Temple v. Commissioner

WALTER P. TEMPLE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Temple v. Commissioner Docket No. 12018. United States Board of Tax Appeals 10 B.T.A. 1238; 1928 BTA LEXIS 3925; March 8, 1928, Promulgated *3925 1. Loss. - The facts in this proceeding establish that petitioner was engaged in the business of ranching and farming for profit. Held, that the loss sustained in 1921, in the operation of his ranch, is a deductible loss. 2. BONUS. - Held that the amount of the bonus paid by petitioner as additional compensation to his bookkeeper in 1921, is a proper deduction from gross income. A. Calder Mackay, Esq., and George M. Thompson, C.P.A., for the petitioner. A. H. Fast, Esq., for the respondent. TRUSSELL *1239 This proceeding results from the Commissioner's determination of a deficiency in petitioner's income tax for the calendar year 1921, in the amount of $39,821.49. The amount of the deficiency in controversy is $6,953.90. Petitioner alleges that the Commissioner erred: (1) in disallowing a deduction of $9,017.04, representing a loss sustained in 1921 from the operation of petitioner's farm, and (2) in disallowing a deduction of $295, representing an alleged bonus paid in 1921 to petitioner's bookkeeper. At the hearing on this proceeding, petitioner waived his allegation of error with reference to automobile expenses. *3926 FINDINGS OF FACT. Petitioner is an individual residing at Alhambra, Calif., in which State he has been engaged in the business of farming and ranching for many years. Immediately after acquiring an education, petitioner engaged in the business of farming on the old ancestral home place, the Temple homestead, which was located about three miles south of El Monte, Calif. He operated that farm until it was sold in 1912, at which time he purchased a 58-acre farm across the river from the Temple homestead. Petitioner derived his livelihood from the operation of that 58-acre farm until 1917, when he entered into a lease with the Standard Oil Co., for the purpose of drilling for oil, which was found in paying quantities. In 1917 petitioner purchased at a bargain price the Workman homestead, consisting of 93 acres of land, together with the residence and buildings, located at Puente, Calif. The Workman homestead was leased by some Japanese at the time petitioner purchased it and he did not gain actual physical possession of the property until 1919, but he purchased the place for the purpose of continuing his occupation and business of farming. In 1919 petitioner cleaned up*3927 the land, tore down some of the old buildings, repaired the roads, overhauled the pumping plant located at the creek on the property, started taking out old walnut trees that had become blighted, and had a survey made for the installment of new irrigation pipe lines. Nothing could be grown on the land without irrigation. In the spring of 1920 petitioner planted about 60 acres in walnut trees, but at that time he contracted the flu and was not able to direct the work of planting. In the spring of 1921 all those trees had to be replaced, and, during the same year, he took out 20 acres of old trees of a mixed variety and replaced them with the best stock *1240 he could buy. In 1921 petitioner had 80 acres of land planted in walnut trees 50 feet apart. All the space between the trees was cultivated and during 1921 petitioner planted beans for the purpose of marketing them at a profit. Petitioner did not move to the ranch to live permanently until 1923, but he went there every day to oversee the work of his hired help and he also engaged in the farming and ranching work himself. Since about July, 1923, petitioner has lived on his Puente ranch and has engaged in the business*3928 of growing walnut trees and each year has grown crops of either beans, corn, tomatoes, pumpkins or squash, for sale on the market. The walnut trees require about 15 years' growth before they come into full bearing, which will approximate from one half to one ton of walnuts per acre. The present market price for walnuts is about $500 per ton. Petitioner employed Milton Kauffman to look after his oil and other business interests and he has given practically his entire time to ranching and farming. He has made his home at the ranch and in recent years has constructed a large home and other buildings on the place so as to provide all the modern comforts of life for himself and his family. Due to the inadequacy of the irrigation system he constructed a large reservoir on the highest spot on the ranch and now has an ample water supply for all purposes. Petitioner's children go swimming in the reservoir, which was built and used for irrigation purposes. Petitioner also remodeled an old building which is now used as a gymnasium and recreation hall and he constructed a mausoleum for the burial of his ancestors. It has been a family custom for many generations to maintain a family*3929 burial place. In 1921 only a few old walnut trees were bearing and petitioner's bean crop was a failure due to the extra dry season and the drying up of the creek upon which petitioner depended for his water supply during that year. Petitioner sustained a net loss of $10,239.83 from the operation of his ranch during 1921, which amount he deducted on his 1921 income-tax return. Of that amount the Commissioner allowed the deduction from gross income of $1,222.79, representing taxes and interest, and he disallowed the deduction of the amount of $9,017.04, claiming that petitioner was a gentleman farmer, that the Workman homestead was acquired for sentimental reasons, and that petitioner did not engage in farming and ranching for profit. The amount of $9,017.04 did not include the cost of any improvements, but merely the expenses of operating the ranch and farm. Elmer A. Potter has been in the employ of petitioner for several years, and during 1921 he was engaged as petitioner's bookkeeper. During that year petitioner paid Potter a bonus of $295 as compensation *1241 in addition to his regular salary. Instead of paying in cash, petitioner actually expended that amount*3930 in purchasing clothes for Potter. The amount of $295 was charged to the bonus account on petitioner's books and Potter included that amount as income in his personal income-tax return. The Commissioner disallowed the deduction of $295 from petitioner's gross income, claiming that the said amount was paid for merchandise which was presented as a gift. OPINION. TRUSSELL: The facts establish that petitioner has been engaged in farming and ranching practically all of his life and that he purchased the Workman homestead for the purpose of farming and ranching for a profit. We think that it is immaterial that petitioner had other profitable business interests and has been able in recent years to build upon his ranch a large home, etc., which seems to be the basis of the Commissioner's denial of the deduction of the loss as recommended by the revenue agent's report made in 1925. Petitioner planted 80 acres of walnut trees for the purpose of marketing the crop at a profit, and each year he cultivated between the rows of trees, planted 50 feet apart, for the purpose of marketing the crop of vegetables which he raised. Petitioner was engaged in the business of ranching and farming*3931 for profit and he is entitled to the deduction of the amount of $9,017.04, loss sustained in 1921, in the operation of that business, under section 214 of the Revenue Act of 1921. During 1921, petitioner paid his bookkeeper a bonus as additional compensation for services rendered. Section 214(a)(1) of the Revenue Act of 1921 provides for a deduction from gross income of salaries "or other compensation for personal services actually rendered." There is no provision requiring such compensation to be paid in cash. In the instant case petitioner paid the bonus as additional compensation in the amount of $295, by purchasing his employee clothes at an actual cost of $295, and that amount was charged to the bonus account on petitioner's books. We are of the opinion that petitioner should be allowed a deduction in the amount of $295 from gross income for the year 1921. Judgment will be entered upon 20 days' notice, pursuant to Rule 50.