Kenneth B. Schley, Jr., and Frederick J. Hart, Executors of the Estate of Ellen R. Schley, Deceased v. Commissioner of Internal Revenue

а virtual hours, came mately work two SCHLEY, Jr., Frederick Kenneth B. employees were standstill, several Hart, Estate of Ellen Executors of the J. bodily at harm frightened in fear Deceased, Petitioners, Schley, .R that their Unionists hands clearly viola- statements acts and OF INTERNAL REV COMMISSIONER sup- (A), (1) are 8(b) tive Section ENUE, Respondent. by proof. ported substantial 3,No. Docket 29992. Co., Inc. Letter Columbia Appeals States Court of United morning of The assault Second Circuit. advance an led 1965 was March three, some guard quickly followed Argued Oct. leave, Ignoring requests to fifteen. Decided March handing lit- out plant, around went talking employees. It was erature and police. necessary to call Media, Inc.

&Mail company raids,

Learning of these guard pro- uniformed hired armed against unauthorized premises

tect its March afternoon of In the entrance. twenty-five mem- Union 1965 some finding un- agents,

bers and (one guard door, pushed aside locked threatening own him

to “kill up”)

gun”; place close the another “to in- a commotion. Work

and created

terrupted hurled threats were

management. alone in Two women sign large cards room failed rep- eight Union or nine surrounded to return threatened

resentatives who place.” and “shut Waterman, Judge, dissented. Circuit 8(b) (1) (A) Act for- Section restraining or co- bids a Union ercing employees of their in the exercise rights 7, one of which under section

rights any or all “to refrain from bargaining] activities.”

such [collective of the Trial Examiner The conclusions conduct, Board that the Union’s physical vio- threats and

which included lence, of section ‍‌​​​‌‌‌​​‌‌‌​​​‌‌​​‌‌​​‌​​​‌​‌​​​​‌​​​​​‌‌​​​​​‌‍constituted violation supported

8(b) (1) over- (A)

whelming proof. used the much If phrase and order” is to “law

meaning society, de- Board’s in our supporting must be

cision these words

enforced. pro-

The manner in which the Union justifies type of or-

ceeded the broadest

der. granted.

Enforcement findings opin-

memorandum of fact and officially reported. ion are not petition The issue on this is whether entitled to an tax income op- deduction for incurred losses during years eration of a farm question. claim that Petitioners this de- proper duction under Sections (a) 165(a) (c) Internal Revenue Code of These sections provide: expenses. 162. Trade or business § (a) In General.—There shall be al- ordinary lowed as a deduction all necessary expenses paid or incur- during year carry- red the taxable any trade business. ****** § Losses.

(a) General shall Rule.—There any allowed as a loss sus- deduction year tained the taxable compensated for insurance or other- wise.

