Ewing v. Commissioner , 20 T.C. 216 ( 1953 )

Lucia Chase Ewing, Petitioner, v. Commissioner of Internal Revenue, Respondent

Ewing v. Commissioner

Docket No. 25111

United States Tax Court

20 T.C. 216; 1953 U.S. Tax Ct. LEXIS 170;

April 30, 1953, Promulgated

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Decision will be entered under Rule 50.

1. The petitioner was not engaged with her controlled corporation, The Ballet Theatre, Inc., in a joint venture for the production of ballet, and her primary motive or intent in advancing funds to the corporation during the years in question was not profit. Held, petitioner's losses on these advances are not deductible under section 23 (e) (2), Internal Revenue Code, as losses incurred in a transaction entered into for profit.

2. The corporation's repayment of the advances received from the petitioner was subject to a contingency that did not occur, and during the years in question the corporation was thereupon freed of any obligation to repay the advances. Held, further, the advances did not give rise to a debt and the petitioner is not entitled to a worthless debt deduction under section 23 (k).

Randolph E. Paul, Esq., and Eugene H. Lattin, Esq., for the petitioner.

John J. Madden, Esq., and John J. O'Toole, Esq., for the respondent.

Arundell, Judge.

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ARUNDELL

The respondent has determined a deficiency of $ 48,397.37 in the petitioner's income tax liability for the calendar year 1943. The issue raised in this proceeding is the deductibility of sums either as a loss incurred in a transaction entered into for profit or as a worthless debt. The calendar year 1942 is involved because of the forgiveness provisions in the Current Tax Payment Act of 1943.

FINDINGS OF FACT.

The petitioner, a resident of New York, New York, filed her income tax returns for the calendar years 1942 and 1943 with the collector of internal revenue for the third district of New York. She filed her returns on a cash basis of accounting.

The petitioner went to New York from Connecticut in the middle 1920's to study drama. She took lessons in singing and dancing as well as dramatic lessons. She became interested in ballet and turned more and more to that phase of theatrical activity. Not long after petitioner went to New York she met Mikhail Mordkin, a Russian ballet dancer and choreographer, and secured a leading part in a ballet to be presented at a Junior League show by Mordkin. The association with Mordkin concentrated petitioner's interest in the ballet and she spent many years studying and dancing under Mordkin's direction. By 1937 she was a principal dancer in the Mordkin Ballet.

In the winter of 1937, Mordkin presented four Sunday night performances at the Hudson Theatre in New York City. Those performances were artistically successful and encouraged Mordkin to consider a tour. The artistic success also stimulated the interest of the petitioner in the production of ballet. In the fall of 1937, Mordkin, petitioner, and Rudolph Orthwine, a New York businessman, made an arrangement to take the Mordkin Ballet on tour in the eastern part of the United States and Canada. They formed Advanced Arts Ballets, Inc., on December 20, 1937, to take over the producing of ballets. The petitioner purchased 51 shares of the 100 shares of stock issued by the corporation, Mordkin purchased 39 shares, and Orthwine purchased the remaining 10.

The Mordkin Ballet continued its tour during the winter of 1938. This hastily arranged tour was artistically successful and encouraged Mordkin to enlarge his performing company and repertoire and go on tour again for the 1938-1939 season. The group met formidable competition from the established foreign companies, and Mordkin, petitioner, and Rudolph Orthwine decided that they could not continue the ballet company because the tour was not a financial success. Rudolph Orthwine surrendered his shares of stock of Advanced Arts Ballets, Inc., to the corporation and the petitioner purchased Mordkin's shares. The petitioner thereby became the sole stockholder of Advanced Arts Ballets, Inc.

In major part the petitioner had financed the Mordkin Ballet by loans to Advanced Arts Ballets, Inc. The petitioner believed that this ballet could make a profit and she hoped that her loans would be repaid with interest.

Richard Pleasant joined the Mordkin Ballet in the fall of 1937. Prior to that time, Pleasant's theatrical and dance background consisted of membership in a college dramatic club, employment as a stagehand and box office attendant for a college theatre, and study of dramatic literature while in college; employment for about 2 years in Hollywood, California, assisting in casting dances for motion picture films; the management of a dance studio in Hollywood, California; and acquaintance with some ballet artists.

By 1939, Pleasant was business manager of the Mordkin Ballet. He believed that the failure of the Mordkin Ballet was attributable to its limited repertoire and production facilities. Its repertoire at its peak was six ballets and Mordkin was its sole choreographer. Pleasant believed that a new ballet group must not only meet the established competition artistically but must also be representative of the contemporary trends and achievements. He envisioned an American company with American as well as foreign choreographers.

Pleasant's new concept of the ballet enthused the petitioner. In 1939, the petitioner, through Advanced Arts Ballets, Inc., formed Ballet Theatre, a new dance company to carry out Pleasant's ideas. The performing company was larger than the Mordkin Ballet, and many of the best choreographers of the day were commissioned to add American and modern ballets to the repertoire. Many great artists of the day, as well as the petitioner, participated in this new project.

In 1939 and 1940, the petitioner loaned money to Advanced Arts Ballets, Inc., to finance the new Ballet Theatre dance company. ^{*176 She had many conversations with Pleasant, the manager of the Ballet Theatre dance company, concerning the financing of the company. They discussed estimates of the cost to produce various ballets, estimates of box office receipts, and the prospects for profitable operations during the ballet season. *177 acquired in connection with the production of ballet performances. In 1939, the properties had a cost or replacement value of approximately $ 100,000 and, in the event of a forced sale, they would have had only a salvage value unless there happened to be at that time a performing company that wanted to purchase them.}

The sales agreement between Advanced Arts Ballets, Inc., and The Ballet Theatre, Inc., provided that, in consideration of the sale, The Ballet Theatre, Inc., agreed to pay to the Advanced Arts Ballets, Inc., "the sum of One hundred thousand ($ 100,000.) Dollars." The payment was to consist of 500 shares of The Ballet Theatre, Inc., stock "on the basis of Two hundred ($ 200.) Dollars for each" share, 250 shares of which were payable on the execution of the agreement and the remaining 250 shares payable upon demand.

