Bessenyey v. Comm'r of Internal Revenue
| Decision Date | 17 December 1965 |
| Docket Number | Docket No. 3774-62. |
| Citation | 45 T.C. 261 |
| Parties | MARGIT SIGRAY BESSENYEY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Saul Duff Kronovet, for the petitioner.
Lee A. Kamp and Arnold Y. Kapiloff, for the respondent.
1. Petitioner, a woman of substantial means, sustained large losses in the raising of Hungarian Half-Bred horses. Held: Petitioner bred and raised these horses in an attempt to perpetuate and establish them as a recognized breed in the United States. She conducted the operation for personal satisfaction and not in order to obtain a profit. Losses thus sustained are not deductible.
2. Petitioner incurred expenses in recovering from the Office of Alien Property (a) a residuary bequest and (b) a cash bequest together with accompany interest. Held, the expenses allocable to the residuary bequest were not incurred in respect of ‘property held for the production of income’ and were therefore not deductible, but the remaining expenses, in respect of the cash bequest plus interest qualified for deduction under section 212, I.R.C. 1954.
The Commissioner determined deficiencies in petitioner's income tax for the years 1955-59, as follows:
+---------------+
¦1955¦$2,079.71 ¦
+----+----------¦
¦1956¦1,034.34 ¦
+----+----------¦
¦1957¦14,117.57 ¦
+----+----------¦
¦1958¦23,314.65 ¦
+----+----------¦
¦1959¦47,370.24 ¦
+---------------+
Petitioner contends that there were no deficiencies in the above years, and that there were overpayments of tax in 1955, 1958, and 1959 in the amounts of $940.26, $4,116.72, $3,375.95, and $4,162.96. The matter of overpayments in 1958 and 1959 is no longer in issue.
The principal question in this case concerns the deductibility of losses incurred by petitioner in the breeding and training of horses in Montana and Maryland from 1955 through 1959. Also at issue is whether legal expenses incurred by petitioner in 1959 in obtaining the release of a cash bequest with interest and a residuary legacy from the U.S. Office of Alien Property are deductible under section 212, I.R.C. 1954.
The stipulation of facts filed by the parties together with the exhibits attached thereto are incorporated herein by this reference.
Petitioner, a woman in her fifties, resides at 2 Sutton Place South, New York, N.Y. She filed her individual income tax returns for the calendar years 1955-59, inclusive, with the district director of internal revenue for the Upper Manhattan District of New York. She is a person of considerable means. Her returns for the years 1955-62 disclose income from dividends, taxable interest, net capital gains, and tax-exempt income from municipal bonds and other sources, as follows:
+-------------------------------------------------------+
¦Year¦Dividends ¦Taxable ¦Capital gains¦Tax-exempt¦
+----+--------------+----------+-------------+----------¦
¦ ¦ ¦interest ¦ ¦income ¦
+----+--------------+----------+-------------+----------¦
¦1955¦1 $45,368.35¦ ¦$8,304.57 ¦(2) ¦
+----+--------------+----------+-------------+----------¦
¦1956¦1 110,898.33¦ ¦3,541.58 ¦$18,743.45¦
+----+--------------+----------+-------------+----------¦
¦1957¦1 101,891.95¦ ¦24,026.45 ¦43,516.43 ¦
+----+--------------+----------+-------------+----------¦
¦1958¦122,194.97 ¦ ¦3,949.24 ¦15,187.92 ¦
+----+--------------+----------+-------------+----------¦
¦1959¦139,504.48 ¦ ¦73,530.82 ¦10,417.48 ¦
+----+--------------+----------+-------------+----------¦
¦1960¦148,406.36 ¦ ¦5,291.29 ¦6,715.00 ¦
+----+--------------+----------+-------------+----------¦
¦1961¦153,019.13 ¦ ¦107,826.30 ¦6,675.00 ¦
+----+--------------+----------+-------------+----------¦
¦1962¦96,291.02 ¦$49,036.59¦1,844,101.62 ¦(2) ¦
+----+--------------+----------+-------------+----------¦
¦ ¦ ¦ ¦ ¦ ¦
+-------------------------------------------------------+
Petitioner was born in Hungary. Her father was a Hungarian count, and her mother an American, the daughter of Marcus Daly who had made his fortune in copper in Montana and was sometimes referred to as the ‘copper king’ of Montana. Petitioner was raised in Hungary on her father's estate and had lived there for more than 30 years when she came to the United States in 1946 to take up residence here. However, she had previously been in this country a number of times to visit her maternal grandmother in Montana. (Her grandfather, Marcus Daly, had died in 1900.)