uals.—In the ^[******] (c) Limitation on case of an Losses individual, Individ- (a) the deduction under subsection shall be limited to— (1) incurred in trade or losses business; (George Wolff, Newark, Joel A. N. J. Sherriff, Joseph Higgins, R. T. New (2) losses trans- incurred City, counsel, brief), York on the profit, action into for entered petitioners. though not connected with a trade * * * or business. Koff, Washington, Howard M. D. C. (Mitchell Atty. Rogovin, Gen., Asst. The Tax found that Mrs. Meyer Walter, Rothwacks and David O. Schley's farming did not con- Attorneys, Department Justice, Wash- stitute trade or business within ington, C., brief), respond- D. meaning of the statute since ent. not carried on with the motive of realiz- ing profits. WATERMAN, Before HAYS Judges. ANDERSON, Circuit The facts are substantial dis- pute. husband, The a stock- Judge: HAYS, Circuit broker, purchased the farm in late 1920’s, assembling approxi- estate executors of the of Ellen a tract of Schley mately petition R. of a review deci- 660 acres. Ten set acres were upheld use, put sion of the which aside for Tax Court residential 250 were denying cultivation, Commissioner Mrs. under used for 350 were assessing pastureland income tax a tax rest deduction was woodland. deficiency payments twenty-five occupied tax in her thirty for the 1959-61. Tax Court’s room house Schley, op- early In Mr. Continuous losses were incurred in 1930’s breeding erating year began building the farm each died in through pedigree question, herd, keeping quality, there- records of so that after. the net each characteristics Since 1953 loss and similar breeding $10,000. rather was never less than stock be sold for could ’61, consumption. This ’60 and the loss herd total incurred than Schley $42,000. 1955 in excess of continuеd until when began raising in or- “commercial” adjusted gross Taxpayer’s income for expenses. A commercial der to cut question, the exclusive requires less attention and is herd less losses, claimed was as follows: breeding expensive than a to maintain $93,259.91 1959— herd. $94,470.57 1960— managed by Frank one The farm was $94,446.29 1961— death Stout from 1929 until his Finding that Mrs. had been farmer an “old fashioned” Stout was strong raised at- on a farm and had a recom- the advice and luctant to seek farming atmosphere, the tachment to a agricultural government mendations operation Tax held Court her continued representatives. not he was aware Since despite history the farm the of more many techniques not be- -of new and did increasing twenty-five than payments receiving the lieve in by losses for the was motivated her love government, many of the technical assist- farm the life there comfort the programs ance offered and relief by profit. rather than desire taxpayer’s used arеa were not farmers agree the losses Petitioners on her farm. question the not deductible unless manager took over Robert Philbrook operation by motivated a de consulted after Philbrook Stout’s death. profit. sire for v. Lamont Commissioner county agent, the him to visit asked Revenue, of Internal 339 F.2d 380 placed requested he be farm and (2d 1964); generally 4A Mer Cir. see agent’s mailing that he list so on the tens, Taxation, Income Law Federal concern- would receive recommendations they (1966). However, 25.08 chal § varieties, crop and other fertilizers finding lenge that Mrs. Court’s problems. other also consulted profit and cite motive lacked agricultural effort authorities might support a differ productive. In make the farm more ent conclusion reached from that below. agent county prepared a com- 1963 the request, prehensive report, in a case such as general explaining improve effi- how to undisputed drawn from basic ferеnces Although operating ciency by sustained facts the Tax must be Court suggestions fol- later most of these were “clearly unless erroneous.” Commission agent county lowed, testified Duberstein, 363 er of Revenue Internal v. prop- utilized if it farm] “even [the 289-291, L.Ed. U.S. S.Ct. erly degree, will nth (1960); Lamont 2d v. Commission great.” be too 380-381; er, supra, 339 F.2d at Austin Commissioner, (2d F.2d v. and records Extensive books 1962). The standard to be used in kept by applying this rule has defined he had not shown to Philbrook Supreme Court: theOn of the losses. idea of extent finding ‘clearly hand, did “A erroneous’ receive although concerning reports is evidence quarterly when reviewing kept support it, the the farm’s court from the accountants participated entire left with the definite some evidence is books. She also concerning the farm and a mistake has firm conviction the decisions manager. occasionally v. consulted been committed.” United States Gypsum Co., United States 364, 395, 333 U.S. result reached in 525, 542, 92 L.Ed. S.Ct. disallowing claimed deductions for busi- (1948). ness income. In the instant case we are strange appear that I No doubt will left with no such conviction. Evidence Congress differ from them inasmuch as management of businesslike efforts appraisal in our all us has bound three of improve efficiency opera by the lower facts1 found court tion does itself establish United the same United States motive. Lamont v. of In Commissioner Gypsum cited rule of review States Co. supra, Revenue, ternal 339 F.2d at 379- majority, quoted equally 680. Such evidence is consistent independ placed upon the further limits finding Schley with a that Mrs. at was by reviewing Commission ence of court tempting to diminish her losses what on Duberstein, er v. Internal Revenue essentially hobby. totality “The 278, 289-291, 1190 80 363 S.Ct. taxpay U.S. including the circumstances”— background, farm, “clearly er’s (1960), erroneous” love of the wherein the independent her substantial applied to the lower rule must also be magnitude of the losses incurred for from undis “factual inferences court’s years than more —indicates puted facts.” basic the farm with no Nevertheless, as I “definite have a “justifies the conclusion firm conviction that a mistake has been of the Tax that a Court motive committed,” I lacking.” would remand to the Tax Id. at 380. Court instructions to allow as de- Petitioners claim that the Tax Court’s computing ductions her net income the Ralph Mauller, 28,014 decision in A. Dec. taxpayer3 (1966) CCH Tax losses Ct. Mem. incurred her farm- is inconsistent with the result reached operations during here. The facts 1959, 1960, and different; vastly of that case are 1961. petitioner had suffered losses for Schley extremely Ellen was an fortu- years three consecutive losses enjoyed independ- nate woman. She were much less substantial here. than ent annual income from investment Nothing Ralph said or decided in A. $90,000 during sources of or thereabouts suggests Mauller the Tax Court’s years each of taxable clearly decision in this case is erroneous. 1961, and she an area lived in judgment The of the Tax Court though which, Stаte” “Garden threatened affirmed.

by during the late of Mrs. Schley’s life, WATERMAN, Judge by (dissent- had not 1961 become an Circuit ing). part great irrevocable suburban great sprawl easterly my colleagues and exurban lies With deference to T agricultural must County dissent from their affirmance of toward the Somerset 52(a) applicable many 1. presented is made Fed.R.Civ.P. will on occasions be * * * Congress the review of decisions of this area. And has in 7482(a) explicit Section of the 1954 Internal the most terms attached the iden- Code, 7482(a), weight findings Revenue for- § U.S.C. tical of the Tax merly 1141(a) In- Section of the 1939 S.Ct. 1200. Court.” 363 U.S. ternal Revenue Code. taxpayers The actual executors judge Schley. 2. “Where has the trial been under the will of Mrs. venience, For con- judge’s jury, findings majority without a must Court and ‘clearly “taxpayer.” stand unless erroneous.’ Fed. Mrs. treat as the She * * 52(a) living during Rules *. rule Civ.Proc. The issue applies itself also factual inferences and the returns under examination were * * * facts, undisputed basic hеrs. composite dairy purchased megalopolis.4 of five farms New York-Newark Greater farm, her in- 1925-1935 decade on had reared husband, things died strong vestment broker had a attachment many bucolic, for- unlike less scenes people, do what