During the years in question, the petitioner owned beneficially 51 shares of stock in The Ballet Theatre, Inc., the certificates of which were held of record in the names of several nominees. Advanced Arts Ballets, Inc., owned 237 1/2 to 250 shares of stock in The Ballet Theatre, Inc., which it had received in partial payment for its properties. The remaining few shares outstanding were held by four individuals. The outstanding shares of stock in The Ballet Theatre, Inc., totaled 341 shares during the years in question.

The petitioner became a member of the board of directors of The Ballet Theatre, Inc., on April 21, 1941, and remained a member during the period ending December 31, 1943. Petitioner was never an officer of The Ballet Theatre, Inc., at any time prior to December 31, 1943.

The Ballet Theatre, Inc., contracted to present ballets in conjunction with the Chicago Opera Company for 8 weeks from early October to the middle of December 1940. Ballet Theatre performed opera ballets with the Chicago Opera and presented independent performances two nights each week.

Following the Chicago production, the petitioner and several other individuals organized Ballet Presentations, Inc. The petitioner loaned $ 62,500 to Ballet Presentations, Inc., in 1941 and deducted $ 62,500 in her amended income tax return for the calendar year 1941.

Commencing in February 1941, Ballet Presentations, Inc., presented Ballet Theatre at the Majestic Theatre in New York. Although a longer run had been anticipated, the show closed after 1 month because it was proving financially unprofitable. The Ballet Theatre company was unable to book a tour without further financial backing. No more performances were presented in the spring of 1941, and Ballet Presentations, Inc., was dissolved late in 1941.

On June 19, 1941, The Ballet Theatre, Inc., entered into an agreement with Hurok Attractions, Inc., whereby Hurok Attractions, Inc., was given the exclusive management of the Ballet Theatre company for the period of 2 years commencing on or about November 1, 1941, and ending on or about October 10, 1943, for tours in the United States of America, Canada, Mexico, and Cuba. The agreement also provided that Hurok Attractions, Inc., was given the exclusive right to the management of the entire attraction for appearances on the stage, in motion pictures, sound films, television, and radio throughout the world.

In this agreement, Hurok Attractions, Inc., guaranteed to The Ballet Theatre, Inc., 15 performing weeks between November 1, 1941, and March 14, 1942; and 18 performing weeks between October 10, 1942, and March 6, 1943. Hurok Attractions, Inc., agreed to pay weekly to The Ballet Theatre, Inc.:

During the season of 1941-1942 (except in New York City), the sum of $ 4,250 per performing week, and in addition thereto, a share of the Manager's weekly gross receipts calculated as follows: From the Manager's weekly gross receipts, the Manager shall retain $ 13,000. plus the amount of any bona fide booking charges which shall actually be paid or incurred by the Manager with respect to said weekly gross receipts, provided that the amount of such booking charges shall in no case exceed 7 1/2% of the said weekly gross receipts of the Manager. The excess of said weekly gross receipts, if any, shall be divided equally between the Manager and the Proprietor [The Ballet Theatre, Inc.]. If, however, the Manager's gross receipts in any week fall below $ 12,500., after deducting the booking charges, if any, in accordance with the provisions set forth above (said amount being herein sometimes referred to as the "deficit point"), then the amount by which said receipts fall below said "deficit point" shall be deducted from the Manager's gross receipts in subsequent weeks before the Proprietor shall be entitled to share in such weekly receipts.

The provisions for payment during the 1942-1943 season (except in New York City) were the same except that the $ 4,250 sum was increased to $ 4,500; the $ 13,000 amount was increased to $ 14,000; and the $ 12,500 sum referred to as the deficit point was increased to $ 12,750.

With reference to the payments by Hurok Attractions, Inc., it was further provided that when performances were given in Philadelphia, Boston, and Chicago, the gross receipts of the manager, Hurok Attractions, Inc., would, for the purposes of the agreement, be fixed at 50 per cent of the total box office receipts; and when a local manager sold a performance in such cities for a "flat sum," the gross receipts of the manager, Hurok Attractions, Inc., would, for the purposes of the agreement, be fixed at 50 per cent of such flat sum. However, if Hurok Attractions, Inc., sold a performance in such cities for a flat sum, this sum would be considered the manager's gross receipts. Furthermore, it was provided that for performances in New York City, The Ballet Theatre, Inc., would not be entitled to share in the weekly gross receipts of the manager, Hurok Attractions, Inc.; and also that for such performances Hurok Attractions, Inc., would pay The Ballet Theatre, Inc., at the "flat rate" of $ 4,250 per week during the 1941-1942 season and $ 4,750 per week during the 1942-1943 season. Hurok Attractions, Inc., guaranteed a minimum of 9 performances in New York City during the 1941-1942 season and a minimum of 18 performances in New York City during the 1942-1943 season.

If Hurok Attractions, Inc., booked or arranged for screening of the ballet for motion picture, television, or radio performances, the net profits were to be divided equally.

Hurok Attractions, Inc., was given an option to extend the period of the contract for 1 year commencing on or about October 10, 1943, and if this option be exercised a further option to extend the contract for 1 year commencing on or about October 10, 1944, and if this second option be exercised, then a third option to extend the contract for 1 year commencing on or about October 10, 1945. The terms of the extended periods were substantially the same as those for the 1941-1942 and 1942-1943 seasons except for increases in the number of performing weeks guaranteed and the amount of the weekly payments. The Ballet Theatre, Inc., had the right to cancel and terminate the options for the years 1944 to 1945 and 1945 to 1946 by written notice not later than March 15, 1943.

Pursuant to the agreement, Hurok Attractions, Inc., agreed to pay transportation expenses and to provide orchestra, wardrobe attendants, and other employees. It also agreed to pay for suppers for performers as required and to provide publicity and advertising.

Also, pursuant to the agreement, The Ballet Theatre, Inc., agreed to be prepared to present 19 designated ballets during the 1941-1942 season and four additional new ballets during each of the successive years of the agreement and any extension or renewal; to secure the rights of performances and to provide the music, musical scores, and orchestral parts. The Ballet Theatre, Inc., further agreed and warranted that all costumes, scenery, wardrobe requirements, and properties would be in first class order, and agreed that it would pay all expenses connected therewith except transportation. The staging, presentation, and performance of the productions were to be supervised and presented by the stage directors and staff of The Ballet Theatre, Inc.

