*973 1. During 1935 the petitioners, mother and daughter, were engaged as equal partners in the operation of a horse farm for profit. The operation resulted in a large net loss for 1935. Held, that the losses sustained are deductible from the gross incomes of the petitioners.
2. On May 25, 1928, petitioner Wegeforth created an irrevocable trust, the net income of which was to be paid to the petitioners in equal shares during the lifetime of the grantor. The trust instrument gave the grantor the right to advise the trustee with respect to her investments. She appointed a firm of attorneys and her son-in-law as her advisers and the trustee at her direction paid the advisers $2,390 in each of the years 1934 and 1935 as compensation for their services. In the determination of the deficiencies the respondent added $1,195 to the net income of this petitioner for 1934 and a like amount to the net income of each petitioner for 1935, representing one-half of the compensation paid. Held, that the respondent did not err in such determination.
3. In 1934 petitioner Wegeforth paid $95 for services of investment counsel and claimed the same as a deduction from gross income. The*974 respondent disallowed the deduction. Held, that the amount is not a legal deduction from the gross income for 1934.
4. In 1934 petitioner Wegeforth created two revocable trusts. The petitioner admits that she is taxable upon the income of the trusts. She reported as the net income of the trusts for 1934 and 1935 the gains, profits, and income, after deducting therefrom $6,416.05 for 1934 and $12,476.17 for 1935 representing amounts paid as commissions to the trustees, salaries to investment counsel, etc. The respondent disallowed the deduction of these payments in the determination of the petitioner's income from the trusts. Held, that the amounts are not legal deductions from gross income.
*633 These proceedings, consolidated for hearing, are for the redetermination of deficiencies in income tax for 1934 and 1935 as follows:
| Petitioner | Docket No. | Year | Deficiency |
| Lillie S. Wegeforth | 94708 | 1934 | $6,082.29 |
| Do | 94708 | 1935 | 12,474.04 |
| Harriet Holbrook Belcher | 94879 | 1935 | 2,477.00 |
*975 *634 The issues for the determination of the Board are as follows:
(1) Whether the petitioners, as equal partners, are entitled to deduct from their gross incomes for 1935 any part of the net loss sustained by the partnership operated under the name of Belbrook Stables.
(2) Whether the net income of petitioner Wegeforth for 1934 should be increased in the amount of $1,195 and the net income of each petitioner by a like amount for 1935, representing one-half of the payments made by the trustee of an irrevocable trust created by petitioner for services of investment counsel.
(3) Whether petitioner Wegeforth is entitled to deduct from gross income of 1934, $95 paid directly for services of investment counsel.
(4) Whether petitioner Wegeforth is taxable upon the gross incomes of two lrevocable trusts made by her in 1934 or upon such gross incomes reduced by $6,416.05 for 1934 and $12,476.17 for 1935, paid by the trustees for fees, services of investment counsel, etc.
FINDINGS OF FACT.
1. The petitioners, mother and daughter, are residents of San Diego County, California. The income tax returns of the former (Lillie S. Wegeforth) for 1934 and 1935 were filed*976 with the collector at San Francisco, and the return of the latter (Harriet Holbrook Belcher) for 1935 at Los Angeles.
2. During 1935 petitioners owned and operated the Belbrook Stables as equal partners, the business of which was the breeding, training, and sale of saddle horses. The operations of the stables in 1935 resulted in a net loss of $32,604.84. The loss was computed by petitioners to be in the amount of $19,752.16 and one-half of that amount, or $9,876.08, was claimed as a deduction from gross income by each petitioner. The respondent disallowed the deduction of the losses claimed.
3. Both of the petitioners have been interested in horses for many years. Harriet Belcher owned her first horse when she was 12 years of age and has owned one or more horses ever since. For about two years prior to 1930 she exhibited her horses at California horse shows, and her husband, Frank G. Belcher, was also an owner of horses which he also exhbited at horse shows. They were married in 1930 and from that date to 1937 lived at Point Loma, San Diego. The horses (six or seven) of Harriet Belcher and her husband were kept at Coronado or San Diego until 1932.
