SoRelle v. Comm'n of Internal Revenue, Docket Nos. 36218
| Decision Date | 07 June 1954 |
| Docket Number | 39789.,36411,Docket Nos. 36218 |
| Citation | 22 T.C. 459 |
| Parties | ELSIE SoRELLE, ET AL.,1 PETITIONERS, v. COMMISSION OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. A. W. SoRelle (referred to as SoRelle) was a farmer and rancher who used a hybrid method of accounting, to wit, cash receipts and disbursements basis plus the use of inventories. He valued his inventories of farm products and livestock (including ordinary beef cattle) pursuant to the ‘farm-price method,’ but apparently valued his inventory of breeding cattle pursuant to an average purchase cost method. Held: (a) Use of a hybrid accounting method, as he used it, is improper; the accrual method more clearly reflects SoRelle's income and must be used by him. Receipts for 1945 sales collected and reported by SoRelle in 1946 may not be included in his 1946 income computed on the accrual basis. David W. Hughcs, 22 T. C. 1, followed. (b) SoRelle's inventories for 1946 and 1947 (wheat, ordinary cattle, and breeding cattle) must be valued pursuant to the farm-price method, which he had elected to use. (c) The Commissioner erred in failing to include 8,500 bushels of wheat in SoRelle's opening inventory for January 1, 1946, and in Elsie W. SoRelle's opening inventory for May 25, 1946, the date of her marriage to SoRelle.
2. Held: (a) Capital gains treatment proper for sales of breeding cattle held over 6 months, despite the fact that they were included in inventory. Number of breeding cattle sold, net sales prices, and bases determined. (b) Depreciation deductions for the breeding cattle not allowable because SoRelle had elected to use inventories.
3. Held, gifts, by SoRelle to his children, of four parcels of land and the matured wheat crops thereon, which gifts were made just prior to harvest, did not result in the donor and his then wife, Elsie, realizing income to the extent of the market value of the wheat. Helvering v. Horst, 311 U.S. 112, distinguished.
4. (a) Prior to her marriage to SoRelle, Elsie W. SoRelle earned income as a schoolteacher and stenographer and reported it on the cash basis. Her income, following the marriage, consisted of her community share (under Texas law) of the income from SoRelle's farming and ranching business. The proper method of accounting for that business was the accrual method. Elsie did not request the Commissioner's permission to change to the accrual method, nor did she follow the adjustment procedures prescribed for farmers, in Regulations 111, section 29.22(c)–6, who wish to change to the accrual basis. She kept no books or records relative to her community income, was unfamiliar with the books of SoRelle's business, and took no part in that business. Held, the accrual method of accounting clearly reflects Elsie's community income from SoRelle's business and must be used by her in reporting that income.
(b) By an amended answer the Commissioner alleged that in computing Elsie's deficiency for 1946, he had erroneously credited her with a tax payment which, in fact, had previously been refunded to her. Held, the Commissioner failed to sustain his burden of proving that such a refund was made.
5. SoRelle was married to Mabel Ruth SoRelle in 1946 until their divorce on March 25, 1946. They permanently separated on January 24, 1946, and, on February 19, executed an agreement (later incorporated into their divorce decree) disposing of all their separate and community property, including interests in future income earned by each other. A small portion of the total net income earned by SoRelle's business during 1946 was earned between January 1 and March 25, 1946, but there was no evidence that the business earned any net income prior to February 19, 1946. Mabel's deficiency notice was mailed more than three, but less than five, years following the filing of her 1946 return. In Docket No. 36411, the Commissioner charged SoRelle with all of the income earned between January 1 and March 25, 1946; alternatively, in Docket No. 39789, he charged Mabel with half of that income. Held, under Texas law the income earned by SoRelle's business following the February 19, 1946, agreement was his separate income and is therefore taxable in full to him; any income earned before that date was community income of SoRelle and Mabel. However, since there was no evidence that SoRelle's business earned net income in 1946 prior to February 19, (a) SoRelle's estate (in Docket No. 36411) failed to carry its burden of proving that some of the income earned by SoRelle's business during 1946 was community income of SoRelle and Mabel and, consequently, taxable to Mabel to the extent of her share, and (b) the Commissioner (in Docket No. 39789) failed to carry his burden of proving that the 5-year statute of limitations in section 275(c) of the Code applies to Mabel.
