(b) That the amounts and notes receivable and cash on hand and in bank as set forth on the attached sheet, marked exhibit "B" and made a part hereof, are correct as of June 30, 1919. That the inventory of the raw material, work in process, and finished product was equal to the amount set forth in Exhibit "B." That on said Exhibit "B" the charged off portions have been brought back and the amount set up on the books for taxes and bad accounts have been omitted. (c) That since June 30, 1919, the transactions and business done by said Consolidated Press Co. are those and only those of a going concern. (d) That there are no existing contracts with any of the directors or officers of said Consolidated Press Company except with L. W. Heath for services and with H. B. Sherman, L. W. Heath and Joseph McKnight for a commission, all of which contracts will be terminated as of June 30, 1919, and commissions earned prior to that only paid. (e) That all of the officers and directors of the Consolidated Press Company will, when requested by the Company, resign and elect as their successors such persons as the Company may designate. The Company Agrees: Unless and until it shall exercise the option given it herein that it will not do, nor allow to be done any of the following things: (a) Place any mortgage or other lien upon any of the property owned by the Consolidated Press Company, a corporation. (b) That it will not permit the Consolidated Press Company, a Corporation, to declare or pay any dividends. (c) That it will not sell, assign, transfer, lease or otherwise dispose of the plant of the Consolidated Press Co., a Corporation, or of this agreement. (d) That it will not increase the capital stock of the Consolidated Press Company. (e) That it shall not permit the Consolidated Press Company to increase the salary or commission given to its officers or directors. (f) That it will not increase by contract or otherwise the debts or obligations of the Consolidated Press Co. for the purpose of increasing the present plant or for purchasing machinery. (g) That it will not amend or change the by-laws of the Consolidated Press Company. It is mutually understood and agreed that there are existing Federal and City taxes either matured, or to mature, which the Consolidated Press Company shall pay as and when they mature and become payable. This agreement is binding on the Executors, Administrators, and Successors of the parties hereof. Attached to this contract was a document addressed to the Equitable Trust Co. of New York, signed by H. B. Sherman, in which he agreed to deposit 2,040 shares, or 51 per cent, of stock of the Consolidated Press Co., as follows: TO THE EQUITABLE TRUST COMPANY OF NEW YORK: I hand you herewith 2,040 shares of the Capital Stock of the Consolidated Press Company, of the aggregate par value of $204,000.00, all of which shares are in negotiable form endorsed in blank and duly stamped for transfer. You will hold the same, and if at any time after the 2nd day of January, 1920, and before the 10th day of January, 1920, E. W. Bliss Company shall deliver to you a duly certified check to my order or to my account for $998,414.37 you will deliver said 2,040 shares to it, and receive and forward the amount so delivered to me. Until said 10th day of January, 1920, you are to hold the same in your possession so that if E. W. Bliss Company make such payment you will be in a position to deliver to it the stock as above-provided. If the payment shall not be made by said E. W. Bliss Company on or before said 10th day of January, 1920, then all the stock herewith deposited shall at once be returned to me. This deposit and option is made pursuant to an agreement entered into between the undersigned and said E. W. Bliss Company, dated July 22nd, 1919, a copy of which is hereto attached. The terms of the above agreement were carried out and on July 28, 1919, E. W. Bliss Co. paid H. B. Sherman, as trustee for the stockholders of the Consolidated Press Co., $980,000 for 1,960 shares, or 49 per cent of the stock of the Consolidated Press Co., and on January 10, 1920, the sum of $1,020.000 for the remaining 2,040 shares, or 51 per cent. The money received by Sherman from E. W. Bliss Co. on July 28, 1919, and January 10, 1920, was paid over by him on July 31, 1919, and January 24, 1920, respectively, to the various stockholders of the Consolidated Press Co., proportionately of the sums received on the basis of $500 per share. The owners of the stock transferred by the taxpayer by gift on July 17, 1919, were paid. their proportion of amounts received from E. W. Bliss Co. On August 1, 1919, Lillian C. Bailey, wife of the taxpayer, loaned $16,500 of the $17,150 received by her on July 31, 1919, to her husband, taking his note due in five years from that date, bearing interest at 4 per cent payable annually, which interest has been paid. Upon the receipt by Lillian C. Bailey of the second installment, $17,420, on January 24, 1920, she loaned $16,500 thereof to her husband, taking his note dated January 26, 1920, due on August 1, 1924, bearing interest at 4 per cent payable annually, which interest was also paid. The money borrowed by the taxpayer from his wife was immediately invested by him in real estate and securities. The amounts due other individuals to whom the taxpayer had made gifts of stock were paid direct to them by Sherman, and taxpayer has at no time had any interest therein, directly or indirectly. The Commissioner held that the gifts by taxpayer were not bona fide; that the taxpayer realized a taxable profit in 1919 and 1920 upon the difference between the cost to him