Field v. Commissioner , 26 B.T.A. 116 ( 1932 )

MARSHALL FIELD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Field v. Commissioner

Docket No. 36908.

United States Board of Tax Appeals

26 B.T.A. 116; 1932 BTA LEXIS 1366;

May 18, 1932, Promulgated

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1. Taxpayer sustained deductible losses in the taxable year in the business of racing and breeding horses and of operating a farm.

2. A contribution to a fund for the purchase of insulin for use by a hospital in experiments for the cure of diabetes, held deductible.

Beverley R. Robinson, Esq., Edward N. Perkins, Esq., Daniel B Priest, Esq., and Samuel L. Rosenberry, Esq., for the petitioner.

John D. Foley, Esq., and James C. Maddox, Esq., for the respondent.

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SMITH

The Commissioner determined a deficiency of $364,238.22 in the petitioner's income tax for 1923. The pleadings raise several issues that have been disposed of by stipulation and/or concession. The only issues for our determination are the deductibility from gross income of (1) losses sustained in the operation of a farm; (2) losses sustained in the racing and breeding of horses; and (3) a contribution of $1,000 to a so-called Insulin Committee.

FINDINGS OF FACT.

The petitioner is engaged in the banking business as a member of the firm of Field, Gore & Company, at 38 Wall Street, New York City. In 1923 he devoted considerable time to other enterprises such as the business of Marshall Field & Company; Marshall Field Estate in Chicago; the operation of a farm; and the racing and breeding of horses.

In 1920 the petitioner bought approximately 1,700 acres of land near Huntington, Long Island, at a price of $1,600 per acre and set aside 500 acres for a farm designated and hereinafter referred to as Caumsett Farm; the remainder of the tract was used as a summer estate, on which he built a residence in 1921. There were some buildings on Caumsett Farm when acquired and petitioner constructed others upon it. There was "a certain amount of work done on a number of the barns and buildings, and so forth, that was done in a certain way for the looks of it."

Prior to 1923 the petitioner was interested in and studied methods of breeding Guernsey cattle. Upon the acquisition of the Caumsett Farm petitioner consulted with importers of Guernsey cattle and operators of farms for breeding Guernsey stock. He spent considerable tiem investigating the possibilities of developing a fine herd of these cattle on the Caumsett Farm. He began acquiring Guernsey cattle in 1922 and kept them at a farm in New Jersey until the Caumsett Farm was ready to receive them. In 1923 petitioner employed Grover Dunning, a man experienced in the operation of a Guernsey breeding farm, as manager of the Caumsett Farm. Under the contract made with Dunning, petitioner guaranteed him a salary of $3,000 a year and gave him a 20 per cent interest in the herd plus a 20 per cent interest in the profits, if any. If losses were sustained, Dunning was to share his proportional part of them. Prior to this time the fee in the farm was transferred by the petitioner to his wife, Evelyn Marshall Field. The petitioner determined that a reasonable rental to charge the farming operations was $15,000 per year and during 1923 rental was paid in the amount of $1,395.47.

Farming operations were started on the Caumsett Farm on or about July 1, 1923, with a herd of about 30 pure blood Guernsey cattle. In connection with the breeding of Guernsey cows, a dairy was operated and the milk was sold at a premium over certified milk. The sales amounted to about 200 quarts daily, at 20 cents per quart wholesale.

The sales from the Caumsett Farm from July 1 to December 31, 1923, amounted to $4,518.13. The net result of operations for the six-month period ended December 31, 1923, was a loss of $43,282.38. The inventory of the farm at December 31, 1923, was $50,311.48. Sales from the farm for the period 1924 to 1928, inclusive (the latter year covering a period from January 1 to December 18), varied from $31,844.86 in 1924 to $59,219.73 in 1928. The inventory on December 18, 1928, was $63,911.80. The net losses from operations for 1924 to 1928 were as follows:

1924	$70,616.97
1925	74,344.35
1926	85,725.97
1927	62,670.03
1928 (to Dec. 18, incl.)	62,435.60

The Caumsett Farm operations have been continuous from July 1, 1923. Near the close of 1928 a corporation was organized for the operation of the farm. By breeding and purchase the herd of Guernseys on Caumsett Farm has increased to 90 head of cattle. In 1925 the petitioner terminated his contract with Dunning and engaged the services of one John S. Clark, who had been the manager of the Mixter Farm in Massachusetts, as manager of the Caumsett Farm at a salary of $3,600 per annum, plus a share of the profits. This man had been very successful in operating the Mixter Farm for the breeding of Guernsey cattle, with the result that the value of the herd increased in a few years from about $50,000 to $700,000, the price realized on a public sale of the herd alone after Mixter's death. Since coming to the petitioner's farm, Clark has succeeded in increasing the value of the herd and has developed a finer blood in the cattle. A careful record has been kept of every cow, showing its pedigree, date of birth, death, or disposal, milk record and butter-fat production, and other data from which the cost of producing and keeping the cow can be determined, as well as its value at any time. The records of the services of the bulls, the breeding of particular strains, and the calving periods are kept.

