## Facts

- Smith, a salaried business executive, purchased a country farm in 1933 and undertook substantial efforts to develop it as a commercial farming operation.
- He expanded cultivated and pasture land, improved soil, used diversified farming methods, and made repairs and equipment purchases.
- Smith employed an experienced farmer and remained actively involved, working most weekends and conferring frequently about operations during weekdays.
- The farm produced agricultural goods; Smith’s family consumed about 10% of the output and sold the remainder to commercial buyers (including butchers, grocers, and a packing company).
- Smith treated the farm as separate from his home, keeping farm capital and operating expenses separate and not using the property for recreation.
- The farm generated net losses in 1942 and 1943, which Smith deducted on his income tax returns.
- The Commissioner disallowed the deductions, asserting the farm was a personal hobby or “country estate,” and determined a deficiency in Smith’s 1943 income and victory tax.
- Smith petitioned the Tax Court for redetermination of the deficiency.

## Issues

1. Whether Smith’s farming activity was a trade or business (or activity engaged in for profit) permitting deduction of 1942 and 1943 net farm losses, or a personal hobby making the losses nondeductible.

## Decision

- The Tax Court held that Smith operated the farm as a business for profit.
- The court allowed the deductions for the 1942 and 1943 net farm losses.
- The deficiency was reduced to the extent it was based on disallowance of the farm-loss deductions.

## Legal Principles

- Deductibility of losses from an activity turns on whether the taxpayer had a bona fide profit objective, determined from the objective facts and the taxpayer’s dominant motive.
- A history of continuing losses is relevant but not conclusive; losses alone do not establish that an activity is a hobby.
- Businesslike conduct (e.g., hiring experienced help, improving operations, investing capital, maintaining separate accounts, and marketing products) supports a finding of profit motive.
- Minimal personal or recreational use and market-oriented disposition of output support characterization of the activity as profit-seeking rather than personal.
- The taxpayer bears the burden to show the deficiency determination is incorrect; credible evidence of commercial intent and operation may satisfy that burden.

## Conclusion

The Tax Court concluded that Smith’s farm was operated with a genuine intent to make a profit, and therefore recurring losses did not bar deduction where the operation was conducted in a commercial, businesslike manner with limited personal use.


Smith v. Commissioner, 9 T.C. 1150 (1947)