Albright v. United States, 13784.

• Decision Date: 10 March 1949
• Docket Number: No. 13784.,13784.
• Citation: 173 F.2d 339
• Parties: ALBRIGHT v. UNITED STATES.
• Court: U.S. Court of Appeals — Eighth Circuit

173 F.2d 339 (1949)

ALBRIGHT v. UNITED STATES.

No. 13784.

United States Court of Appeals Eighth Circuit.

March 10, 1949.

Dennis D. Daly, of St. Paul, Minn., and Allan E. Finseth, of Kenyon, Minn., for appellant.

Theron Lamar Caudle, Asst. Atty. Gen., George A. Stinson, Ellis N. Slack, Lee A. Jackson, and Sumner M. Redstone, Sp. Assts. to Atty. Gen., and S. Walter Shine, Atty. Department of Justice, of Washington, D. C., and John W. Graff, U. S. Atty., of St. Paul, Minn., for appellee.

Before GARDNER, Chief Judge, and WOODROUGH and RIDDICK, Circuit Judges.

RIDDICK, Circuit Judge.

The question on this appeal is whether profits realized from sales of livestock from a dairy herd maintained for the production and sale of dairy products and from sales of a breeding herd maintained for the production and sale of livestock constitute ordinary income or are to be treated as capital gains under section 117(j) (1) of the Internal Revenue Code, 26 U.S.C.A., § 117.¹

The taxpayer is a farmer whose principal income is derived from the sale of dairy products and hogs.

In his dairy operations the taxpayer maintains a herd of 36 dairy cattle, of which an average of 18 to 20 head are producers of milk which the taxpayer sells to local creameries. Calves which are not needed for the maintenance of the dairy herd at the desired number are sold on the market. Dairy cows which by reason of age, injury, or disease are unfit for maintenance in the dairy herd, or which because of decreased milk production are economically less desirable than available young stock, are sold and replaced by young stock raised by the farmer.

In 1945 the taxpayer received $141.83 from the sale of calves, $3,986.39 from the sale of dairy products, and $482.99 from the sale of dairy cows. All of the cows sold in 1945 had been held by the taxpayer in his dairy herd for more than four years.

In 1946 the taxpayer received $101.45 from the sale of calves, $4,421.38 from the sale of dairy products, and $1,152.44 from the sale of eight cows and two heifers removed from the dairy herd. The heifers had been maintained in the dairy herd for more than two years and the cows for longer periods.

In his hog-raising business the taxpayer regularly maintained a breeding herd of ten sows and one boar. Each year, as soon as they are marketable after the breeding season, the taxpayer sells his breeding herd, replacing it with an equal number of young sows raised by him and with another boar purchased from a neighboring farmer. The evidence is that this is the usual and customary practice in the hog-raising industry. The hogs raised, with the exception of the ten sows retained for breeding purposes, are sold on the market.

In 1945 the taxpayer received from the sale of hogs raised for market $2,500.23, and from the sale of his breeding herd $660.44. In 1946 the taxpayer received from the sale of hogs raised for market $2,142.80, and from the sale of his breeding herd $671.80. In each year the animals in the breeding herd had been held for more than six months, the majority for one year or more before sale.

In his income tax returns for the years 1945 and 1946 the taxpayer in computing his net income included his receipts from the sale of dairy products and calves and from the sale of hogs raised for and sold on the market. He treated the amounts received from the sale of cows removed from the dairy herd and from the sale of his breeding herd of swine as capital gains, and included only 50 per cent of these amounts in his computation of net income. The Commissioner ruled that the sales from the dairy and breeding herds were productive of ordinary income and, as such, includible in full in the taxpayer's income for the years mentioned. He determined deficiencies in taxpayer's income tax for each year, which taxpayer paid and brought this action to recover. This appeal is from the judgment of the District Court in favor of the United States.

Section 117(j), so far as material in the present action, provides that the recognized gains and losses from the sale or exchange of property used in the trade or business of the taxpayer, held for more than six months, which is of a character subject to the allowance for depreciation provided in section 23(l), is not of a kind properly includible in the inventory of the taxpayer if on hand at the close of the taxable year, and is not held by the taxpayer primarily for sale to customers in the ordinary course of trade or business, shall be treated as gains and losses from the sale or exchange of capital assets held for more than six months if the aggregate of such gain exceeds the aggregate of such losses. See Sections 29.117-1 and 29.117-7 (as amended by T.D. 5394, 1944 Cum.Bull. 274, 276), Treasury Regulations 111.

