*622 NONDEDUCTIBLE LOSSES. - During the taxable years petitioners were members of two partnerships, which were engaged in breeding polo ponies and race horses. On the facts, held that neither of such partnerships was carrying on a trade or business, and the losses sustained were not incurred in transactions entered into for profit, within the purview of section 23, Revenue Act of 1932.
*1114 These are consolidated proceedings for the redetermination of deficiencies in income tax as follows:
| Petitioner | Docket No. | Year | Deficiency |
| W. S. Farish | 81146 | 1932 | $10,759.31 |
| Do | 83296 | 1933 | 2,395.12 |
| Libbie Rice Farish | 81145 | 1932 | 10,759.31 |
| Do | 83295 | 1933 | 2,395.13 |
The issues raised by the pleadings are (1) whether petitioners are entitled to deduct from gross income for 1932 and 1933 their distributive shares of the losses sustained in those years by two partnerships known as Huisache Stables and Farish, Wiess & Evans; (2) whether a certain "group" engaged in the purchase*623 and sale of stock of the Ohio Oil Co. in 1932 is taxable as a corporation or a partnership; (3) whether petitioners are each entitled to deduct a loss of $18,750 on the sale of stock of the Houston Textile Mills in 1932 (this issue was conceded by respondent at the hearing); and (4) the correct amount of deductions allowable to petitioners on account of contributions made by them in the respective taxable years. This last issue depends upon the final redetermination of the net income of petitioners, and will be recomputed under Rule 50. Only issues (1) and (2) require consideration here. The facts were stipulated in part, and in part established by oral testimony.
FINDINGS OF FACT.
During the calendar years 1932 and 1933, and at all times mentioned herein, W. S. Farish, hereinafter referred to as petitioner, and his wife, Libbie Rice Farish, were married and living together as *1115 husband and wife, and were legal residents of the city of Houston, Texas. All of the property, income, and deductions and all of the transactions referred to herein belong to the community in which petitioner and his wife each had an equal interest under the community property laws of the*624 State of Texas.
Huisache Stables partnership. - During the taxable years petitioner and his wife jointly owned a one-half interest in a partnership known as Huisache Stables, which was organized in 1928. Petitioner and his wife, and the partnership mentioned, kept their books and made their income tax returns for the taxable years on a calendar year basis. During the year 1932 the partnership sustained a net loss of $8,736.41, of which the distributive share of petitioner and his wife was $4,368.21. During the year 1933 the partnership sustained a net loss of $7,832.62, of which the distributive share of petitioner and his wife was $3,916.31.
The expenses of operation of Huisache Stables for the years 1929 to 1933, both inclusive, were as follows: 1929, $9,213.19; 1930, $11,699.16; 1931, $8,124.67; 1932, $8,736.41; 1933, $7,832.62. There was no income for any of the years 1929-1933. The book values of the capital assets of the partnership at the end of the taxable years were: 1932, $16,267.75; 1933, $16,494.52.
The petitioner, W. S. Farish, during the taxable years, was engaged in the oil business and as a corporation executive. In 1933 he became chairman of the*625 board of the Standard Oil Co. of New Jersey, and he draws a salary of approximately $112,500 per year. Prior to 1933 he was president of the Humble Oil & Refining Co. at a salary of $60,000 per year. During the years 1932 and 1933, in addition to his salary, petitioner received dividends from securities in the amounts of $137,812.32 and $97,450.30, respectively.
S. P. Farish, petitioner's brother, was engaged in the oil producing and royalty business, as well as a number of other activities, including the manufacture of oil well screens and dealing in tractors. He was president of the Reed Roller Bit Co. at a salary of $20,000 per year. He was also president of the Navarro Oil Co., and an officer of the F. W. C. Royalty Corporation. He devoted about one-third of his time to each of these companies. In addition he was a director of the Circle Oil Co., Union National Bank, and Gulf Tractor & Equipment Co., and was president of the Emsco Screen Pipe Co. In 1933 he received salaries in a total amount of $76,685.33, and dividends on stocks of domestic corporations in the amount of $25,498.41.
S. P. Farish was a polo player, having played a number of years, and was a member*626 of the Huisache team, which had recently won the Houston Elimination Tournament.
