Waterman, Hays and Anderson, Circuit Judges. Waterman, Circuit Judge (dissenting).
The executors of the estate of Ellen R. Schley petition for review of a decision of the Tax Court which upheld the Commissioner in denying Mrs. Schley an income tax deduction and assessing a tax deficiency in her income tax payments for the years 1959-61. The Tax Court's memorandum findings of fact and opinion are not officially reported.
The issue on this petition is whether the taxpayer is entitled to an income tax deduction for losses incurred in the operation of a farm during the years in question. Petitioners claim that this deduction was proper under Sections 162(a) and 165(a) and (c) of the Internal Revenue Code of 1954. These sections provide:
§ 162. Trade or business expenses.
(a) In General. -- There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.
(a) General Rule. -- There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.
(c) Limitation on Losses of Individuals. -- In the case of an individual, the deduction under subsection (a) shall be limited to --
(1) losses incurred in a trade or business;
(2) losses incurred in any transaction entered into for profit, though not connected with a trade or business. * * *
The Tax Court found that Mrs. Schley's farming activities did not constitute a trade or business within the meaning of the statute since they were not carried on with the motive of realizing profits.
The facts are not in substantial dispute. The taxpayer's husband, a stockbroker, purchased the farm in the late 1920's, assembling a tract of approximately 660 acres. Ten acres were set aside for residential use, 250 were put under cultivation, 350 were used for pastureland and the rest was woodland. Mrs. Schley occupied a twenty-five or thirty room house on the farm.
In the early 1930's Mr. Schley, who died in 1944, began building a breeding herd, keeping records of quality, pedigree and similar characteristics so that his stock could be sold for breeding rather than for consumption. This herd was continued until 1955 when Mrs. Schley began raising "commercial" cattle in order to cut her expenses. A commercial herd requires less attention and is less expensive to maintain than a breeding herd.
The farm was managed by one Frank Stout from 1929 until his death in 1959. Stout was an "old fashioned" farmer reluctant to seek the advice and recommendations of government agricultural representatives. Since he was not aware of many new techniques and did not believe in receiving payments from the government, many of the technical assistance and relief programs offered to the farmers in taxpayer's area were not used on her farm.
Robert Philbrook took over as manager after Stout's death. Philbrook consulted the county agent, asked him to visit the farm and requested that he be placed on the agent's mailing list so that he would receive recommendations concerning crop varieties, fertilizers and other problems. Philbrook also consulted other agricultural authorities in an effort to make the farm more productive. In 1963 the county agent prepared a comprehensive report, at taxpayer's request, explaining how to improve general efficiency in operating the farm. Although most of these suggestions were later followed, the county agent testified that "even if it [the farm] is utilized properly to the nth degree, the profit will not be too great."
Extensive books and records of the farm operation were kept but they were not shown to Philbrook and he had no idea of the extent of the losses. On the other hand, the taxpayer did receive quarterly reports concerning the farm from the accountants who kept the farm's books. She also participated in some of the decisions concerning the farm and occasionally consulted with the manager.
Continuous losses were incurred in operating the farm each year from 1935 through the years in question, and thereafter. Since 1953 the net loss each year was never less than $10,000. In 1959, '60 and '61, the total loss incurred was in excess of $42,000.
Taxpayer's adjusted gross income for the years in question, exclusive of the claimed losses, was as follows:
Finding that Mrs. Schley had been raised on a farm and had a strong attachment to a farming atmosphere, the Tax Court held her continued operation of the farm despite the history of more than twenty-five years of increasing losses was motivated by her love for the farm and the comfort of her life there rather than by a desire for profit.
Petitioners agree that the losses in question are not deductible unless the farm operation was motivated by a desire for profit. Lamont v. Commissioner of Internal Revenue, 339 F.2d 377, 380 (2d Cir. 1964); see generally 4A Mertens, Law of Federal Income Taxation, § 25.08 (1966). However, they challenge the Tax Court's finding that Mrs. Schley lacked a profit motive and cite testimony that might support a different conclusion from that reached below.
In a case such as this the inferences drawn from undisputed basic facts by the Tax Court must be sustained unless "clearly erroneous." Commissioner of Internal Revenue v. Duberstein, 363 U.S. 278, 289-291, 80 S. Ct. 1190, 4 L. Ed. 2d 1218 (1960); Lamont v. Commissioner, supra, 339 F.2d at 380-381; Austin v. Commissioner, 298 F.2d 583, 585 (2d Cir. 1962). The standard to be used in applying this rule has been defined by the Supreme Court:
"A finding is 'clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S. Ct. 525, 542, 92 L. Ed. 746 (1948).
In the instant case we are left with no such conviction. Evidence of businesslike management and efforts to improve efficiency of the farm operation does not by itself establish profit motive. Lamont v. Commissioner of Internal Revenue, supra, 339 F.2d at 379-680. Such evidence is equally consistent with a finding that Mrs. Schley was attempting to diminish her losses on what was essentially a hobby. "The totality of circumstances" -- including the taxpayer's background, her love of the farm, her substantial independent income and the magnitude of the losses incurred for more than 25 years -- indicates that she operated the farm with no expectation of profit and "justifies the conclusion of the Tax Court that a profit motive was lacking." Id. at 380.
Petitioners claim that the Tax Court's decision in Ralph A. Mauller, Dec. 28,014 CCH Tax Ct. Mem. (1966) is inconsistent with the result reached here. The facts of that case are vastly different; the petitioner had suffered losses for only three consecutive years and the losses were much less substantial than here. Nothing said or decided in Ralph A. Mauller suggests that the Tax Court's decision in this case is clearly erroneous.
The judgment of the Tax Court is affirmed.
WATERMAN, Circuit Judge (dissenting).
With great deference to my colleagues I must dissent from their affirmance of the result the Tax Court here reached in disallowing claimed deductions for business income.
No doubt it will appear strange that I differ from them inasmuch as Congress has bound all three of us in our appraisal of the facts*fn1 found by the lower court by the same United States v. United States Gypsum Co. rule of review cited and quoted by the majority, and by the further limits placed upon the independence of a reviewing court by Commissioner of Internal Revenue v. Duberstein, 363 U.S. 278, 289-291, 80 S. Ct. 1190, 4 L. Ed. 2d 1218 (1960), wherein the ...