The contract with Hurok Attractions, Inc., led the petitioner to believe that the amount paid by Hurok would cover the operating expenses of the Ballet Theatre company and that the share of the profits which The Ballet Theatre, Inc., might receive under the contract would be sufficient to cover the cost of two or three new ballet productions per year.

After the Majestic Theatre presentation in the winter of 1941, The Ballet Theatre, Inc., dismissed Pleasant, who had originated the idea of Ballet Theatre, because of his failure to interest other people in advancing funds to support the presentation and to operate financially as he had promised. German Sevastianov was employed at Hurok's suggestion to serve as director in Pleasant's place.

By October 1941, The Ballet Theatre, Inc., had assembled a highly skilled ballet company. It had acquired tangible assets such as scenery, costumes, musical scores, and other ballet properties from Advanced Arts Ballets, Inc., and had accumulated similar properties in the preparations for the 1940-1941 and 1941-1942 seasons.

On October 1, 1941, High Time Promotions, Inc., was incorporated in the State of New York with an authorized capital consisting of 100 shares with a par value of $ 1 each. The corporation was primarily organized and availed of the purpose of channeling funds from the petitioner to The Ballet Theatre, Inc. The existence of High Time Promotions, Inc., enabled the petitioner to advance funds to The Ballet Theatre, Inc., without publicity and also enabled her to advance funds separate from a group known as Ballet Associates who wished to invest their funds for the sponsorship of specific ballets. The petitioner hoped that others might advance funds to The Ballet Theatre, Inc., through High Time Promotions, Inc.

High Time Promotions, Inc., at no time received funds from anyone other than petitioner. Petitioner was the beneficial owner of all of the stock of High Time Promotions, Inc., during the entire period of its existence but was never a stockholder of record or an officer.

Under the terms of the agreement between the petitioner and High Time Promotions, Inc., dated October 9, 1941, the petitioner advanced to High Time Promotions, Inc., the following sums on the stated dates during the 1941-1942 ballet season:

Date	Amount
Oct. 9, 1941	$ 11,000.00
Oct. 14, 1941	15,000.00
Oct. 29, 1941	2,500.00
Nov. 14, 1941	7,500.00
Nov. 28, 1941	5,000.00
Dec. 6, 1941	3,500.00
Dec. 15, 1941	5,000.00
Dec. 31, 1941	20,000.00
Jan. 8, 1942	10,000.00
Jan. 15, 1942	3,000.00
Jan. 17, 1942	5,000.00
Feb. 3, 1942	5,000.00
Feb. 27, 1942	5,000.00
Feb. 27, 1942	5,000.00
Mar. 9, 1942	5,000.00
Mar. 13, 1942	10,000.00
Apr. 6, 1942	10,000.00
Apr. 15, 1942	50,000.00
Apr. 28, 1942	10,000.00
Apr. 30, 1942	10,000.00
May 6, 1942	10,000.00
June 24, 1942	10,000.00
June 24, 1942	10,000.00
June 25, 1942	5,000.00
July 3, 1942	5,000.00
July 28, 1942	7,500.00
Total	$ 245,000.00

Under the terms of an agreement between High Time Promotions, Inc., and The Ballet Theatre, Inc., dated October 9, 1941, High Time Promotions, Inc., advanced to The Ballet Theatre, Inc., $ 243,500 of the $ 245,000 received from the petitioner. The $ 243,500 was advanced to The Ballet Theatre, Inc., in installments in approximately the same amount as received from the petitioner and on approximately the same dates.

1. Your loan or loans will be repayable to you by the corporation on October 1, 1942 with interest at 6% per annum from October 1, 1941 (or may be repaid in whole or in part prior to said date, in the discretion of the undersigned).

2. The corporation will not make any payments of principal or interest to you or to any other persons making loans to the corporation unless simultaneously therewith a payment bearing the same ratio to unpaid principal is made to all such persons including you.

3. The corporation warrants that it has made an agreement with The Ballet Theatre, Inc. and that a true copy of said agreement has been exhibited to you.

4. The corporation will lend to The Ballet Theatre, Inc. under the terms of the aforesaid contract with The Ballet Theatre, Inc. all funds which will be available for that purpose. Not more than 5% of your loan will be used for administrative expenses of the corporation. No salaries will be paid by the corporation to its officers or directors or to any members of its staff.

5. The corporation will cause The Ballet Theatre, Inc. to give program credit for sponsorship of its new ballets of the forthcoming season in such manner as the corporation shall deem advisable and reasonable under its contract with The Ballet Theatre, Inc.

6. You are under no obligation of any kind beyond the loan hereby made by you.

The terms of the agreement between High Time Promotions, Inc., and The Ballet Theatre, Inc., dated October 9, 1941, were as follows:

1. Ballet Theatre agrees to accept, upon the terms herein set forth, all loans which may be made to it by Promotions.

2. The principal of said loans shall be repayable on October 1, 1942, but only out of the funds referred to in paragraph 4. In lieu of a fixed rate of interest on such loans Ballet Theatre will pay to Promotions on or before October 1, 1942 a sum equal to such proportion of the "operating profits" as is set forth in paragraph 4.

3. Promptly after the close of the 1941 season, Ballet Theatre will have an audit made of its operations for the 1941 season by independent public accountants, to determine the "operating profits" of the season. The term "operating profits" shall [be -- sic] deemed to mean the excess of "gross receipts" over all "production expenses" and "running expenses". The term "gross receipts" shall include all sums of whatever kind (other than loans or investments in stock) which shall be received by Ballet Theatre during the 1941 season from or in connection with its presentations of the 1941 season. The terms "production expenses" and "running expenses" shall include all expenditures (including rehearsal expenditures) made by the Ballet Theatre during the 1941 season (except production expenses, if any, which are incurred in connection with new productions which are produced not for the 1941 season but for subsequent seasons). All computations made by such independent accountants shall be binding upon both parties.

