Purdy v. Commissioner

Frederick A. Purdy, Petitioner, v. Commissioner of Internal Revenue, Respondent

Purdy v. Commissioner

Docket Nos. 18473, 19870

United States Tax Court

12 T.C. 888; 1949 U.S. Tax Ct. LEXIS 180;

May 31, 1949, Promulgated

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Decision will be entered for the respondent.

The petitioner, engaged principally in the business of managing, leasing, and selling real estate, and in other businesses, from all of which he earned at least about $ 17,000 per year, was also interested in an economic theory called by him "Mass Consumption." He had published a book on the subject about 1937, on which he lost about $ 2,000. He also published pamphlets, one as late as 1942, on the matter. Only a few were sold. He hoped eventually to develop the matter into a nonprofit organization, from which he would draw a salary and profit by sale of pamphlets and lectures, and hoped his publications would help his reputation as student and scholar. Mass Consumption Corporation was organized in 1943, with petitioner as president and a director, and it obtained tax exempt status in 1946. His return for 1943 claimed $ 873.24 deductions as expense of "effort to get job of introducing Mass Consumption"; and for 1944 his return claimed contribution of $ 600 to Mass Consumption Corporation. Held, on the facts, that the $ 873.24 and $ 600 were not deductible expenses of trade or business within section 23 (a) (1) (A) of the Internal Revenue Code.

Peter Forrest, Esq., for the petitioner.

Stephen P. Cadden, Esq., for the respondent.

Disney, Judge.

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DISNEY

These cases, duly consolidated, involve income taxes for the calendar years 1943 and 1944. Deficiencies were determined in the respective amounts of $ 497 and $ 299.52. Only a portion of each is involved, some items of the determination being conceded, and the petitions leaving for our consideration only the question whether the Commissioner erred in denying deduction of $ 873.24 for 1943 and $ 600 for 1944 as ordinary and necessary expenses of business, under section 23 (a) (1) (A) of the Internal Revenue Code.

We make the following findings of fact.

FINDINGS OF FACT.

The petitioner resides at Scarsdale, New York, and has his principal place of business at 342 Madison Avenue, New York City. He filed his Federal income tax returns for 1942, 1943, and 1944 with the collector for the third district of New York. He is a licensed real estate broker, having been in the real estate business since 1932. Since 1932 he has been, and during the taxable years he was, a stockholder, director and vice president of Herbert, McLean, Purdy Management Corporation (hereinafter called Herbert, McLean), a company engaged in the ownership of office buildings in New York and management of office buildings for other owners, and the sale and leasing of real estate in New York City. His duty as vice president was general management of the company. Its address is 342 Madison Avenue. Petitioner's salary from that company was $ 15,600 in 1942, $ 15,000 in 1943, and $ 14,160 in 1944. Management of that company was his principal business during the taxable years. He has also, in and since 1944, been vice president and director, and owner of one-half of the stock of Madison Central Corporation (hereinafter called Madison), the owner of a property at 41st Street and Madison Avenue, New York City, the address of the corporation being 299 Madison Avenue. Petitioner is general manager. His salary from that corporation was $ 2,500 in 1944. During 1942, 1943, and 1944 he was also president of Cort Chambers Corporation, which was owner of a 90-year lease on a 32-story office building, president of Betby Corporation, the owner of some small properties; and he was owner and president of Purdy Door Operator Co., making an automatic garage door operator. The petitioner worked at managing Herbert, McLean and Madison from nine o'clock in the morning until from about 5 o'clock in the evening to as late as 2 o'clock in the morning. During recent years petitioner's living has been made from the real estate business, conducted by Herbert, McLean and Madison.

