Henry P. WHITE and Estate of Nancy A. White, Deceased, T. Leo Sullivan, Administrator, c.t.a., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent

United States Court of Appeals for the Sixth Circuit1955-12-16No. No. 12445

227 F.2d 779

Summary · law.co

Holding. The Tax Court's decision upholding the Commissioner's disallowance of the deductions is affirmed. The laboratory expenses were not deductible because the taxpayer lacked a profit motive, despite the useful nature of the ballistics research.

A taxpayer who operated a ballistics laboratory for seventeen years sought to deduct substantial operating losses on his joint income tax returns for 1948 and 1949. The laboratory had generated only minimal gross income ($700 in 1948 and $2,500 in 1949) while incurring expenses of approximately $19,000 and $21,000 respectively. Although the taxpayer's ballistics research provided valuable services to private industry and the federal government, the Tax Court determined that he lacked a genuine profit motive in operating the facility. The court found that the laboratory had sustained net losses every year since its 1936 inception and that no reasonable evidence suggested it could ever generate sufficient income to cover its costs.

The central issue was whether the laboratory expenses qualified as ordinary and necessary business expenses or deductible losses under federal tax law. The Tax Court's factual findings—that the taxpayer did not operate the laboratory as a genuine business or with intent to profit—were not clearly erroneous. The absence of a legitimate profit motive was the critical distinction that rendered the claimed deductions improper, despite the socially beneficial nature of the work performed.

Summary generated by law.co from the public-domain opinion. The opinion text itself is public domain.

Key issues

Whether laboratory operating expenses qualify as ordinary and necessary business expenses under Internal Revenue Code Section 23
Whether losses from the laboratory are deductible as losses incurred in a transaction entered into for profit
Whether the absence of a profit motive disqualifies otherwise socially beneficial activities from tax deductions

Procedural posture

The petitioners appealed to this court from a Tax Court decision that upheld the Commissioner's disallowance of deductions claimed on joint income tax returns for 1948 and 1949.

Authorities cited

No cited authorities resolved to law.co cases yet.

Opinion · public domain

majority opinion

PER CURIAM.

We are asked by the petitioners to reverse a decision of the Tax Court upholding the Commissioner’s disallowance of certain deductions taken by the petitioner husband (herein called the “taxpayer”), and his since deceased wife in their joint income tax returns for 1948 and 1949. At issue is the question whether expenses incurred in the operation of a ballistics laboratory owned by the taxpayer were ordinary and necessary expenses of a trade or business or losses in a transaction entered into for profit, and thus deductible under Section 23 of the Internal Revenue Code of 1939. The Tax Court held that they were not.

The taxpayer was graduated from Cornell with an engineering degree in 1934. Thereafter for a short period he sold automobiles and later worked in a bank. In 1935 he became the beneficiary of a large inheritance, and in 1936 opened a ballistics laboratory in Cleveland, specializing in guns and ammunition research. Subsequent to the taxable years involved a new laboratory was established in Bel Air, Maryland, at a cost of $300,000.

In 1948 the petitioner reported gross income from the laboratory of about $700 and expenses of about $19,-000. In 1949 gross income of about $2,-500 and expenses of over $21,000 were reported. The Tax Court found that the taxpayer did not operate the laboratory as a business or with the intent of making a profit during these years, and that its expenses were neither ordinary and necessary business expenses nor losses within the meaning of Section 23 of the 1939 Code. These were factual findings which unless clearly erroneous we cannot disturb. United States v. United States Gypsum Co., 1948, 333 U.S. 364, 394, 68 S.Ct. 525, 92 L.Ed. 746.

The evidence showed that the laboratory sustained substantial net losses during every one of the seventeen years from the date of its inception in 1936 to the time of the Tax Court hearing in 1953. More important, there was no evidence of any reasonable possibility of the laboratory’s ever generating gross income sufficient to offset its expenses. In the light of this and the other evidence of record, we think the Tax Court’s findings were not clearly erroneous, and that its resultant decision was correct.

It is true, as the Tax Court took pains to point out, that the taxpayer through this ballistics laboratory performed worthy and useful services for private industry and for the federal government. The essential that was missing, however, was a profit motive on the part of the taxpayer. Thacher v. Lowe, D.C.S.D.N.Y.1922, 288 F. 994; Coffey v. Commissioner of Internal Revenue, 5 Cir., 1944, 141 F.2d 204; Morton v. Commissioner of Internal Revenue, 2 Cir., 1949, 174 F.2d 302, 303; Ewing v. Commissioner of Internal Revenue, 2 Cir., 1954, 213 F.2d 438. It is that which distinguishes this case from those cited by the petitioners, where the taxpayers activities were perhaps less worthy, but where a profit motive could reasonably be found to exist. Commissioner of Internal Revenue v. Widener, 3 Cir., 1929, 33 F.2d 833; Whitney v. Commissioner of Internal Revenue, 3 Cir., 1934, 73 F. 2d 589; Farish v. Commissioner of Internal Revenue, 5 Cir., 1939, 103 F.2d 63.

The decision of the Tax Court is affirmed.

. “§ 23. Deductions from gross income. In computing net income there shall be allowed as deductions: (a) [as amended by Sec. 121, Revenue Act of 1942, c. 619, 56 Stat. 798] Expenses. — (1) Trade or business expenses.— * * * (e) Losses by Individuals. — In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise — (1) if incurred in trade or business; or (2) if incurred in any transaction entered into for profit, though not connected with the trade or business; or * * 26 U. S.C., 1952 ed., § 23.