Court Opinion

ID: 4481733
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:15:03.902935+00
Date Added: 2024-06-11T14:54:00.923325
License: Public Domain

Dawson, J., concurring: Irrespective of whether the expenses relating to the maintenance and operation of petitioner’s fishing and hunting preserve and pleasure resort were “ordinary and necessary,” I think Judge Withey has hit the nail squarely on the head by answering the threshold question: Did petitioner’s nonprofit motivated recreational activities constitute “carrying on any trade or business” within the meaning of section 162(a) ? I agree that the correct answer is “No,” and it is in support of such, conclusion that I make the following comments. In my view it is an absolute requirement under section 162(a) that allegedly deductible expenses be paid or incurred in carrying on a profit-motivated activity. Section 162 allows deduction of ordinary and necessary expenses of carrying on trade or business, in computing taxable income under section 63(a). An expense is not deductible under section 162(a) if it is not incurred in carrying on trade or business. To constitute trade or business within the meaning of section 162(a) an activity must be carried on with a motive to profit, and that motive must be the primary or dominant purpose. The courts, including the United States Supreme Court, have affirmed that principle in a virtually unbroken line of decisions, beginning with the decision in Flint v. Stone Tracy Co., 220 U.S. 107 (1911), under the Corporation Excise Tax Act of 1909. See also Von Baumbach v. Sargent Land Co., 242 U.S. 503, 514 (1917); Brooks v. Commissioner, 274 F.2d 96 (C.A. 9, 1959); Hirsch v. Commissioner, 315 F.2d 731 (C.A. 9, 1963); Teitelbaum v. Commissioner, 346 F.2d 266, 269 (C.A. 7, 1965); Lamont v. Commissioner, 339 F.2d 377, 380 (C.A. 2, 1964); Schley v. Commissioner, 375 F.2d 747 (C.A. 2, 1967); Szmak v. Commissioner, 376 F.2d 154 (C.A. 2, 1967); and Bessenyey v. Commissioner, 379 F.2d 252, 256 (C.A. 2, 1967). In Hirsch v. Commissioner, supra at 736, the Court of Appeals gave this explanation of the profit motive aspect of carrying on a trade or business, together with its linkage to a tax on net income and to section 162(a) : the warp and woof of the definitions of “carrying on any trade or business” as used in Section 23 [the 1939 Code predecessor of Code section 162(a)] and elsewhere in the Act, is that the activity or enterprise claimed to constitute “carrying on a business” be entered into, in good faith, with the dominant hope and intent of realizing a profit, i.e., taxable income therefrom. * * * From the very import of Section 23, which presupposes that the taxpayer has received taxable income before deductions can be taken therefrom, it is clear that Congress intended, that the profit or income motive must first he present in and dominate any taxpayer’s “trade or business” before deductions may be talcen. * * * the basic and dominant intent behind the taxpayer’s activities, out of which the claimed expenses or debts loere incurred, must be ultimately to make a profit or income from those very same activities. * * * Absent that basic and dominant motive, the taxpayer’s activities, no matter how intensive, extensive or expensive, have not been construed by the Courts as carrying on a trade or business within the purview of Section 23. * * * [Emphasis supplied.] See also United States v. Gilmore, 372 U.S. 39, 46 (1963), where the Supreme Court said it is clear that “the only kind of expenses deductible” under section 23(a) (1) (a) (now section 162(a)) are those that “relate to a ‘business,’ that is, profit-seeking, purpose.” This judicial construction of tbe term “business” conforms to the evidence of congressional intent in the formative years of the income tax.1 It is also implicit in the scheme of the Federal income tax.2  It is clear from the facts of this case that the petitioner, in carrying out its purpose “as a fishing and hunting preserve, and as a pleasure resort for the use of its members,” was not engaged in a “business” within the intendment of section 162(a). It is equally clear that petitioner’s practices were intentionally designed to benefit its member-shareholders through the application of petitioner’s lumber business to the recreational purposes of the club. Bather than raise dues for the recreational activity, which petitioner had the authority to do, additional lumber was cut so that the profits accruing therefrom could be applied to reduce the recreational deficits. Unquestionably the lumbering profits were used to benefit petitioner’s members. Cf. Coastal Club, Inc., 43 T.C. 783 (1965), affirmed per curiam 368 F. 2d 231 (C.A. 5, 1966). Whether an activity constitutes the carrying on of a trade or business within the purview of section 162(a) depends upon whether such activity is conducted in good faith with the intention of making a profit. International Trading Co. v. Commissioner, 275 F. 2d 578, 583-584 (C.A. 7, 1960); see also Samuel Yanow, 44 T.C. 444 (1965), affirmed per curiam 358 F. 2d 743 (C.A. 3, 1966). Petitioner would have us define the term “trade or business” not as an activity entered into with the intent of making a profit, which is the law,3 but in the context of whether the corporation is fulfilling its particular corporate purpose. The error in petitioner’s proposition is that it equates the word “purpose” with “business,” and that is wrong. The term “trade or business” is not a variable to be determined in the context of diverse purposes. Such, term must be given a logical meaning, and the law is well established that its meaning is definable in the context of a profit motive. Probably the core of petitioner’s misconception is the failure to recognize that besides being instruments through which