tunate was able very simple one. issue here is run do—in a farm. loved to her case Taxpayer IRC under took deductions other trade —no busi- She had no farming (1954) 162(a) ex- for her § broker, ness.5 But even if she were penses. concedes The Commissioner maintained deducti- she could also expenses and that were incurred Folker ble farm “business losses.” See Taxpayer they paid as claimed. Johnson, Cir., F.2d says expense items occasioned ‍‌​​​‌‌‌​​‌‌‌​​​‌‌​​‌‌​​‌​​​‌​‌​​​​‌​​​​​‌‌​​​​​‌‍these fn. 2. carrying course of .farming. main- The Commissioner plot On a 10-acre of northern New Jer- sey tains were not occasioned because so farmland at Far Hills Somerset carrying County, relatively on a business new was not in a she dwelt agree farming. tax- housе, parties Both commodious brick surrounded going payer’s farming vegetable gardens. activities had been lawns and flower death. on ever since husband’s She conducted her single issue, therefore, acres, is whether some 650 divided 250 additional farming activity required ex- tillage, pasture- in in acres 350 acres activity pense land, woodland, a business items was 50 in which was involving management, However, how wise their 4. suburbia became the inroads of consuming, very has ever or time when be- extensive evident after 1961 separate gravel gan not to constitute a for and for held to be demands including Comm’r, 1964, inquiry April, sod, trade or Wheeler v. business. an 1957); (2 availability gravel super- 241 Cir. Thomas F.2d 883 about the highway (1958); highway Vreeland, H. Reed T.C. 31 and other construction 78 aff’d, super- Rollins, (1959), example, For Interstate Beale 32 T.C. 604 needs. (4 1960); highways Morris 276 F.2d 368 Abrams, Cir. 78 and 287 are intersect Mer T. Memo. 1962-190. 5 664 acre C. within five miles of the tens, Taxation, Farm,” largely Federal § in Bed- Law of Income “Field located 30.25, County. minster, fn. 45. Some 85 Somerset acres Lamington in are Oldwick Hunter- activity farming 6. had Inasmuch as the County. don any many been continuous over changes might Though it character result was stated on income tax its expenses na- in the returns for 1959 and 1960 she was heavier-tlian-usual change-over expendi- brokerage temporary “partner” ture Street Wall explainable (if Schley, permissibly tures the ac- firm of Moore deceased’s is tivity business) firm, undisputed “at- or a trade as husband’s it is is operation trade of a active therewith. tributable to had no connection regularly from or carried re business One receives expenditures ceipt corporate taxpayer”; de- stock dividends coupons personally suspect han not or bond or who ductible and are otherwise personally being truly expenditures. portfolio of dles one’s own not business as CIR, 582, Mayrath 41 589- owned investment securities but who See v. T.C. mangement 590, 1966); part aff’d, (5 takes no in the F.2d 209 active 357 corporations CIR, 1092, in which the invest of the Koons v. 35 T.C. made, Also, not intention ments have been does as the of the himself out a dealer investment of the outset of the venture is one hold securities, carrying determining on a or whether “trade criteria usable Bowers, venture, business.” See Dalton v. 287 a business see 5 venture is 404, 205, Mertens, 77 L.Ed. 389 Law of Federal Taxa- U.S. S.Ct. Income 410, (1932); Clark, tion, 94, proper Burnet fn. v. U.S. it was § 28.73 (1932); history 53 S.Ct. 77 L.Ed. 397 CIR consider the back Smith, (1951), rev’d, farming activity. it was T.C. 135 On this issue (2 denied, they Cir.), Schleys, in F.2d 310 816, cert. 346 U.S. clear that when (1953). farming, L.Ed. intention 74 S.Ct. started definite Activity protection go involving breeding or en to Angus the business of Black into investments, profit. or hancement one’s other- hers, something or than a Taxation, 28.72, Law of Federal Income § activity, personal farming some other kind of ac- businesses, with reference to “It as, tivity, instance, losses, an avocational has been ‘if said that or even re- activity, perhaps, hobby, philan- peated losses, criterion thropy, pleasant farming business, or a judged time-killer to re- which is to be dowager’s large lieve a proportion boredom. then a of the farmers of country pale. would be outside the It and the Tax Commissioner gain, gain is the and not necessity labeling taxpayer’s avoid farming which is one of the factors which itself enter activities as of these be- ques- into the determination of the cause, first, upon burden tax- Riker, Jr., tion.’ Samuel 6 B.T.A. payer to show that activities were taxpayer’s petition 893.” Here statutory coverage within the pitched upon proposi- Tax Court was upon the Commissioner show tion that “The as a not;7 and, second, business for and the losses sus- satisfy failed to that she had a tained were from the of that “genuine profit conducting motive” Though taxpayer’s business.” activities failed to show failed to convince Court that the that these constituted the car- proposition supportable, so advanced rying on of a business. that evidence has me convinced that the says nothing The statute about a tax- engaged fаrmer here was in business and payer’s motives, says only: entitled to take her claimed deductions individual, “In the case her tax returns for (a) deduction under subsection shall 1961. be limited to— presented The evidence was to the Tax (1) losses in a trade or incurred * * pleadings, stipulation, business testimony taxpayer assumption But of five there has wit- been an nagged by nesses, and taxpayer individuals harassed and exhibits. The acquisitive “in produced drives are a business.” Commissioner no witnesses and However, to be in one business need no rebutttal of his Al- own.8 though profit have a reasonable in schedule was evidence show- profit immediately. ing gross or need not profits, expenses (includ- realize a total is depreciation), One in business if his activities have and net losses sus- entered operation been good are carried on in into and tained in the farm for each making year, purpose through 1961, faith for the from 1935 we must profit. approach by looking problem Lаmont of In- v. Commissioner our at the Revenue, 377, (2 activity ternal ques- 339 F.2d for the taxable 1964). Mertens, quoted Cir. As is tion.9 may questioned longer period given It no be that de- events each are their gross purely significance light ductions from are tax matters legislative grace actually place matter of and statu- of what in that tax- took tory authorizing year. doing them are sections able Whether one is busi- strictly narrowly predecessor and construed. The [the ness or not within § 23 always upon the burden is to 26 U.S.C. is often a most dif- § 165] prove expenses question fall within the ficult to decide and often de- provisions pends upon aggregate many deduction the statute. con- siderations, perhaps themselves may expenditures 8. Deductions be al- consequence minor but decisive when solely lowed of the tax- taken as a whole. A must of payer. Blum, Arthur N. T.C. necessity prove his actual status in the (1948), aff’d, (3 1950). 183 F.2d 281 Cir. period advantage an which he seeks being give As our court said in v. Comm’r Stoddard would him. Revenue, (2 subject of Internal 141 F.2d It is not a which when settled statutory 1944), referring period remains one immutable as scheme of income taxation: to another. separate taxable Each taxable period; involved, are different taxes figures Reported Nevertheless, pertinent does demon- The are: the schedule adjusted gross operation income, had been con- farm exclusive of strate that though always operation $98,259.91; years, losses: tinuous for 27 1959 — $94,446.29. showing pro- $94,470.57; failed net losses never 1961 — I960 — Is not this an income. duce annual operation: The farm important of whether most criterion activity pursued for ? loss on Total Net

