Opinion ID: 414389
Heading Depth: 1
Heading Rank: 4

Heading: Review of the Tax Court's Findings

Text: 24 Whether petitioners intended to run the dairy farm for a profit is a question of fact, and as such our review is limited to a determination of whether the tax court was clearly erroneous in determining that petitioners lacked the requisite profit motive. 2 Fed.R.Civ.P. 52(a); Commissioner v. Duberstein, 363 U.S. 278, 80 S.Ct. 1190, 24 L.Ed.2d 1218 (1960); Godfrey v. Commissioner, 335 F.2d 82, 84 (6th Cir.1964), cert. denied, 379 U.S. 966, 85 S.Ct. 660, 13 L.Ed.2d 560. This standard of review applies although the only dispute is over the proper interpretation of uncontested facts. Commissioner v. Duberstein, 363 U.S. at 291, 80 S.Ct. at 1199. It is not enough, then, that we would have reached a different conclusion had the decision been ours to make. Rather, [a] finding is 'clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed. United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 541, 92 L.Ed. 746 (1948). This is one of those rare cases in which we are convinced that a mistake has been made. 25 Our basic disagreement with the tax court stems from our belief that the court improperly evaluated petitioners' actions from the perspective of whether they sincerely believed that they could make a profit from their current level of activity at the farm. On the contrary, petitioners need only prove that their current actions were motivated by the expectation that they would later reap a profit, in this case when they finished renovating the farm and began full-time operations. It is well established that a taxpayer need not expect an immediate profit; the existence of start up losses does not preclude a bona fide profit motive. 26 The presence of losses in the formative years of a business ... is not inconsistent with an intention to achieve a later profitable level of operation, bearing in mind, however, that the goal must be to realize a profit on the entire operation, which presupposes not only future net earnings but also sufficient net earnings to recoup the losses which have meanwhile been sustained in the intervening years. 27 Bessenyey v. Commissioner, 45 T.C. 261, 274 (1965), aff'd, 379 F.2d 252 (2nd Cir.1967), cert. denied 389 U.S. 931, 88 S.Ct. 293, 19 L.Ed.2d 283; see also Benz v. Commissioner, 63 T.C. 375, 384 (1974). The tax court was apparently of the view that petitioners' decision to spread these start-up losses over a period of years before starting full-time operation of the farm was inconsistent with a bona fide intention to make a profit. It is uncontested, however, that substantial time, effort, and money were needed to return the farm to a profitable operation, petitioners' only choice being when they would make this investment. We see no basis for distinguishing petitioners' actions from a situation in which one absorbs larger losses over a shorter period of time by beginning full-time operations immediately. In either situation the taxpayer stands an equal chance of recouping start-up losses. In fact, it seems to us a reasonable decision by petitioners to prepare the farm before becoming dependent upon it for sustenance. Keeping in mind that petitioners were not seeking to supplement their existing incomes with their current work on the farm, but rather were laying the ground work for a contemplated career switch, we will examine the factors relied upon by the tax court. 28 The tax court found that the amount of time petitioners devoted to the farm was inadequate. In reaching this conclusion the court ignored petitioners' agreement with the tenant-farmer under which he would convert 10 acres a year to profitable crops in exchange for the right to farm the land. In this situation the limited amount of time spent by petitioners, who were fully employed in Chicago, is not inconsistent with an expectation of profit. The fact that the taxpayer devotes a limited amount of time to an activity does not necessarily indicate a lack of profit motive where the taxpayer employs competent and qualified persons to carry on such activity. Treas.Reg. Sec. 1.183-2(b)(3). There is no indication in the record that the tenant-farmer was not qualified to convert the land, or that 10 acres a year was an unreasonable amount. In these circumstances the tax court erred in inferring a lack of profit motive from the amount of time personally spent by petitioners on renovating the farm. 29 The court also rested its decision on the lack of a concrete plan to put the farm in operable condition. Once again, this ignores petitioners' agreement with the tenant-farmer concerning reclamation of the land. Under this agreement the majority of the land would be tillable by the time petitioners were prepared to begin full-time farming. The tax court also believed that petitioners' decision to renovate the farm house and orchard prior to obtaining farm equipment evidenced a lack of profit motive. As petitioners planned to live on the farm when they switched careers refurbishing the house would seem to be a necessary first step. The court also failed to consider the uncontradicted testimony regarding repairs made to the hay barn and equipment shed, which supported petitioners' contention that they were interested in operating a farm rather than just living on the land. Additionally, we fail to understand how renovating the orchard, a potential source of food and income, is inconsistent with an expectation of profit. 