4. One-half of the operating profits shall be retained by Ballet Theatre and the remaining one-half shall be devoted to the repayment of loans made by Promotions and by outside lenders, the proportion (hereinafter called "Promotions' proportionate share") of said remaining one-half so to be paid to Promotions to be the same as the proportion which the loans made by Promotions shall bear to the aggregate of all loans made by Promotions and by outside lenders. (The term "outside lenders" shall mean all persons other than Promotions who shall make loans to Ballet Theatre for the production of new ballets for the 1941 season.) In the event that Promotions' proportionate share of the operating profits shall be duly paid to Promotions in accordance with the foregoing and shall be less than the total of the loans made by Promotions, then Promotions shall have no further claim against Ballet Theatre for the unpaid balance of its loans. In the event that the amount of operating profits shall be such as to permit repayment in full, in accordance with the foregoing, of the loans made by Promotions, then Promotions shall also be entitled to receive, in lieu of a fixed rate of interest on its loans, Promotions' proportionate share of the remaining balance of said one-half of the operating profits.

5. Ballet Theatre agrees that the loans received by it hereunder will be used solely to defray the production expenses (including rehearsal expenses) of new ballets for the 1941 season. It further agrees that it will credit Promotions with the production of such ballets as Promotions shall reasonably request, having regard to such obligations as Ballet Theatre may have for credit to outside lenders. Such credit shall be included in souvenir books and programs and shall be in such form as Promotions shall reasonably request.

6. It is understood that Promotions shall have no rights or claims with respect to any sums which Ballet Theatre may derive in seasons subsequent to the 1941 season from any source (including the presentation of any ballets financed hereunder) and that Promotions shall not have any proprietary interest of any kind in the ballets financed hereunder or in any parts thereof.

7. This agreement is not intended to create any partnership between the parties hereto.

The Ballet Theatre, Inc., operated at a loss of $ 205,035.05 during the 1941-1942 season. Sixteen hundred dollars of this loss was covered by an advance from Ballet Associates. *225 Time Promotions, Inc., on the books of account of The Ballet Theatre, Inc. The balance of the advance ($ 40,064.95) remained on the books of account of The Ballet Theatre, Inc., as a loan for the 1942-1943 season.

During the period of its existence (October 1, 1941-December 9, 1942), High Time Promotions, Inc., expended (in addition to the funds loaned to The Ballet Theatre, Inc.) $ 454.76 for legal expenses and franchise taxes. It received no income. High Time Promotions, Inc., operated at a loss during the year 1942.

On December 9, 1942, High Time Promotions, Inc., was dissolved and assigned to petitioner its claim against The Ballet Theatre, Inc., in the amount of $ 40,064.95, on account of the advances from the petitioner in the amount of $ 245,000. Petitioner also received all of the remaining assets of the corporation. This left $ 203,789.81 unpaid on petitioner's advances to High Time Promotions, Inc. High Time Promotions, Inc., was dissolved because petitioner no longer needed it to preserve anonymity and because no one other than the petitioner had advanced money to it.

Under the terms of an agreement between the petitioner and The Ballet Theatre, Inc., dated October 2, 1942, the petitioner advanced to The Ballet Theatre, Inc., the following sums on the stated dates during the 1942-1943 ballet season:

Date	Amount
Aug. 10, 1942	$ 10,000.00
Aug. 31, 1942	5,000.00
Aug. 31, 1942	10,000.00
Sept. 9, 1942	6,000.00
Sept. 22, 1942	4,000.00
Sept. 28, 1942	17,000.00
Oct. 2, 1942	3,000.00
Oct. 15, 1942	7,000.00
Oct. 26, 1942	3,000.00
Oct. 30, 1942	5,000.00
Nov. 16, 1942	5,000.00
Nov. 17, 1942	5,000.00
Nov. 28, 1942	5,000.00
Dec. 2, 1942	5,000.00
Dec. 30, 1942	5,000.00
Feb. 23, 1943	5,000.00
Mar. 20, 1943	5,000.00
Mar. 24, 1943	5,000.00
Apr. 2, 1943	10,000.00
Apr. 27, 1943	7,500.00
May 11, 1943	2,500.00
May 18, 1943	2,500.00
May 27, 1943	5,000.00
June 14, 1943	5,000.00
June 28, 1943	5,000.00
July 9, 1943	5,000.00
July 22, 1943	5,000.00
July 30, 1943	5,000.00
Aug. 10, 1943	5,000.00
Aug. 30, 1943	5,000.00
Total	$ 172,500.00

The terms of this agreement dated October 2, 1942, were essentially identical with the agreement between High Time Promotions, Inc., and The Ballet Theatre, Inc., dated October 9, 1941, except that it was the petitioner who agreed to make the advances, the season was 1942-1943, and the principal and interest were payable on October 1, 1943, rather than October 1, 1942. These terms were set forth in a letter dated October 2, 1942, from the petitioner to The Ballet Theatre, Inc., in which the petitioner stated:

Dear Sirs:

I am forwarding to you herewith my check to your order in the amount of $ 3,000.00 as a loan to your corporation.

The Ballet Theatre, Inc., and Hurok Attractions, Inc., entered into a supplemental agreement on June 26, 1942. This supplemental agreement provided that in settlement of disputes and requests for modifications that had arisen between the parties and in consideration of the payment of $ 15,222.98 from The Ballet Theatre, Inc., to Hurok Attractions, Inc., the parties agreed to terms which included the following:

1. The Ballet Theatre, Inc., released Hurok Attractions, Inc., from all claims arising from its failure to provide a minimum of 15 performing weeks for the 1941-1942 season.

2. Hurok Attractions, Inc., irrevocably exercised its option to extend the term of the original contract for 1 year commencing on or about October 10, 1943.

3. For the 1942-1943 season, the guaranteed performing weeks were increased to 19. The weekly payments were increased to $ 4,750 outside of New York City, and $ 5,750 in New York City, and the "deficit point" was decreased from $ 12,750 to $ 12,000.

Ballet Theatre was the only ballet company sponsored by Hurok Attractions, Inc., during the 1942-1943 season. Because Hurok Attractions, Inc., was not sponsoring the other ballet company it had sponsored during the 1941-1942 and previous seasons, the petitioner expected The Ballet Theatre tour for the 1942-1943 season would be longer than that of the previous season. The petitioner, by reason of the favorable publicity the company was receiving, was hopeful that a movie contract would be secured.