4. In 1930 Lillie*977 Wegeforth owned a small house at Rancho Corta Madera, located at an elevation of about 4,000 feet and about 50 miles from San Diego. In 1930 she leased 80 acres from the Corta Madera Corporation, which owned Rancho Corta Madera. She made *635 some improvements to the property, including fencing, the sinking of wells for water, etc., and pastured horses there. In 1932 Harriet Belcher and her husband also transferred their horses to Rancho Corta Madera where they have been kept ever since. The stables built on the leased premises were called the Belbrook Stables. In 1937 the name was changed to Belbrook Farm. Both petitioners contributed to the expenses of the stables.
5. In 1932 the two petitioners employed Thomas Jefferson to train and care for the horses and to assist in showing them at horse shows.
6. Petitioner Belcher became greatly interested in the training and exhibition of saddle horses, and she devoted much time to the study of the pedigrees of horses and to their care and training. The best saddle horses were exhibited at California horse shows.
7. In 1933 the two petitioners and Thomas Jefferson spent about two months visiting the principal horse*978 farms in Kentucky, Ohio, and other states. They learned much about the breeding, feeding, and training of horses and the best strains of blood for good saddle horses. The petitioners, especially Harriet Belcher, seriously considered the operation of the Belbrook Stables on a commercial basis. They came to the conclusion, however, that Thomas Jefferson was not a proper person to act as manager of such a breeding farm as they wished to conduct. He was accordingly discharged in the fall of 1934 and a man by the name of Mallon, who apparently had the necessary qualifications, was employed.
8. Beginning with 1935 the petitioners agreed that they would operate the Belbrook Stables on a commercial basis and that the gains and losses would be shared equally between them. The number of horses owned on January 1, 1935, was about 15, including a stallion by the name of Highland Dare Chief. Significant changes were made in the operation of the Belbrook Stables in 1935 as compared with its operation in 1934. Some of the show horses were mares, and through an investigation of their pedigrees the petitioners came to the conclusion that six had good blood strains. These six were converted*979 into brood mares. Advertising of the Belbrook Stables was begun in 1935. The stallion, Highland Dare Chief, was advertised at stud in various horse magazines and periodicals such as the American Horseman, and Saddle and bridle, in the East, and Sportolog Magazine, in California. The names of colts for sale by the stables were likewise advertised. Another medium of advertising deliberately adopted was the horse show. In 1935 the horses of the Belbrook Stables were exhibited on the California horse show circuit in different cities of California, and on the eastern circuit, including the horse shows at Atlantic City, Devon, and Sewickley, Kansas City, and St. Louis. At these shows the stables met with great success, *636 gaining a national reputation and winning approximately $5,000 in money prizes.
In 1935, or shortly before then, the amount of land for the pasturage of the horses at Rancho Corta Madera was increased from 80 acres to 500 acres and it was expected gradually to increase the stud.
9. Harriet Belcher devoted much time and attention to the Belbrook Stables. In 1932, 1933, and 1934 it was her practice to spend each week and at the Rancho Corta Madera and*980 to advise with the manager in the training of horses. After the business was organized on a commercial basis she averaged about three days a week at Rancho Corta Madera and in 1937 moved from Point Loma to the Rancho for closer supervision of operations.
10. Although some of the horses at the Belbrook Stables were used individually by Harriet Belcher and her husband, they were not considered a part of the stud and the Belbrook Stables received the usual fees from the owners of such horses for their keep.
The accounts of the Belbrook Stables were kept separately from the other accounts of the two petitioners. An accurate record was made of all income and of expenses. No amounts were treated as expenses which were not properly the expenses of the stables.
11. In 1936 the manager, Mallon, died. The petitioners then considered the abandonment of the project because of the large losses which they had sustained from operations. After much consideration and in the belief that the enterprise might be put on a profitable basis under good management, they agreed to continue. They obtained a new manager in the person of Harry Daniels, who recommended a large increase in the number*981 of horses to be kept and raised.