30 The tax court took into account the history of losses in considering petitioners' intentions. While a history of losses is relevant, in this case little weight should be accorded this factor. Petitioners did not expect to make a profit for a number of years, and it was clear from the condition of the farm that a financial investment would be required before the farm could be profitable. Accordingly, that petitioners lost money, as they expected, does not cast doubt upon the sincerity of their motivation. In this regard, the tax court should have also considered the fact that petitioners were reaping what profit they could through leasing the land to a local farmer. 31 The court believed that most of petitioners' problems were attributable to their lack of expertise. While lack of expertise is relevant, efforts at gaining experience and a willingness to follow expert advice should also be considered. Treas.Reg. 1.183-2(b)(2). The court here failed to consider the uncontradicted evidence that Melvin Nickerson read trade journals and Government-sponsored agricultural newsletters, sought advice from a state horticultural agent regarding renovation of the orchard and gained experience by working on neighboring farms. In addition, petitioners' agreement with the tenant-farmer was entered into on the advice of the area agricultural extension agent. To weigh petitioners' lack of expertise against them without giving consideration to these efforts effectively precludes a bona fide attempt to change careers. We are unwilling to restrict petitioners in this manner and believe that a proper interpretation of these facts supports petitioners' claims. 32 The tax court recognized that the farm was not used for entertainment and lacked any recreational facilities, and that petitioners' efforts at the farm were prodigious, but felt that this was of little importance. While the Commissioner need not prove that petitioners were motivated by goals other than making a profit, we think that more weight should be given to the absence of any alternative explanation for petitioners' actions. As we previously noted the standard set out by the statute is to be applied with the insight gained from a lifetime of experience as well as an understanding of the statutory scheme. Common sense indicates to us that rational people do not perform hard manual labor for no reason, and if the possibility that petitioners performed these labors for pleasure is eliminated the only remaining motivation is profit. The Commissioner has argued that petitioner was motivated by a love of farming that stems from his childhood. We find it difficult to believe that he drove five hours in order to spend his weekends working on a dilapidated farm solely for fun, or that his family derived much pleasure from the experience. Furthermore, there is no support for this contention in the record. At any rate, that petitioner may have chosen farming over some other career because of fond memories of his youth does not preclude a bona fide profit motive. Treas.Reg. Sec. 1.183-2(b)(9). We believe that the absence of any recreational purpose strongly counsels in favor of finding that petitioners' prodigious efforts were directed at making a profit. See Allen v. Commissioner, 72 T.C. 28, 36 (1979); Gregory v. United States, 76-1 U.S. Tax Cas. (CCH) p 9220 (W.D.La.1976). 33 Based upon these facts we conclude that the tax court erred in finding that petitioners had failed to prove a bona fide expectation of profit. We recognize that the scope of our review in this case is limited. In a similar situation the Supreme Court observed that: 34 Decision of the issue presented in these cases must be based ultimately on the application of the factfinding tribunal's experience with the mainsprings of human conduct to the totality of the facts of each case. The nontechnical nature of the statutory standard, the close relationship of it to the data of practical human experience, and the multiplicity of relevant factual elements, with their various combinations, creating the necessity of ascribing the proper force to each, confirms us in our conclusion that primary weight in this area must be given to the conclusions of the trier of fact. 35 Commissioner v. Duberstein, 363 U.S. at 289, 80 S.Ct. at 1198. Nonetheless, when the basic facts are not disputed and the inference drawn from them by the trier of fact is the result of an overly restrictive view of what a party must prove in order to prevail we will not hesitate to exercise our power to reverse. In this case the court erroneously concluded that petitioners were required to prove a bona fide expectation of profit from their current efforts at the farm. We think that it is sufficient that petitioners had a bona fide expectation that their current work would allow them to commence profitable farming in the future, and that the uncontested facts establish that they had this expectation. 36 If this were a case in which wealthy taxpayers were seeking to obtain tax benefits through the creation of paper losses we would hesitate to reverse. Before us today, however, is a family of modest means attempting to prepare for a stable financial future. The amount of time and hard work invested by petitioners belies any claim that allowing these deductions would thwart Congress's primary purpose, that of excluding hobby losses from permissible deductions. Accordingly, we hold that the tax court's finding was clearly erroneous and 37 REVERSE.