*67 Decision will be entered for the respondent.
A ballistics laboratory, owned by petitioner, and operated consistently at a loss held, on facts, not a business carried on for profit and the excess of expenditures over income not deductible as either a loss or business expense under section 23, Internal Revenue Code of 1939.
*91 Respondent determined deficiencies in income taxes of petitioners for the calendar years 1948 and 1949 in the amounts of $ 1,088.51 and $ 10,014.28, respectively. Petitioners, in addition to resisting the deficiency determinations, claim that, if they prevail, there has been an overpayment of income taxes for the calendar year 1948, due to certain conceded arithmetical errors.
The question presented*68 is whether petitioners were entitled to deduct under section 23 expenditures claimed to be ordinary and necessary expenses of a trade or business.
FINDINGS OF FACT.
Petitioners, Henry P. White and Nancy A. White, husband and wife, filed joint income tax returns for the calendar years 1948 and 1949 with the collector of internal revenue for the eighteenth district of Ohio.
On March 19, 1951, petitioners filed with respondent a claim for a refund of $ 7,671.05 for the year ended December 31, 1948.
Petitioner Henry P. White, hereinafter sometimes called petitioner, was graduated from Cornell University in 1934 with a degree in engineering and was licensed as a mechanical engineer by the States of Ohio and Maryland. He sold automobiles for the remainder of 1934 and was employed by the Central National Bank of Cleveland in 1935. He also became the sole beneficiary in 1935 under a trust of approximately $ 2,000,000.
In 1936, petitioner opened a ballistics laboratory in Cleveland, Ohio, specializing in guns and ammunition research, and in such work employed the services of subordinates. Until petitioner went into the armed service this laboratory had continued to function under his direct*69 supervision. During petitioner's absence, his first assistant operated the laboratory. When petitioner returned from the service, he again took over direction and management of the laboratory and it has continued to function under his supervision through the years in question. This research laboratory is now located at Bel Air, Maryland, in proximity to Army and Navy proving grounds.
Operation of the laboratory included the preparation and publication in 1948 of a book entitled "Centerfire Metric Pistol and Revolver Cartridges," and research preparatory to the publication in 1950 of a second book entitled "Centerfire American and British Pistol and Revolver Cartridges," but income realized from sales of the first book during the years in controversy did not exceed $ 500. No attempt was made in the years in issue to segregate those expenditures properly attributable to producing the copyrighted publications and laboratory research library data, although it appears that most of the endeavors *92 of petitioner and his associates were connected with the named activities.
During the years involved, approximately one-half of petitioner's time was devoted to the preservation and*70 conservation of his estate. His secretary expended all of her time upon petitioner's personal affairs. The general manager of the laboratory spent half of his time on the personal affairs of petitioner. An arbitrary method of allocating the latter's salary according to the time spent on petitioner's personal affairs and the laboratory endeavors was used.
Petitioners' joint income tax returns for 1948 and 1949 reported the following income and expense items in the operation of the ballistics laboratory resulting in net losses which were disallowed by respondent:
| 1948 | |||
| Income | $ 730.10 | ||
| Expenses: | |||
| Payroll | $ 15,462.53 | ||
| Office supplies | 1,900.49 | ||
| Shop and laboratory supplies | 1,376.96 | ||
| Advertising | 1,976.61 | ||
| Social security | 133.38 | ||
| Unemployment compensation | 66.70 | ||
| Workmen's compensation | 73.01 | ||
| Personal property tax | 618.64 | ||
| Insurance (1/3) | 181.62 | ||
| Telephone | 458.94 | ||
| Burglar alarm | 447.30 | ||
| Utilities | 680.79 | ||
| Cleaning | 81.82 | ||
| Repairs | 137.07 | ||
| Post office box rent | 6.00 | ||
| Auto expense | 288.72 | ||
| Police commissions | 42.00 | ||
| Miscellaneous | 242.51 | ||
| Legal | 35.00 | ||
| Surety bonds | 53.00 | ||
| Depreciation | 2,039.71 | ||
| $ 26,302.80 | |||
| Less: Administration of investments | 6,947.88 | 19,354.92 | |
| Net loss | $ 18,624.82 | ||
| 1949 | |||
| Income | $ 2,502.26 | ||
| Expenses: | |||
| Payroll | $ 19,104.61 | ||
| Shop and laboratory supplies | 851.51 | ||
| Office supplies | 1,846.03 | ||
| Advertising | 1,668.50 | ||
| Payroll taxes | 254.42 | ||
| Workmen's compensation | $ 95.55 | ||
| Fire insurance (1/3) | 202.65 | ||
| Other insurance | 124.50 | ||
| Burglar alarm | 453.60 | ||
| Telephone | 477.51 | ||
| Light, power, and water | 774.09 | ||
| Cleaning | 107.01 | ||
| Post office box rent | 6.00 | ||
| Auto expense | 297.32 | ||
| Repairs | 256.67 | ||
| Miscellaneous | 208.23 | ||
| Police commissions | 43.40 | ||
| Depreciation | 2,342.06 | ||
| $ 29,113.66 | |||
| Less: Administration of investments | 8,090.38 | $ 21,023.28 | |
| Net loss | $ 18,521.02 |
*71 *93 Of the $ 730.10 income received from the operation of the ballistics laboratory in the year 1948, $ 625 was acquired in fees for writing articles for the National Rifle Association.
