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*631OPINION.

Littleton:

The taxpayer contends that its income for the years 1919 to 1922, inclusive, is ascribable primarily to the activities of its stockholders who were regularly and actively engaged in the conduct of its affairs; that the capital employed in its business is not a material income-producing factor and that it is, therefore, entitled to classification as a personal-service' corporation and to exemption from taxation under section 218 of the Revenue Act of 1918 and section 218 of the Revenue Act of 1921. It further contends that the amounts drawn by its stockholders during the years involved herein represent reasonable compensation for services actually rendered by them in those years and that, even if classification as a personal service corporation is denied, the deficiency determined by the Commissioner should be disallowed.

The Commissioner on the other hand insists that the income of the taxpayer was not ascribable primarily to the activities of its stockholders; that the use of capital was a material income-producing factor, and that the amount allowed by him as salaries to the taxpayer’s officers for the years 1919 to 1922, inclusive, viz, $14,850 for each year, was adequate and reasonable compensation for the services rendered by them. He also insists that the amounts paid by the taxpayer for the Stephens’ books under the agreement were capital expenditures, and, as they had heretofore been charged to expense and deducted from gross income, the deductions should be disallowed and the deficiency, as heretofore determined by him, increased accordingly.

We can not agree with the taxpayer that its income is ascribable primarily to the activities of the stockholders and that its capital is not a material income-producing factor. On the other hand, we think that the use of capital was not only a material factor in producing the taxpayer’s income, but that it was the principal factor. It appears from the evidence that, for a person or corporation to undertake to engage successfully in the abstract business in the locality served by the taxpayer, the ownership or use of a set of ab*632stract books, such as is owned by the taxpayer, is absolutely necessary; otherwise the business can not survive. The books owned by the taxpayer were acquired in the year 1898, at a cost of $25,000, and since that date a large amount of money has been expended in keeping them complete. In addition the taxpayer had the use, if necessary, of another set of books which, though incomplete, appear to be of value. Regardless of the activities of its stockholders, the taxpayer could not furnish the abstracts — from the sale of which its entire income is derived — without the ownership and use of such books. For these particular books it has paid, and is paying, large amounts of money. The original capital of the taxpayer was invested in them and, in addition, large amounts have been spent in adding to them. This capital of the taxpayer was a material income-producing factor, without the use of which the business could not long survive. It follows that the taxpayer is not entitled to classification as a personal service corporation, or to exemption from taxation as such.

During the years 1919 to 1922, inclusive, the taxpayer divided its net income equally among its three officers and stockholders in lieu of compensation for services rendered by them during those years. The Commissioner has determined that amounts in excess of $14,850 a year represent a distribution of profits and he has, therefore, disallowed as deductions from gross income the amounts drawn by the officers in excess of $14,850 for each year and has increased the taxpayer’s income by the amounts disallowed. In view of the facts disclosed by the record we are of the opinion that the allowance made by the Commissioner should be approved.

The only other question presented by the record is whether the amounts paid by the taxpayer during the years 1919 to 1922, inclusive, to the Stephens Investment & Trust Co. through the Colorado National Bank, under the agreement referred to in the findings of fact, are capital expenditures or ordinary and necessary business expenses. It appears from the evidence that the taxpayer and the Landon Abstract Co., which at the present time is the taxpayer’s only competitor, secured from the Denver Abstract & Title Co., under a contract of purchase of the entire capital stock of that company, the use of an incomplete set of abstract books, which books were to become the property of the taxpayer and the Landon Abstract Co., through the ownership by them of the entire capital stock of the Denver Abstract & Title Co., as soon as they should have paid the amount of $74,000 through monthly installments. The control of the books of the Denver Abstract & Title Co. by the taxpayer and 'the Landon Abstract Co. was for the purpose of eliminating competition and to have a set of books to rely upon in the *633©vent of their own records being destroyed. Charles H. Scott, president of taxpayer, testified in respect to these books as follows:

A good many years ago Stephens was ip the business and he had a set of books and he was sort of a thorn in the flesh and we leased his books so that we can use them in case we need to if any of our records should be destroyed. These books are not posted or kept up with the daily transfers. If at any time any of our books should get mislaid or we should lose them or if they should partially get burned or anything of that sort, we have the use of these books, which are stored away, to replace anything that would be lost in our own books. Kind of ap insurance business you might almost call it.

Q. You have those books stored away and go to them whenever you need to, when any of your own records are misplaced or destroyed you go to these books?

A. Yes.

The books of the Denver Abstract & Title Co. were of value for two reasons: First, that they precluded competition, and secondly, in the event of the taxpayer’s books being lost or destroyed it will be in a position to replace them. Upon the completion of the payments under the agreement it will be a part owner of a set of books at a cost of $74,000. It therefore appears that by the payments made under the contract of purchase the taxpayer is acquiring an interest in a valuable asset, and we are of the opinion that the amounts so paid constitute capital expenditures and not ordinary and necessary business expenses. Since these amounts have been charged to expense and deducted from gross income, the deductions should be disallowed and the taxpayer’s net income for each of the years increased accordingly.

ARttndell not participating.

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How this case has been treated — in progress