*41 Decision will be entered for the respondent.
Partnership loss claimed by petitioner held, on the facts, not to have been incurred in a business or transaction entered into for profit and hence not deductible under section 165, I.R.C. 1954.
*13 Respondent has determined a deficiency in petitioner's income tax for the calendar year 1954 in the amount of $ 6,000.10. The issue remaining for decision is whether a loss sustained by petitioner may be deducted as a business loss under section 165 of the Internal Revenue Code of 1954.
FINDINGS OF FACT
The stipulated*42 facts are hereby found accordingly.
Petitioners, Valentine Howell (hereinafter referred to as petitioner) and his wife, Loretta B. Howell, reside at 156 Wyoming Avenue, Maplewood, N.J. They filed a timely joint Federal income tax return for the year 1954 with the district director of internal revenue, Newark, N.J.
On April 23, 1951, petitioner entered into a written partnership agreement with Miriam Howell Warren, who was petitioner's second cousin and sister-in-law (hereinafter referred to as Miriam), under which a theatrical agency was formed. As of the time of the agreement, Miriam had been in the literary and talent agent business for 19 years. A literary and talent agent acts as business and personal representative for playwrights, novelists, actors, directors, and others in the entertainment world. The agent introduces authors, actors, and directors to possible producers and publishers, negotiates contract terms, and handles other business for his clients. The agent usually receives 10 percent of his client's earnings. In a few instances, particularly in the case of actors, he receives 5 percent.
In 1951 petitioner was executive vice president of Prudential Insurance Co. *43 At that time, Prudential, through its president, was planning to decentralize its operations throughout the United States. The plan was to establish six regional home offices which would handle administrative functions and matters affecting company policy. Petitioner was opposed to the proposed change in Prudential's method of doing business.
In April 1951, Paul Small Artists Ltd., Inc. (hereinafter referred to as Small), the agency employing Miriam, was moving from *14 New York City to California. Miriam was not willing or able to move with the agency. She contemplated forming her own agency and, after turning down some proposals, discussed it with petitioner, who knew of her ability and past experience, as well as the clients she represented.
In 1951 petitioner was in an income tax bracket of over 80 percent, and he was aware of the tax implications of the agreement and that he was playing with 20-cent dollars. He was an actuary, well acquainted with future probabilities.
Under the terms of the partnership agreement, the partnership was named "The Miriam Howell Agency" (hereinafter referred to as Agency); Miriam was designated the "Managing General Partner" and petitioner*44 the "Dormant and Silent General Partner." Miriam assigned to the partnership all her rights and interest in and to the Agency representation of 27 writers and 11 actors. It was agreed that:
4. The partnership term shall commence on the date of this agreement and continue until dissolved by operation of law or by the will of either of the parties hereto.
5. The partnership shall be carried on and shall be managed solely by [Miriam]. * * * [Petitioner] shall take no active part in the management or conduct of the partnership business * * *. Notwithstanding that the party of the second part shall be the dormant and silent general partner, he shall nonetheless have all the rights and obligations of a general partner, including the right to share the profits and the obligation to bear the losses of the firm * * *.
* * * *
7. The Dormant and Silent General Partner agrees to reimburse the partnership at the end of every calendar year of the term thereof for all disbursements of whatever kind over the gross receipts of the partnership, except such sums contributed by such Dormant and Silent General Partner under the provisions of paragraphs 8 and 9 hereof. To illustrate: If at the end*45 of the calendar year of 1951 all the partnership disbursements amount to the sum of $ 30,000.00, and the gross receipts as defined in this paragraph 7 aggregate the sum of $ 15,000.00, the Dormant and Silent General Partner shall at the end of such calendar year 1951 reimburse the partnership for the sum of $ 15,000.00, representing the difference between such total expenditures and such gross receipts of the partnership.
