl, which amount was arrived at by taking one-ninth of the increased salaries and bonuses amounting to $12,000 credited to the Pomeroys in each year. The bonuses of $4,000 each to the Pomeroys and $888.88 to Reidl were credited on the books of the corporation on December 31, 1919, instead of December 1, 1919, as provided in the resolution of the board of directors. They were not paid, however, until 1920. The bonuses. of $4,000 each to the Pomeroys and $888.90 to Reidl for 1920 were credited on the books on December 31, 1920. Of this amount only $5,544.36 was actually paid. The balance of $3,344.54 was carried on the books of the corporation until December 31, 1922, when it was credited back to surplus. When this amount was credited back to surplus the accounts of the officers were charged on the basis of stockholdings as follows: J. P. Pomeroy, 45 per cent-stock_ Total. $1,500. 04 3. 344. 54 The following table is made up from the 1919 and 1920 income and profits tax returns filed by the taxpayer: 1919 1920 Gross sales. Net taxable income. Tax paid... $251, 743.92 Total expense for wages, commissions, and salaries, including total compensation to officers.. 84, 512.32 $226, 918. 16 4, 612. 26 261.23 82, 853. 30 The taxpayer deducted on its returns $25,333.32 as compensation paid to officers for each of the years 1919 and 1920, and also took a deduction under the head of "general expenses" of $10,346.05 in 1919, and $9,398.38 in 1920, on account of commissions paid to two of its officers on sales made by them. The Commissioner allowed as deductions by the corporation, $26,790.49 in 1919, and $25,842.82 in 1920, as salaries, commissions, and bonuses paid to its officers, and disallowed for 1919, $8,888.88, and $8,888.90 for 1920, on account of bonuses or additional compensation DECISION. The determination of the Commissioner is approved. Appeal of THE POTTS-TURNBULL ADVERTISING CO. Docket No. 404. Under the conditions of fact existing in this appeal the taxpayer is not entitled to classification as a personal service corporation. Submitted January 19, 1925; decided April 14, 1925. Wendell H. Cloud, Esq., for the taxpayer. J. A. Adams, Esq., for the Commissioner. Before GRAUPNER, LITTLETON, and SMITH. This appeal is taken from a deficiency in income and profits taxes of $7,718.63 for the calendar year 1918, based upon the disallowance of a claim that the taxpayer is a personal service corporation. From stipulations filed and the oral and documentary evidence submitted, the Board makes the following FINDINGS OF FACT. 1. The taxpayer is a Missouri corporation with its principal offices at 300 Gates Building, Kansas City, Mo. The company was incorporated, at the instance of Henry K. Turnbull, as "The Turnbull Business Development Company," under a certificate of incorporation dated July 19, 1910, with an authorized capital of $5,000, divided into 500 shares of stock of a par value of $10 each, 250 shares being preferred stock, and 250 common stock. The stock was subscribed for as follows: The articles of incorporation recite that at least one-half of the capital stock was actually paid up in lawful money of the United States. The purposes for which the corporation was organized are set forth in its articles of incorporation, as follows: To transact the business of advertising, promoting and developing the business of other corporations, partnerships, or individuals for hire, or upon commission, or otherwise, by and through the means of preparing advertising for other corporations, partnerships or individuals, and of advertising the business, commodities or other property, real, personal or mixed, of other corporations, partnerships, or individuals in newspapers, books, booklets, prospectuses, magazines, circulars, pamphlets or other similar literature and advertising medium, 2. On July 21, 1913, under authority of the Secretary of State of the State of Missouri, the name of the company was changed to "Potts-Turnbull Advertising Company." The capital stock of the corporation was in no way changed until December 31, 1919, when the Secretary of State issued a certificate authorizing the increase of the capital stock of the corporation from $5,000 to $100,000. This change was subsequent to the taxable year under consideration. In the increase under this authority, the par value of the shares was increased from $10 to $100 each, and the preferred stock was canceled and exchanged for common stock. The articles of incorporation do not disclose any preferences given to preferred stock and the stockholders or directors have never, by by-laws or otherwise, made any distinction between the preferred and the common stock, except as to name, and no preferences have ever been given to the preferred stock by any legal action of record taken by the stockholders or directors of the company. 3. The capital stock of the corporation was held by the persons and in the amounts shown below as of the beginning and end of the year 1918: F. S. Turnbull, who was the wife of H. K. Turnbull, S. T. Balcom, who was a sister of H. K. Turnbull, and P. S. Harris, were the only stockholders who were not regularly engaged in the business affairs of the taxpayer in the year 1918. The others were regularly and actively engaged in the affairs of the taxpayer, without outside interests, and gave their time and efforts exclusively to the business of the taxpayer. The shares of stock standing in the name of F. S. Turnbull were gifts from her husband, H. K. Turnbull. Her stock certificates were never delivered to her, but were held in the possession of Turnbull at all times. The one share standing in the name of S. T. Balcom was given to her by her brother, Turnbull, to qualify her for a directorship, and the ten shares owned by P. S. Harris were subscribed for by him at the time the corporation was organized. 