Staley and Freedman, Circuit Judges, and Cohen, District Judge.
The taxpayer*fn1 challenges the decision of the Tax Court sustaining the Commissioner's determination of income tax deficiencies totalling $177,452.44 which resulted from the disallowance of losses incurred in the years 1955 through 1959 in the breeding, training and exhibition of English Setter dogs and the breeding, training and racing of horses. The Tax Court in effect held that these activities of the taxpayer did not constitute a trade or business under § 165(c)(1) or transactions entered into for profit under § 165(c)(2) of the Internal Revenue Code of 1954,*fn2 but were hobbies. The losses were held to be personal expenses under § 262,*fn3 and therefore not deductible.*fn4
The Tax Court found these undisputed facts:
The taxpayer has been engaged in the manufacture, bottling and promotion of a soft drink popularly known as "7-Up" in the Philadelphia-New Jersey area since the 1930's. His initiative and skill has promoted the soft drink into a highly successful product. In the years involved -- 1955 through 1959 -- he was the president of three and a partner in four "7-Up" bottling companies. He was also an active director in an advertising agency which dealt with the "7-Up" product, and was an officer and director in a realty company and in an apartment building venture. His salaries, director's fees and partnership distributions from the "7-Up" bottling companies during the years involved were large*fn5 and his director's and management fees from the advertising agency, the realty company and the apartment house were substantial.*fn6
The taxpayer had owned and been interested in English Setter dogs since childhood. He considered the English Setter a beautiful, intelligent and "noble" animal and feared that the breed was declining in popularity as a sporting dog. He therefore determined sometime in 1934 that he would preserve and enhance the English Setter. This, in his own words, was the primary reason for his undertaking to breed them. While he was engaged in the breeding and selling of dogs, sometime in 1945 he decided to raise cattle for money-making purposes. He continued in this for about three years, but abandoned the enterprise because it was not profitable. In 1955 he realized that his dog breeding activities were likely to continue unprofitable and decided to enter the thoroughbred horse breeding and racing fields which he thought would yield large profits. At the time he had no familiarity with the sport, but he thought he would put to use in horse breeding and racing the knowledge he had acquired in his breeding and racing of dogs. During the years involved he owned twenty-five or thirty horses which were trained for racing by a public trainer. In 1960 he obtained a full-time trainer. In 1957 or 1958 he purchased property in New Jersey where he established his home and apparently his stables and kennels as well.
During the years involved the taxpayer kept no detailed books and records of the income and expenses relating to his dog and horse activities, and commingled the income from these sources with his general personal income in a single bank account from which he also paid out all expenses. At the end of each taxable year an accountant, who was the controller of the "7-Up" bottling companies, made up worksheets of the income and expenses of the taxpayer's dog and horse activities taken from the taxpayer's bank statements and checkbooks. On the basis of these worksheets, which lumped together the dog and horse activities, a certified public accountant prepared the taxpayer's federal income tax returns. This record keeping was in marked contrast to the careful and detailed records kept by the "7-Up" bottling companies in which the taxpayer was interested, each of which had its separate bank account and detailed records of income, expenses, inventories, etc.
Beginning in 1943 to and including the years in issue the taxpayer claimed losses from cattle, dog and horse operations in generally increasing magnitude.*fn7 Until 1960 these activities showed no profit. There were small profits in 1960 and 1963 and large losses in 1961 and 1962.
The Tax Court found that the taxpayer's dog and horse operations were not carried on for profit but as personal hobbies and therefore disallowed the losses during the years involved. It is this conclusion which the taxpayer attacks as clearly erroneous.
The scope of our review of the Tax Court's decision is limited. Commissioner of Internal Revenue v. Duberstein, 363 U.S. 278, 80 S. Ct. 1190, 4 L. Ed. 2d 1218 (1960), has established that not only the findings of fact but equally all the inferences the Tax Court draws from these findings are binding unless shown to be clearly erroneous. The principle which formerly had much vitality that a reviewing court is just as competent as the trial tribunal to determine what inferences should be drawn from the findings of fact no longer applies.
The Tax Court based its ultimate finding that the taxpayer's dog operation was not carried on for profit but as a personal hobby on his long-standing interest in English Setters, his admission that it was for this reason that he initially undertook their breeding, which he continued despite uninterrupted substantial losses, and on his informal accounting methods. We have carefully reviewed the record and cannot say that the Tax Court's conclusion was clearly erroneous.
The decision regarding the horse operation, however, is not free from clear error. Absent here, of course, was the important element which motivated him to undertake the breeding and exhibition of dogs, -- his childhood love of English Setters. Despite this difference, the Tax Court relied on the reasoning which it followed in regard to the taxpayer's dog operation with the added findings that the taxpayer had failed to cull his unprofitable horses and had received no winnings from racing. The two findings regarding culling and race winnings are clearly erroneous.
1. The Tax Court found that the taxpayer made no attempt to "cull" or dispose of unprofitable horses during the years involved. It considered this failure to be "inconsistent with the existence of a profit motive." This was a significant item in the Tax Court's ultimate decision. An examination of the record shows, however, that there is evidence, apparently not called to the Tax Court's attention, which makes it clear that the taxpayer did engage in culling. His income tax returns for the years in issue disclose that he sold ten horses at cost or less, which clearly indicates that he was reducing his losses by selling unprofitable horses. The Tax Court's finding that there was no culling of horses during the years involved must therefore be set aside.
2. The Tax Court found that during the years involved the taxpayer received no income from horse race winnings. The taxpayer calls attention, however, to track certificates in the record which show various winnings by his horses. He also urges that race winnings must be inferred from the record, because it is represented by the difference between his gross income and his income from the sale of horses. This we need not determine; it is a matter which the Tax Court may ...