Smith v. Commissioner

Smith (plaintiff) was a business executive earning a comfortable salary who bought a country farm in 1933. Despite multiple efforts to make the farm profitable, Smith reported continuous losses every year for over a decade. Smith increased the land cultivated and used as pasture, rented the farm, employed an experienced farmer, improved the soil, and used diversified farming methods. He spent most weekends working on the farm, talked to his employee about farm operations most weekdays, and expended plenty of money repairing the buildings and buying equipment. Smith always considered the farm separate from his home, kept the capital and operating expenses separate, and did not use the farm for recreation as it did not have those facilities. Smith’s family consumed only about 10 percent of the food produced and sold the rest to butchers, grocers, and a packing company. The farm produced a variety of products but only a few suitable for home consumption, and it produced much more of those than Smith’s family could eat. Smith claimed the farm as a business operated for profit and deducted the operating expenses on his tax returns. The tax commissioner disallowed the deductions, claiming Smith did not operate the farm for profit but for recreational purposes or a hobby. In support, the commissioner showed the farm experienced continuous losses and argued Smith bought it primarily to have a country estate for his home and grow food for home consumption.