The petitioner's Guernsey cattle are sent to national shows, where, in 1928, one of his young bulls sold for $4,500. Other sales have been made, but the better cows and young stock have been retained for breeding purposes.

When stock was first brought upon the Caumsett Farm the petitioner had certified public accountants set up an accounting system for the farm and they soon sent an accountant to the farm to keep its books and records. This man lives at the farm and renders monthly reports to the petitioner and prepares semiannual and annual reports of the income and expenses of the farm. The accounts are regularly audited and the results of these audits are carefully studied by the petitioner. The sources of revenue from the Caumsett Farm operations are the sale of pure blooded Guernsey cattle and the sale of milk. The petitioner's home, adjacent to but separated from the farm proper, is charged at market prices for all supplies procured from the farm. During the period July 1 to December 31, 1923, the income and expenses of the Caumsett Farm were as follows:

Sales		$4,582.13
Cost of goods sold
Inventory at beginning of year	None
Labor	$14,958.56
Materials and supplies	8,254.09
Feed	4,216.03
Seed	1,014.80
Fertilizer	1,955.26
Purchases	46,900.00
	77,298.74
	77,298.74
Inventory at end of year	50,311.48
		26,987.26
Gross profit	[Loss]	22,405.13
Expenses
Rent	1,395.47
Medicine and medical attention	620.69
Transportation	1,268.35
Board	1,676.09
Horse expense	55.00
Auto expense	1,341.58
Tractor expense	584.86
Insurance	2,433.91
Telephone	231.67
Repairs	106.97
Expenses of purchasing cattle	3,418.32
Testing and registry	86.51
Service fee	300.00
Miscellaneous	3,111.85
Depreciation	1,742.88
Total expenses		18,374.15
	[Loss]	40,779.28
Other deductions
Loss on sale of equipment		$1,003,00
	[Loss]	41,782.28
Other Income
Interest
Rent
Loss on Operations		41,782.28
Salaries
Gilbert K. Dunning	$1,500.00
John S. Clark		1,500.00
Loss for period		$43,282.28

During and subsequent to 1923, the Caumsett Farm was conducted by the petitioner as a business for the purpose of making a profit.

In 1921 petitioner became interested in racing and breeding thoroughbred horses in England and acquired "Golden Corn," with which he won purses and stakes of about Pound 9,000. Petitioner realized a profit from horse racing that year, which he returned as income. After consulting men actively interested in racing and breeding horses in England, Field decided to invest more money in the enterprise, acquired more horses, entered into arrangements for their "keep" upon a breeding farm in Ireland and their training for racing in England. Field paid a specified amount to the keeper and trainer for each horse in their care and the trainer shared in the winnings of the horses he trained. The petitioner arranged with an English firm of accountants to make a report and audit of his receipts and disbursements in connection with the racing and breeding of horses in the British Isles.

In 1923 petitioner started racing and breeding horses in the United States. He discussed with men experienced in such affairs the possibility of making the venture a success from the standpoint of producing thoroughbred horses and making a profit. He arranged with the owner of a breeding farm at Paris, Kentucky, to keep his horses there, and with a trainer at Belmont Park to train his horses for races, and under these arrangements the petitioner paid the keeper and trainer a monthly fee for each horse in their care. The petitioner and another owner of racing horses had a joint arrangement for the operation of their stable at Belmont Park. Records of all expenditures and receipts in connection with the racing and breeding of petitioner's horses are kept and regularly audited by certified public accountants.

The petitioner has been actively interested in horses for many years and has devoted considerable time to the study of methods of breeding thoroughbred horses. He determines what mares are to be bred to what stallions and instructs the keeper as to the breeding of his horses; these instructions are not changed without his consent. While the trainers have charge of training the horses, such training being highly technical and very difficult, the petitioner outlines a program for the racing of each horse and the trainers endeavor to have the horse in condition to carry out the program. The petitioner supervises all racing activities and his horses are entered in or "scratched" from races either by him personally or after communication with him. The keepers and trainers of petitioner's horses render regular reports to him and consult him about all matters pertaining to his horses.

