*2500 1. Expenses, other than taxes, paid by a trustee in the operation of a farm, a part of a trust estate, in the circumstances of the instant case are not legal deductions from the gross income of the trust estate in the determination of the taxable income thereof, the evidence failing to show that such expenses were ordinary and necessary expenses paid in the carrying on of a trade or business.
2. Taxes so paid by the trustee are allowed as legal deductions under section 214(a)(3) of the Revenue Act of 1921.
*1234 The Commissioner determined a deficiency in income tax of $1,025.77 for the calendar year 1922.
The only issue is whether or not certain expenses incurred and paid by a trustee in the operation of a farm, part of a trust estate, and designated losses, as reported on Form 1040 F, are deductible from gross income of the trust estate.
The case is submitted on the pleadings and certain stipulated facts.
FINDINGS OF FACT.
The petitioner is an Ohio corporation, organized as a bank and trust company, with its principal office at*2501 Cleveland, Ohio, and files its petition in the capacity of trustee under a certain trust agreement dated October 13, 1921.
Contemporaneously with the execution of the agreement under which the Union Trust Co. was appointed trustee, J. H. Wade conveyed to the trustee 2,500 shares of the capital stock of the Union Trust Co., 5,000 shares of the common capital stock of the Cleveland-Cliffs Iron Co., and approximately 500 acres of land, known as the Valley Ridge Farm, situated in Cuyahoga and Geauga Counties, Ohio.
The material portions of the said trust agreement necessary to be here considered, provided, in substance: That the Union Trust Co., the trustee, should have absolute control of the trust estate *1235 and should handle, manage, sell, invest and reinvest, lease for any term permitted by the laws of the State in which the leased property is situated, and deal with the trust estate in such manner and form as to it shall seem wise, all statutory requirements or other limitations as to the investment of trust funds now or hereafter enacted or prescribed, being hereby expressly waived. In the execution of said trust, the trustee was authorized to comply with all legal*2502 requirements as to the execution of all writings, deeds, mortgages, leases or other documents and formalities without the order of any court, and no person purchasing from or otherwise dealing with said trustee should be required to see to the application of any purchase money or other money or property paid or delivered to said trustee.
It was further provided that the trustee should also have the power finally to determine as between persons entitled to income and principal, what is income and what is principal of the trust estate, and to apportion expenses and losses to principal or income as to it should seem equitable.
The trust also provided that from the income derived from said trust estate the trustee should pay all charges and expenses by it deemed necessary for the proper care, management and preservation of the trust estate, including all taxes, assessments, insurance, maintenance, repairs to buildings, equipment and furnishings, and all expenses of operating the Valley Ridge Farm, and including compensation to the trustee for its services, it being agreed that the trustee should receive as compensation 2 1/2 per cent of the gross income from the trust estate. In*2503 addition to said compensation, the trustee was also to recive 1 per cent of the principal of said trust estate upon distribution thereof. The trustee was further authorized to employ such agents and attorneys as it should deem proper, whose reasonable expenses and compensations should be a charge against the income from the trust estate; and in the management of said Valley Ridge Farm, the trustee was authorized to employ a manager or supervisor, who shall have the right to draw on the income account of said trust estate and on the reserve fund provided for in the trust agreement to pay all charges and expenses of the kind authorized in connection with said Valley Ridge Farm.
The trust agreement also provided that the trustee should allow each of said children of J. H. Wade to reside on said Valley Ridge Farm without any charge, but any extra expense arising from such use and occupancy, such as expenses for servants, house-supply bills and other items not chargeable to the regular upkeep accounts should be paid by such occupants. After the death of any of said children, his or her children, if there should be any such surviving, should likewise have the right to reside on the*2504 said property under the same conditions. In the event of any dispute among any of *1236 the children of J. H. Wade, or surviving children of any of said children, as to such occupancy of the Valley Ridge Farm, such occupancy should be allowed at the times and in the manner determined by the trustee.
