Cecil v. Commissioner of Internal Revenue

• Decision Date: 09 January 1939
• Docket Number: No. 4377.,4377.
• Citation: 100 F.2d 896
• Parties: CECIL v. COMMISSIONER OF INTERNAL REVENUE
• Court: U.S. Court of Appeals — Fourth Circuit

100 F.2d 896 (1939)

CECIL v. COMMISSIONER OF INTERNAL REVENUE

No. 4377.

Circuit Court of Appeals, Fourth Circuit.

January 9, 1939.

Junius G. Adams, of Asheville, N. C. (Adams & Adams, of Asheville, N. C., on the brief), for petitioner.

John A. Gage, Sp. Asst. to Atty. Gen. (James W. Morris, Asst. Atty. Gen., and Sewall Key, Sp. Asst. to Atty. Gen., on the brief), for respondent.

Before NORTHCOTT, Circuit Judge, and WEBB and CHESNUT, District Judges.

CHESNUT, District Judge.

The Commissioner of Internal Revenue on February 7, 1935, notified the taxpayer, Cornelia V. Cecil, of a proposed deficiency income tax assessment for the year 1931 in the amount of $2,924.86. She thereupon petitioned the Board of Tax Appeals for a redetermination of the deficiency. On fully stipulated facts the Board (three members dissenting) confirmed the action of the Commissioner, 37 B.T.A. 904; and the taxpayer has now filed her petition here to review this ruling of the Board.

Two items, both claimed deductions from income, are in controversy. One deduction claimed by the taxpayer was $20,267.08 paid on account of county, town and city taxes for the tax year 1930-1931 assessed against the Biltmore Estate in Buncombe County, North Carolina, near Asheville. The other item claimed as a deduction was in the amount of $36,309.18, as a part of the cost of the maintenance and operation of the Biltmore Estate which is owned, maintained and operated by the petitioner as a museum and park open to the public for an admission charge. This latter item was not considered by the Commissioner but was presented to the Board by an allowed amendment of the taxpayer's petition for redetermination. The Board disallowed both items.

We will first consider the deductibility of the item of $36,309.18 for maintenance. The question presented is whether the operation of the Biltmore Estate constituted the carrying on of a "business" within the meaning of that word in section 23(a) of the Revenue Act of 1928 (45 Stat. 791, 26 U.S.C.A. § 23(a)) which reads:

"Deductions from gross income. In computing net income there shall be allowed as deductions: (a) Expenses. All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business."

The relevant facts, taken from the stipulation and findings by the Board are as follows. The Biltmore Estate, situated in Buncombe County, North Carolina, near Asheville, comprises 12,000 acres of ground, much of which is highly landscaped and on which is situated Biltmore House and Gardens constructed in the years 1890 to 1895 by George W. Vanderbilt at a cost of several million dollars. The Mansion House itself covers about four acres of ground and contains a very notable collection of paintings, antiques and other objects of art. The Gardens are elaborate and extensive and there are 17 miles of improved roadways. About 2500 acres of the Estate are used for the purpose of a large dairy farm with a herd of 700 milk cows, and the products thereof are widely sold in neighboring territory. The Estate as a whole constitutes a unique establishment which is a conspicuous landmark in Western North Carolina. About seven hundred persons are employed in its care and management.

The taxpayer is a daughter of the first owner and occupied and used the property as her residence for some years prior to March 15, 1930 when she discontinued her personal residence there and opened the property to the public for an admission charge as a Museum and Gardens and Landscaped Estate. For a year or two thereafter she maintained her residence in Washington or New York but in 1932 she and her children went to England where she has continuously since been resident. The House and Gardens and about 10 miles of landscaped roadways on the Estate are open to the public for an admission charge of $2.00, in most cases, every day in the year except a few holidays.

The gross income from the activities conducted on the Estate for the year 1931 amounted to $573,782.37. Of this amount $38,653.50 resulted from paid admissions to the Estate, House and Gardens, and $2,633.23 represented the gross sale of views of the Estate. These receipts were included by the taxpayer as a part of her taxable income. No personal or living expenses of any kind of herself or family were charged against the receipts from the Estate. The maintenance and operation of the Estate including the dairy farm, for the year 1931 resulted in a net loss of $10,608.29, exclusive of taxes and the maintenance item now in controversy. The Commissioner allowed the taxpayer's deduction in the amount of $44,460.07 representing salaries and wages and sundry items of expense incurred and paid in connection with the exhibition of Biltmore House and Gardens, but did not consider the item of $36,309.18 now in controversy, which had not been included by the taxpayer in her return, but was set up by her in the proceeding before the Board by an allowed amendment, and was claimed by her as a further deduction for maintenance of the landscaped portion of the Estate open to the public for an admission charge. For the year 1931 the taxpayer reported an income of $173,599.67 from non-taxable securities, and a capital net gain from the sale of assets held more than two years in the amount of $150,272.45. The return further showed total deductions for taxes in the amount of $79,024.56, which included the item of $20,267.08 in dispute. The taxpayer reported and paid a tax of $9,490.14, computed at the rate of 12½ per cent of the capital gain of $150,272.45, less $74,351.29, the latter figure representing the "excess of ordinary deductions over ordinary income".