8. The Dormant and Silent General Partner, upon demand by the Managing General Partner, agrees to contribute to the partnership [$ 25,000]. * * * Such sum shall be contributed in such amounts and at such times as the Managing General Partner in her sole discretion shall determine to be required for the safe and profitable operation of the partnership and for the establishment of a suitable reserve fund for future contingencies. * * *
Petitioner paid $ 14,000 to Small for its rights and interest as agency representative of the author and principal performers of the play, "The Moon is Blue." Miriam, while associated with Small, had represented the author in the sale of the play and the principals in *15 obtaining their parts in the play. Small agreed in a separate*46 contract:
We hereby agree to and do hereby assign, transfer and convey absolutely and unconditionally to [petitioner] any and all rights and interest of our company in and to the agency representation of the * * * author and artists * * * in respect to their performance in and relationship to the play entitled The Moon is Blue. We also agree to and do hereby assign, transfer and convey absolutely and unconditionally to [petitioner] all our rights and interest of whatsoever kind and nature (inclusive of any and all commissions and/or participations in any and all proceeds and revenues) in and to such play entitled The Moon is Blue * * *. In consideration of such assignment by us, it is agreed that we shall be paid by [petitioner] the sum of Fourteen Thousand and no/100 ($ 14,000.00) Dollars upon the execution of this agreement. * * * Any and all commissions arising in connection with, or in anywise payable in respect to, The Moon is Blue, shall be paid directly to [petitioner] at 156 Wyoming Avenue, Maplewood, New Jersey; we shall have no right to retain any of such commissions. * * *
With respect to the sums received by petitioner by reason of the assignment of the Small contract, *47 it was agreed:
9. The Dormant and Silent General Partner further agrees to contribute any sums received by him, up to the extent of the sum of $ 14,000.00 by reason of the assignment to him by [Small] of all rights, title and interest on the part of [Small] to receive commissions in respect to the earnings, compensation and income of certain individuals * * *. In respect to such further contributions, however, it is understood and agreed that this agreement is made subject to the interests accruing to [Miriam and petitioner] by reason of sums advanced by them and included as part of the consideration for the execution of such assignments. Any and all proceeds in excess of such sum of $ 14,000.00 which may be received by the Dormant and Silent Partner under such assignment * * * shall constitute income or gross receipts for all purposes * * * of this partnership agreement.
The compensation of the partners and the division of profits was provided for in the partnership agreement as follows:
10. The salary and special compensation which the Managing General Partner shall receive for her services to the partnership shall be in addition to her interest in the net profits as provided *48 in paragraph 11 hereof. The total amount of the aforementioned salary and special compensation shall be the sum of $ 250.00 weekly, plus 25% of the gross receipts derived by the partnership from the conduct of its business.
11. (A) The profits accruing from the partnership business, after deducting therefrom all expenditures and outlays attending the conduct and management of the business, shall be divided as follows:
(1) Fifty (50%) percent to the Managing General Partner;
(2) Fifty (50%) percent to the Dormant and Silent General Partner.
(B) Any losses suffered or incurred in the conduct of the business of the partnership shall be borne solely by the Dormant and Silent General Partner.
The dissolution or termination of the partnership was provided for in the partnership agreement as follows:
16. The dissolution of the partnership shall be governed by the Uniform Partnership Law. Upon such dissolution an account shall be taken as soon *16 as practicable of all property, assets and liabilities of the firm, and the same shall be sold and the proceeds distributed as provided in section 71 of the Uniform Partnership Law, and the partners, or their representatives, shall execute*49 all necessary instruments for the winding up of the partnership affairs.
17. In the event of the termination of the partnership or the dissolution thereof, the firm name of The Miriam Howell Agency, together with the good will, if any, therein, shall not be considered as a partnership asset and the Managing General Partner shall have the right, following such termination or dissolution of the partnership, to use such firm name in connection with the pursuit of her own individual enterprise without liability to the Dormant and Silent General Partner for any payment in connection with her aforementioned right to use such firm name, as in this paragraph 17 provided.
Miriam managed and directed the Agency from its formation in April 1951 to its termination in 1959. As dormant and silent general partner, petitioner took no active part in the operation of the partnership. The two would have lunch together at monthly or longer intervals and discuss general partnership problems.
During the years 1951 to 1959, inclusive, the partnership's gross receipts, expenses exclusive of Miriam's compensation, partnership profit or loss prior to compensation of Miriam, compensation paid to Miriam, and*50 partnership loss deducted by petitioner on his joint income tax return were as follows:
| Expenses | Profit or | Partnership | |||
| Partnership | exclusive of | loss prior to | Compensation | loss | |
| Year | gross | Miriam's | Miriam's | paid | deducted |
| receipts | compensation | compensation | to Miriam | by petitioner | |
| on | |||||
| his return | |||||
| 1951 | $ 6,866 | $ 10,121 | ($ 3,255) | $ 9,931 | ($ 13,186) |
| 1952 | 29,833 | 17,780 | 12,053 | 20,635 | (8,582) |
| 1953 | 31,968 | 26,541 | 5,427 | 20,992 | (15,565) |
| 1954 | 59,177 | 40,549 | 18,628 | 27,598 | (8,970) |
| 1955 | 72,785 | 52,414 | 20,371 | 29,986 | (9,615) |
| 1956 | 61,399 | 54,614 | 6,785 | 22,813 | (16,028) |
| 1957 | 40,160 | 43,367 | (3,207) | 21,466 | (24,673) |
| 1958 | 44,743 | 31,314 | 13,429 | 23,440 | (10,011) |
| 1959 | 26,053 | 20,928 | 5,125 | 12,541 | (7,416) |
| Total | 372,984 | 297,628 | 75,356 | 189,402 | (114,046) |
During the existence of the Agency, it represented several actors, authors, and playwrights whose plays were successfully produced. Some authors represented failed to duplicate earlier successes; young talent agents and employees failed to produce sufficient income to justify the additional expense of their employment; and two major clients died while*51 the partnership was in business.