Gross expenses operations $6,351.78 $18,151.04 $11,799.26 1959 ................... 15,287.68 20,671.87 5,384.19 ................... 15,046.38 7,491.52 22,537.90 1961 ................... very beginning place a beef-cattle From farm is not a show barn, even, through separate no There is horse books having converted into the farm have horse stable been and bank accounts fancy Meara, kept board one an em- cattle barn. There are Charles fences, There ployee taxpayer’s husband’s stables or barns. elaborate deceased electricity brokerage re- The fences is no the barns. firm. The books show old; ceipts purchased expenditures, are at and some least utilities, feed, sold, supplies, fences are woven barns and cost of wire. badly During tools, paint. fertilizers, fuel, plants, in need of seeds and Jersey sundry threshing baling, purchases, of New the State Security fees, for farm veterinarian Social tax issued licenses vehicles agent county payments; summary receipts au- duced rates. also a expenditures by depreciation years, actual- to issue them on vehicles thorized schedules, help, inventories, etc., farms; hired ly being on true and he vis- used taxes,10 insurance, li- real estate auto him- farm and satisfied ited registration cattle, taxes, cense rent met the re- self allowances, repairs, crops. sales of quirements reсeipt li- farm vehicle censes.

Not the were farm entirely separate kept books of account Originally, first and for the living personal books Schleys operation, of the the farm account, house and but even the Angus de- raised cattle and had Black grounds operated separately from were improving Black endeavors voted their to grounds The maintained farm. Angus breeding In 1955 lines. salary paid a caretaker whose development converted from of the taxpayer’s personal bank account. Angus began raising Black breed and performed work caretaker on cattle, is, grow- of “commercial” production farm. of the None farm’s except fattening residence, was used at of cattle for and beef. portion of a heifer butchered once activity This the basic farm year twice and divided between and 1961. In 1959 hired employees. residence and manager, Philbrook, a new Robert managed year farm in аnd expen- In contrast with attractive throughout gen- managing places sive in the fashionable show Hills, eral Far hearing area about it at the time of the Tax Court realty In 1961 the local real taxes $6,442.31, estate on the farm the total 29% expense budget. farming 1964, and, appears, operation. sugges- in December as far as Most of these managing being it now. tions are followed. now developed “Considerable demand has herdsman, Philbrook was a farmer and petitioner’s sod, near farm for which dairy farmer, had been was ac- brings price an acre. Peti- $200 quainted breeding with the of cattle. efforts, through tioner has made duties, connection with his Philbrook negotiate manager, farm to sales general performed work, farm cared However, property. sod from farm, for the cattle directed the as of the end of no sod had been employees, work of the two other sold. George Harrison Philbrook and Hender- part employment, shott. gravel As deposits their “There are several given occupancy petitioner’s these three men were on farm. These can be Upon of houses located on be- removed without adverse effect coming manager, immediately farming operation. The demand for agricultural agent gravel county petitioner’s consulted the area has in- and asked him to visit the farm. Phil- creased with the recent construction requested placed brook also' vicinity. that he be new homes' A sur- agent’s mailing vey, Exploration list for recommen- made the Eastern crop varieties, fertilizers, dations Company, may petitioner indicates that problems. During employ- quantities gravel. saleable agricul- ment Philbrook has consulted matter is still under considera- adopted sug- tural authorities their tion.” gestions attempt make foregoing objective On the basis of the productive. more evidence, including the evidence relative Taxpayer post-tax years’ possible never showed her farm ac- extractive Philbrook; count crops,” books or upon portions records “cash selected she, herself, finger kept testimony of three of the five operation, and, finances orally even witnesses who testified though elderly health, poor hearing, and in con- whose will be dis- sulted participated later, with Philbrook and cussed the Tax found Court that: manager’s in some of the decisions. “Petitioner had been raised on a Parenthetically, strong even as evidence was farm and had a attachment relating op- before atmosphere. continued She hiring eration before 1959 operate and before the the farm after the death of so, Philbrook, too, apparently husband, notwithstanding long its objection admitted history without losses, as to its rele- because of her love vancy, presented relating was also to ac- for the farm and the comfort of her tivities on the fаrm after the taxable life there. up 1961 and to the Tax Court hear- operate, “Petitioner did not or in- ing in December 1964. operate, tend to the as a business post-1961 This profit during years 1960, was summar- 1959, the below, speaking ized the court as of and 1961.” Findings December in the court’s tragic It seems to me that if one loves of Fact as follows: greatly one’s work and loves the environ- 1963, petitioner “In the entire done, had ment in which that work is one is surveyed utility, to determine supposed because of those loves to be needs, improvement fertilizer of fer- carrying devoid of a motive in tility, drainage. and this Though Based on pride accomplish- that work. of survey, county agent the made com- joy occupying a ment and the one’s prehensive showing necessary report time and interest one loves to work steps may outweigh which would have to be taken do indeed in a conscien- improve general efficiency in order to entrepreneur’s inadequate tious mind an realizing profits’ the that work and intent ? Lamont v. return11 for financial nevertheless, Revenue, employees, un- Internal of his Commissioner work get supra. system We think not.” he does der our economic money as such gaged in a trade or business loved were maintained. vising pose equipped usually performed ness of is not or business’ within Despite state tenants conducted raised beef cattle The evidence shows quired; spent statute So “But the mere “There is interest. it, opinion: machinery.” for what he sells must enough. some of her agricultural and this, taxpayer to do the manual adequate making with the the tax collector. operation; by petitioner be it the court followed raising. occupied To quote doubt operation regulations, The farm itself necessary books and qualify profit. own time specialists; her operated one in the busi- went on to and she saw from the meaning of the that and She for the the activities business, recognizable as a advice petitioner It he labor time and buildings employed ^[*] records a farm is the super- is ‘trade those say: pur she en- testify in December motive or intent of intent ‍‌​​​‌‌‌​​‌‌‌​​​‌‌​​‌‌​​‌​​​‌​‌​​​​‌​​​​​‌‌​​​​​‌‍and activities would seem in this case court nent tured 1965.) This was for her and her Of in another ^[*] course, [Judge’s ion at Regs. business, operation the amount of loss operation reading as follows: ed from erates a support been the best emphasis facts.” “carefully arteriosclerosis “(2) “Sec. vertebra. being engaged sources. were not If note] 1.165-6(a) motive in trade or petitioner gross but sustains of its belief that has the It hearing. point considered several In inapplicable. income, petitioner considered, She died certainly farming business, case, spokesman [Emphasis realizing profits, the Tax Court engendered by business,” regulation quoted pointed and had a was not (2), another sustained a if may for she would (She owns and loss from is any, Income unfortunate iri a footnote supplied.]” petitioner’s be deduct- first, out trade “engaged addition suffered too ill tell her August opin- above, then perti- Tax frac- the op- all or gain important. testify petitioner As herself could prof produce need in those to her intent and motives it, sought of such nature