In refusing to allow the deduction of the item of $36,309.18 for maintenance, the Board, as it appears from its opinion, acted on the view that the operation of the Estate, as a place of exhibition for the public for an admission charge, was not the carrying on of a "business" within the meaning of the statute, unless it affirmatively appeared that the taxpayer intended to make a profit from the enterprise; and the Board concluded, in the absence of any express statement in the stipulation as to the taxpayer's intention, that she did not intend to make a profit, by reason of the inclusion in a printed circular descriptive of the Estate, of the sentence reading — "An admission charge is made, estimated as sufficient to defray the expenses of opening the House and Gardens to the public."

In our opinion the Board acted on a too narrow and restricted interpretation of the statute. The term "business" as here used was evidently not intended to have a technical meaning but to be understood in its ordinary acceptation. It is a comprehensive term which, as used in the corporation income tax law of 1909, was defined by the Supreme Court in Flint v. Stone Tracy Co., 220 U.S. 107, 31 S.Ct. 342, 55 L.Ed. 389, Ann.Cas.1912B, 1312, and Von Baumbach v. Sargent Land Co., 242 U.S. 503, 515, 37 S.Ct. 201, 204, 61 L. Ed. 460, as including "that which occupies the time, attention, and labor of men for the purpose of a livelihood or profit". In United States v. Atlantic Coast Line Co., 4 Cir., 99 F.2d 6, 7, this court, in an opinion by Judge Northcott, approved the definition given in Black's Law Dictionary, that "`business' is a very comprehensive term and embraces everything about which a person can be employed". In the adjudicated cases which have applied the word as used in section 23(a) of the Revenue Act of 1928, and in corresponding sections of other income tax statutes, there is the recurrent expression that the enterprise must have been undertaken for "gain or profit"; and in many of the cases the test is stated in terms which generally distinguish between "business" and "pleasure". Thus in Doggett v. Burnet, 62 App.D.C. 103, 65 F.2d 191, 194, the Court of Appeals of the District of Columbia, said:

"The proper test is not the reasonableness of the taxpayer's belief that a profit will be realized, but whether it is entered into and carried on in good faith and for the purpose of making a profit, or in the belief that a profit can be realized thereon, and that it is not conducted merely for pleasure, exhibition, or social diversion."

In George v. Commissioner, 22 B.T.A. 189, 195, the Board said:

"The real test is whether the operation was carried on as a business for gain or whether it was carried on for recreation or pleasure. And this question is largely a matter of the intent of the petitioner."

The taxpayer's intention is important (Commissioner v. Field, 2 Cir., 67 F. 2d 876, 877) but not necessarily controlling, as the nature of the enterprise and its financial results may be even more important. Thacher v. Lowe, D.C., 288 F. 994. That substantial losses, rather than some net profit, have resulted does not prevent the enterprise from being a business within the meaning of the statute. Thus in Wilson v. Eisner, 2 Cir., 282 F. 38, the conduct of a racing stable by the taxpayer on which he made a profit for about one-third of the time but lost money for two-thirds, was held a business enterprise. To the same effect is Commissioner v. Widener, 3 Cir., 33 F.2d 833.¹ Similar decisions were reached in Plant v. Walsh, D.C., 280 F. 722, where the taxpayer conducted a very expensive farm; in Commissioner v. Fields, 2 Cir., 67 F.2d 876, in the case of a farm and racing stables; and also in Doggett v. Burnet, 62 App.D.C. 103, 65 F.2d 191, where the taxpayer was engaged in a long losing business of publication and sale of books of a particular religious nature. Nor did long continued losses in maintaining an orchard destroy its business character. George v. Commissioner, 22 B.T.A. 189, 194. But if the gross receipts from an enterprise are practically negligible in comparison with expenditures over a long period of time it may be a compelling inference that the taxpayer's real motives were those of personal pleasure as...