On April 1, 1954, the partnership agreement dated April 23, 1951, was amended to eliminate from the compensation of Miriam 25 percent of the gross receipts derived from the efforts of two other employees of the partnership. The two other employees were to receive the 25 percent of the gross receipts on the business they produced. *17 On November 1, 1956, the partnership agreement of April 23, 1951, as amended on April 1, 1954, was further amended to reduce the compensation of Miriam to 12 1/2 percent of the gross receipts after the amount of compensation at the rate of 25 percent of gross receipts reached $ 7,000 in any 1 year. Petitioner did not think that Miriam's salary should be reduced, because she contributed both the ability and the active work of the Agency and because the partnership could not have obtained any other person to perform her services for a lesser amount. Small, Miriam's employer prior to the formation of the Agency, had guaranteed her $ 200 a week. She had a part ranging from 25 to 50 percent of the business she obtained. Subsequent to the termination of the Agency, Miriam's compensation as a literary and talent agent*52 was more than she had received during the existence of the Agency. It consisted of a salary of $ 26,000 a year and a participation of 10 percent in all commissions on business for which she was responsible when those commissions exceeded $ 40,000 a year.
Since the termination of the partnership, petitioner has received some deferred payments resulting from such sources as subsidiary rights on plays, foreign productions, stock and amateur productions, and television.
Under the terms of the partnership agreement, petitioner sustained a loss from the operation of the Agency during 1954 of $ 8,970.15, which amount was deducted on petitioner's joint Federal income tax return as his distributive share of the net operating loss sustained by the partnership in that year. In his deficiency notice respondent determined that the amount claimed as a loss "is not allowable inasmuch as it has not been shown that Valentine Howell entered into and carried on such partnership for the purpose of making a profit."
Petitioner's primary motive and intent was to assist Miriam. Petitioner hoped that the partnership would become self-sustaining and that some profit might result. Petitioner was not engaged*53 in the partnership as a business for profit in 1954, and the transaction he entered into in participating in the partnership was not a transaction entered into for profit. The loss sustained by petitioner in that year is not deductible under section 165 of the Internal Revenue Code of 1954.
OPINION
It may ordinarily be reasonable to assume that businessmen do not undertake a commercial venture except for the purpose of making a profit. In such a situation, although they may exercise bad judgment so that the prospects of a profitable operation are negligible or even absent, that alone would be an inadequate *18 criterion for determining the taxpayer's purpose. Samuel Riker, Jr., Executor, 6 B.T.A. 890">6 B.T.A. 890 (1927); James Otis, 7 B.T.A. 882 (1927). The mere fact that a person invests his time or money, or both, may, without more, tend to show that it was his purpose to succeed even though a more detached judgment might indicate the likelihood of failure. We should not then substitute an objective conclusion of our own or try to determine what the "prudent" business decision should have been. Edwin S. George, 22 B.T.A. 189 (1931).*54
But on this record we cannot say that this principle should apply. "Whether the amounts presently in controversy are claimed as 'losses' or as ordinary and necessary business expenses, the existence of a profit motive on the part of petitioner is requisite." Henry P. White, 23 T.C. 90">23 T.C. 90 (1954), affd. 227 F. 2d 779 (C.A. 6, 1955), certiorari denied 351 U.S. 939">351 U.S. 939. Petitioner was in the 80-percent income tax bracket and any loss to him, if deductible in full, would be comparatively slight. On the other hand, the beneficiary of his enterprise was a relative and, presumably, a friend. And the excessive generosity of the terms of the agreement of partnership with this relative was such that it would, on analysis, require an incorrigible optimist to assume that any profit could flow to petitioner.