The Ballet Theatre, Inc., operated at a loss of $ 183,795.17 during the 1942-1943 season. Forty-three thousand, one hundred sixty-four dollars and ninety-five cents of this loss was covered by an advance from Ballet Associates in the amount of $ 3,100 and by the sum of $ 40,064.95 advanced by High Time Promotions, Inc., and left over from the previous season. The balance of this loss in the sum of $ 140,630.22 was charged against the $ 172,500 advanced by the petitioner to The Ballet Theatre, Inc., for the 1942-1943 season. Pursuant to the agreement between the petitioner and The Ballet Theatre, Inc., the latter was no longer contingently obligated to repay $ 140,630.22 of the $ 172,500 advanced, and this sum was eliminated from the account of the petitioner on the books of account of The Ballet Theatre, Inc. The balance of the advance ($ 31,869.78) remained on the books of account of The Ballet Theatre, Inc., as a loan for the 1943-1944 season.

The Ballet Theatre, Inc., operated at a loss during the taxable years in question.

During this entire period from 1938 to 1943, the petitioner took no part in the business management of Ballet Theatre, its predecessor, or The Ballet Theatre, Inc. She was a professional dancer and was paid a regular professional salary for her dancing.

The total amounts advanced to The Ballet Theatre, Inc., by the petitioner during the 1942-1943 season and by the petitioner through High Time Promotions, Inc., during the 1941-1942 season were more than the petitioner contemplated she would advance at the beginning of those seasons.

In computing the losses in the amounts of $ 205,035.05 and $ 183,795.17 for the 1941-1942 and 1942-1943 seasons, respectively, The Ballet Theatre, Inc., deducted from income or gross receipts the production costs totaling $ 78,134.84 for the 1941-1942 season and $ 64,439.91 for the 1942-1943 season. These "production costs" consisted of expenditures for choreography, settings, costumes, props, and music which had a useful life of more than 1 year and which could be used by The Ballet Theatre, Inc., for more than 1 season.

The sum of $ 243,500 advanced by the petitioner (through High Time Promotions, Inc.) to The Ballet Theatre, Inc., for the 1941-1942 season, and the sum of $ 172,500 advanced directly by the petitioner to The Ballet Theatre, Inc., for the 1942-1943 season were not evidenced by a note or other evidence of indebtedness. The total sum advanced to The Ballet Theatre, Inc., during each of those years exceeded the value of its physical assets during those years.

The Ballet Theatre, Inc., was only contingently obligated to repay to High Time Promotions, Inc. (and through it to the petitioner) that part of the sum advanced to it by the petitioner (through High Time Promotions, Inc.) in 1941 and used in the 1941-1942 season. The contingency was that The Ballet Theatre, Inc., earn "operating profits" as explained in the agreement dated October 9, 1941. The Ballet Theatre, Inc., incurred a loss during that season and thereafter was not obligated contingently or otherwise to repay $ 203,435.05 of the $ 243,500 advanced.

The Ballet Theatre, Inc., was only contingently obligated to repay to the petitioner that part of the sum advanced to it by the petitioner in 1942 and used in the 1942-1943 season. The contingency was that The Ballet Theatre, Inc., earn "operating profits" as explained in the agreement dated October 2, 1942. The Ballet Theatre, Inc., incurred a loss during that season and thereafter was not obligated contingently or otherwise to repay $ 140,630.22 of the $ 172,500 advanced.

The petitioner (and High Time Promotions, Inc.) could look only to the "operating profits" of The Ballet Theatre, Inc., for repayment of the $ 243,500 and $ 172,500 advances, and in the absence of such profits, The Ballet Theatre, Inc., was not obligated to resort to any of its assets to repay either of those sums.

The sums advanced to The Ballet Theatre, Inc., by the petitioner and by High Time Promotions, Inc., for the 1941-1942 and 1942-1943 seasons were entered as loans in the books of account of The Ballet Theatre, Inc., and were shown as loans payable on its balance sheets. During the years in question, no books of account appropriate to a joint venture enterprise were maintained by the petitioner, nor were there any entries or accounts appropriate to a joint venture enterprise in the books of account of The Ballet Theatre, Inc. No partnership returns were filed during those years.

During the years 1941 through 1943, neither the petitioner nor High Time Promotions, Inc., intended to or did form with The Ballet Theatre, Inc., a syndicate, group, pool, joint venture, joint enterprise, partnership, or other unincorporated organization through or by means of which any business, financial operation, or venture was carried on.

The petitioner's primary motive or intent in advancing funds to The Ballet Theatre, Inc. (either directly or through High Time Promotions, Inc.), was to aid in the production of the ballet as an art in America. The petitioner hoped that the ballet would become financially self-sustaining as well as an artistic success and that some profit might result from the production. The petitioner's primary motive or intent in advancing these funds during the years in question was not the earning of profits for herself, and the transactions she entered into in making the advances were not transactions entered into for profit.

OPINION.

The basic question before us is the deductibility of unrecovered sums advanced by the petitioner to The Ballet Theatre, Inc., her controlled corporation, for the production of ballet. The sum of $ 203,789.81, *202 In her original petition, the petitioner claimed the amounts as worthless debts under section 23 (k). In an amended petition and on brief, she seeks the deduction of the amounts under section 23 (e) (2) as a loss incurred in a joint venture with The Ballet Theatre, Inc., for the production of ballet at a profit. She does not, however, abandon the worthless debt theory but argues it alternatively.

For reasons set forth in our recent opinion in Evans Clark, 18 T. C. 780, we cannot sustain the petitioner on the worthless debt theory. As explained in that case, a debt within the meaning of section 23 (k) does not arise where the obligation to repay is subject to a contingency that has not occurred. With reference to the worthless debt deduction claimed for 1943, it is clear from the petitioner's agreement with The Ballet Theatre, Inc., that the latter was not obligated to repay the sums advanced by the petitioner unless it earned profits during the 1942-1943 season. This contingency never occurred and, therefore, there never came into being a debt. Instead, losses were sustained during that season and The Ballet Theatre, Inc., was thereupon absolved of any obligation to make repayment at any time. Since no debt ever came into existence, the sum claimed for 1943 is not deductible under section 23 (k) as a debt that became worthless during the taxable year 1943.

