1928 BTA LEXIS 4198">*4198 A loss sustained by the petitioner in farming operations held to be deductible.
10 B.T.A. 97">*97 This is a proceeding for the redetermination of a deficiency in income tax of $7,419.19 for the year 1923. The deficiency results in part from the disallowance by the respondent of a deduction of $19,127.03 taken by the petitioner as a loss sustained in the operation of a farm.
FINDINGS OF FACT.
The petitioner is a resident of Uniontown, N.J., and has an office for the transaction of business in New York City.
About 1915, he acquired what is known as the Green Lane Farm. This farm, consisting of 75 acres, is located on a highway about 1 3/4 miles from Elizabeth, N.J., and at the time of acquisition was in a run-down condition. The land is practically level and is adapted to growing corn, alfalfa, and wheat, all of which the petitioner grew on it. The farm had only one dwelling house on it and that was a seven-room frame structure erected about the year 1840. The petitioner's original plan in acquiring this farm was to have a few cattle and a few1928 BTA LEXIS 4198">*4199 chickens on it and to operate it with a couple of men so as to produce only enough poultry and dairy products for his own use. During the years from 1916 to 1919, the petitioner erected a horse barn, test barn, cow barn, dairy barn, and a house for the men employed on the farm to live in.
10 B.T.A. 97">*98 In 1919, the petitioner conceived the idea of operating the farm as a poultry and dairy farm. Because of its location on a highway and its proximity to the City of Elizabeth, it was decided that the produce could be sold on the farm without incurring any delivery expense. Subsequent events have confirmed the correctness of this decision. After computing the cost of operation, including the labor, superintendence and feed, and considering that vegetables, milk and eggs could be produced in sufficient quantities to bear the operating expenses, the petitioner decided that the farm could be operated at a profit by raising for sale a better grade of chickens and cattle.
For the purpose of carrying on his farm operations the petitioner, in 1919, employed as farm manager and superintendent, Edward C. Peets, a man experienced in the management and operation of poultry and dairy farms1928 BTA LEXIS 4198">*4200 similar to that contemplated by the petitioner. The petitioner also proceeded to stock his farm with White Leghorn and Jersey Black Giant chickens and registered Guernsey cattle. Under the supervision of the petitioner, Peets had charge of all operations of the farm, including the hiring and management of the help. He lived in the only residence on the farm, which was the old dwelling erected about 1840, and received the use of the house and $82.50 per month as his salary.
It was the petitioner's intention to build up the reputation of his cattle and to increase the number of the herd to 60 or 75. During 1921, the petitioner purchased at public auction in Pennsylvania a cow which was guaranteed to be free from tuberculosis and other diseases. This cow was tested by state veterinaries, but was not examined by a veterinary employed by the petitioner before being brought into the herd. It subsequently developed that this cow was affected with a disease known as "contagious abortion" which was communicated to other of the cows and as a result about one-half of the cows in the herd aborted and some of these became sterile.
Cattle of the type owned by the petitioner sell from1928 BTA LEXIS 4198">*4201 $5,000 to $7,000 per head when in a healthy condition. However, when they have the disease that was communicated to his herd, their value is from $40 to $75 per head for beef purposes.
In an attempt to eliminate this disease from his herd of cattle, it was necessary for the petitioner to incur various additional expenses, including those for veterinary services.
The petitioner was informed that in about two years his cattle would become immune from this disease but this was found to be incorrect and the disease continued among the cows. The petitioner is now eliminating from his herd every cow that shows any signs of the disease.
10 B.T.A. 97">*99 In 1923, the petitioner had about 20 head of cattle and about 600 chickens on his farm. The petitioner has not exhibited any of his cattle at fairs or shows within recent years for fear of spreading the disease affecting them. He, however, places his chickens on exhibition in fairs. While the petitioner has received numerous prizes on his cattle and poultry, these awards have not been in cash, but mostly blue ribbons.
As a result of the disease affecting certain of his cows and of the purchase in 1923 of a sterile bull which was1928 BTA LEXIS 4198">*4202 subsequently sold, it was not possible for the petitioner to increase his herd as contemplated and the income from the sale of the dairy produce was consequently less than was originally expected. While the disease was present, the petitioner could not sell any of his cattle except for beef.
Petitioner's profits were also affected by the fact that labor and feed costs increased without a corresponding increase in the prices received for the farm products.
The petitioner never has lived on the Green Lane Farm, and on this farm there are no facilities for recreation such as golf links, tennis courts, or flower gardens. He, however, lived on an adjoining farm in which he had no interest but which belongs to his brothers and sisters during their lives, with the remainder to the petitioner's son. For about seven years the petitioner has been visiting his farm on Wednesdays, when he spends about one hour there, and again on Saturdays, when he spends the day. While at his farm the petitioner goes over the fields and the condition of the farm, sees what the employees are doing, inspects the cattle and discusses with the men matters relating to the farm.
A complete detailed record1928 BTA LEXIS 4198">*4203 is kept of the farm operations. This record consists of detailed statements furnished the petitioner each week by the farm superintendent. A statement or report relating to the dairy shows the number of cows, record of milkings, number of bulls, the amount of milk produced, milk sales, butter sales, cream sales, and skimmed milk sales. A similar statement is prepared for the poultry operations and shows the number of hens, cocks, chicks, eggs produced, and eggs sold.
