## Facts

- Margit Sigray Bessenyey, a New York taxpayer with substantial independent investment income, claimed deductions for losses from horse-breeding and training operations conducted in Montana and Maryland (1955–1959).
- She purchased Hungarian Half‑Bred brood mares in 1948 and pursued a long-term goal of perpetuating and establishing the breed in the United States.
- The horse activity generated large, recurring losses during 1955–1959; she continued the activity while expressing limited concern for conventional business profitability and deriving personal satisfaction from the project.
- The Commissioner determined deficiencies by disallowing (1) the horse-operation losses and (2) parts of legal expenses claimed in 1959.
- In 1959, she incurred legal fees to obtain the release of property held by the U.S. Office of Alien Property, consisting of (a) a cash bequest plus accrued interest and (b) a residuary legacy.
- She deducted the legal fees under I.R.C. § 212; the Commissioner disallowed the portion tied to the residuary legacy and disputed deductibility more generally.

## Issues

1. Whether the horse-breeding and training activity during 1955–1959 was a trade or business or other activity engaged in for profit, permitting deduction of the claimed losses.
2. Whether legal fees incurred in 1959 to recover (a) a cash bequest plus interest and (b) a residuary legacy were deductible under I.R.C. § 212 as expenses for producing/collecting income or for managing, conserving, or maintaining property held for income production.

## Decision

- The Tax Court held the horse operation was not conducted with an actual and honest profit objective; the losses were not deductible.
- The Tax Court allowed a § 212 deduction for the portion of legal fees allocable to recovering the cash bequest plus accrued interest.
- The Tax Court disallowed the portion of legal fees allocable to recovering the residuary legacy because it was not incurred with respect to property held for the production of income.

## Legal Principles

- Deductibility of losses from an activity depends on whether the taxpayer had an actual and honest objective of making a profit; sustained losses, lack of businesslike practices, personal pleasure, and the taxpayer’s ability to subsidize losses may support a finding of no profit motive.
- In determining profit motive, the court evaluates objective facts (including manner of operation, expertise, time and effort, history of income/losses, expectations of economic return, and financial status), not the taxpayer’s stated intent alone.
- I.R.C. § 212 permits deductions for ordinary and necessary expenses paid for the production or collection of income or for the management, conservation, or maintenance of property held for income production.
- Legal fees are deductible under § 212 only to the extent they are properly allocable to income-production or to income-producing property; fees attributable to acquiring or recovering a capital inheritance interest are not deductible under § 212.

## Conclusion

The Tax Court denied deductions for repeated horse-breeding losses because the activity was primarily driven by non-economic objectives rather than profit, and it permitted a § 212 deduction only for legal fees tied to recovering a cash bequest and accrued interest, not for fees tied to a residuary legacy.


Bessenyey v. Commissioner, 45 T.C. 261 (1965)