that penetrate but it must court reasonably expect thoughts purpose can 1959-1961 Burnet, Doggett App.D.C. by considering one. motive oral (1933); Kenneth; men, 65 F.2d Phil- of three her son (1954), White, Henry manager during brook, P. 23 T.C. 90 (C. per years; Hart,12 partner affirmed curiam 227 F.2d 779 and Frederick 1955). words, A.6, brokerage In other in her deceased husband’s old raising petitioner's firm, who, and cattle died after Meara ‘engendered by motive and after the of the taxable close payment taxes, job, love, After allowances If mind! his he loves depreciation upon depreciable proper loss, perform- as- he is not demonstrates sets, setting profitable operation spending of reserves for the aside acquisition replace profit” purрose making of assets to new “for of time “payment” depreciated ones, by and with- and in a or business. hence he is not trade receipts doing? man- to drawal himself as But if he what he’s hates ager business, of the how often as entrepreneur Schley does an show excess 12. Kenneth and Frederick Hart are “expenditures” They petitioners “taxpay- “income”? over here. are So, entrepreneur’s we now examine the er’s” executors. charge edged issue, opinion at took the farm books in out of 88 below pages transcript, and records. some of which di- rectly years 1959-1961. related to the farmer, Kenneth, himself a testified supposed I if at- would one have length at efforts to as to his mother’s tempted to “do the one could with” best paying one, operation a make the a business that meant to the best one do making affirmatively prof- both more going profitable could it a con- to make its, by decreasing expenses in order ; cern and it should be obvious when open- profits. to make more testified that He weighs desirability farmer things his on mother was consulted all ing gravel he has bank his farm every- operation, about the farm balance the per of the received benefit cash thing experiments done was against yard disruption cubic trying purpose “for conducted industry do to his extractive would profit” make a taxes, that if largest expenditures, real estate pas- agriculturally balanced fields and one sure, enjoy- tures. To be owner’s reduced, could, hoped, could be he paramount property ment of the would be showing make the difference between any that Mrs. event—but the fact instead a loss. Schley, Kenneth and look- Court, only Kenneth, The Tax ing gravel possible into would seem sales opinion: said in its to me to show definite desire to make “Kenneth, why when asked his money they out of If had had .the operate mother continued to the farm no such wouldn’t hаve even desire after her husband’s death I considered it. do not read the record replied: ‘I’m sure the main reason any 1959- indicate had been she continued of the gravel, well demand for but there her own of the farm love may have been in of the increase view itself and desire take Schley in the real estate taxes in ” * *’* do the it. best could with years, an increase assumes was which one caused the need to more civic render And growing population services to a fast insight pleasure “An into she de- County, Somerset turn would which in compared rived from the farm as with nearby gravel deposits use road and any alleged profit motivation was re- house construction needs. testimony vealed of Kenneth when he was asked direct exam- So much for Kenneth. present ination whether time Philbrook, though As for pursue his mother was anxious to appeared pages transcript, in 25 possibility gravel selling some extremely pertinent vital on the company possibly cash to a interested employer’s motives, issue of his the court acquiring replied: it. He ‘If she only mentioned that when he was asked pursue getting can idea why operating the farm crop a so-called cash it ruin- in without replied: enjoys he “I think farm- ing way, property any well, they operates ers. That’s the reason she go want to it.’ In other ahead with However, it.” Philbrook also testified: words, petitioner have will- would “Q. you any Have ever indi- only seen increase the farm income operating cation spoil that Mrs. if it did not or interfere with hobby plaything? this farm enjoyment property or a A. way.” No. Not since I been there. Q. I point am principal astonished that those two iso- Toward what testimony, you lending your lated bits of Kenneth’s one all efforts man- directly ager Well, relative to motive of the farm? A. would (though put the other to motive in 1964 think that it was to better ” * * * Schley counsel) put paying were acknowl- it on a basis. help.” boss, period the the and this ease was was undoubted-' She The beginning involved ly proud period Why years a should the when woman. she con- three prob- except operating to there.” discuss "was sult— lems? Her not financial condition was her secur- about Hart advised by employees! to It be bandied about Though he and her investments. ities just appear she would was as close- him she was advised testified that she making Hart, mouthed have had with who could a every put farm on to the effort finding ; that the access to a books!] paying basis, answer also testified he farm suffered “from numerous deficien- why question: you she “Do know to the cies, inefficiency and obvious indiffer- operating the His answer farm?” was opera- profit-making ence to overall its farming; I “Well, was: she loved management” [certainly tion true question and answer know.” last This upkeep fences, the see barns quoted, al- the court was all that below contradictory p. supra, but rather though, sure, testimony was Hart’s to be confusing as “The farm inasmuch 1961 that It until after short. wasn’t necessary equipped itself buildings the was with any apparently he direct interest had machinery,” p. see long years farm; over supra!]; finding spread and a that the through 1961, Schley’s death expenditures between annual and annual handling the Hart which was gross profits, relatively static in recent brought capital the annual in- years, steadily had widened because of $90,000, he few come of had visits but increasing expenses. it, about and those were with Mrs. below, As due of court I ac- The farm was casual nature. a great weight cord findings to these inferential problem. Ms Out not fact, I find from the managed but the court below somehow record, just portions whole thereof, not selected that a make that Hart farm- out realized a such nature ing “profit indifference was matter of contrary those made inferences from petitioner.” This inference was required. Court are extraordinary Hart never said one. idea; during he such findings accept I the factual made be- keep question here in he didn’t low, pointed I but have out and shall books; point important addi- out that there are bonds, stocks, in the world of record; in the tional facts and the ulti- coupons, investments, and far finding upon mate inferential of fact condition of fences moved turns, which case Jersey. County, New Somerset in the actuated motive my question, mind is to “clear- Summarizing, listed the court ly finding. I erroneous” ultimate So though persuaded that, tax- items that it have a firm and definite conviction farm, payer did indeed judgment a mistake was committed when motive, genuine profit so did so without a awarded Commissioner. operate love, did out of The uncontrovert- business. These are: When lower court determinations are expense history ap- appellate court, ed 28 of income reviewed inclusive; pellate a dis- from 1935 to must find- court look first management ings paragement below, abilities I the court which bеlieve manager heretofore; fully died in 1959 of a farm then detailed appellate may in Philbrook’s we are interested all the evi- [but court examine managerial years!]; petitioner’s close- dence in record to ascertain whether findings “clearly because her affairs mouthedness about erroneous.” manager appellate court, sure, didn’t consult with must give weight great losses of her farm [but about the extent inferences profit-shar- managers court, equally were not on drawn trial appellate may reject were “hired true basis with that the court her — 758 they clearly Repair, pages if erro-