A statement is also submitted showing the amount of time put in on the farm by the various farm employees and the amount of time expended by each employee on the different departments of the farm. Copies of sales memoranda made at the time of sales are furnished the petitioner at the end of each week. At the end of the year the petitioner's secretary adds the amounts shown in the reports for the year and makes a statement of the totals.
All of the farm products used by the petitioner are charged to him at the same price as paid by others, and at the end of each month he makes payment to the farm superintendent by check. The 10 B.T.A. 97">*100 check is deposited by the superintendent in a bank where the farm account1928 BTA LEXIS 4198">*4204 is kept and against which he draws to pay salaries and incidental farm expenses. The products from the petitioner's farm were sold at the highest obtainable prices and labor employed at the lowest obtainable price.
The petitioner has sustained losses on account of the operation of his farm as follows:
| 1919 | $15,500.40 |
| 1920 | 18,298.56 |
| 1921 | 14,910.21 |
| 1922 | 18,303.38 |
| 1923 | 19,127.03 |
Although the gross receipts from farming operations have increased materially since 1919, the petitioner has sustained a loss each year down through 1926.
The total expenditures made in connection with the petitioner's farming operations for the year 1923 amounted to $27,087.96, and gross receipts for that year amounted to $7,960.83, leaving a loss of $19,127.03, which the respondent has disallowed. Included in the $19,127.03 is an amount of $2,647.80, which represents local taxes paid by the petitioner in 1923. While people came to the farm to buy milk and other farm products, the farm is not kept as a "show place." The cows are kept locked in the stables and can be seen only through the windows.
The petitioner is a member of Kean-Taylor & Co., security bankers in New York. 1928 BTA LEXIS 4198">*4205 He is president of the First National Bank of Perth Amboy, and vice president of the Plainfield-Union Water Co.
The petitioner was born on the farm adjoining the one which is involved here. He has lived on a farm, is familiar with farming operations and for a great many years he owned farms. He has had for a number of years a half interest in the Blooming Dale Farm, which is situated in another county in New Jersey.
OPINION.
TRAMMELL: The only issue involved in this proceeding is the deductibility of the $19,127.03 representing the amount by which the expenditures made in connection with the operation of the Green Lane Farm exceeded the receipts therefrom. This depends upon whether the farm was operated as a business. It was denied by the respondent that it was so operated.
The petitioner acquired the Green Lane Farm in 1915 to produce poultry and dairy products for his own personal use and after making several improvements he decided in 1919 to operate it as a poultry and dairy farm, planning to meet the ordinary operating expenses out of the proceeds from the sale of vegetables, eggs and 10 B.T.A. 97">*101 milk and derive a profit from the sale of high-grade poultry and1928 BTA LEXIS 4198">*4206 registered cattle which he expected to raise. In accordance with this decision he employed a farm superintendent experienced in the management and operation of farms of the type contemplated, and proceeded to stock the farm with a good quality of chickens and registered cattle. Pursuant to his plan of increasing the number of his herd the petitioner in 1921 purchased a cow which was guaranteed to be free from disease. This cow was examined by state veterinaries who decided that she was free from disease. It later developed that she had a contagious disease which was communicated to about one-half of the petitioner's herd. This disease retarded the increase of the herd and resulted in a smaller amount of income being realized. It reduced the sale price of cattle so affected from the normal market price of about $7,000 to the price of beef cattle, about $40 to $75 per head. In addition it was necessary for the petitioner to incur very great expenses in attempting to free the herd from the disease. In addition to employing a veterinary to treat the cattle, he has tests made by Cornell University. He has consulted with the Bureau of Animal Industry of the United States Department1928 BTA LEXIS 4198">*4207 of Agriculture, the State Department of Agriculture, the State College of New Jersey and with others whom he thought would be able to assist him in the matter. Having been advised that the cows would develop an immunity to the disease in about two years, he followed out that theory and found it to be erroneous. Now as a last resort, he is eliminating from the herd all cows that show any symptoms of the disease.
The petitioner spent one day and part of another each week in managing and directing the operations of the farm. Detailed records were kept of all income and expenses in connection with the farm and the petitioner paid the same price as others for the products he received therefrom. There is nothing in the record to warrant a conclusion that the petitioner operates the farm as a place of recreation or amusement or as a show place.
The petitioner testified that 65 years ago he was born on the farm on which he now lives, and which adjoins the Green Lane Farm; that he has always lived on the farm and is familiar with farming operations. He has owned farms for a great many years and for a number of years has owned a one-half interest in Blooming Dale Farm, which is situated1928 BTA LEXIS 4198">*4208 in a different county from that in which the Green Lane Farm is located. The petitioner testified that when he began the operation of the Green Lane Farm as a poultry and dairy farm in 1919, it was with a view of making a profit therefrom, and that as soon as he can eliminate the disease from his herd of cattle, the operation of the farm will show a profit.
10 B.T.A. 97">*102 From a consideration of all the evidence we are of the opinion that during the pear 1923, the petitioner in operating the farm in question was engaged in farming as a business. The mere fact that he sustained losses from year to year and had other business interests does not prove that the farm was not operated as a business venture. See ; ; . Inasmuch as the petitioner was engaged in farming as a business, the loss sustained by him in the operation of the farm was a proper deduction from gross income.
Judgment will be entered on 15 days' notice, under Rule 50.