The estate in Hungary consisted of some 16,000 to 18,000 acres, about half of which was devoted to forestry products and the other half to livestock and crop cultivation. Some 30 to 50 families lived on the estate and supplied the required labor. Petitioner's father supervised the entire estate, but he was assisted by a chief forester as well as by a farm manager. Among other things, the farm had a dairy operation consisting of about 60 to 70 cows; pigs were raised for internal consumption and sale; calves were regularly produced and sold as veal, the basic meat of Hungary; and various crops were produced, including grains, corn, potatoes, and sugar beets. In addition, there were bred, trained, and maintained on the farm some 20 or so teams of oxen and water buffalo for very heavy farming chores, approximately 40 to 60 heavy horses for somewhat lighter chores, and between 25 and 50 riding and carriage horses primarily for use on the estate, but also, on occasion, for sale. The riding and carriage horses consisted of a breed of horse known as the Hungarian or Hungarian Half-Bred. Also, petitioner's father was interested in horse-racing, and he personally supervised the breeding and training of Thoroughbred racing horses on the estate.
While living in Hungary petitioner obtained substantial knowledge regarding horse breeding, training and management through extensive reading, observation of others, and practical experience. In addition, she received some formal instruction in England with respect to these matters.
From about 1930 to 1946 the breeding, raising, and training of the Hungarian horses were petitioner's principal responsibility on the farm. She chose which mares were to be bred to which stallions, but did not do any of the physical work required. She instructed the employees in this regard and also with respect to the early stages of training; she personally directed the more advanced training.
The Hungarian or Hungarian Half-Bred is a distinct breed of horses which has been bred in Hungary for over 100 years. They were originally a cross of native Hungarian horses with Arabians and English Thoroughbreds. In Hungary, a registry was maintained to keep records of the pedigrees of this breed. It would be considered an open registry in that it permitted continued breeding of Hungarians with Arabians and Thoroughbreds, although it did not admit other breeds. The Hungarian Government maintained its own breeding farms for these horses and private breeders were subject to Government supervision.
The term ‘Hungarian Half-Bred’ was used to distinguish this breed from the ‘English Thoroughbred.’ It was not intended to suggest that the Hungarian is not a distinct breed of horses or that it is a ‘half-breed’ or a ‘mongrel.’
During World War II petitioner's father was arrested by the Germans and placed in a concentration camp. Petitioner and her mother remained at the farm during the war years, and petitioner was active in the Hungarian underground. Petitioner's father was liberated by the U.S. Army and was able to reach Switzerland where he was joined by his wife. Both of them then came to the United States. Petitioner remained on the family farm until the end of 1946. At that time it became evident that the Communists were taking over the country, so she also left for the United States.
After coming to the United States, petitioner learned that the Army had brought some Hungarian horses to the United States. In the fall of 1945, the U.S. Army made the first shipment of horses from Europe to the United States following the war. A second shipment of horses from Europe to the United States was made in early 1946. The foregoing two shipments consisted of 63 Thoroughbreds, 18 purebred Arabians, 17 Grade Arabians, 9 Lippizaners and 37 Hungarians. Most of these horses were taken from the German Army as spoils of war, but some came from Poland and Hungary. Most were placed in the Remount Service which was a breeding program to produce horses for the U.S. Cavalry. When the U.S. Army discontinued the Remount Service in the Cavalry Branch, the horses were sold at Fort Reno, Okla., in 1948. Petitioner had learned about these Hungarians in the hands of the Army and ‘had been interested in their fate.’ When she heard that the Army was selling them, she ‘got very interested in the idea of buying some of these blood lines.’ She ‘felt that these horses were too good blood lines to get scattered amongst people who did not know what they were, and (she) hoped in the future to be able to breed them and continue.’
At this time petitioner and both of her parents were ill so that she was unable to attend the sale personally. Instead, she authorized a Hungarian veterinarian, Dr. Bela Marissy, to attend the sale for her and instructed him to purchase such mares as he considered had the best bloodlines. She did not ask him to buy any geldings or stallions. Petitioner chose Dr. Marissy because he knew Hungarian horses, having been employed by the horse division of the Hungarian Department of Agriculture in connection with the state farms that raised the horses. Petitioner left the selection of horses completely to the discretion of Dr. Marissy.
At the sale, Dr. Marissy selected and purchased nine Hungarian brood mares for petitioner at a cost of about $150 each. At the time of...
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