In 1932 the petitioner conceived the idea of "Mass Consumption Consumer Initiated Control of Production and Exchange." In 1933 he issued a mimeographed memorandum on the subject. In 1936 or 1937 he published a book entitled "Mass Consumption," with an introduction by Roger W. Babson. He lost about $ 2,000 on the publication in 1936 and 1937. About 1,200 copies were sold. From 1936 to 1944 he gave talks on mass consumption and published pamphlets on the subject. In 1942 he published a pamphlet called "A Post-War Plan" and another called "Mass Consumption" -- "A program by Businessmen." Attempts to sell resulted in a few of the latter being sold, though 2,000 of the first pamphlet and 10,000 of the second were printed. To the extent of $ 1,135.89, the bills for 1942 were paid by petitioner's real estate office and then charged to his account. The petitioner produced various statements and receipts indicating payment of expenses of Mass Consumption of about $ 197 for 1943 and $ 394 for 1944.

Mass consumption in the petitioner's view consists of the voluntary organization by memberships of consumers so that they may insure manufacturers certain volume of production so that the manufacturers will not overproduce as they do now for our distribution system. Effectiveness of this system requires requisition by which the mass consumer may indicate goods such as he may desire to have, and the deposit of wages by the employer upon the consumer's order to a proportion monthly that will pay for the goods ordered in advance. It was the petitioner's intention that the mass consumption organization was to be nonprofitable, but he looked forward to a time at which he would be introducing the system in the United States and hoped to gain profit financially by his work in connection with mass consumption, to be realized from lectures and the sale of pamphlets. For later years he looked forward to making the whole thing nonprofitable, except for his salary. Petitioner is a student of economics and has been for a number of years. His idea on mass consumption was an educational and scientific one, which he was attempting to advance. On June 20, 1947, in a letter to the internal revenue agent in charge, petitioner stated, inter alia, quoting from a letter of his own under date of November 27, 1943: "The desire to be of use beyond gaining one's own needs is strong in everyone and I think it becomes stronger as the responsibility of self-support becomes lightened. This usefulness is the whole motive that I have in the Mass Consumption work."

Mass Consumption Corporation was organized in Delaware as a membership corporation on November 27, 1943. It has no capital stock and no stockholders. It was not organized for profit. Petitioner is the president and one of three directors. It obtained an exempt status for income tax purposes in August 1946. It was the petitioner's thought to obtain a good job in the future dealing with mass consumption, and he hoped that the publication of his book and pamphlets would help his reputation as a student and scholar. He received no taxable income from Mass Consumption up to the end of 1944 and reported none. His mass consumption affairs were conducted in his regular business office. He had no separate office for such affairs, but paid to his company a proportion of costs that were involved. He received no salary from Mass Consumption Corporation and none was accrued on its books. In a letter under date of December 19, 1946, to the Treasury Department petitioner stated, in pertinent part, as follows:

You will find herewith a copy of my three-page letter of June 21, 1946 to the Commissioner of Internal Revenue at Washington. As a result of this letter the Treasury Department on a printed or multigraphed form headed 1491M-April 1946 addressed a letter to Mass Consumption Corporation in my care dated August 13, 1946 which prints the statement with additional paragraphs, doubtless familiar to you, that it is the opinion of the office at Washington that the Mass Consumption Corporation is exempt from Federal income tax, as it is shown that this corporation is organized and operated exclusively for educational and scientific purposes. The work which I carried on prior to the formation of the corporation in November of 1943 is identical with the work being carried on by the Mass Consumption Corporation and on the same basis would be, I believe, exempt. You will note that according to the fifth paragraph of my letter of June 21, 1946 enclosed herewith it is my feeling that I shall not have to go into giving my entire time to mass consumption and accordingly, the expenses incurred in the years 1942 and 1943 may be considered from the same viewpoint as latterly, that is, these expenses were contributions by myself to this educational and scientific work.

In his income tax return for the year 1942 the petitioner stated that his occupation was vice president of Herbert, McLean, Purdy Management Corporation. His return for 1943 states the same. His return for 1944 states his employers' names as the Herbert, McLean, Purdy Management Corporation and the Madison Central Corporation, with income therefrom in the respective amounts of $ 14,160 and $ 2,500. In the return for 1943 he listed $ 873.24 as expense of "effort to get job of introducing Mass Consumption in United States." The return for 1942 stated the same in effect. In his return for 1944 petitioner showed $ 600 contributed to Mass Consumption Corporation and claimed it as a deduction. The contribution did not show on the books of Mass Consumption Corporation. The respondent in the deficiency notice as to 1943 denied the deduction of $ 873.24 as not deductible under the provisions of section 23 (a) of the Internal Revenue Code. The record does not show the Commissioner's determination as to the $ 600 claimed as contribution for 1944.