*1116 About 1928, or prior thereto, petitioner and his brother conceived the idea of breeding polo ponies by crossing throughbred stallions with mares of Arizona or Texas type. While W. S. Farish was in Europe, he purchased four thoroughbred stallions and some brood mares in England, and at about the same time S. P. Farish gathered together a carload of Arizona Steel Dust mares and a carload of Texas Billy mares. These were taken to a ranch near Uvalde, Texas, about 90 miles southwest of San Antonio and 310 miles from Houston. About October or November, 1934, because of a drought in the Uvalde region, the horses were moved to the Armstrong Ranch in Willis County, Texas, and in 1935 they were shipped to Berclair, Texas, where petitioner and his brother had purchased a ranch consisting of 7,000 acres. This ranch they also stocked with Hereford cattle. In 1929 the Huisache Stables partnership had 82 horses, consisting of 2 stallions, 64 brood mares, 10 geldings, 1 filly, and 5 suckings. In 1930 the partnership had 100 horses; in 1931, 147 horses; in 1932, 171 horses; and in 1933, 175 horses.
*627 The process of breeding polo ponies, until they are broken in for polo playing and ready for sale, requires about eight years. It was expected that approximately 60 percent of the geldings, fillies, yearlings, and sucklings would ultimately develop into polo ponies. The selling prices of polo ponies ranged from about $250 to $1,000, the average price being about $750, although occasionally much higher prices were obtained for outstanding horses.
Up to the time of the hearing no polo horses had been sold from the Huisache Stables, but arrangements were being made to send some 10 to 20 horses east in charge of a polo dealer for purposes of sale.
Petitioner W. S. Farish did not take an active part in the management of the Huisache Stables, but relied principally on his brother to look after this business. He visited the ranch twice in the last two years, and went out to Uvalde several times. Each trip did not consume more than one day.
Partnership of Farish, Wiess & Evans. - During the calendar years 1932 and 1933 petitioner and his wife jointly owned a 45 percent interest in a partnership known as Farish, Wiess & Evans, which was organized in 1932 as successor to*628 a predecessor partnership organized in 1929. Petitioner and his wife and the partnership kept their books and made their tax returns on a calendar year basis. During 1932 this partnership sustained a net loss of $20,742.93, of which the distributive share of petitioner and his wife was $9,334.32. During 1933 the partnership sustained a net loss of $4,061.06, of which the distributive share of petitioner and his wife was $1,827.48.
In the years 1932 and 1933 the partnership of Farish, Wiess & Evans had gross income of $2,025 and $1,085, respectively, and the *1117 expenses amounted to $22,767.93 and $5,146.06, respectively. At the close of the same years the partnership had assets of a book value of $9,940.27 and $8,811.63, and liabilities, including capital accounts, of $49,328.43 and $52,260.85.
This partnership was organized under the following circumstances: In the spring of 1928 petitioner and one Wiess and John W. Evans were in Kentucky, where they met a man named James Headley, who had been a trainer of horses for friends of Evans and of horses in which he was financially interested. Petitioner, Wiess, and Evans purchased two two-year olds, one filly, and one*629 colt, which they put in training at Lexington, Kentucky, with a view to racing them. Later, they took them to Henderson, Kentucky, to their first race meet, and one of them, a filly called Sylphonia, won a purse of $500 or $600. They had purchased this horse for $2,500, and after the race they were offered $7,500 for her. Thereafter, petitioner, Wiess, and Evans entered into negotiations with Headley, as a result of which in February 1929 they purchased a one-half interest in his stable, consisting of twenty-odd horses and stable equipment, for approximately $40,000. This partnership was continued for a couple of years under the name of Paradise Stock Farms. Headley having become involved financially, a division was made of the stock about 1931 and the partnership of Farish, Wiess & Evans continued without Headley. During the years 1932 and 1933 the partnership efforts were directed solely to liquidation of the assets. Petitioner and his wife owned a 45 percent interest in the partnership, Wiess had a 45 percent interest, and Evans had a 10 percent interest.
Ohio Oil Group. - On August 15, 1929, petitioner and his wife entered into a certain group agreement with Jesup*630 & Lamont, brokers of New York City, in which the brokers were designated as group managers. The agreement was for the purpose of purchasing and selling stock of the Ohio Oil Co. It was renewed from time to time and was in effect during the taxable year 1932. Other individuals signed similar agreements with the brokers, which agreements also were in effect during 1932.