The trustee was directed to allow to accumulate in a "reserve fund" any net income from said estate together with the net income of said reserve fund with the right to draw on said reserve fund and the net income therefrom for the maintenance of the trust estate in any year in which the income should not be sufficient for such purpose. When such reserve fund, including the accumulations thereon, shall have reached the amount of $40,000, the trustee might in its discretion distribute the net income thereafter arising from said trust estate in equal shares among the children of J. H. Wade, and if any of them should have died, per stirpes among said children and the lineal descendants of the deceased child or children, reserving, however, sufficient subsequently accruing income to make good any withdrawals from said reserve fund so as to restore it to said amount.
The trust*2505 agreement further provided that upon the death of the last survivor of the three children of J. H. Wade, the trust should terminate and should there remain in the trust at that time any real estate, the same should be sold upon such terms and conditions as should seem proper to the trustee. If at that time there should be living three or more beneficiaries, grandchildren or great-grandchildren of J. H. Wade, the entire trust estate should be divided among them in equal shares per capita. If at that time there should be living only one or two beneficiaries who are grandchildren or great-grandchildren of said J. H. Wade, each such beneficiary was to receive one-third of the trust estate, and the remainder of the trust estate was to be divided in equal shares between the trust funds held by the trustee, the Union Trust Co., and should be known as the "Ellen Garretson Wade Memorial Fund" and the "J. H. Wade Purchase Fund of the Cleveland Museum of Art," and the principal and income thereof was to be disposed of in the manner provided for in the trust agreements under which said memorial fund and purchase fund were created. If at the termination of said trust there should not be living*2506 any grandchild or great-grandchild of J. H. Wade, the entire trust estate was to be divided in equal shares between said memorial fund and said purchase fund.
The trust agreement further provided that if the Union Trust Co. should be consolidated with or merged into any other corporation qualified to execute the trust, such consolidated or merged corporation should automatically upon such consolidation or merger become vested with all the rights and powers and subject to all of the duties of said trustee and likewise successively upon any subsequent *1237 merger, the consolidated or merged corporation should become vested with all of the rights and powers and subject to all of the duties of the constituent corporation previously acting as trustee under the trust agreement.
The petitioner, as trustee, reported on Form 1040, for the calendar year 1922, income as follows:
| Interest | $482.03 | |
| Dividends on stock of domestic corporations | 28,600,00 | |
| 29,082.03 | ||
| Deductions: | ||
| Interest paid | $1.35 | |
| Expenses of collecting income | 525.59 | |
| 526.94 | ||
| 28,555.09 | ||
| Less: Loss from business of operating a farm | 39,453.06 | |
| Net loss | 10,897.97 |
Attached*2507 to Form 1040 was Form 1040-F, showing results of farming operations as follows:
| INCOME | |
| Sale of live stock raised or produced on the farm | $1,474.00 |
| Less: Loss on sale of live stock produced | 200.00 |
| 1,474.00 | |
| Sale of vegetables | 1,330.62 |
| Other receipts | 72.00 |
| 2,676.62 | |
| FARM EXPENSES | |
| Hired help | $19,484.60 |
| Feed, hay, etc | 2,866.07 |
| Seed, plants, etc | 754.03 |
| Fertilizer | 247.00 |
| Fuel oil | 660.16 |
| Taxes | 2,139.01 |
| Insurance | 1,360.00 |
| Machinery and tools | 1,009.01 |
| Painting | 7,597.72 |
| Freight | 106.77 |
| Live stock | 387.08 |
| Electric light | 181.50 |
| Fencing | 204.60 |
| Ice | 237.20 |
| Plumbing | 193.75 |
| Miscellaneous expenses | 4,701.18 |
| 42,129.68 | |
| Net loss from farm operations | 39,453.06 |
*1238 The petitioner received and disbursed the amounts above set out from the sources and for the purposes indicated.
The Commissioner, in determining the deficiency for the year in question, disallowed the deduction designated "Net loss from farm operations" in the amount of $39,453.06, on the grounds that the loss resulted from the cost of maintaining the estate intact, and inasmuch as the trust did not constitute a regular business conducted for profit, such loss*2508 could not be allowed.
OPINION.
