Blake v. Commissioner , 38 B.T.A. 1457 ( 1938 )

ISRAEL O. BLAKE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Blake v. Commissioner

Docket Nos. 82668, 90661.

United States Board of Tax Appeals

38 B.T.A. 1457; 1938 BTA LEXIS 735;

December 29, 1938, Promulgated

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">*735 Stock farm for breeding, training, racing, and selling trotting horses, held, a business for profit, not a hobby

Julius Weiss, Esq., for the petitioner.

Allen Aiken, Esq., for the respondent.

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MURDOCK

">*1457 The Commissioner determined deficiencies in the petitioner's income tax for the calendar years 1932 and 1933 in the amounts of $2,096.45 and $1,776.92. The only issue for decision is whether the Commissioner erred in disallowing in each year a loss sustained in the operation of the Newport Stock Farm. The Commissioner has conceded that he erred as to an item of $2,000 included in the petitioner's income for 1932 as compensation received by him from the Pine Hill Crystal Spring Water Co., and also as to an item of $500 for the same year. The petitioner has waived a third assignment of error.

FINDINGS OF FACT.

The petitioner is an individual who resides in New York City.

The petitioner was born on a farm in Vermont. He was 84 years of age at the date of the hearing and was still actively engaged in business. He is not a man of great wealth. He went to New York City at 17, and has remained there ever since, except for brief">*736 periods. He has been engaged in the ice business for a great many years. He acquired considerable knowledge of and fondness for horses while on the farm and while engaged in the ice business. J. H. Gaines, a physician who regularly practiced in Newport, Vermont, also was well informed about horses.

">*1458 These two men formed an equal partnership in 1905 for the conduct of a stock farm for breeding, raising, training, racing, and selling standard-bred horses. They entered into that transaction for profit.

They first bought about 25 acres of ground adjoining the town of Newport, Vermont. They improved that property with buildings, including frame barns and paddock enclosures. They called their business the Newport Stock Farm. The original investment of the two men was about $15,000, of which each contributed one-half. Later, they bought 100 acres for pasture purposes. That land was about a mile and a half from the stables. Their total investment in property for the conduct of this business was about $40,000. One of the properties which they bought had formerly been a fairground and was improved with a race track and stands for spectators. The partners used the">*737 track to train their horses.

They sometimes employed as many as 30 men. They employed a trainer, who had charge of the operation of the stock farm. Gaines was in the habit of visiting the stables several times every day. The petitioner spent his summers in Vermont and at such time made frequent visits to the stables.

Detailed accounts of the operation of the business were maintained and monthly reports were received by the petitioner from Gaines. The partners carefully considered all expenditures. Audits were made by outside accountants.

The partners acquired a number of thoroughbred brood mares and several stallions. They began to breed and raise trotting horses. They trained their own horses and entered them in the principal stake races for trotting horses, both in the Grand Circuit and in country circuits. Their purpose was to develop some horses with which they could win races and, in that way, to build up a good reputation for their farm so that they might sell their horses at a profit. The income of the farm was derived from purses won in races, from the sale of horses, from stud fees, from boarding the horses of others, from rent of pasturage, and from rent">*738 for the fairgrounds property. The partners regularly advertised their business in magazines, particularly those relating to trotting horses. They never entered any horses in amateur races.

Gaines died in 1929, following a period of ill health. The petitioner bought out Gaines' interest in the stock farm shortly before the latter died and thereafter has operated the business as sole proprietor. The nature of the business has remained substantially the same. It has never been conducted on a lavish scale. Usually there were from five to seven brood mares, two or three stallions, three or four foals, and a few two-year-olds and three-year-olds on the farm. The trotters were sold just as soon as they could establish their worth in races. The petitioner owned, at the date of the hearing, ">*1459 several very promising young trotters, one of which as a two-year-old filly had established a record of 2:06 1/2. Some of these trotters were favorably mentioned in 1938 among prospective winners of the Hambletonian, the most valuable stake race for trotting horses in the United States.

The operation of the farm has resulted in losses for most years, although profits of from $5,000">*739 to $7,000 were realized in some of the earlier years. The following table shows the petitioner's share of the losses for the years from 1922 to 1933, inclusive:

1922	$4,534.09
1923	3,913.92
1924	2,762.37
1925	1,373.37
1926	4,028.63
1927	5,409.39
1928	$1,855.76
1929	10,612.32
1930	4,061.07
1931	3,385.14
1932	10,489.88
1933	8,532.34

The Commissioner, in determining the deficiencies for 1932 and 1933, disallowed the losses claimed of $10,489.88 for 1932 and $8,532.34 for 1933, with the explanation that "the farm has been operated as a hobby."

The partners at the time they acquired their real estate for the farm believed that the value of the property would increase and that they would be able to sell the land at a profit. They had in mind that the town of Newport was hemmed in on one side by a lake, on another by a river, and on a third by mountains, so that any growth would have to be in the direction of their properties. The petitioner still believes that he can more than recoup his losses through the sale of his horses and real estate.

The Newport Stock Farm was a business regularly carried on by the petitioner during the taxable years">*740 for profit. The losses incurred were incurred in business and in a transaction entered into for profit. They represented ordinary and necessary expenses paid or incurred during the taxable year in carrying on that business.

OPINION.

MURDOCK: The Commissioner has disallowed the losses on the stock farm on the ground that the farm was operated by the petitioner as a hobby rather than as a business for profit. He relies almost entirely upon the fact that the operation of the business has resulted in a long and uninterrupted series of losses. The evidence as a whole, however, preponderates in favor of the petitioner. This small farm was operated on a relatively modest scale. The total investment of the two partners was originally about $40,000. Only about ten or twelve horses were owned at a time. The petitioner did not live at the farm at any time. The place where he spent his summers was about thirty ">*1460 miles from the farm. He admits that he has always been very fond of horses and that he derives the usual pleasure from a winner. The principal items of expense were for labor and feed. The expenses included the cost of some horses. The operation of the farm">*741 was businesslike in every way, unless the series of losses may be looked upon as unbusinesslike. The petitioner, who is quite keen and alert despite his advanced age, testified without contradiction that he entered into the business for the purpose of making a profit and has always conducted the business for that purpose. He furthermore testified with considerable conviction that he has no reason to regard this venture as an unprofitable one, even though he has sustained these losses. The point he makes is that he has a very valuable collection of horses to show for his investment, as well as some real estate which has constantly increased in value during the period of his holding. The whole question here is to determine whether, as a matter of fact, the intention of the petitioner has been to realize a profit from the operation of this farm, and this question may not be determined solely from the recurrence of losses. ; ; ">*742 . We are satisfied from the entire record that such was his intention and that the Commissioner erred in concluding that he conducted the farm as a hobby or for personal pleasure. There is no question about the amount of the losses or of their relationship to the business.

Decision will be entered under Rule 50.