of the 160 shares and the sales price, and that his income-tax returns for 1919 and 1920 were willfully false and fraudulent with intent to evade the tax by reason of his failure to report as his income the claimed profit upon the stock. DECISION. The deficiencies determined by the Commissioner are disallowed. OPINION. LITTLETON: The foregoing findings of fact dispose of the questions involved in this appeal. The evidence presented shows that prior to the date of any offer to purchase the stock in the Consolidated Press Co., before any offer had been made by the taxpayer to sell his stock and prior to any offer to purchase the stock, he made absolute and valid gifts of certain of the 160 shares of stock owned by him in the Consolidated Press Co.; that it was not until five days after the gift that an offer was made to purchase the stock. The evidence further shows that some weeks prior to the date of the actual delivery of the stock taxpayer informed the donees of his intention to make the gift. The Commissioner contends that the taxpayer knew that the stock was to be sold; that the negotiations had reached the point where the gift by the taxpayer constituted a gift of the proceeds from the sale of the stock; that the gifts were not bona fide and were made with intent to defraud the Government of the tax upon the sale, and that the returns of the taxpayer for 1919 and 1920, which did not include the profit upon the sale of the stock, were willfully false and fraudulent with intent to evade the tax. There is no evidence to support this contention. Even if we should find as a fact that the taxpayer had reason to believe that E. W. Bliss Co. or someone else would probably make an offer to purchase the stock, this would not, in view of the other evidence before the Board, have any effect upon these particular gifts. The gifts here involved were of the stock and not of the proceeds therefrom, and no part of the amounts received by the donees constituted income to this taxpayer. It therefore follows that the determination of the Commissioner that the taxpayer realized a profit upon the sale of 160 shares of stock of the Consolidated Press Co., and that the returns, which did not include this profit, were willfully false and fraudulent with intent to evade the tax, was erroneous. JAMES dissents. On reference to the Board, MARQUETTE and TRAMMELL dissent. 104881-27-27 APPEAL OF D. A. FISHER, INC. Docket No. 4128. Submitted July 15, 1925. Decided January 16, 1926. O. R. Ewing, C. P. A., for the taxpayer. J. Arthur Adams, Esq., for the Commissioner.. Before LITTLETON, SMITH, and TRUSSELL. This is an appeal from the determination of a deficiency in income and profits tax for the calendar year 1918 in the amount of $2,616.68, arising from the denial of taxpayer's claim that it was entitled to classification as a personal service corporation. FINDINGS OF FACT. Taxpayer is a Tennessee corporation with principal office at Memphis, engaged in business as an insurance agency, writing all kinds of insurance, except life. The agency was originally started in 1867 by P. A. Fisher. Upon his death the business was carried on by his son, D. A. Fisher. On January 1, 1914, D. A. Fisher incorporated the agency for $50,000, the stock having a par value of $10 per share. Good will was charged with this account and no cash or tangible assets were paid in for the stock. At that time a portion of the stock was issued to D. A. Fisher and to others who were regularly and actively engaged in the business, the remainder being held in the treasury. Shortly after incorporation the taxpayer acquired for 3,000 shares of stock and $300 in cash the insurance agency of Clyde Richert, which possessed no tangible assets. The stock of the taxpayer was owned and salaries were paid to the stockholders during the year 1918, as follows: D. A. Fisher, president, 26,210 shares___ Salary. $10,000 3, 150 3, 300 1,590 All of the stockholders were regularly engaged in the active conduct of the taxpayer's business and devoted their entire time thereto. The services rendered by the corporation consisted of soliciting risks, writing and delivering policies, assuming responsibility for the collection of premiums from the insured, collecting the premiums and remitting them to the insurance companies, less the commissions allowed. The assets and liabilities at the beginning and end of the year 1918 were as follows: Taxpayer was allowed a period of time by the various insurance companies, beyond the time fixed for the payment to it of the premiums by the insured, in which to remit premiums for which it had assumed liability. During the taxable year the premiums paid by the taxpayer before collection from the insured were negligible. During the taxable year, for the purpose of assisting in the fireprotection campaign, and in order to interest property owners generally in the installation of appliances for protection against fire, taxpayer carried a small supply of fire extinguishers, hose, etc., which it sold. It also took orders for fire doors which it ordered shipped direct to the purchaser. The purchaser made payment direct to the shipper and, in addition, paid taxpayer a service charge of 5 per cent of the cost of such doors. The taxpayer's purpose in having a fire-protection department during the taxable year was to assist in popularizing the fire-protection campaign and to interest its clients and others in the installation of fire-protection apparatus, especially fire doors, which were not sold or carried in stock by any merchant in that territory. The income and deductions for the taxable year were as follows: |