Disregarding the first year of operation, which may not be a reasonable test, and looking at the second and third years, both of which were available to petitioner as a measure of the prospects for the year before us, the second year would have required gross receipts of almost $ 87,000 before petitioner could *55 hope to receive a single penny. 1*56 They were actually less than $ 30,000. The third year was even worse, for there the expenses, excluding the fixed compensation of petitioner's partner but considering the 25 percent of gross receipts to which she was entitled in addition to her fixed compensation, were 108 percent of total gross receipts. These would have had to reach infinity before there could be any return to petitioner. Perhaps the clearest approximation of the prospects is to average the 2 years. On this approach gross receipts of over $ 380,000 have been needed to allow anything for petitioner. 2 The record is completely *19 devoid of any evidence from which we can even infer that an agency with a single top executive could, under any circumstances, and over no matter how long a period, achieve any comparable gross receipts figures.
*57 When to this it is added that petitioner was an experienced businessman, well acquainted with probabilities, and that he contributed a capital investment 3 of at least $ 25,000 in addition to assuming all the losses, it is impossible for us to reach the conclusion that petitioner had any significant purpose to engage in a profitable transaction. The benefit to his relative, as compared to his potential detriment if the partnership developed unprofitably, is so great that its existence seems to us sufficient to provide a motive for petitioner's action which has no reference to the expectation, hope, or purpose of operating a business or securing a profit. What we said in Lucia Chase Ewing, 20 T.C. 216">20 T.C. 216, 228 (1953), affd. 213 F. 2d 438 (C.A. 2, 1954), seems equally applicable here:
The petitioner's primary motive or intent in advancing funds to The Ballet Theatre, Inc. * * * was to aid in the production of the ballet as an art in America. The petitioner hoped that the ballet would become financially self-sustaining as well as an artistic success and that some profit might result from the production. The petitioner's primary*58 motive or intent in advancing these funds during the years in question was not the earning of profits for herself, and the transactions she entered into in making the advances were not transactions entered into for profit.
Petitioner points out that his relative was not a "dependent" and he was not thereby relieved of any otherwise existing obligation of support. But the purpose to benefit her might well exist regardless of any legal obligation. There is also evidence that her earnings, both before and after the partnership, were greater than those she received while it existed. But there is nothing in the record from which we can conclude that there was any acceptable alternative open to her at the time the partnership was formed or during the year before us which would have approached*59 the financial benefit which she achieved at that time through the partnership.
We have accordingly found as an ultimate fact that, similarly to Ewing, petitioner had no real purpose to operate a profitable business *20 or enter into a transaction for profit. This disposes of the issue, which is essentially factual. McLean v. Commissioner, 285 F. 2d 756 (C.A. 4, 1961), affirming a Memorandum Opinion of this Court; Morton v. Commissioner, 174 F. 2d 302 (C.A. 2, 1949), affirming a Memorandum Opinion of this Court, certiorari denied 338 U.S. 828">338 U.S. 828.
Decision will be entered for the respondent.
Footnotes
1. This figure is based on a computation derived from the partnership agreement. Expenses exclusive of Miriam's compensation were 60 percent of partnership gross receipts. Miriam was to receive 25 percent of the gross receipts. Thus, in order for petitioner to receive anything, the partnership would have to earn an amount of which 15 percent (100 percent less 85 percent) is more than $ 13,000, Miriam's fixed salary.↩
2. We have refrained from employing as a criterion the whole history of the enterprise as set forth in our findings. This has, however, been held to be permissible in determining the reasonableness of any expectations even though the experience itself was not currently available. "There is, however, substantial importance in the reasonable expectations entertained on that date. Subsequent events may serve to establish both that the expectations were entertained and also that such expectations were reasonable and intelligent. Our consideration of them has been confined to this purpose." James Couzens, 11 B.T.A. 1040">11 B.T.A. 1040, 1165 (1928). See also Louise Cheney, 22 B.T.A. 672↩ (1931). If we were to refer to those figures, an even more certain conclusion would result. Excluding the initial year, 4 of the 8 years of the partnership show expenses prior to Miriam's compensation of more than 75 percent, so that petitioner could have received nothing. In 3 of the 4 remaining years the expenses prior to Miriam's compensation were about 70 percent, so that, including her fixed salary, the partnership would have needed gross receipts of about $ 250,000 before petitioner could receive anything. For the entire 8 years, expenses, together with Miriam's percentage of gross receipts, were about 100 percent of earnings, so that even before Miriam's fixed compensation and certainly after it there were no profits to which petitioner could look. In the meantime, of course, the excess of expenses, including Miriam's compensation, was proceeding consistently and petitioner was making good the deficits.
3. Respondent contends that the $ 14,000 paid by petitioner for the Small contract was to be in addition to the $ 25,000. We find it unnecessary to pass upon this disagreement of the parties as to the effect of the Small contract payment.↩