individuals conduct their commercial endeavors for profit, corporations are also the mechanisms by which individuals govern themselves, practice their religion, provide their recreation, advance their political views, promote their social beliefs, and many other activities identified with their personal life which are undertaken without motive of profit or gain to those on behalf of whom such activities are conducted. Congress provided in section 501(c)(7) that social clubs should be exempt from income tax only if “operated exclusively for pleasure, recreation, and other nonprofitable purposes.” A club which engages in business and derives income from such activities as making its recreational facilities available to the general public or by selling real estate, timber, or other products is not exempt under section 501 (c) (7). See sec. 1.501(c) (7)-l(b), Income Tax Regs., Aviation Club of Utah, 7 T.C. 377 (1946), affd. 162 F.2d 984 (C.A. 10, 1947). Thus, if we should allow this petitioner to deduct its excess recreation expenses from its lumber profits, it is obvious that the statutory scheme would be nullified and the business income of social clubs could easily escape taxation. Any social club that desired to engage in profit-motivated activities with nonmembers could relinquish any claim of exemption and eliminate any profit derived from nonmember profit-motivated activities by the simple device of spending such profits on nonprofit-motivated activities for the pleasure and benefit of its members. Certainly Congress never intended such a result. ■The congressional intent to distinguish between types of activities for business expense deduction purposes is further reflected in statutory provisions which tax part of certain income of exempt corporations. Sections 511-514 of the Code require tax-exempt charitable and educational organizations, business leagues, etc., to pay tax on their “unrelated business taxable income.” The latter term is defined in section 513(a) as meaning— any trade or business the conduct of which is not substantially related * * * to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption * * * Section 512(a) defines “unrelated business taxable income” as meaning— the gross income derived by any organization from any unrelated trade or business (as defined in section 513) regularly carried on by it, less the deductions allowed by this chapter which are directly connected with the carrying on of such trade or business * * * [Emphasis supplied.] It is apparent that these provisions separate the nonexempt activity from the exempt or nontaxable activity and explicitly limit business expense deductions in respect of the taxable activity to those business expenses which are “directly connected with the carrying on of such trade or business” ('Emphasis supplied.) If the business expense deductions of an exempt organization are limited to the expense it incurs in carrying on its taxable activity, it logically follows that Congress could not have intended a more favorable tax treatment of nonexempt nonprofit corporations engaged in part in business activities and in part in nonprofit-motivated activities. If the law is that a nonexempt organization may deduct the expenses of a nonprofit activity from business income, it follows that nonexemption is decidedly more advantageous than exemption as to those charitable organizations, business leagues, etc., whose expenses in carrying on their exempt activity exceed their income therefrom. JSTonexemption would permit them to pay tax only upon their unexpended income, as contrasted with the net income which is taxable to others. It would give such corporations not only all the deductions and allowances authorized for taxable profit corporations, but also an additional deduction for whatever amounts of taxable income they consume in conducting the personal and mutual functions for which they were organized. I think we have a responsibility to prevent the malfunctioning of section 162(a) in the manner urged by the petitioner in this case. Otherwise the net effect would be to permit the offset of taxable income by consumption at the corporate level for personal functions of the members. As previously stated, the result would be clearly contrary to congressional intent underlying the scheme of the corporation income tax. In my judgment the rationale advocated by respondent herein is legally sound and should be adopted by this Court. Hoyt and Simpson, JJ., agree with this concurring opinion.   Early congressional meaning of tie term “business” is reflected in tie enactments of tie Civil War era, tie 1894 Act and tie 1909 Act. See, e.g., tie House and Senate comments on tie Excise Bill of 1912, wild would lave extended tie Corporation Excise Tax Act of 1909 to tie carrying on of business by individuals. H.R. 21214, 62d Cong., 2d Sess. (1912); 48 Cong. Rec. 9678 et seq. In Flint v. Stone Tracy Co., 220 U.S. 107, which upheld the validity of tie 1909 Act, tie Supreme Court expressed its view of “business” as being “That which occupies time, attention, and labor of men for the purpose of a livelihood or profit.” It is noted that the definition of “business” as set forth in the 1912 Excise Bill with respect to individuals is similar to the Supreme Court’s definition of that term. See also Higgins v. Commissioner, 312 U.S. 212 (1941).    See Everett R. Taylor, T.C. Memo. 1969-186, where this Court recently said: “The sine qua non of a trade or business as described in section, 162 is the existence of a profit motive. * * * the cases are consistent in holding that a profit motive of some description is a prerequisite to the finding of a trade or business.” Of course, the evidence herein is un-controverted that the recreational activity carried with it no profit motive of any description.