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corporationregulationrespondent

respondent

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Dunn v. Commissioner of Internal Revenue, 70 T.C. 715

Facts

Herbert and Georgia Dunn engaged in harness horse racing and breeding activities, with Herbert reporting losses from these activities over several years. Despite his interest in horses since 1940, the court found that Herbert did not have a bona fide expectation of profit from his racing activities. Georgia, on the other hand, redeemed her shares in Bresee Chevrolet, Inc. under an agreement that provided for a 12-year payout, which was subject to restrictions imposed by General Motors. After the redemption, Georgia did not retain any interest in the corporation.

Herbert has been interested in horses since at least 1940… In 1970 and 1971, petitioners spent the winter in Florida.

Issue

1) Whether Herbert Dunn was engaged in the trade or business of harness horse racing and breeding, and 2) whether the redemption of Georgia Dunn's stock in Bresee Chevrolet, Inc. constituted a complete termination of her interest in the corporation.

The question before us is whether Herbert's harness horse racing and breeding activities constitute a trade or business, as petitioners contend, or an activity not engaged in for profit, as respondent contends.

Rule

An activity not engaged in for profit under section 183 is defined as any activity other than one with respect to which deductions are allowable for the taxable year under section 162. For stock redemption under section 302, a shareholder is entitled to exchange treatment if all the stock owned by that shareholder is redeemed and they have no interest in the corporation other than as a creditor.

Section 183(d) provides that, if for any 2 of 7 consecutive taxable years… the activity shall be presumed to be engaged in for profit unless the Commissioner establishes to the contrary.

Analysis

The court analyzed Herbert's activities and found that he did not have a bona fide expectation of profit, as evidenced by his consistent losses and lack of significant racing activity. The court also considered the factors outlined in the regulations regarding whether an activity is engaged in for profit. In contrast, Georgia's stock redemption was deemed a bona fide severance of her interest in the corporation, as she did not retain any prohibited interest after the redemption.

Analysis of these factors convinces us that Herbert had no bona fide expectation of profit… However, on the facts of the record herein, we are convinced that Herbert's activities were not potentially profitable.

Conclusion

The court concluded that Herbert's harness horse racing and breeding activities were not engaged in for profit, while Georgia's stock redemption was entitled to capital gain treatment under section 302.

Accordingly, Georgia is entitled to capital gain treatment with respect to the proceeds of the redemption.

Who won?

The prevailing party on the first issue was the respondent, as the court found that Herbert's activities were not engaged in for profit. The prevailing party on the second issue was the petitioners, as the court ruled that Georgia's stock redemption allowed for capital gain treatment.

The court ruled in favor of the respondents on the first issue and the petitioners on the second.

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Related Cases

Koshland v. Helvering, 298 U.S. 441, 56 S.Ct. 767, 80 L.Ed. 1268, 105 A.L.R. 756, 36-1 USTC P 9294, 17 A.F.T.R. 1213, 1936-1 C.B. 219

Fin Hay Realty Co. v. U.S., 398 F.2d 694, 22 A.F.T.R.2d 5004, 68-2 USTC P 9438

Estate of Kamborian v. C.I.R., 469 F.2d 219, 30 A.F.T.R.2d 72-5744, 72-2 USTC P 9747

McDonald’s Restaurants of Illinois, Inc. v. C. I. R., 688 F.2d 520, 50 A.F.T.R.2d 82-5750, 82-2 USTC P 9581

Jackson v. Commissioner of Correction, 227 Conn. 124, 629 A.2d 413