A similar contingency existed with reference to the advances received by The Ballet Theatre, Inc., for the previous 1941-1942 season. It is true that the advances came directly from High Time Promotions, Inc, the money having been turned over to the latter by the petitioner for the sole and only purpose of using the funds as advances to The Ballet Theatre, Inc. Indeed, petitioner herself testified that High Time Promotions, Inc., was a mere conduit to so channel her funds. In these circumstances, respondent would completely disregard High Time Promotions, Inc., and treat the advances for the 1941-1942 season as being made directly by petitioner to The Ballet Theatre, Inc. Counsel for the petitioner does not directly argue to the contrary and, in fact, in advancing his major argument that petitioner was engaged in a joint venture, he would treat the advances as having been made directly by petitioner to The Ballet Theatre, Inc.

Whether or not High Time Promotions, Inc., is to be recognized, the same contingency prevails for the year 1941-1942 as for 1942-1943. While there appears a statement in the contract between petitioner and High Time Promotions, Inc., that the sums advanced would be repaid on a day certain, the very same agreement relates that the money advanced by the petitioner to High Time Promotions, Inc., would be turned over to Ballet Theatre on terms which make its repayment dependent on the making of profits. With High Time Promotions, Inc., only a conduit for petitioner's venture, it is obvious that any repayment to her was purely contingent. To view these contracts as providing otherwise would be entirely unrealistic.

We think, therefore, that the reasoning in Evans v. Clark, supra, is equally applicable to the advances for the 1941-1942 season. No debt was created and there was no bad debt to be deducted.

We turn now to the principal argument. The petitioner contends that the sums advanced in 1941-1942 and 1942-1943 represented her contributions to a joint venture with The Ballet Theatre, Inc., for the production of ballet and their loss is deductible under section 23 (e) (2)*205 a transaction entered into for profit. The respondent denies the existence of a joint venture relationship and also contends the petitioner's primary motive or intent in advancing the funds was not profit.

The legal relation known as a joint venture has been developed by American courts and is of comparatively recent origin. 48 C. J. S., Joint Adventures, secs. 1 and 2. It has been defined as a "special combination of two or more persons, where in some specific venture a profit is jointly sought without any actual partnership or corporate designation," and also as "an association of persons to carry out a single business enterprise for profit." 48 C. J. S., supra, sec. 1. See also Alger Melton, 7 B. T. A. 717, 723; McCausey v. Burnet, 50 F. 2d 491; Chase S. Osborn, 22 B. T. A. 935, 945.

Under section 3797, Commissioner v. Culbertson, 337 U.S. 733">337 U.S. 733, where the existence of a family partnership was in issue, the Supreme Court stated that the question whether a partnership is real for income tax purposes depends upon the intention of the parties and their intention is a question of fact to be resolved by considering all the facts, including the agreement and conduct of the parties. We think these principles are equally applicable here where the kind of partnership in question is an alleged joint venture.

In support of the contention that she was engaged in a joint venture with The Ballet Theatre, Inc., the petitioner argues that a joint venture was created by agreements with that corporation dated October 9, 1941, and October 2, 1942, which are set forth in detail in our Findings of Fact. She contends The Ballet Theatre, Inc., contributed valuable theatre properties to the alleged venture and she supplied most of the funds; that these funds were not for the unrestricted use of the corporation but only for the production of ballets; and also that there was to be a sharing of profits.

After giving careful consideration to these contentions and examining all of the evidence, we are of the view that the record does not support the petitioner but, on the contrary, establishes that the petitioner and The Ballet Theatre, Inc., did not intend to and did not in fact enter into a joint venture or partnership or any form of unincorporated organization such as is set forth in section 3797.

Throughout the agreements and correspondence between the petitioner and The Ballet Theatre, Inc., there is no mention of a joint venture and the petitioner's advances are referred to as loans. In fact, the agreements for the 1941-1942 and the 1942-1943 seasons expressly provide that "This agreement is not intended to create any partnership between the parties hereto."

Another factor evidencing intent is the provision for losses. Roland P. Place, 17 T.C. 199">17 T. C. 199, affd. per curiam (C. A. 6, 1952) 199 F.2d 373">199 F. 2d 373, certiorari denied 344 U.S. 927">344 U.S. 927; Joe Balestrieri & Co. v. Commissioner (C. A. 9, 1949), 177 F. 2d 867; 48 C. J. S., supra, sec. 2. Under the contracts with The Ballet Theatre, Inc., the petitioner in effect undertook to and did make good all losses incurred by The Ballet Theatre, Inc., during the years in question except for relatively small amounts that were made good by advances from others. In fact, rather than sharing in losses, The Ballet Theatre, Inc., received additional assets without a corresponding increase in liabilities, since part of the advances were used to acquire ballet properties that became the sole property of The Ballet Theatre, Inc., and could be used for more than 1 season. These expenditures were referred to as "production costs."

Although the petitioner in effect made good the losses incurred by The Ballet Theatre, Inc., her agreements with The Ballet Theatre, Inc., were such that aside from the sums advanced, she was not personally liable for the obligations it incurred. The express provision of the agreements disavowing the partnership relationship might well have been included as further evidence of the absence of liability on the part of the petitioner.

The petitioner's subordinate position with reference to profits is also significant. The contracts with The Ballet Theatre, Inc., provided that the petitioner was to recover these advances and to receive a return on them measured by only one-half of the "operating profits" of The Ballet Theatre, Inc., for the particular season. As defined in the contracts, "operating profits" meant the sum remaining after gross receipts were reduced by production costs and expenses.

Moreover, The Ballet Theatre, Inc., was the sole owner of the Ballet Theatre dance company and any profits inuring to The Ballet Theatre, Inc., from the performances belonged to it alone. The petitioner's only right was to recover her advances and to receive compensation for the use of the advances, both of which were to be measured by the amount of the profits, if any. Sugg v. Hopkins, 11 F.2d 517">11 F. 2d 517, 519, and cases cited therein; cf. Plains Realty Co., 31 B. T. A. 412; Mariani v. Summers, 52 N. Y. S. 2d 750 (S. Ct. N. Y. Co., 1944), affd. 269 App. Div. 840, 56 N. Y. S. 2d 537 (1st Dept., 1945).

