Commissioner of Internal Revenue v. Field

• Decision Date: 04 December 1933
• Docket Number: No. 74.,74.
• Citation: 67 F.2d 876
• Parties: COMMISSIONER OF INTERNAL REVENUE v. FIELD.
• Court: U.S. Court of Appeals — Second Circuit

67 F.2d 876 (1933)

COMMISSIONER OF INTERNAL REVENUE v. FIELD.

No. 74.

Circuit Court of Appeals, Second Circuit.

December 4, 1933.

Pat Malloy, Asst. Atty. Gen., and Sewall Key and Francis H. Horan, Sp. Assts. to Atty. Gen. (E. Barrett Prettyman, Gen. Counsel, Bureau of Internal Revenue, of Washington, D. C., of counsel), for petitioner.

Beverley R. Robinson and Daniel B. Priest, both of New York City (Edward N. Perkins and Samuel L. Rosenberry, both of New York City, of counsel), for respondent.

Before MANTON, AUGUSTUS N. HAND, and CHASE, Circuit Judges.

MANTON, Circuit Judge.

The respondent, in his income tax return for the year 1923, charged off losses sustained by him in the operation of a farm and a racing stable. The Commissioner refused to allow these losses, and, on appeal to the Board of Tax Appeals, the Commissioner's determination was reversed. 26 B. T. A. 116. He filed his petition to review here (sections 1001-1003 of the Revenue Act of 1926, c. 27, 44 Stat. 9, 109, 110, as amended by section 1101 of the Revenue Act of 1932, c. 209, 47 Stat. 169, 286 (26 USCA §§ 1225, 1226, and § 1224 and note).

This petition presents the question whether, in operating his farm and racing stable for 1923, respondent was conducting a business operated for profit so that the expenses and losses incurred therein would be deductible under section 214 (a) of the Revenue Act of 1921. Section 214 (a), 42 Stat. 239 allows as deductions from income:

"(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. * * *

"(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business."

Treasury Regulations 62, promulgated under the Revenue Act of 1921, permits losses of farmers to be deducted even if the taxpayer owns and operates a farm in addition to being engaged in another trade or business, provided the farm is not operated for recreation or pleasure (article 145), and a person cultivating or operating a farm for recreation or pleasure, the result of which is a continuous loss from year to year, is not regarded as a farmer (article 38).

The respondent is engaged in the banking business. In 1923, he devoted considerable time to other enterprises. Among these were the operation of his farm on Long Island and the racing and breeding of horses in England and in this country. At his farm on Long Island he bred and raised Guernsey cattle, offered them for sale, selling some, and also sold the milk. The farm was on very valuable land, owned by his wife, but leased to the farming enterprise at $15,000 per year or $30 per acre. The enterprise was commenced in 1922 in the charge of a man experienced in breeding Guernsey cattle and under an indefinite partnership arrangement by which he was to share in the profits but not the losses, and was to receive a salary of $3,000 annually. He was a graduate of an agricultural college and had previous experience in Guernsey breeding in this country. Respondent testified that it was his intention to enter into the operation of the farm as a business enterprise, intending to develop a fine true-breeding strain and sell the stock. It was his hope to obtain a reputation and to be able to demand high prices for his products. He paid high prices for his bulls and other cattle, equipped the farm with modern buildings and equipment, and raised crops. The milk sold brought higher than market prices. His sales amounted to 200 quarts daily. In addition, he gave his personal time and attention to the project and educated himself in the breeding of cattle by study and reading. The cattle were exhibited at shows and advertised for sale. Books of account were kept and an accurate audit made of the investment and income. It was expected that the losses at the commencement of the enterprise would be greater than later because the heifers were kept rather than sold in order to improve the breeding process and to obtain a permanent herd.

In 1921, the respondent entered his racing and horse breeding operations with an intention, as he testified, of obtaining thoroughbreds with a serious and businesslike desire to make his operations profitable. He obtained what he regarded as the guidance of expert opinions, and acquired thoroughbreds for the purpose of carrying out this business for a profit. The findings below show that the methods and practice pursued indicated his desire to carry on for a profit. He knew and understood the breeding of horses, and, as found below, showed intelligence about its direction. Moreover, he testified that it was his intention to give up the enterprise if it was not successful in making money. He testified that he had just reached the point where he was confident that profits were to be made; that, if he sold his mares he could cover his losses, but that would wreck his enterprise.

The losses in 1923 at his Guernsey cattle farm were $43,282.28. His farm was started about July 1, 1923, with 30 head of pureblood Guernsey cattle. Sales from the farm amounted to $4,518.13 up to December 31, 1923, and there was an inventory on that date of $50,311.48. The losses during this six months' period which constituted the taxable year were $43,282.38. His horse breeding in this country in 1923 was done on a farm in Kentucky. He also bred horses in Ireland since 1921, but trained them for racing in...