Godfrey v. CIR

• Decision Date: 29 July 1964
• Docket Number: No. 15386.,15386.
• Citation: 335 F.2d 82
• Parties: Edward R. GODFREY and Georgia G. Godfrey, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Sixth Circuit

335 F.2d 82 (1964)

Edward R. GODFREY and Georgia G. Godfrey, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 15386.

United States Court of Appeals Sixth Circuit.

July 29, 1964.

Paul J. Buckley, Dayton, Ohio, for petitioners.

Edward L. Rogers, Atty., Dept. of Justice, Washington, D. C. (Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Atty., Dept. of Justice, Washington, D. C., on the brief), for respondent.

Before CECIL, and O'SULLIVAN, Circuit Judges, and McALLISTER, Senior Circuit Judge.

CECIL, Circuit Judge.

This case is on petition for review from a decision of the Tax Court. The first issue before us involves the question of whether the losses incurred in the cattle-raising activities of the petitioner, Edward R. Godfrey, are deductible as business expenses for the taxable years 1955, 1956 and 1957. The petitioners, Edward R. Godfrey and Georgia G. Godfrey, filed joint returns during the years in question. This review concerns only Mr. Godfrey whom we will refer to as the taxpayer or petitioner.

The facts are stated in the Memorandum Findings of Fact and Opinion of the Tax Court reported at 22 CCH TCM 1. The facts may be briefly stated as follows: The petitioner was an executive of General Motors Corporation and in 1943 he was transferred from Anderson, Indiana, to Dayton, Ohio, where he became factory manager of the corporation's Frigidaire Division. Subsequently, he became general manager of that division.

In 1943 the petitioner purchased a farm of 109.27 acres of land in Warren County, Ohio, about seventeen miles from his place of employment. He then made his home in the residence of this farm until 1948. At that time he was transferred to Detroit, Michigan, where his employment required him to be until he retired in 1955. During this period he spent three weekends out of four each month on the farm. Considering the original purchase price, the improvements to the residence and farm, the purchase of additional farm machinery and equipment and the purchase of an additional tract of twenty-seven acres of land, the petitioner had an investment of approximately two hundred thousand dollars. At the time of the purchase, he had no experience in farming and his knowledge of farm operations was meager.

A small herd of Jersey cattle was on the farm at the time of the purchase. The petitioner supplemented this herd with the purchase of some additional Jersey cattle and conducted an operation for the production and sale of milk. He sold all of the Jersey cattle in 1950 and discontinued the production of milk. In 1945 he decided that the breeding, raising and selling of polled Hereford cattle would constitute the best use of his farm. He thereupon bought eight cows and one bull at a cost of $2,785. He estimated that it would require a herd of one hundred animals to operate at a profit and that it would take ten to twelve years to develop a herd of that size through the natural increase method. In 1957 the petitioner made a revised estimate that it would be 1961 or 1962 before he could hope to have a herd of 100 animals. In order to make a profit after reaching this goal he estimated that he would have to have a calf yield of sixty-five per year, sell sixty animals per year, at $400 each, and hold his operating expenses to $20,000 per year. He never achieved any of these goals. At the beginning of the year 1958, there were sixty animals in the herd.

In January, 1959, the petitioner sold his herd, consisting of fifty-four animals, for $12,600. He sold the farm, including all of the land, residence, farm buildings and equipment for $210,000 in January of 1960.

The petitioner's losses for the taxable years in question were: 1955, $15,968.12; 1956, $14,406.68, and 1957, $16,945.07. He seeks to deduct these losses as expenses incurred in a trade or business. Section 162(a), Title 26 U.S.C., allows the deduction of "ordinary and necessary expenses * * * in carrying on any trade or business," and Section 165(c) (1), Title 26 U.S.C., provides that "losses incurred in a trade or business" may be deducted. Section 1.162-12 of Income Tax Regulations provides: "A farmer who operates a farm for profit is entitled to deduct from gross income as necessary expenses all amounts actually expended in the carrying on of the business of farming." (Not applicable to a farm operated for recreation or pleasure.)

Whether a farm is operated for profit or pleasure is determined, for income tax purposes, from the primary or dominant purpose of the taxpayer. Hirsch v. Commissioner, 315 F.2d 731, 736, C.A. 9, and cases there cited; Wright v. Commissioner, 274 F.2d 883, C.A. 6; White v. Commissioner, 227 F.2d 779, C.A. 6. Did the taxpayer have a dominant motive to make a profit? This is a factual question and must be determined from all the facts and circumstances surrounding the taxpayer's purchase, use and operation of the farm. Many factual considerations enter into the ultimate finding of whether the taxpayer reasonably, and in good faith, was dominated by the profit motive.

The Tax Court found as an ultimate fact: "Petitioner was not, during any of the taxable years involved, engaged in a `business' of breeding, raising and selling cattle." It concluded: "We believe from our consideration of the evidence, that petitioner's primary purpose in buying and developing the farm as a whole, was not to establish a business with which to augment his already large income, but rather to gratify his desire to establish a substantial country estate."

Our review in this field of litigation "must be quite restricted" and we must accept the Tax Court's conclusions on factual issues unless they are clearly erroneous. Commissioner v. Duberstein, 363 U.S. 278, 290, 291, 80 S.Ct. 1190, 1199, 4 L.Ed.2d 1218. Being unable to say that the factual findings of the trial court are clearly erroneous, the judgment of the Tax Court is affirmed on this issue of the case.

The second issue presented on this review concerns the deduction by the taxpayer of expenditures in a joint venture in Florida real estate. Section 212(2), Title 26, U.S.C. provides that an individual may deduct "ordinary and necessary expenses paid or incurred * * * for the management, conservation, or maintenance of property held for the production of income."

In 1955, petitioner together with four other persons contracted to purchase fifty acres of land in St. Petersburg, Florida, known as the "Goose...