The capital loss sustained by the group during 1932 was $194,999.11, of which the proportionate interest of petitioner and his wife was $9,749.95.
The group agreement provided that the parties constituting the group, of which petitioner was one, would participate therein to a total stated commitment, designated in the case of petitioner to be 1,000 shares, and provide a margin of 30 percent in cash or approved securities for the stock purchased by the group managers. The group managers agreed to purchase and sell on margin or otherwise *1118 stock of the Ohio Oil Co. for the account of members of the group at such times and for such price and on such terms as the group managers might deem proper. Each member of the group was responsible to the extent, but only to the extent, of his participation regardless*631 of the payment or nonpayment of the participation of any other member of the group. The group managers were vested with sole discretion and management of the group. The agreement was to continue in force for six months from date, but might be extended by the group managers for not more than six months. Upon termination of the agreement, the group managers were required to distribute all assets among the members according to their respective participations. It was further provided in the agreement that no partnership relation or liability between the group managers and the participants, or between the participants, should arise therefrom.
Contributions. - Petitioner and his wife paid contributions in 1932 of $5,423.50 and in 1933 of $14,611.
OPINION.
HILL: During the taxable years 1932 and 1933 petitioner was a member of two partnerships known as the Huisache Stables and Farish, Wiess & Evans, respectively, each of which sustained a net loss in each of those years. Petitioner contends that he is entitled to deduct his distributive share of such net loss either as ordinary and necessary expenses paid or incurred in carrying on a trade or business, or as losses incurred*632 in a trade or business and not compensated for by insurance or otherwise, or as losses incurred in transactions entered into for profit, though not connected with the trade or business, within the meaning of section 23 of the Revenue Act of 1932.
The amounts of net losses sustained by the partnerships, and the amounts of petitioner's distributive shares, have been stipulated by the parties and set out in our findings of fact above, but respondent disallowed the deductions claimed on the theory that the partnerships represented "pleasure enterprises" and not businesses or transactions entered into for profit.
Many cases involving similar questions have been decided by both the Board and the courts. Among those in which the deductions were allowed as business expenses or losses, petitioner cites: ; ; ; ; ; *633 ; ; *1119 ; .
Respondent cites, among others, the following cases in which the deductions were disallowed: ; affd., ; ; ; affirmed in ; .
The facts and circumstances vary so widely, that any attempt to analyze and discuss in detail the cited decisions would unduly prolong this opinion to no useful purpose. Each case must stand on its own bottom. However, certain general rules are laid down which may be helpful in arriving at a correct conclusion under the facts of the present proceedings.
Unless it can fairly be said from the evidence that the ventures in question constituted trades or businesses carried on by the partnerships, or that the losses resulted from*634 transactions entered into for profit, the deductions claimed by petitioner do not come within the statute. The question involves a matter of intention, which we must determine not alone from petitioner's statement that the enterprises were entered into for profit, but from the surrounding facts and circumstances as well.
It has been held that repeated losses do not necessarily indicate that the enterprise was not conducted as a business, , but where the venture results only in loss year after year without any reasonable prospect of profit, the rule is otherwise. In , the Board, in holding that the stock-breeding and produce farm operated by the petitioner was not a business conducted for profit, said at page 1059:
In the instant proceeding the enterprise was established at least twelve years before the first taxable year, and * * * sustained losses in each year in which it was operated. In such conditions the operating losses must have extinguished the original invested capital before 1918, and, had the farm been operated for business purposes by anyone relying on the receipts*635 therefrom for livelihood or income, it would probably have been sold by the sheriff long before the beginning of the taxable years here in question.
In affirming our decision, the Court of Appeals, after quoting in part the foregoing extract, expressed the opinion that the Board was justified in its conclusion that the farm was operated "not as a business for profit." Applying the same rule in , the court remarked that in ascertaining the intention of the taxpayer it could "see no escape from making the crux of the determination his receipts and expenditures."