The conduct of the parties and the manner in which they regarded their relationship subsequent to the execution of the agreements is further evidence that they were not joint venturers. There were no books of account kept by an alleged joint venturer or any entries or accounts on the books of The Ballet Theatre, Inc., appropriate to a joint venture relationship. These advances were entered as "loans" on the books of The Ballet Theatre, Inc., and on its balance sheets. The financial result of the operation was recorded on the same books of account of The Ballet Theatre, Inc., as used in previous years when the corporation was not allegedly a joint venturer and the losses were recorded as losses of The Ballet Theatre, Inc., not as losses of a joint venture. No partnership returns were filed as is required of a joint venture. L. C. Olinger, 10 T.C. 423">10 T. C. 423. In the exclusive management contract with Hurok Attractions, Inc., The Ballet Theatre, Inc., made no reference to the joint venture. The petitioner exercised no control over the business activities and took no part in the management and there is no evidence that she had any right to do so other than as a stockholder and director in The Ballet Theatre, Inc. The petitioner testified that she had nothing to do with the control of business affairs. Cf. Joe Balestrieri & Co. v. Commissioner, supra.

In setting forth these factors, it is not our view that as a matter of law each is indispensable to the formation of a joint venture. In some jurisdictions, for example, it is not essential that there be a sharing of losses. 48 C. J. S., supra, sec. 2; Orvis v. Curtiss, 157 N.Y. 657">157 N. Y. 657, 52 N. E. 690; Mariani v. Summers, supra;Usdan v. Rosenblatt, 93 N. Y. S. 2d 862 (S. Ct. N. Y. Co., 1949). However, the characteristics referred to above are commonly found in bona fide joint ventures and their presence or absence in any particular case is a fact which, in accordance with Commissioner v. Culbertson, supra, may be considered in resolving the question of intent to determine whether there is a real joint venture relationship for income tax purposes.

Finally, we come to the requirement relating to the petitioner's motive or intent in making the cash advances, a requirement basic to the allowance of a loss deduction under section 23 (e) (2) regardless of whether the petitioner contends the losses were incurred in a joint venture or in any other relationship.

Section 23 (e) (2) allows the deduction of losses only if they are incurred in a "transaction entered into for profit." That is, no loss is deductible under this provision if the taxpayer engaged in the transaction merely or primarily for pleasure such as farming for a hobby, or primarily for such other purposes devoid of profit motive or intent, such as promoting charitable enterprises or obtaining the benefits of financial security by the purchase of an annuity. Morton v. Commissioner, 174 F. 2d 302, certiorari denied 338 U.S. 328">338 U.S. 328; Thacher v. Lowe, 288 Fed. 994; Lihme v. Anderson, 18 F. Supp. 566">18 F. Supp. 566; Coffey v. Commissioner, 141 F. 2d 204, affirming 1 T. C. 579; John Randolph Hopkins, 15 T. C. 160; Frederick H. Wood, 34 B. T. A. 1252; Early v. Atkinson, 175 F. 2d 118; see Helvering v. National Grocery Co., 304 U.S. 282">304 U.S. 282; Weir v. Commissioner, 109 F. 2d 996, certiorari denied 310 U.S. 637">310 U.S. 637. Not only must the earning of profit be the taxpayer's motive or intent but, in addition, that motive must be the primary purpose for engaging in the transaction and it is not sufficient if it is merely incidental or subordinate to other purposes. Lihme v. Anderson, supra; Coffey v. Commissioner, supra;John Randolph Hopkins, supra; see Helvering v. National Grocery Co., supra; Weir v. Commissioner, supra.In short, the profit motive must be the "prime thing." Lihme v. Anderson, supra.

The respondent contends the petitioner did not advance the sums primarily for the purpose of earning a profit in the production of ballet but for the primary purpose of satisfying her desire to see the ballet flourish in some form as an art in America. After carefully studying all the evidence and giving due weight to the testimony of the petitioner, as well as the contracts pursuant to which she advanced the sums, we have concluded that during the years in question the petitioner did not finance the production of ballet primarily for the purpose of earning a profit.

For many years the petitioner has been a principal dancer in the Ballet Theatre dance company. She is devoted to the art of ballet and anxious to develop that art in America. Commencing in 1937, she advanced large sums of cash for the production and presentation of ballet performances.

Beginning with her first advances in 1937, the petitioner has suffered continuous losses. Since that time, up to and including the 1941-1942 and 1942-1943 ballet seasons before us in this proceeding, the ballet company or companies in which she has been financially, artistically, and professionally interested have been financial failures. Never at any time had they even nearly achieved financial success or at least indicated a pattern of decreasing losses. Each year substantial losses were suffered and there was not, by the time the advances in question were made, anything but highly speculative reasons for concluding that financial failures would not occur again as they in fact did. Nonetheless the petitioner advanced sums as high as $ 50,000 at a time during the seasons in question and there is no evidence that she ever refused to make advances when asked to do so or that she advanced any substantial sum for the promotion of any other theatrical enterprise. As stated by the Circuit Court of Appeals for the Second Circuit, in Morton v. Commissioner, supra, p. 304:

It is true that a record of continual losses over a series of years does not in itself preclude the allowance of such losses as a business expense. The intent of the taxpayer in making his expenditures is what counts; but the continuing lack of profits is an important factor bearing on the taxpayer's true intention.

Cf. Thacher v. Lowe, supra.

Despite the continued losses, the petitioner apparently gave little or no attention to the business management of The Ballet Theatre, Inc., and we cannot find sufficient indication that she made the inquiries which would have been made as a matter of course if her primary interest was financial gain. She seems to have made advances as the needs of The Ballet Theatre, Inc., developed and almost entirely at the request of the corporation's business managers. Some of the advances were made at a time during the financially unsuccessful seasons when the performances were about to be discontinued because of the lack of funds.