12. The total deficit from the operation of the Belbrook Stables during the years 1931 to 1934, inclusive, amounted to $69,217.96. Net operating losses of the Belbrook Stables, per books, for the years 1935, 1936, 1937, and 1938, were $32,604.87, $39,605.42, $29,956.42, and $43,031.20. The number of horses purchased, raised, and sold during the years 1935 to 1938, inclusive, is shown as follows:
| 1935 | 1936 | 1937 | 1938 | |
| Number of horses purchased | 2 | 2 | 14 | 4 |
| Number of horses raised | 5 | 6 | 4 | 7 |
| Number of horses sold | 4 | 5 | 3 | 16 |
13. Belbrook Stables was a business operated for profit during the year 1935.
14. On May 15, 1928, petitioner Wegeforth created an irrevocable trust of which the Crocker First Federal Trust Co., now the Crocker First National Bank of San Francisco, was the trustee. She placed property, consisting principally of shares of stock and bonds, of a *637 value of approximately $1,000,000 in the trust. The grantor and her daughter, Harriet Belcher, each had a one-half interest in the income of the fund for the life of the grantor. In the trust indenture the grantor reserved the right*982 to advise the trustee with respect to investments. Pursuant to such reserved right she informed the trustee that a firm of attorneys in San Francisco and her son-in-law, Frank G. Belcher, would act in her behalf. Pursuant to her authorization, the trustees paid these two agents $2,390 each year for services in 1934 and 1935. The net income, after the deduction from gross income of this $2,390, was paid to the petitioners in equal shares during the years 1934 and 1935. In the determination of the deficiencies the respondent added $1,195 to petitioner Wegeforth's net income for 1934, and added the same amount to the net income of each of the petitioners for 1935, upon the ground that this was a part of the income of the trust fund paid out at the direction of the grantor.
15. In 1934 petitioner Wegeforth paid $95 for the services of investment counsel. The deduction was disallowed by the respondent in the determination of the deficiency.
16. In 1934 petitioner Wegeforth created two revocable trusts. She is admittedly taxable upon the income of these trusts. During the years 1934 and 1935 the trustees paid out for fees to themselves and for services of investment counsel, *983 etc., $6,416.05 and $12,476.17, respectively. The respondent held in the determination of the deficiencies of petitioner Wegeforth that the amounts above referred to are not legal deductions from gross income and that she is taxable upon the income from the trust funds without any diminution for those expenses.
17. Neither of the petitioners was engaged in a trade or business for profit during the years 1934 and 1935, except the operation of the Belbrook Stables in 1935.
OPINION.
SMITH: 1. The first question for consideration is whether the petitioners are entitled to deduct from their gross incomes of 1935 any amount by reason of losses sustained through the operation of the Belbrook Stables, claimed to be a partnership business operated by the petitioners for profit. In his deficiency notice in the case of petitioner Wegeforth the respondent stated:
The Belbrook Stables were operated by you with your daughter, Mrs. H. H. Belcher, for breeding, raising and training horses for exhibition purposes to be entered in various horse shows on the Pacific Coast and elsewhere. Although such stables were maintained by you for several years previous to the taxable year, the operations*984 always resulted in losses which were not claimed as deductions on your income tax returns.
*638 Information at hand indicates such stables were operated in the taxable year for personal pleasure and as hobbies by yourself and your daughter, in the same manner that they were operated in prior years. * * *
Although the net operating losses of the Belbrook Stables for the year 1935 were $32,604.87, the petitioners each claimed the deduction from gross income of only $9,876.08. This is the only amount of the loss for 1935 in issue in these proceedings.
The petitioners admit that the Belbrook Stables were not operated for profit prior to 1935. They claim that in 1935 the stables were operated as a business and with the expectation of deriving a profit therefrom; that beginning with 1935 show horses with the best blood strains were converted into brood mares and that the stables began to be extensively advertised.
From a consideration of all of the evidence we can not doubt that it was the intention of the petitioners to operate the Belbrook Stables in 1935 for the purpose of deriving a profit therefrom. Each of the petitioners is entitled to deduct from her gross income*985 of 1935 one-half of the loss here in issue, or $9,876.08. This determination is upon the authority of ; ; affd. (C.C.A., 3d Cir.), ; ; ; ; .
