OPINION.
Milliken:
Section 200 of the Revenue Act of 1918 prescribes three requirements of a personal service corporation, to wit: (1) The income of the corporation must be ascribed primarily to the activi ties of the principal owners or stockholders. (2) Such principal owners or stockholders must themselves be regularly engaged in the active conduct of the aifairs of the corporation. (3) Capital (invested or borrowed) must not be a material income-producing factor.
Failure to comply with any one of these requirements is fatal to a claim that a corporation is a personal service corporation. In the case of Matteson Co. v. Willcuts, 12 Fed. (2d) 447, it was pointed out that this provision, permitting a certain class of corporations to be taxed on the same basis as a co-partnership, was in the nature of a concession to those corporations whose functions were primarily personal service in character, which service was rendered to its patrons in a manner similar to the way a partnership rendered the same kind of service, and where such corporation did not require any considerable amount of capital and such capital as was actually employed was not a material income-producing factor. The necessity for strict compliance with the requirements of the statute is aptly stated in the case of Matteson Co. v. Willcuts, supra, the court saying:
Every corporation Ras full control of its own activities. It knows what the requirements of a personal service corporation are. It may comply therewith and easily keep within the limits thereof if it so choose, or it may not if it otherwise prefers. If it does not fairly observe and keep within the requirements of the law, it should not claim the benefits which the law confers. To nearly comply with the law, or to come within hailing distance thereof, is not-enough.
And, in discussing the first requirement of personal service status, the court said:
It is not necessary under the law that each stockholder shall be engaged in rendering the personal service, but the letter and the spirit of the law both require that the great body of the stock shall be in the hands of those who are rendering this service.
In the case of Matteson Co. v. Willcuts, supra, some doubt was expressed whether 16 per cent of the stock being held by a stockholder, who rendered no personal service, would be sufficient to defeat personal service classification. However, after holding that an additional 20 per cent of the stock was owned by one not regularly engaged in the aifairs of the corporation, the court was clearly of the opinion that the condition was not met.
In the case at bar, during the year 1918 there was outstanding in the hands of stockholders, who rendered no personal service and received no salaries, 35 per cent of the stock of the corporation. F. M. Rosenberg, trustee, held for undisclosed persons 40 shares of stock, and we are not advised as to the terms or conditions under which the stock was held. S. F. Rosenberg held 42 shares of stock and rendered no service to the corporation. George M. Wells held, as trustee, 16 shares of stock. One witness testified that this stock was held for his wife, but we are not advised as to the terms or conditions upon which it was held. It should also be noted that W. Z. Tankersly, who was the owner of 107 shares of stock of the corporation, was in failing health during the year 1918 and unable to devote his entire time to the business of the corporation prior to his death in August, 1918, and upon his death his stock passed by inheritance to his widow and children, who rendered no service to the corporation. During the year 1919 there was outstanding in the hands of stockholders who rendered no personal service, 49-4/14 per cent of the corporate stock. S. F. Rosenberg held 42 shares, (same as in the year 1918); G. M. Wells, trustee, 16 shares, (same as in year 1918); Mrs. W. Z. Tankersly, 60 shares; and Mrs. Mary Adams, 20 shares. The latter two stockholders were the widow and daughter, respectively, of W. Z. Tankersly, and rendered no personal service to the corporation.
It is manifest that the non-active stockholders held too large a percentage of the total stock to justify a holding that there was a substantial compliance with the first prerequisite laid down by the statute. Such being the case, it becomes unnecessary to consider the remaining requirements of the statute as a prerequisite to personal service classification.
Judgment will be entered for the Commissioner.