Section 117(b) of the Internal Revenue Code provides that in the case of a taxpayer, other than a corporation, only 50 per cent of the gain or loss recognized upon the sale or exchange of a capital asset, held for more than six months, shall be taken into account in computing net capital gain, net capital loss, and net income.

In order for the taxpayer to come within the provisions of section 117(j) permitting him to treat the sales from his dairy and breeding herds as sales of capital assets, the burden is upon him to show: (1) that the animals sold were used in his trade or business; (2) were subject to allowance for depreciation; (3) were held for more than six months; (4) were not property of the kind includible in the inventory of the taxpayer if on hand at the close of the taxable year; and (5) that the animals were not held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. In the brief filed on behalf of the Government it is admitted that the taxpayer has established the first four of these requirements. The Government's contentions in support of the ruling of the Commissioner are: (1) that taxpayer has not established by the necessary proof that the animals sold from the dairy and breeding herds were not held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, and (2) that the sales in question were not such as to come within the terms of section 117(j) under the interpretation of that section by the Income Tax Unit of the Internal Revenue Bureau. These two separate contentions are in reality but one since the facts in this case are undisputed, and on the facts established by the evidence the Bureau has ruled that profits from sales of the kind shown by the evidence in this case are not to be treated as capital gains within the meaning of section 117(j).

The first ruling relied on by the Government is I.T. 3666, 1944 Cum.Bull. 270, issued in response to a request for advice relative to the application of section 117(j) to gains and losses from the sale or exchange of livestock acquired or raised and retained for draft, breeding, or dairy purposes. That part of I.T. 3666 pertinent to the question here is:

"* * * it is held that any livestock used for draft, breeding, or dairy purposes, irrespective of whether such livestock was raised or otherwise acquired, is property used in the trade or business, of a character which is subject to the allowance for depreciation, within the meaning of section 117(j) of the Internal Revenue Code, provided it is held for more than six months. This is equally true whether the farmer keeps his books and files his returns upon the cash receipts and disbursements basis or upon the accrual basis.

"The sale of animals culled from the breeding herd as feeder or slaughter animals in the regular course of business is not to be treated as the sale of a capital asset."

The second ruling relied on by the Government is I.T. 3712, 1945 Cum.Bull. 176, issued to explain and amplify I.T. 3666. The phrase "culled from the breeding herd" is defined as:

"the normal selection for sale of those animals which, due to injury, age, disease, or for any other reason (other than that of changing the breed or the quality of the offspring) are no longer desired by the livestock raiser for breeding purposes, and also the normal selection for sale of animals for the purpose of maintaining the herd at a regular size. The primary factor is normal practice in the case of the particular taxpayer involved."

The third or special ruling relied on by the Government is contained in a letter of the Commissioner dated August 4, 1947 (1948 C.C.H., para. 6091), in response to an inquiry from a member of the Senate. The letter is a further explanation and amplification of I.T. 3666 and I.T. 3712. The Commissioner states that representatives from the Commissioner's Office, the Chief Counsel's Office, and from the Treasury Department were called before the Ways and Means Committee of the House of Representatives to discuss the question of capital gain on the sale of cattle, particularly sales from a dairy herd. The Ways and Means Committee was advised by these representatives that the Bureau would adhere to its position taken in I.T. 3666 and I.T. 3712 concerning the sale of "culls" as ordinary income, but that the Bureau conceded that the determination of what should be classed as "culls" is difficult and depends upon the peculiar facts in each case. The Commissioner defined "culls" as follows:

"`Culls' not only represent animals sold because they had passed their state of economic usefulness or were undesirable for other purposes but also represent animals regularly sold from the breeding or dairy herd in order to keep the herd at a desirable size."

Referring to previous rulings of the Bureau, the Commissioner says:

"In I.T. 3712 it is stated that since in many cases it will be found impractical to determine accurately the number of animals sold from the herd which would be subject to section 117(j), the following prima facie test is provided for the guidance of livestock raisers: If the number of animals sold...