those inferences Harold which covered 70 hearing transcript. to a mis- inferences and led of the The whole neous have Holtzoff, testimony taken result. 2B Barron & tenor his of was to the effect Procedure, 1133, p. taxpayer, son, Federal Practice & that her § and her (1961 Wright ed.); Coal, manager, Tennessee were sincere farmers desirous getting highest possible & R. Co. v. No. Iron Muscoda Local returns 1943). (5 property. Among F.2d out of the testi- other credit he was hired in Field I could do about for that realization. Theodore And could investment siderable cash might realizable, expended profit question is not troverted pectation to be determined the whole record.13 If all of (over $20,000 for recreation or for The Tax Court does not Whether her motive and newly-hired understanding receipt an intent Farm] safely in the three elapse view of purpose Sabelis, effort record uncontroverted of income and shows taxpayer operated her farm income build on a profit fact that in the before receipts 1959 he conclusive on taxpayer’s paying pleasure to make that trying that I operate shows 37 T.C. intent, ais profit year period manager a consideration business three that there question of fact from the basis” that the farm for independent hired put to see what years) realization. operated apparently the uncon- some time in the ex- that when the issue that she here in (1962). income no net incon- “with wait [the it mony tion.” to make it a more mendations improve their to me a desire that the Field farm could be come as itably? A. it could and it was their ^[*] and, the income how that much as a farm could be all * * * * “ * * *Q. paying possible. ^[*] * * we they maybe they in the they might into ^[*] just his of hoped * be. would like Wanted to find out what possible, Basically make * * They basis larger production another beef-cattle overall, I * * * They expressed * position * * like to increase think to a small best utilized the farm as efficient were behind ** is it were disturbed particular increase if at all import to it was to to have would increase their profitable * get income-wise your they operated they the farm he testified: the income. my opinion belief give the recom- wanted production desire, bring the times for, possible. thought opera- extent about them prof- over- in- on as bettering he devoted his efforts toward Repair pointed also mat- out that no property. the income from the ter what to in- could done productivity crease re- terms of cash The Tax made mention what- lengthy ceipts ever of the testi- the real estate 1959- uncontroverted taxes mony Agricultural County Agent, keep profits 1963 would down.14 Within, space ‍‌​​​‌‌‌​​‌‌‌​​​‌‌​​‌‌​​‌​​​‌​‌​​​​‌​​​​​‌‌​​​​​‌‍pages tran- being high of 194 as as ter- are —this script'taxpayer sup- pages in cited to 57 rific overhead.” item port request of her point find- for an ultimate At this it should be mentioned of fact taxpayer’s pay- farm real tax estate profit purpose as ments, deductible re- tax hobby. supported and not as “Taxes,” And turn well as other income requests findings by direct ref- tax deducts farming operations, available to her transcript pages. erence are all included expense side of her farm Repair testified: loss statements. The taxes alone are existing quite “But expense. under conditions to- p. an item of See day, income, supra, would and fn. 10. very taking small Though place because with real estate tax- after area, up past year Jersey legislature our es until passed New it; totality suggestions Repair’s all the evidence before advice and (the sought, only eagerly total income for but when alleged Subsequent question) busi ceived followed. by thereabouts, prepared question, him ness or as he $488 was in years, $11,388.98, requests loss his claimed a of business of because expenses Repair taxpayer so-called must have presented business suggestions approximately $12,000, roughly been 24 detailed list of with a efficiency improving the in- his There of times income. business County’s suggestion that no record he was come the farm. Somerset in from changes long-time County Agent, acquainted attempting in his activities designed forward, outlay, in de from stated either to 1951 1957 survey: expenses in his or increase his his crease to into come. Lamont situation falls The always been “This has category attempts to two crop good practical beef and a justify alleged losses, Henry P. no effort to waste There has been White, per (1954), 23 90 affirmed T.C. equipment money fancy curiam, 1955), (6 F.2d 779 227 Cir. cert. if labor. are times when extra There denied, 351 100 U.S. 76 S.Ct. spent the income a little more had been (1956), L.Ed. 1466 v. Com and Morton might greater.” missioner, (2 Cir.), F.2d 302 cert. rely my Tax Court and brothers The denied, 338 77, 94 L.Ed. U.S. S.Ct. upon seeming similarities between (1949), cited which cases are Lamont, F.2d case that of Corliss opinion White, here. Court in its (2 1964), we 41 T.C. where Cir. wealthy taxpayer like another affirmed a Tax Court determination sought Lamont, to de not en- Lamont’s were because duct losses” two successive “business gendered by the motive interest years, claimed losses deductible in carrying realizing profits not he was laboratory. personal of a For permit trade or business so year laboratory the first he offset income of income tax deductions claim- allowаnce against laboratory expenses $105.10 under ed him to be allowable Section year $19,354.92, and for the second he 162(a). against offset ex $2502.26 