In 1923 petitioner had one mare at the breeding farm in Kentucky. In 1924 he sent some horses from England and had three mares and ten weanlings and yearlings there. By purchase and breeding, the petitioner's horses at the Kentucky farm increased until in 1931 he had 27 mares and 36 weanlings and yearlings, a half interest in another mare, and a half interest in the stallion, Stimulus. There has been a continuous weeding out process in an endeavor to increase the quality of the horses, and, consequently, increasing the profit from their sale.

The sources of revenue in the racing and breeding of horses are the racing stakes, stud fees, and proceeds from the sales of horses. In England the expenses incident to horse racing are less than in America, and the stakes for the Derby and Elysim races are Pound 10,000 and Pound 12,000, respectively; the stakes in this country run as high as $50,000 for the Kentucky Derby and Preakness. The petitioner owned a one-fourth interest in Sir Galahad, a horse that was purchased in 1925 by the petitioner and three associates for $125,000, from which he has realized $38,250 from the sale of the services of the stallion, and has had the use of the horse for breeding.

During the year 1923, petitioner's income from and expenses of racing and breeding horses was as follows:

Item	American stable	English stable
Income
Purses	$2,139.90		Pound 2,250- 0- 0
Expenses
Stable:
Keep of horses	6,645.00		3,907-11- 2
Entry and jockey fees	2,011.85		3,185- 0- 9
Salaries and commissions	1,166.67		340-18- 9
Transportation	443.38		655- 4- 8
Insurance	733.65
Bonuses	550.00		527-10- 0
Shoeing	126.50		103-15- 0
Veterinary, medicine, etc	114.00		139-16- 3
Miscellaneous	317.44		241- 5- 4
Total expenses	12,108.49		9,101- 1-11
Loss from operations	9,968.59		6,851- 1-11
Losses on sales of horses
Cost		Pound 10,090-10-0
Proceeds of sale		2,516- 1-6	7,574- 8- 6
Loss for year	9,968.59		14,425-10- 5
English loss converted at rate of exchange Dec. 31, 1923 ($4.3233)			$62,365.86
Combined loss			$72,334.45

Petitioner realized profits from and sustained losses upon the racing and breeding of horses as follows:

Year	Stable	Profit	Loss	Net loss
1924	American	$6,378.51
1924	English		$37,956.20	$31,577.69
1925	American		130,013.84
1925	English		36,946.14	166,959.98
1926	American		134,469.62
1926	English		36,575.90	171,045.52
1927	American		72,817.24
1927	English		22,031.01	94,848.25
1928	American		50,800.31
1928	English		51,157.56	101,957.87

During the years 1925 to 1928, inclusive, petitioner engaged in steeplechase racing, as the result of which he had profits and losses as follows:

Year	Profit	Loss
1925	$6,524.25
1926	797.28
1927		$1,290.58
1928		631.11

During and subsequent to the taxable year under consideration, the petitioner carried on the racing and breeding of horses as a business for the purpose of making a profit.

In 1923 petitioner was chairman of the Beekman Street Hospital in New York, a hospital doing a large amount of charity work and whose patients are mainly ward patients. Shortly after insulin was discovered as a cure for diabetes, the petitioners and others interested in the hospital organized a committee with a chairman, secretary and treasurer, to raise a fund for the purchase of the extract, which was then very expensive, so that the hospital could try the new cure in an experimental way. The petitioner contributed $1,000, which he designated a contribution to the Insulin Committee.

In his income-tax return for 1923, the petitioner deducted from gross income the losses sustained from the operation of the Caumsett Farm and from the breeding and racing of horses, and also the $1,000 contributed to the Insulin Committee. The Commissioner disallowed the claimed deductions in the determination of the deficiency for 1923.

OPINION.

SMITH: (1) The first question presented by this proceeding is the deduction from gross income of losses sustained from the operation of the Caumsett Farm. Section 214(a) of the Revenue Act of 1921 permits a taxpayer to deduct from gross income, in computing net 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.

The losses are deductible, provided the Caumsett Farm was operated as a trade or business for profit. ; ; A.F.T.R. 1931; . The petitioner contends that the Caumsett Farm was operated for profit within the meaning of the taxing statute and the mere fact that it was operated at large losses in 1923, and subsequent years, does not change the character of the enterprise as a business for profit. In support of his contention the petitioner cites numerous decisions of the Board and of the courts in which losses sustained on farm operations have been held legal deductions from gross income. ;; ; ; ; ; ; ; ; ; ; ; ; .