The ballistics laboratory was of some service and benefit to a limited number of persons and organizations, but it was not capable of producing income in sufficient amount to offset the usual expenses. Petitioner has never made a profit from the operation of the ballistics laboratory; it has incurred losses in every one of the 17 years from its inception in 1936 to the time of trial in 1953. For example, petitioners' joint income tax return for the calendar year 1951 revealed that they suffered a $ 33,369 loss.
Subsequent to the taxable years in question petitioner made a capital investment of $ 300,000 for the construction of a new ballistics laboratory in Maryland. In determining whether his new enterprise would be profitable petitioner has figured no amount for interest on this capital investment, nor has he figured any amount for the value of his own services for the years 1953 and 1954. Petitioner had no real expectation of any net income for years subsequent to those in issue.
Petitioner*72 did not operate the ballistics laboratory as a business or with the intent of making a profit during the taxable years 1948 and 1949.
The expenditures claimed were neither ordinary and necessary expenses of carrying on a trade or business nor losses within the meaning of section 23, Internal Revenue Code of 1939.
OPINION.
Whether the amounts presently in controversy are claimed as "losses" or as ordinary and necessary business expenses, the *94 existence of a profit motive on the part of petitioner is requisite. 1 The principle which we are now required to apply has been aptly stated by Judge Learned Hand sitting as a District Judge in Thacher v. Lowe, (S. D., N. Y.) 288 F. 994">288 F. 994, 995:
It does seem to me that if a man does not expect to make any gain or profit * * * it cannot be said to be a business for profit, and while I should be the last to say that the making of a profit was not in itself a pleasure, I hope I should also be one of those to agree there were other pleasures than making a profit. * * * it does make a difference whether the occupation which gives him pleasure can honestly be said to be carried on for profit. Unless you*73 can find that element it is not within the statute, * * *
Nor do we think it necessary that "pleasure" be equated with idleness or that financial return is the indispensable equivalent of public benefit. The gratification derived from an occupation worth doing, possibly beneficial to others and probably requiring long hours of arduous labor, must still not be confused with an intention to return a profit. We find no evidence here that petitioner did, or could in good faith, have had such an intention during the years in dispute.
Petitioner's independent*74 wealth, the long history of losses, 2 and the entire disproportion of receipts to expenditures 3 may not singly and individually be conclusive. But when considered together and coupled with the necessity of overcoming the burden of proof imposed upon petitioner, they lead us to the conclusion that as of the tax years before us, anyone of his intelligence, education, and ability, with knowledge of the facts, could not in good faith reasonably have expected or intended to operate his ballistics laboratory profitably.
*75 Such statements as the following from petitioners' brief are thus wide of the mark: "We * * * know the value of research and the many benefits that result from it." It may readily be granted that petitioner's work has been useful and perhaps unique; that he has rendered service not only to industrial producers but to local and even Federal Government.
But when over a period of some 12 years the expenses of operation always exceeded the financial return, when in the period here involved the proportion of cost to income averaged in the neighborhood of 12 *95 to 1, when we know from the record that even in a subsequent year there was not only no profit but even an increased loss, it strains the credulity to conclude that the purpose of these activities was to earn money as contrasted with performing a public service.
Paraphrasing Louise Cheney, 22 B. T. A. 672, 674, petitioner's intention was not to run a business or make a profit but to obtain the personal gratification of fulfilling a recognized need. Petitioner is to be commended for the devotion of his time and effort in a worthwhile endeavor. But this does not supply the missing element of profit*76 motive.
This disposition renders unnecessary any consideration of respondent's alternative contention that the expenses must, in any event, be disallowed because to some undisclosed extent they resulted in the acquisition of capital assets.
Decision will be entered for the respondent.
Footnotes
1. "* * * An occupation or employment will not be excluded from the classification of business merely because it actually results in loss instead of profit; but it is essential that livelihood or profit be at least one of the purposes for which the employment is pursued, * * *." Deering v. Blair, (C. A., D. C. Cir.) 23 F.2d 975">23 F. 2d 975, 976. See also Chaloner v. Helvering, (C. A., D. C. Cir.) 69 F. 2d 571, 572↩.
2. "* * * It would be specious to say that a vain hope that on some remote day a profit may result is enough to give the operation * * * the character of trade or business. It is far different from saying, as the Board and the courts have in other cases, that the fact of a loss does not deprive a business enterprise of its character as a business. * * *." Louise Cheney, 22 B. T. A. 672, 674↩.
3. "* * * But if the gross receipts from an enterprise are practically negligible in comparison with expenditures over a long period of time it may be a compelling inference that the taxpayer's real motives were those of personal pleasure as distinct from a business venture, * * *." Cecil v. Commissioner, (C. A. 4) 100 F. 2d 896, 899↩.