Gamble v. Comm'r of Internal Revenue

• Decision Date: 30 August 1977
• Docket Number: Docket No. 1617—76.
• Parties: LAUNCE E. GAMBLE AND JOAN L. GAMBLE, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

68 T.C. 800

LAUNCE E. GAMBLE AND JOAN L. GAMBLE, PETITIONERS
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 1617—76.

United States Tax Court

Filed August 30, 1977.

Among his other business and investment interest, T was engaged in the business of racing thoroughbred horses. He purchased a pregnant broodmare for use in that business. The colt that was thereafter born had considerable promise as a racehorse in view of its bloodlines. T intended to exploit the colt either by selling it, racing it (after training which ordinarily does not begin until about 18 months after birth), or in some other manner. His intention to sell did not predominate over his other possible objectives. When the colt was about 16 months old, and had neither been trained nor in fact raced, T made a highly profitable sale of it at an auction. Held, the colt was not held by T ‘primarily’ for sale to customers in the ordinary course of his business. Malat v. Riddell, 383 U.S. 569. Held, further, the gain realized was entitled to capital gain treatment pursuant to sec. 1231(a), I.R.C. 1954. Held, further, basis of the colt determined.

[68 T.C. 800]

Alice Welt Cunningham and Jerry H. Robinson, for the petitioners.

James H. Ross, Jr., for the respondent.

RAUM, Judge:

The Commissioner determined a deficiency of $62,256.60 in petitioners' 1971 income tax. At issue are first, whether petitioners realized ordinary income or capital gain from the sale of a yearling colt, and second, the proper cost basis of the colt.

FINDINGS OF FACT

The parties have filed a stipulation of facts and a supplemental stipulation of facts, both of which, together with the exhibits attached thereto, are incorporated herein by this reference.

Petitioners Launce E. Gamble and Joan L. Gamble, husband and wife, timely filed a joint Federal income tax

[68 T.C. 801]

return for 1971. At the time they filed their petition herein they resided in San Francisco, Calif. Launce E. Gamble will sometimes hereinafter be referred to as petitioner.

Mr. Gamble's principal occupation consists of seeking out investment opportunities and managing his assets. He owns stocks, bonds, real estate, farming interests, mining interests, oil and gas operations, and cattle ranches. From 1964 through 1974, in addition to the interests described above, he was also engaged in the business of racing thoroughbred horses. During that period, he acquired full or partial ownership of a total of 13 horses for business or investment purposes.¹ However, because from time to time he sold certain of the horses which he owned (and also because one of his horses died), he never owned—in whole or in part—more than five horses at any one time.

Mr. Gamble entered the thoroughbred racing business on February 1, 1964, when for $10,000 he purchased Tasty, a broodmare then pregnant with a foal sired by the stud Seaneen. Tasty was considered to have been placed in service in Mr. Gamble's business immediately upon her purchase, and she was held for use in his business until she was sold on November 1, 1966. Mr. Gamble received net proceeds of $6,522.58 from her sale.

He purchased his first interest in a stud when on October 17, 1964, he bought a 1/32d interest in New Policy. He sold this interest shortly afterwards, on March 19, 1965, for a net selling price of $6,500.

While owned by Mr. Gamble, Tasty gave birth to three foals, including the one she had been carrying when she was purchased. Relevant information concerning these foals appears in the following table:

+---------------------------------------------------+
                ¦ ¦ ¦ ¦ ¦ ¦Net ¦
                +------+------+---------+------+----------+---------¦
                ¦ ¦ ¦Date of ¦Date ¦Age when ¦selling ¦
                +------+------+---------+------+----------+---------¦
                ¦Name ¦Type ¦birth ¦sold ¦sold ¦price ¦
                +------+------+---------+------+----------+---------¦
                ¦ ¦ ¦ ¦ ¦ ¦ ¦
                +---------------------------------------------------+
                

Tasty/Seaneen
                (Tasty Charger) Colt 3/31/64 10/22/65 18 months, $2,937
                

 22 days
                

Tasty/Noor
                (Love Potion) Filly 3/13/65 7/17/66 16 months, 3,494
                

 4 days
                

Tasty/Pleiades 2d
                (Miss Pleiades) Filly 2/7/66 7/16/67 17 months, 4,074
                

 9 days
                

[68 T.C. 802]

The record does not reveal whether any of Tasty's foals was ever trained for racing while owned by Mr. Gamble. However, as a general rule, the training of a horse for racing does not begin until 18 months after birth. And, as appears from the preceding table, each of the three foals was sold when it was approximately 18 months of age or slightly younger. Moreover, the record does establish that none of these foals was actually raced while it was owned by Mr. Gamble. Notwithstanding this apparent lack of direct involvement of these horses in actual racing, the parties have stipulated that each of Tasty's foals is ‘properly characterized as having been used in the Petitioner's * * * business.’

