Commissioner of Internal Revenue v. Widener
| Decision Date | 20 June 1929 |
| Docket Number | No. 4001,4003.,4002,4001 |
| Citation | 33 F.2d 833 |
| Parties | COMMISSIONER OF INTERNAL REVENUE v. WIDENER (three cases). |
| Court | U.S. Court of Appeals — Third Circuit |
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Lansdon (dissenting).
I disagree with the action of the Board in holding that the losses sustained by the petitioners, Joseph E. Widener and George D. Widener, in maintaining and operating racing stables, are deductible from the respective gross income of the petitioners in each of the several taxable years.
Horse racing has long been called the "sport of kings." There is a well-defined difference between sport and business. The one is pursued for personal pleasure, relaxation, or recreation; the other is engaged in for the purpose of earning profits or as a means of livelihood. It is one of the characteristics of sport that it wastes capital. On the other hand, a primary attribute of business is the conservation and increase of capital. Sport employs wealth to secure pleasure; business utilizes it to create more wealth. The motives that impelled one of these petitioners to enter the horse-racing business are set forth in the findings of fact as that "he was fond of horses and wanted an outdoor occupation." This does not suggest an intention to engage in a business for profit.
In the cases of both the Wideners there is in the record a very definite statement of receipts, expenses, and losses for each of the taxable years, but there is no information as to the amount of capital employed. It is hardly possible to determine whether an enterprise is conducted as a business, if the amount of the investment is not known. It is obvious from the figures here that, unless the stables of the petitioners were heavily financed at the outset, the original capital was lost several times over prior to and during the taxable years. The huge annual deficit disclosed by the record must have been made good by equally huge additional capital contributions. This is a process aptly described in the speech of the common man as "throwing good money after bad," and is rarely indulged in by real business men. Ordinarily it is impossible in an enterprise carried on for profit or as a means of livelihood, but it is not at all an unusual procedure for those who, regardless of expense, pursue some sport, recreation or pastime for personal gratification. The excess profits tax law recognized the principle that capital employed in business for profit is entitled to a fair return before any income emerges. If these petitioners were in a position to claim an 8 per cent. return on their capital investment and also to reduce their respective gross incomes by the amount of these alleged losses, it is plain that in time they might entirely avoid any payments to the public revenues, even though they were eventually in receipt of substantial annual receipts in excess of expenditures.
Certainly no one would contend that the fact that an enterprise sustains losses in a given year or even for a series of years is proof that it is not conducted for profit. Due to commercial conditions, crop failures, changes in an art, the vagaries of fashion, or any one of the numerous other causes, many men have found themselves forced to continue a losing business year after year in the hope of recouping their fortunes by some favorable turn of affairs. Such conditions do not exist here. These petitioners voluntarily engaged in an enterprise that is notoriously uncertain. They made good their losses and continued their operation after it was clear that there was little if any prospect of profit. The motives and purposes that governed them were not based either on the hope of or the desire for profits. They were willing to pay and able to pay for the pleasure which they derived from indulging in the "sport of kings" and doubtless the resulting personal gratification was ample compensation for the costs incurred.
The findings of fact, supra, indicate that racing rather than the breeding and sale of horses was the principal purpose for which these petitioners conducted their alleged business. It is recited that the employees of the stables included trainers, jockeys, blacksmiths, rubbers, exercise boys, and veterinarians. Services rendered by such men are peculiarly necessary in conducting a racing stable, but they have a relatively small place in the...
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