SEAWELL: The issue is whether claimed deductions, designated losses and representing expenses incurred and paid by the petitioner during the taxable year in the operation of the Valley Ridge Farm, constituted ordinary and necessary expenses in carrying on a trade or business, within the meaning of the Revenue Act of 1921.
Section 214(a) of said Act, provides:
That in computing net income there shall be allowed as deductions:
(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; * * *
* * *
(3) Taxes paid or accrued within the taxable year, except * * *
(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business.
There is no question as to the amount or character of the gross income nor as to the amounts incurred and paid in the operation of the farm and maintenance of the trust estate.
The petitioner alleges that, in its capacity as trustee, it was in the taxable year engaged in carrying*2509 on a trade or business, to wit, the business of operating the Valley Ridge Farm.
The answer of the Commissioner denies this and also denies that the losses sustained in the operation of the farm are deductible from the income or other assets of the trust estate.
It, therefore, becomes material to ascertain whether the trustee was, in fact, operating the Valley Ridge Farm as a business.
The trust agreement specifically requires the trustee to pay "all expenses of operating the Valley Ridge Farm." Ordinarily a farm is a business and when so conducted in reality all the "ordinary and necessary expenses paid or incurred" therefor are deductible from the gross income in computing net income under the statute. Was the Valley Ridge Farm so conducted as a business? The petitioner says it was; the respondent says it was not. The burden of proof is on the petitioner. Rule 30; .
*1239 There is nothing in the terms of the trust agreement indicating that the farm should be operated on a commercial basis, except the fact that the enterprise is called a farm. Neither is there evidence that the farm was operated as a business for*2510 profit. The stipulated facts rather indicate that the 500 acres of land were kept as a country estate, a place of rest and recreation and amusement for the beneficial owners. The fact that, while occupying the premises without rental charge to them, the children of the settlor should, under the terms of the trust, personally pay their own servant hire and house-supply bills, does not change the indicated situation.
In , it was held that unless it was found from the evidence that the farm there in question was operated for "profit," rather than "conducted only for the pleasure of the owner and as a part of the estate of a country gentleman," it should be held that the farm was not conducted as a business. The fact that the owner may receive pleasure from the operation of a farm makes no difference if it is, in fact, operated as a business. The fact that a profit is not realized makes no difference if the operation is on commercial lines and the element of intended profit is present.
In the operation of the Valley Ridge Farm for the taxable year the gross income appears from the stipulation, and our findings of fact in accordance*2511 therewith, to have been the sum of $2,676.62, while the expenditures for the same period amounted to $42,129.68, a net loss of $39,453.06.
It is said that the relation of receipts to expenditures, in an enterprise such as is here in question, may not determine intent, but that such a relationship may be an evidentiary fact to be taken into consideration in arriving at what the intent is, whether to engage in a business or to pursue a pleasure. . See also .
The large unitemized accounts for hired help and miscellaneous expenses arouse a suspicion, at least, of walks and grounds, perennial flowers, lawns, sequestered nooks and sheltered groves about the dwelling provided without rental to the children, and of tennis courts, all kept and dressed by workmen trained for the purpose and under continuous pay. Such expenditures, made for personal or family use and benefit, are expressly not deductible. Section 215(a)(1) and (2), Revenue Act of 1921.
In cases heretofore coming before the Board involving the matter here in controversy, there has usually been offered evidence of*2512 the taxpayer, or others cognizant of the facts, that the enterprise, although showing a loss, has been, in fact, operated with a hope or profit and as a business with that end in view. The petitioner here fails to offer such evidence or to secure a stipulation of facts *1240 from which we can ascertain the real purpose in setting up the farm for operation under the trust. Neither are the large expenditures claimed as deductions from gross income shown to be ordinary and necessary expenses incurred in the operation of the business, even if the farming were conducted as a business.
We, therefore, conclude that the petitioner has not show itself entitled to the deductions claimed, except as to the item for taxes paid by it. By section 214(a)(3), taxes are expressly allowed as a deduction.
Reviewed by the Board.
Judgment will be entered under Rule 50.