We think the terms of the agreements under which the petitioner advanced these funds to her controlled corporation, The Ballet Theatre, Inc., is further evidence bearing on her primary motive or intent. The advances were to be repaid only out of one-half of "operating profits" for the particular season, and to the extent that these profits were insufficient for that purpose, the petitioner lost all right to recovery. The Ballet Theatre, Inc., was absolved of all liability to make repayment even though it might earn a substantial profit in subsequent seasons.

Moreover, as previously explained, the "operating profits" upon which the petitioner's recovery as well as gain depended were computed by deducting from gross receipts not only expenses, referred to as preliminary, running, and other expenses, but also the cost of ballet properties which became the sole property of The Ballet Theatre, Inc., and could be used for more than 1 season. The effect of this arrangement was that part of the sums which the petitioner seeks to deduct for income tax purposes represents expenditures for assets that became the property of petitioner's controlled corporation. These expenditures totaled approximately $ 78,000 for the 1941-1942 season and approximately $ 64,000 for the 1942-1943 season.

We think it is relevant to inquire why the taxpayer agreed to such a subordinate position as to recovery of her advances as well as gain when the undertaking was financed mainly with her cash advances totaling approximately $ 203,000 in 1 year and $ 140,000 in the next, and The Ballet Theatre, Inc., supplied assets valued at approximately $ 100,000 with possibly only scrap value upon liquidation. It is also noteworthy that despite this disparity in the value of the respective contributions, petitioner could share in only one-half of the "operating profits" and, further, this proration remained the same from 1 season to the next despite the fact that the amount of her cash advances varied. When we take into consideration the fact that this was not an arm's length transaction in which the taxpayer obtained the best bargain she could but, rather, is one in which the taxpayer is dealing with her dominantly controlled corporation, ^{*219 We think the absence of a primary motive or intent to earn profits is further evidenced by the fact that the petitioner advanced substantial amounts late in the 2 seasons before us. She advanced approximately $ 128,000 and $ 62,000 from April to September of the years 1942 and 1943, respectively. To recover these amounts, much less earn a return on them, it would have been necessary to overcome a second limitation in addition to the limitation of sharing in only one-half of the "operating profits" as explained previously. That is, it would have been necessary for. The Ballet Theatre, Inc., to earn profits sufficient to absorb the then current losses, which must have been considerable judging from the fact that the losses for the seasons totaled approximately $ 205,000 and $ 183,000, respectively. Moreover, these profits would have had to be earned late in a season that as of the date of the late advances had proved to be a financial failure.}

In reaching the conclusion that the petitioner's primary motive or intent in advancing the sums was not the earning of profit, we have kept in mind the fact that circumstances which would lead a reasonable business man to conclude that a theatrical enterprise of this character had no reasonable chance of success might not have that effect on an enthusiast of the ballet, and in this proceeding we are not testing the petitioner's motive or intent by asking what a reasonable man would have done. But even when the transaction is viewed from the petitioner's standpoint, we think the record at best merely establishes that she hoped for a profit. After a most painstaking study of the entire record, we have reached the conclusion that the petitioner was not primarily concerned with the earning of a profit on her advances but, rather, with the success of the ballet as an art. We, therefore, conclude that the petitioner may not deduct the sums in question under section 23 (e) (2) as a loss incurred in a transaction entered into for profit. Morton v. Commissioner, supra; Thacher v. Lowe, supra; Lihme v. Anderson, supra; Coffey v. Commissioner, supra; John Randolph Hopkins, supra; Frederick H. Wood, supra; Early v. Atkinson, supra;Helvering v. National Grocery Co., supra; Weir v. Commissioner, supra.

Decision will be entered under Rule 50.

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Footnotes

• 1. During the period 1938 through 1940, petitioner made the following loans to Advanced Arts Ballets, Inc.:

  Year	Amount
  1938	$ 141,900
  1939	116,200
  1940	141,500
  Total	$ 399,600

  In her Federal income tax return for the calendar year 1939, petitioner claimed a loss of $ 58,100 as a bad debt deduction with respect to these loans. In her Federal income tax return for the calendar year 1940, petitioner claimed a loss of $ 241,500 as a bad debt deduction with respect to these loans. The obligation to repay the loans made during these years was not subject to a contingency, but was absolute.↩

• 2. The ballet season starts about October 1 and runs through the winter. Performances are also given in the summer months. Although the summer period is often referred to as a separate season, in this proceeding the entire year from October 1 through September 30 shall be referred to as a season.↩

• 3. The dance company formed by Pleasant under the auspices of Advanced Arts Ballets, Inc., was known as "Ballet Theatre." The new corporation formed April 18, 1940, was "The Ballet Theatre, Inc." The dance company continued, under the auspices of the new corporation. We shall continue to refer to the dance company as "Ballet Theatre" and to the corporation by the full corporate name, "The Ballet Theatre, Inc."↩

• 4. The installments as set forth in a schedule submitted by the parties in a stipulation total $ 238,500. However, the parties have stipulated that this total is $ 243,500 as found above.↩

• 5. The petitioner did not advance funds to Ballet Associates during any years material to this proceeding.↩

• 6. While the respondent makes no particular objection to the amounts the petitioner seeks to deduct, it seems that $ 203,435.05 was the amount which became unrecoverable from The Ballet Theatre, Inc., in 1942.↩

• 7. SEC. 23. DEDUCTIONS FROM GROSS INCOME.

  In computing net income there shall be allowed as deductions:

  * * * *

  (e) Losses by Individuals. -- In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise --

  * * * *

  (2) if incurred in any transaction entered into for profit, though not connected with the trade or business; * * *↩

• 8. SEC. 3797. DEFINITIONS.

  (a) When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof --

  * * * *

  (2) Partnership and Partner. -- The term "partnership" includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title, a trust or estate or a corporation; and the term "partner" includes a member in such a syndicate, group, pool, joint venture, or organization.↩

• 9. During the years in question, the petitioner held beneficially 51 shares of The Ballet Theatre, Inc.; her wholly owned corporation held 237 1/2 to 250 shares, and 250 additional shares were due from the corporation because of the sale of properties to it. There were outstanding during these years 341 shares of the capital stock of The Ballet Theatre, Inc.↩