Newam Theatre Corp. v. Commissioner, Docket No. 797.

Docket No. 797. | B.T.A. | Mar 25, 1925

Lead Opinion

OPINION.

Korner:

In the Appeal of Bryant & Stratton Commercial School, Inc., 1 B. T. A. 32, this Board said:

The statutory definition of a personal service corporation contains three elements, all of which must he present. First, the income must be ascribed primarily to the activities of the principal stockholder^]; second, such principal owners or stockholders must be regularly engaged in the active conduct of the corporation’s affairs; and, third, the income of the corporation may not be materially produced by capital. It will be noted that each of these three elements is so qualified as to require careful individual judgment in every case. The first element requires not that the income must be ascribable entirely to the activities of the stockholders, but only that it shall be primarily so. In the second element the stockholders are not merely to be somewhat engaged in the corporation’s affairs, but they must be regularly and actively engaged in such affairs. And in the third element, if any capital is employed in the business, it may not be a material income-producing factor. These qualifying words, primarily, regularly, and actively, and material, preclude any definitive classification. They make necessary the application of a flexible judgment, and since we are required by the statute to decide the question, it is our judgment which must be applied to the facts of each case which comes before us. No intensive rule can be laid down * * *. The very statement of a rule, if rigidly adhered to, would defeat the letter and intendment of the Act.

In the light of the above, let us examine the facts in the instant appeal. The record leaves no doubt of the fact that all of the stockholders of the taxpayer were regularly and actively employed in the active conduct of the affairs of the corporation. Every play presented by the taxpayer was selected upon the joint and several judgment of Erlanger, Dillingham, and Ziegfeld.

It being established that all the stockholders of taxpayer were regularly and actively engaged in the conduct of the affairs of the corporation, the remaining elements for consideration are whether the income of the corporation must be ascribed primarily to such activities of these stockholders, and whether capital was an income-producing factor.

The income of this taxpayer was primarily derived from the presentation of plays selected by its three stockholders but produced by others. From the standpoint of this taxpayer the successful presentation of these plays presented two prime requisites. The first requisite was a careful selection of the play to be presented and a contract with its producer for its presentation; the second requisite was a suitable place for its presentation. Under the circumstances presented here, each was a very necessary prerequisite. The play, no matter how careful its selection, could not prove an income-producing success without a commodious place for its presentation. The taxpayer corporation engaged to do two things — to select and procure the plays and to furnish its patrons a place in which to view them. Without the presence of both these requisites the income of the corporation could not have been a success from an income-producing standpoint.

The first of these elements of success has been discussed and was undoubtedly due to the personal efforts, activities, and services of the entire group of stockholders. But the latter element was a material income-producing factor as well, and that element constituted capital. The corporation was enabled to provide the place (the theatre), which, as we have observed, was a material factor in producing its income, by its possession of a leasehold of the theatre premises. Such a leasehold was a capital asset of the corporation and entered into its capital account. This leasehold was especially valuable to the corporation because it made possible the presentation of the plays selected by its stockholders and in that very material manner helped to produce the income of the corporation. The business in which the corporation was engaged makes this reasoning particularly applicable and constitutes a cogent factor in our determination. There are businesses which are so conducted that the places in which they are conducted do not matter much or contribute materially to the income, but a theatre for the presentation of plays to large bodies of the discriminating public does not come within such class. The theatre which taxpayer held under leasehold was capital to the corporation and was a material income-producing factor.

The Board is of the opinion that the instant appeal is distinguishable from the decision in Bryant c& Stratton Commercial School Appeal, supra, on this point, because of the different state of facts presented. In the instant appeal the function of the corporation was not to render personal service to the persons from whom it derived its income, but its function was to make its lease productive of income. In the Bryant & Stratton Commercial School Appeal the reverse was true. There the lease was an incident to the performance of personal service for the students of the school, i. e., giving instruction to these students. Teaching was the function and the lease was a necessary incident. In the instant appeal the function of the corporation was the operating of a theatre and its business was to operate it successfully. The personal services which were rendered by its stockholders were in behalf of the corporation to assure profit from the lease by such successful operation. There were no personal services to patrons or customers. The personal services were by the stockholders for the corporation.

It is the opinion of the Board that the taxpayer is not entitled to classification as a personal service corporation, and the determination of the Commissioner is approved.