OPINION.

Was the petitioner, in the taxable years, engaged in a business, in making the expenditures in question here, that is, in connection with "Mass Consumption"?

We have studied the facts in this matter, and the cases cited by the parties, particularly Doggett v. Burnet, 65 Fed. (2d) 191, primarily relied upon by the petitioner, and Chaloner v. Helvering, 69 Fed. (2d) 571, and James M. Osborn, 3 T. C. 603, respondent's principal citations. These cases more nearly resemble the instant case than any others suggested or found. After such study, we have come to the conclusion that the petitioner was not, in the matter of "Mass Consumption" involving the expenditures here involved, engaged in trade or business within the purview of section 23 of the Internal Revenue Code. The question is one of fact, and we need not set forth in detail our analysis of the circumstances.

We have here a business man engaged in the management of at least two companies and interested in others, deriving an income of approximately $ 17,000 from only two, who also becomes interested in an economic theory and writes upon the subject, to his financial loss. Of course, it is well settled that he is not limited to one business, and that the mere fact of loss is not determinative; but, as said in Cecil v. Commissioner, 100 Fed. (2d) 896: "* * * if the gross receipts from an enterprise are practically negligible in comparison with expenditures over a long period of time it may be a compelling inference that the taxpayer's real motives were those of personal pleasure as distinct from a business venture * * *" The personal pleasure may well consist in the satisfaction found in expression in writing, or forwarding a theory of interest to the person involved, as here.

We find the situation here more analogous to that in Chaloner v. Helvering, supra, and James M. Osborn, supra, where the deductions were disallowed, than in the Doggett case, supra. A fair appraisal of all the circumstances is convincing that the petitioner was not in the taxable years expecting to make a profit, and that the closest approach thereto was a vague idea that sometime in the future there might be such, in a position with the "Mass Consumption" organization, much as in the Osborn case, and that he was pursuing, not a business, but a hobby, as in the Chaloner case. We do not find so much similarity to the Doggett case. There, the sale of books was limited; here, practically no sales in the taxable years are shown. No income therefrom is reported. The petitioner in the Doggett case was devoting apparently her entire time to the pursuit of publishing and attempting to sell the books involved, with possibilities of large current profit. Here, the petitioner devoted his days, and at times also much of the night, to the real estate business (of only two of his companies), and not only does he appear to have little time left for "Mass Consumption," but no proof whatever appears as to the amount of time spent on it. As to intention, the evidence is vague. Though he testified that profit was to be from lectures and sale of pamphlets in the years under review here, in his returns from 1942 and 1943 he refers to the expenses claimed as those of getting the job of introducing mass consumption in the United States, while for 1944 his return made no claim for "Mass Consumption" expenses, the amount involved being claimed as a contribution to "Mass Consumption." "Mass Consumption" was, in our view of all these facts, a hobby or scientific study for the petitioner, not a business. He hoped that the publication of pamphlets and the book would help his reputation as student and scholar. He stated in writing that usefulness was his whole motive in mass consumption work. It would be altogether unrealistic, in our opinion, to view such work as trade or business for the petitioner. In his letter of December 19, 1946, he stated that the expenses in 1942 and 1943 may be considered contributions by him to "this scientific and educational work"; i. e., "Mass Consumption." His hope of fitting himself to earn a salary in the future with "Mass Consumption" bears analogy to the intentions of the petitioner in the Osborn case.

Without further discussion of the facts, we conclude and hold that the petitioner was not engaged in trade or business in the matter of "Mass Consumption" and that the Commissioner is not shown to have erred in denying the deduction of expense thereof, under section 23 (a) (1) (A) of the Internal Revenue Code. This renders it unnecessary to consider whether such expenditures were properly or fully shown by the evidence.

Decision will be entered for the respondent.