4. The gross business of the taxpayer, excluding fees for preparation of advertising, for the year 1918, was $507,949.51, and a detailed analysis discloses that the business was produced and handled by the several persons and in the amounts here listed: The company paid publishers for advertising placed in publications the sum of $432,132.85. All of the persons above mentioned served in the capacity known in the taxpayer's business as "account executives" and, with the exception of Krebs, were all stockholders in the corporation. Krebs was employed on a commission basis. In the business conducted by the taxpayer an "account executive" is a person who handles the account of an advertiser; that is, he develops the advertising business of the advertiser with the taxpayer through solicitation, outlines the advertiser's program, determines the publications or advertising medium which should be used by the advertiser, supervises the writing of copy and the insertion of the advertising in the advertising medium. Krebs was employed by the taxpayer in 1917, or early in 1918, with a view to obtaining a certain account which it was thought he could influence. This account was secured and has been held by the company. In securing this particular account, which was that of a firm by whom Krebs had been employed, Krebs was used merely as a means of contact, the details and technicalities incident. to obtaining the account being handled by Turnbull. Krebs had had experience in the advertising department of a manufacturing concern and in selling advertising novelties for another firm, but he had not had experience in an advertising business such as was conducted by the taxpayer. During 1918 the company paid commissions to Krebs, as salary, in the sum of $3,434.18, he being the only employee other than a stockholder to whom a salary in excess of $2,000 was paid. He became a stockholder in 1919. Turnbull, who owned 239 shares of preferred stock throughout the year, and 55 shares of common stock at the beginning and 75 shares of common at the end of the year, is shown to have produced and handled business to the amount of $266,181.88 of the total of $507.949.51. He was consulted and acted as adviser on all matters appertaining to obtaining new clients, planning advertising compaigns for advertisers, and originating new ideas for advertisements. He was president, treasurer, and general manager of the taxpayer; initiated the work for himself, the other stockholders and the employees; and was constantly consulted as to the details of the business. Prior to organizing "The Turnbull Business Development Company," he had been for five years in the advertising department of the Kansas City Journal, and previous to that he had been advertising manager of a dry goods company. Barth had formerly been advertising manager for a publication known as the Kansas Farmer and was well versed in farming conditions. Whalen was experienced in the mail order selling business. 5. The business of the taxpayer originated from contact between the account executive, or an officer of the corporation, and a representative of the concern from which it was desired to obtain business. Securing an account usually involved a detailed study and analysis by the taxpayer's representative of the advertiser's business, problems of distribution, sales policies, and the selection of the proper advertising mediums in order to present the product of the advertiser in a territory where results could be obtained. The methods used may be summarized in the following examples: Preceding the acquisition of one of the taxpayer's major accounts and as a result of conferences with the advertiser, Turnbull made a trip to New York and obtained a number of sketches to show his ideas for a change of methods in advertising the product manufactured by the advertiser, whose account it was desired to acquire. The advertiser was a manufacturer of soap, who made a laundry soap and a toilet soap. This advertising had not been productive of the best results. Turnbull, through his experience and imagination, devised a series of illustrations which detracted from the labor of using laundry soap and centered attention on the attractive results of cleanliness. These ideas were visualized by a commercial artist and not only brought the advertising account to the taxpayer, but increased sales for the advertiser. In another of the major accounts, which was that of a fur buyer, Turnbull, after a conference with the advertiser, selected illustrations of various fur-bearing animals and constructed an illustrated narrative showing methods of hunting and trapping and the profits that might be made therefrom. These were suggested as a means of more appealing publicity for the advertiser. This account was secured, and the first insertion of an advertisement in a weekly paper, through the taxpayer company, resulted in about 6,000 inquiries regarding the advertiser's product at a cost of approximately 11 cents each, whereas by the method formerly used by the advertiser, the inquiries received had cost from 50 to 60 cents each. In securing the account of a manufacturer of lamps which resulted in one of the taxpayer's larger accounts, the stockholder representative of the taxpayer designed a new and more attractive style of a lamp shade for the advertiser and recommended a different sales plan, which resulted in an increase of annual sales from a few hundred thousand dollars to over four million dollars in 1924. 6. The representative of the taxpayer corporation handling the account of the advertiser made for his own purpose a memorandum of the advertising to be placed over a particular period by the advertiser. No signed orders from the advertiser were taken by the taxpayer, with the possible exception of instructions contained in letters from advertisers. After securing the account of an advertiser, the account executive or officer handling the account made out an "Order Memo," which was transmitted to the order clerk. A regular printed form was provided for this purpose, but in some instances a memorandum was furnished the order clerk either verbally or in some way other than by the use of the regular form. The order clerk then made out an order to the publisher on a printed form in use by the taxpayer, which bore a specific number, directing the insertion of certain copy in one or more certain issues of the |