Clark v. Commissioner , 24 B.T.A. 1235 ( 1931 )

JAMES CLARK AND JOHN H. O'BRIEN, EXECUTORS OF THE ESTATE OF DAVID SHAW, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Clark v. Commissioner

Docket No. 34499.

United States Board of Tax Appeals

24 B.T.A. 1235; 1931 BTA LEXIS 1523;

December 22, 1931, Promulgated

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The operation during the years 1923, 1924, and 1925 of a breeding farm and racing stable by decedent at a considerable loss in each year held, under the facts proven, to have been the operation of a business for profit, and the excess of expenditures incident to such operation over receipts for such of these years are deductible as business losses in computing decedent's net income.

Irwin N. Loeser, Esq., for the petitioners.

Arthur Carnduff, Esq., for the respondent.

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SMITH

The respondent has determined deficiencies in the income tax of the decedent, David Shaw, in the amounts of $12,303.91 for 1923, $12,076.40 for 1924, and $4,437.21 for the period January 1, 1925, to November 13, 1925. Not all of the deficiencies are in dispute. The errors alleged are that:

(a) For the year 1923 the Commissioner has included in the income of the said David Shaw, deceased, alleged profit from the sale of Cleveland Electric Illuminating stock in the amount of $2,320.00, whereas the said decedent actually sustained a loss on the sale of said stock in the amount of $187.75.

(b) Farm losses for the year 1923 in the amount of $20,900.00, for the year 1924 in the amount of $26,825.00, and for the period January 1st to November 13th, 1925, in the amount of $31,729.12 have been disallowed by the Commissioner in contravention of Sections 214(a)(4)(5) of the Revenue Acts of 1924 and 1926.

FINDINGS OF FACT.

The decedent, David Shaw, a resident of Cleveland, Ohio, had amassed a considerable fortune in the steel business, retiring from that business in 1898 or 1899. He was a lover of fine horses and after his retirement he usually kept several fine trotting and pacing horses, which he drove for amusement in "matinee races" held by the Gentlemen's Driving Club of Cleveland, of which he was a member. These were races in which nonprofessional drivers, usually the owners of the horses, competed for trophies instead of money purses as in professional racing.

In 1907 the decedent purchased a farm of 75 acres in the suburbs of Cleveland and equipped it as a breeding farm or nursery for trotting and pacing horses, with stables, a dwelling house for a superintendent, bungalow for a caretaker, a blacksmith shop, and other out buildings. Decedent also acquired a training stable and caretaker's cottage at the North Randall Race Track nearby, purchased several brood mares and a stallion of approved breeding, and entered regularly the professional racing activity. Colts were bred at the farm, which was known as the Beau Ideal Farm, and were trained at North Randall, their capabilities were developed, and those showing promise were entered in the races on what is known in harness racing as the "Grand Circuit," competing for money purses. Decedent employed in this racing business professional trainers and other necessary help. From this time forward his horses were at times entered in matinee races, as these were considered beneficial in schooling the horse and in some of these instances decedent himself drove, but in all the races on the Grand Circuit his horses were driven by his trainer, a professional driver.

On establishing the Beau Ideal Farm decedent devoted practically all of his personal attention to it, visiting the farm almost every day and going over details of management with his superintendent. The greater part of each day he spent at the North Randall track watching the training of his horses. He also required his assistant superintendent, who handled purchases and pay rolls, to report to him at his home every Sunday for the purpose of submitting bills for approval and checking over with him the financial matters of the business. At these conferences decedent examined all bills carefully and insisted on care and economy in operation.

The decedent's horses were raced regularly on the Grand Circuit and won quite a number of purses. Some of these horses he raised, and some he purchased. In some cases horses which did not come up to expectations were sold. In 1923 he sold for $1,000 a colt which he had raised, and another which he had purchased for $1,800 he sold for $800. He advertised regularly in a recognized harness horse publication the services of his stallions. Decedent attended all the race meeting on the Grand Circuit in which his horses were entered.