reviewing In the Lamont case Morton, penses $21,023.28. suc findings judges were satisfied City lawyer attempted cessful York New and conclusions of Tax Court prove to that he 1942 and 1943 was in amply supported by There the evidence. “country in the business of on a totality of circumstances included Virginia. property home” in He received taxpayer’s the wide dissem- interest country no income from his whatever ination An inference from of his ideas. acreage home the thirteenth activity para- his this interest was ownership prod property, of his of the taxpayer, mount with and that he being sold, gross uce good claiming acting not when faith receipts sale of $275.00 sought to ideas disseminate those he sought some He deduct fruit. to $2850 realizing in the sometime expenses for 1942 for 1943 ex $3180 personal profit out of dissemina- pensеs. tion, surely “clearly erroneous.” distinguishable easily The case is other case cited Doggett present support court did case —there our of its result affirming Burnet, opinion App.D.C. 103, in its 65 F.2d 191 demonstrate (1933), page not considered one is Tax Court had where cited equaled $1,000 Land Act” which “Farm Assessment total of least over two-year gives period. Here, “ac- much-needed tax relief land the sales far agricultural tively when devoted use” exceeded that amount. gross products raised on the land sales Judge negligible and to the excellent discussion of and were indeed almost non- van Orsdell that comparison expenses culminates in follow- existent with the ing language, applicable they attempted which is as to deduct in the involved Hugenia Dog- years, compelling here as was taxable ais in- gett surely supports here ference that their real motives were those just supported Doggett: personal pleasure Miss as distinct from en- gaging business, see Cecil v. Commis- proper “The test is not the reason- Revenue, sioner of Internal 100 F.2d 896 ableness belief (4 1939). Such is not the case here. realized, will but whether good it is entered into and carried on in uncontroverted making purpose really operated faith and for the shows that this profit, farm; going or in the that a belief that this had been a thereon, 1934; can be realized taxpayer upon that it is concern since that merely pleasure, given conducted for ex- husband’s death in 1944 was hibition, or residence; social diversion. life estate in the farm and ness is a pellant unsuccessful. conscientiously believing time and end it will enterprise, capital on the future outcome of the shows a plied engaged ^[******] ****** “We think a better here for willingness legitimate in a is whether prove profitable. years capital whether legitimate has been to this one. or not present be successful or invest test devoting that enterprise, enterprise to be The busi- time and case person ap- ap- was under doctor’s those hired who was hired ing that he would see what he could do of these able which was less than the total penses, of income to ness books that any personal account duced a cash income meticulously separate years entirely separate years taxpayer, the ratio account; here $3.00 kept a new farm or involved; averaging care; security with that expenses keep an every year every year that in the first elderly woman, the farm the farm busi- farm books of manager that understand- about $1.00 investment farm ex- the tax- during pro- certainly “It that cannot be said trying put about the farm onto a conducting enterprise is this either as paying basis, better and who hobby pleasure; or for recreation question lent all his efforts George and as said in v. Commissioner endeavor; expert that that advice was Revenue, of Internal 22 B.T.A. 189: sought and was taken further that operation ‘The real test is whether purpose; that paint the barns needed gain was carried on as a business for and the fences were not in the best of whether was carried on for recre- condition, county and to the mind of the pleasure. question ation or And this agent perhaps it would have been better largely a matter of the intent of the management quite not to have been petitioner.’ Applying these tests frugal expenses; so about that one could bar, difficulty case at we find no have a reasonable reaching appel- the conclusion that would return with a small conducting lant a business within heavy they were, larger taxes as as and a purview Act, of the Revenue relief; one with tax that items carried on is entitled to the benefit deduc- ledger the “loss” side the farm includ- tions claimed.” farm, ed estate real taxes in 1961 those taxes were of total 29% taxpayers Lamont, It is clear expenses and that tax relief is now White, and Morton were motivated available; likely gravel there are personal pleasure rather than a desire deposits on the land and a engaged demand income-producing to be in an gravel neighborhood; begin- activity. gross receipts As taxpayers’ alleged ning businesses were advent of the new objective manager tests for the tion to interest in substitute a definite Objec- intent. donative improving so determination of all facets of upon undisputed relied eventually spread facts between tive to lessen the to determine outgo; the Tax Court and that income way had farmed dependent upon to this the cash woman was in no oecupy- day-to- years purpose in so she had what the farm for her income from time, needs, day personal in the resi- had lived farm, Court, j dence since and loved reverse the WOuld farmers, atmosphere. apprehend the Commissioner impressed fact that Mrs. was so with the $90,000