The Huisache Stables partnership involved in the present case was organized in 1928 for the purpose of breeding, training, and selling polo ponies. At the end of the taxable year 1933 there had been no *1120 income and the operating expenses then totaled $45,606.05. The capital investment was $16,494.54. Thus at the end of the first five years of operation, the expenses amounted to nearly three times the invested capital.
At the end of 1933 the partnership had 175 horses, including stallions and brood mares. Excluding the latter, about 60 percent of the remainder, *636 or 70 horses, represented prospective polo ponies, or horses that might be developed into polo ponies. The cost of those 70 ponies up to that time was approximately $650 each, to which must be added the cost of maintenance and training over a further period of not less than four years, as well as the expense of shipping to market, sales commissions, possible losses from death, and other items. At the time of the hearing in 1937, no polo ponies had been sold, but it was expected that shortly thereafter some 10 to 20 ponies would be shipped to the eastern market for sale. The average sale price of polo ponies was about $750 each.
We think it is apparent from these facts that if the anticipated percentage of the horses bred and raised by the partnership were successfully developed into polo ponies, unless they could be sold at prices in excess of the average, the partnership would sustain considerable loss. Approximately nine years after the organization of the partnership, during which time it had consistently sustained an operating loss each year, it had only 10 to 20 polo ponies ready for sale. What they were sold for, or whether they were sold at all, we do not know. But*637 certainly no facts are disclosed by the record which persuade us that there was any reasonable basis to anticipate a future realization of profit from the operations of the partnership, commensurate with the capital invested.
The records suggest that petitioner is a man of sound business judgment. During the taxable years he was an executive of large corporations, and had an income from investments and salaries of approximately $200,000 per annum. The probability of realizing a fair profit from the breeding of polo ponies in the circumstances shown was so remote as to negative the notion that the petitioner was induced to enter into the venture with any such expectation. It was entirely outside the scope of his prior business activities. What, then, was his primary motive in becoming a member of the partnership? It is not shown that petitioner played polo or was particularly interested in the game. However, his son and two brothers played polo, and S. P. Farish appears to have been a player of prominence and an enthusiast for the sport. They conceived the idea of breeding a new and perhaps outstanding strain of polo ponies by crossing thoroughbred stallions with common Texas*638 and Arizona mares. The accomplishment of such a result might well have been *1121 considered by petitioner and his brother, S. P. Farish, who was also a man of means, as sufficient compensation even if the venture otherwise produced no monetary gain. We need not decide. Doubtless it was hoped that gain might be realized or at least that the venture would pay its own way, but the facts, in our opinion, do not reasonably support the conclusion that petitioner's primary or actuating motive was the expectation of realizing reasonable profits on his investment in the Huisache Stables partnership.
Much the same general situation existed with respect to the partnership of Farish, Wiess & Evans. The predecessor partnership, known as Paradise Stock Farms, was organized about February 1929, to breed race horses. This partnership had only losses, and during the taxable years was in process of liquidation. Like the Huisache Stables, the venture was foreign to petitioner's usual line of business activities and no facts have been established which reasonably indicate that it was a business carried on for profit or that there was any reasonable expectation of profit. Petitioner devoted*639 only a negligible portion of his time to the affairs of either of the partnerships. His participation appears to have been limited, mainly to the contribution of capital.
Respondent has determined that neither partnership above mentioned was engaged in carrying on a trade or business, and that neither constituted a transaction entered into for profit. Petitioner has the burden of proving by a preponderance of the evidence that such determination is erroneous. This, we think, he has wholly failed to do. Accordingly, on the first issue, respondent's action is approved.
The second issue is whether the "Ohio Oil Group", which was engaged in the purchase and sale of stock of the Ohio Oil Co. in 1932, is taxable as a corporation or a partnership. Petitioner and his wife were members of the group in 1932. The group sustained a capital loss in that year, of which the pro rata share of petitioner and his wife was $9,741.68. This amount was claimed in their return as a capital net loss, and the deduction was disallowed by respondent on the ground that the group was an association taxable as a corporation. The parties have stipulated that if the Board should hold that the group*640 is taxable as a partnership, the claimed deduction is allowable.
The facts in the instant case are in all material respects similar to those in , where we held that the syndicate was not an association taxable as a corporation. That decision is controlling here, and therefore on the second issue respondent's determination is reversed.
Judgment will be entered under Rule 50.