For some years following the purchase of the Beau Ideal Farm the business returned a profit, but for the years 1918 up to the time of decedent's death in 1925 it showed a loss each year. For 1918 to 1922, inclusive, these losses were approximately $20,000 each year and were claimed as deductions representing business losses by decedent in his income-tax returns for such years and were allowed by respondent. For the years 1923, 1924, and 1925 decedent had regular and necessary expenses incident to operation of his breeding and racing establishment as follows:

1923	$21,146.33
1924	33,806.30
1925	27,413.22

For those years decedent received purses won by his horses in racing as follows:

1923	$4,010
1924	7,380
1925	4,310

From the time decedent's racing establishment began to lose money he complained bitterly to his employees and business associates of this condition. At times he would threaten to abandon the enterprise and sell the farm and equipment. At other times he would express the conviction that he would soon develop a fast horse and retrieve the losses. The breeding, training and racing of horses is a highly speculative business and at all times during the period when losses were being sustained there was a reasonable ground for expectation that a profit might ultimately be realized. At one time decedent bred and developed a horse which established a world's record and for which he refused an offer of $65,000. From a purely financial standpoint the refusal of this offer was justified, as the horse was sound and could reasonably be expected to win in purses more than this amount the following season and at the end of that time have a sale value of the amount of the offer made. This horse, the following year, developed a foot disease which destroyed its value for racing.

Decedent kept no regular set of books for his racing establishment. He maintained several bank accounts and one of these was used for all funds pertaining to the farm and training stables, a record being kept on the check and stub of the purpose of each payment made. The checks were drawn by his assistant superintendent and signed by decedent.

On July 20, 1923, the decedent sold 232 shares of stock of the Cleveland Electric Illuminating Company at $110 a share, or a total of $25,520, which he had purchased in 1922 at a total cost of $25,672.75. Decedent paid on this sale a brokerage fee of $35, and the transaction resulted in a net loss for him in 1923 of $187.75. The respondent in his deficiency notice has charged decedent with a gain upon the transaction of $2,320, upon the assumption that the shares of stock were originally purchased at par.

OPINION.

SMITH: The principal issue for determination is whether decedent's losses from operation of his breeding and racing establishment were incurred in a trade or business entered into and carried on for profit or were losses sustained in an activity carried on merely for the personal pleasure derived, without expectation of profit. The question must be determined from all of the evidence respecting the character of decedent, the conditions under which he established the activity, his conduct of its operations, its losses and gains, and the opinion of decedent, if that can be determined, as to its promise of financial return.

Respondent's insistence appears to be that irrespective of decedent's intention in establishing this activity his continued operation of it at a loss during the years 1923, 1924, and 1925, after suffering considerable losses in the five preceding years, when considered in connection with his admittedly great interest and pleasure in fine horses and racing, is sufficient to show that his desire for and expectation of profit was subordinate to his personal pleasure and enjoyment in the breeding and racing of his horses.

We would think this conclusion reasonably justified if these were the only facts shown, but the record contains proof of other conditions which in our opinion are inconsistent with such conclusion. It is true that decedent was a wealthy man and it can not be doubted that he experienced personal pleasure in the racing of his horses, but when we consider the fact that he was a close man in money matters, that the breeding and racing establishment was not a show place in any sense, and that decedent was not a man with social aspirations, that its operation showed a profit for some years and during the later years in which losses were incurred the petitioner was bitterly disappointed, but expressed the belief that conditions would change and a profit be realized, we must conclude that the continuation of operations was with a view of retrieving the losses incurred.

Many businesses are run at a loss for years in the anticipation that they will become successful. The proof is quite convincing in this case that there actually existed at all times a strong probability that such expectation would be realized.

In our opinion the facts shown in connection with the decedent's acquisition and operation of this breeding farm and racing stable bring this question at issue in line with our decisions in ; affd., ; and , where we held losses and/or expenditures incident to the operation of racing stables to have been incurred in a business carried on for profit and therefore deductible in computing taxable income.

We hold that respondent was in error in disallowing the deduction of losses sustained in 1923, 1924, and 1925 in the operation of his breeding and racing stables and also in determining that decedent realized a profit in 1923 upon the sale of stock in the ClevelandElectric Illuminating Company.

Reviewed by the Board.

Judgment will be entered under Rule 50.