that, despite the fact that

enterprise had all characteristics “profit going farm, motive”

n ofits owner normally taken would thought granted, he national reve- required nue him to determine the de- STATES INSURANCE AMERICAN COMPANY, Plaintiff-Appellant, here in suit.15 ficiencies v. disadvantageous light view of D’ATRI, D’Atri’s Sunoco Emilio d/b/a taxpayer appears which because of Fox, Station, Leona A. William Service position it is all (cid:127)comfortable financial Motors, Inc., De- Fox Fox and Clarence fendants-Appellees. testimony important the more during the taxable 1959-1961 No. 16998. very definite moves efforts were being profitable Appeals made to the farm make States Court United Sixth Circuit. seriously should have been by considered April

the Tax Imbesi C. I. Court.16 See 1967.

R., (3 1966), 361 F.2d 640

particular And see 644-645. Commis Duberstein,

sioner of Internal Revenue v. 284-290, ‍‌​​​‌‌‌​​‌‌‌​​​‌‌​​‌‌​​‌​​​‌​‌​​​​‌​​​​​‌‌​​​​​‌‍U.S. S.Ct. (1960), Supreme

L.Ed.2d 1218 where the

Court declined the invitá- Government’s performed Compare, g., Sabelis, soil test e. Theodore the fall laboratory University (1962); Ralph Mauller, Rutgers ex- T.C. 1058 A. sug- (June 24, 1966). completed and a perts T.C.Memo. 1966-146 was Report delivered gested was Land Use being upon these vаluable

16. At the risk of manner based some to surveys. repetitive, pointed manager committed was should out Surely brought there were results about these recommendations. follow these “profit testimony mo- that a moves and was showed efforts. this evidence undisputed prior supported by these and was exhibits have existed must tive” present Repair dur- (whose must have issue, pages testimony completely 1959-1961. of candid surveys ignored Court) had been mentioned The above survey working closely together ports to make the in addition to by Repair get report and which land more fertile so as to made earlier p. upon, production see maximum amount of commented out of Tax Court significant each tillable acre and that there had been think also testimony cooperation by Schley’s undis- full in Philbrook with all Kenneth period three-year government agencies. puted terested re As a making number of sult of this to 1964 the obvious interest from 1961 pay, comprehensive kept under doubled farm had conserva plan property prepared management. tion This for the Philbrook’s Department Agricluture ignored. the U.S.

Case Details

Case Name: Kenneth B. Schley, Jr., and Frederick J. Hart, Executors of the Estate of Ellen R. Schley, Deceased v. Commissioner of Internal Revenue

Court Name: Court of Appeals for the Second Circuit

Date Published: Mar 17, 1967

Citation: 375 F.2d 747

Docket Number: 29992_1

Court Abbreviation: 2d Cir.