We have carefully examined the cases referred to above and others in which the Board has allowed the deduction from gross income of losses sustained in the operation of farms. From a consideration of all of them we reach the conclusion that the intention of the taxpay er with respect to the operation of the farm is material. Cf. ;;If the taxpayer operates a farm with the intention of making a profit and not merely "as a place of pleasure, exhibition, and social diversion" (), the fact that losses may be sustained from the operation of the farm does not change the character of the enterprise from one operated for profit to one not operated for profit.

The testimony of the petitioner in the proceeding at bar is most emphatic that the Caumsett Farm was operated for profit. He testified that, even though expensive buildings were placed on the Caumsett Farm, he did not regard it as fair to charge the farm operations with any expense in respect of the excess cost of such buildings over the cost of ordinary farm buildings. He also ascribed his losses from the farm operations up to 1928 as being attributable largely to the fact that the first Guernsey bull purchased for breeding purposes proved not to be valuable for such purposes; that the bull was disposed of in about 1928, and another pure-bred bull acquired. He stated that subsequent results were far more satisfactory and it was his opinion that the herd could be sold at the present time, even with the depressed prices now prevailing, at a profit over all losses. There is no evidence that the Caumsett Farm was operated as a place of pleasure, or for social diversion. In the circumstances it must be held that the Caumsett Farm was operated for profit, within the meaning of the statute, and that the petitioner's losses sustained from the operation of the farm in 1923 are legal deductions from gross income.

A similar situation exists with regard to the venture of racing and breeding horses. The petitioner had a considerable income from his racing operations for the period September 4, 1920, to December 31, 1921, which he testified he had included in his gross income for 1921 and paid a tax thereon. There can be no question that the business of racing and breeding horses, entered into in 1921 or 1922, was for the purpose of making a profit. Part of the petitioner's testimony upon this point follows:

Q. Now, you, Mr. Field, are interested, are you not, in the raising and breeding of horses?

A. Yes, sir. Q. When did you first do that?

A. Well, I, first of all, started in 1920, when I bought the first yearling I ever bought. The outcome of that was extremely successful, financially, and after that I invested some other money that I had in stock, with the idea of starting a stud.

It so happens that out of the first yearlings I bought, one of them I thought turned out to be a good brood mare, and I started a stud. From that time on, I had carried it on with business-like ideas, with the idea of a further stud and raising for profit.

Q. Did you have any definite [idea] or purpose in it with reference to making money out of it?

A. Yes, sir; when I first started, in 1929, I did not know - I mean I started it as more or less of a fluke.

Q. Did you say 1929?

A. No; I mean in 1920. Then, having made some money out of it and having a chance to enlarge upon it, with the starting off of such good brood mares as I then had, I decided to start it. I talked to several people about it and they all seemed to think it was a real good chance of making a profit, if one was able to put the capital into it; * * *

The losses sustained from the racing and breeding of horses in 1923 are deductible from gross income, in accordance with the following decisions: George D. Widener at al.,; affd., ; ; ; .

The petitioner's contribution of $1,000 to the Insulin Committee was in fact a contribution to a "fund" for charitable and/or scientific purposes within the purview of section 214(a)(11) of the Revenue Act of 1921, since the committee was the agency of the hospital for raising the fund for the purchase of insulin for use by the hospital, an institution doing charitable work, for experiments in the cure of diabetes, a scientific endeavor. Subject to the 16 per cent limitation, the contribution should be allowed as a deduction from petitioner's gross income.

Reviewed by the Board.

Judgment will be entered under Rule 50.

STERNHAGEN, LOVE

STERNHAGEN, dissenting: In my opinion, the evidence is not sufficient to establish that the petitioner's place on Long Island or his racing and breeding of horses was a trade or business. Furthermore, the artificial accounting by which petitioner's consumption of his own produce is made to appear like a sale and purchase should have no legal weight, even although it may afford useful or interesting statistics, as many household accounts do. Cf. Louise Cheney,22 B.T.A. 672">22 B.T.A. 672.

ARUNDELL and MURDOCK agree with this dissent.

LOVE, dissenting: I dissent from the prevailing opinion because the record fails to convince me that a man of Field's known and recognized business experience and sagacity would invest in an enterprise of that kind the amount of capital which the record shows he put into the Caumsett Farm and expect it to prove a profitable investment from a financial standpoint. His ambitions and motives evidently were along other lines.