2. The second question for our consideration is whether the income of petitioner Wegeforth for each of the years 1934 and 1935 should be increased in the amount of $1,195 and the income of petitioner Belcher for 1935 by a like amount by reason of the payments by the trustee of the irrevocable trust to investment counsel and attorneys designated by the grantor of the trust. There is no question here as to the right of the trustee to deduct from the gross income of the trust the expenses paid out by the trustee other than the payments to investment counsel which were made at the direction of petitioner Wegeforth. The respondent*986 increased the net income of the petitioners by the amounts indicated, saying: "These payments were made for legal and investment advice rendered by your attorneys and investment counsel."
The respondent considered that the amounts of $2,390 paid by the irrevocable trust in 1934 and 1935 were income of the petitioners paid out by the trustee in accordance with their direction; that the petitioners were not engaged in a trade or business with reference to the operation of the trust property; and that therefore they are not entitled to exclude those amounts from their gross incomes.
The evidence does not show that either of the petitioners, or, for that matter, the trust, was engaged in a trade or business which would *639 warrant the deduction of the amounts here in question. They were not ordinary and necessary expenses paid in connection with the carrying on of a trade or business. The action of the respondent in increasing the net incomes of the petitioners by the above amounts is approved. See ; affd. (C.C.A., 2d Cir.), *987 .
3. Petitioner Wegeforth claims the deduction from gross income of 1934 of $95 representing an amount paid by her for investment counsel. The respondent has disallowed the deduction upon the ground that she was not engaged in any trade or business which warranted the deduction. We approve his determination.
4. Petitioner Wegeforth created two revocable trusts in 1934. She is admittedly taxable upon the income of them under section 166 of the Revenue Act of 1934. She returned as net income the gross income of the trusts less payments made by the trust to attorneys and investment counsel, etc., of $6,416.05 for 1934, and $12,476.17 for 1935. In the determination of the deficiencies the respondent increased the petitioner's income from the trusts by the amounts above stated, alleging that the petitioner is not entitled to those deductions since they were not ordinary and necessary expenses paid or incurred in the carrying on of any trade or business.
The petitioner argues that by reason of the size of the trusts and the many purchases and sales of securities this issue falls within the principle of *988 . The facts in that case showed that Mrs. Kales carried on a large business in the purchase and sale of securities, and the court held that she was engaged in a business for profit which permitted her to deduct from gross income, as from a business carried on for profit, expenses incurred in the carrying on of such business.
Although the evidence in the instant case shows that petitioner Wegeforth devoted some time and attention to purchases and sales of securities, we do not think that the evidence shows that she was engaged in a trade or business involving her investments.
The facts in the proceedings at bar are somewhat similar to those involved in the case of ; affirmed, sub nom. , where the petitioner employed a trust company to look after her investments. The Board and the court held that the amounts paid as expenses to trustees were not a legal deduction from gross income.
Section 23(a) of the Revenue Act of 1934, as above indicated, provides for deductions of*989 all "ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." In a concurring opinion in the recent decision of the *640 United States Supreme Court in the case of , Mr. Justice Frankfurter stated in part:
* * * To avail of the deductions allowed by § 23(a), it is not enough to incur expenses in the active concern over one's own financial interest. "* * * carrying on any trade or business", within the contemplation of § 23(a), involves holding one's self out to others as engaged in the selling of goods or services. * * *
In , as in the instant proceedings, the property of the decedent taxpayer had been placed in a revocable trust, with the taxpayer as sole beneficiary and the right reserved in him to direct all investments and reinvestments of the corpus. The taxpayer there maintained an office in an office building in which he spent a few hours almost every day and he employed two men to do clerical work, keep his personal books, and read trade journals, financial services, and corporate*990 statements. The Board decided that such activity did not constitute a trade or business and the Board's decision was affirmed by the Ninth Circuit. See also
The action of the respondent on this issue is approved.
Decision will be entered under Rule 50.