Each of these three foals was sold at a ‘secondary’ California yearling sale. None of them was considered to be of a high enough quality to have been accepted either at one of the two premier national thoroughbred sales (i.e., Keeneland and Saratoga), or even at the ‘select’ California sale.

The record does not disclose the manner in which Mr. Gamble computed for Federal income tax purposes his gain from the sale of any of these foals. It does reveal, however, that in 1967 he reported $4,074 as long-term capital gain from the sale of a thoroughbred filly identified as ‘Tasty's Yearling,‘ which was apparently Tasty/Pleiades 2d (Miss Pleiades).

On the basis of his experience with Tasty's three foals, Mr. Gamble determined that Tasty would not produce successful race horses, so he decided to replace her with a broodmare of higher quality. Thus, at the same sale at which Tasty was sold, he purchased a new broodmare, named ‘Pie Queen,‘ for use in his business. When purchased, Pie Queen was carrying a foal sired by My Host.

While owned by Mr. Gamble, Pie Queen gave birth only to the foal she had been carrying at the time of her purchase. She died on February 1, 1969, in the process of giving birth to

[68 T.C. 803]

her next expected foal. Relevant information concerning the Pie Queen/My Host foal appears below:

+---------------------------------------------------+
                ¦ ¦ ¦ ¦ ¦ ¦Net ¦
                +------+------+---------+------+----------+---------¦
                ¦ ¦ ¦Date of ¦Date ¦Age when ¦selling ¦
                +------+------+---------+------+----------+---------¦
                ¦Name ¦Type ¦birth ¦sold ¦sold ¦price ¦
                +------+------+---------+------+----------+---------¦
                ¦ ¦ ¦ ¦ ¦ ¦ ¦
                +---------------------------------------------------+
                

Pie Queen/
                My Host
                (Bellemente) Filly 3/12/67 8/18/68 17 months, $23,744.50
                

 6 days
                

As had been done with Tasty's three foals, the Pie Queen/My Host filly was sold just as she reached the age at which she would have been expected to have begun training for racing and before she was actually raced at a public track. Nevertheless, the parties have stipulated that this horse also is ‘properly characterized as having been used in the Petitioner's * * * business.’

In computing for Federal income tax purposes his gain from the sale of this foal, Mr. Gamble deducted $2,000 as its cost basis; this amount was determined by an allocation of a portion of the total cost paid for Pie Queen pregnant with the foal. The portion so allocated was based upon the stud fee of the foal's sire, My Host.² In reporting the gain from the sale of this animal, Mr. Gamble's 1968 tax return indicated that the filly had been ‘acquired’ in ‘Mar., 1967’ which date reflected her birth rather than the date on which Pie Queen had been purchased.

Subsequent to Pie Queen's death, Mr. Gamble and his ‘agent’ studied the catalogue of the annual fall mixed sale at Keeneland, Ky, with a view towards obtaining another broodmare suitable for use in Mr. Gamble's horse racing business. One of the broodmares listed in the catalogue was Champagne Woman. In addition to a description of Champagne Woman's pedigree, racing record, and past production record, the catalogue indicated that Champagne Woman was believed to be carrying a foal sired by Raise A Native.

Upon studying this catalogue, Mr. Gamble recognized the fine qualities of, and the value inherent in, Champagne Woman in her expectant state. Not only did she herself have

[68 T.C. 804]

an impressive record, but also, Raise A Native was known as a particularly successful stud. His offspring included 17 stakes winners, among them Majestic Prince, winner of both the Kentucky Derby and the Preakness Stakes. In 1969 the 19 yearlings sired by Raise A Native sold for a total of $935,000, or an average price of $49,211 per horse. Over the course of his lifetime, a total of 41 Raise A Native yearlings have been sold for an average price of $50,256.

Prior to November 10, 1969, Mr. Gamble did not know the exact amount of Raise A Native's stud fee, although he believed that it was rather high. Subsequent to that date, he ascertained that in 1969 the stud fee for a mare's service by Raise A Native was $27,500 for a shareholder (an owner of an interest in the stud horse), and between $32,500 and $35,000 for a nonshareholder.

Mr. Gamble and his agent both expected that Champagne Woman would sell for a price in excess of $100,000; in fact, they thought that the auction might begin with bids of $100,000 or more. Therefore, because Mr. Gamble had decided that he wanted to purchase a broodmare costing no more than approximately $50,000, Champagne Woman was not included among the horses for which Mr. Gamble's agent was supposed to bid.

However, notwithstanding the considerations referred to above, Champagne Woman was purchased for Mr. Gamble's account on November 10, 1969, at the Keeneland sale, for only $60,000.³ She was acquired for use in his horse racing business, and was placed in service in that business immediately upon her purchase.

To ensure that Champagne Woman was in foal, Mr. Gamble's agent had the horse examined by a veterinarian prior to completing the purchase. If that...