6. Held, SoRelle's deficiencies for 1946 and 1947 were due, at least in part, to negligence. No part of Elsie W. SoRelle's deficiencies for 1946 or 1947 was due to negligence. Benjamin L. Bird, Esq., R. R. Wilson, Esq., and Wentworth T. Durant, Esq., for the petitioners.
Frank C. Allen, Esq., and John W. Alexander, Esq., for the respondent.
The Commissioner determined the following deficiencies and penalties in the three dockets here consolidated:
+-----------------------------------------------------------------------------+
¦Docket ¦Petitioner ¦Year¦Deficiency¦Negligence penalty ¦
¦No. ¦ ¦ ¦ ¦(Section 203(a)) ¦
+-------+----------------------------+----+----------+------------------------¦
¦36218 ¦Elsie SoRelle ¦1946¦$42,868.89¦$2,143.44 ¦
+-------+----------------------------+----+----------+------------------------¦
¦ ¦ ¦1947¦46,299.20 ¦2,314.00 ¦
+-------+----------------------------+----+----------+------------------------¦
¦36411 ¦Estate of A. W. SoRelle, ¦1946¦51,503.18 ¦2,578.16 ¦
¦ ¦Deceased, et al ¦ ¦ ¦ ¦
+-------+----------------------------+----+----------+------------------------¦
¦ ¦ ¦1947¦90,685.00 ¦4,534.25 ¦
+-------+----------------------------+----+----------+------------------------¦
¦39789 ¦Mabel Ruth SoRelle ¦1946¦4,572.70 ¦ ¦
+-----------------------------------------------------------------------------+
By amended answers the Commissioner seeks to have us increase the deficiencies and penalties in Docket No. 36218 (Elsie SoRelle) to the following:
+---------------------------------------------------+
¦Year¦Deficiency¦Negligence penalty (Section 293(a))¦
+----+----------+-----------------------------------¦
¦1946¦$42,927.49¦$2,146.37 ¦
+----+----------+-----------------------------------¦
¦1947¦68,558.59 ¦3,427.93 ¦
+---------------------------------------------------+
Many issues were raised in these proceedings. For convenience and clarity, therefore, the opinion has been segregated into captioned portions, each of which contains the findings and opinion applicable to an issue or related group of issues. A number of adjustments made by the Commissioner in the income reported by A. W. SoRelle and Elsie SoRelle for 1946 and 1947 were not contested. These will be given effect in a computation under Rule 50.
Elsie SoRelle, the widow of A. W. SoRelle, resides at Amarillo, Texas. A. W. SoRelle, Jr., Irving SoRelle, Jack SoRelle, and Charles W. SoRelle are the independent executors of the estate of A. W. SoRelle who died January 10, 1949; they reside at Amarillo, Texas. A. W. SoRelle, hereinafter sometimes referred to as SoRelle, was married three times. The first marriage to Laura SoRelle was terminated by divorce on January 17, 1945; SoRelle married Mabel Ruth SoRelle on February 12, 1945, and they were divorced on March 25, 1946; SoRelle married Elsie SoRelle on May 25, 1946, and this marriage was terminated by his death on January 19, 1949.
SoRelle was a farmer and rancher, conducting his business as a sole proprietorship. The income tax returns of A. W. SoRelle, Elsie SoRelle, and Mabel Ruth SoRelle were filed with the collector of internal revenue for the second district of Texas.
(a) Whether the correct method of reporting income from SoRelle's farming and ranching business is the cash, the accrual, or a hybrid accounting method.
(b) If the accrual or a hybrid method is correct, then whether the Commissioner erred in his application of the method in valuing cattle and wheat inventories pursuant to the so-called farm-price method.
(c) If the accrual or a hybrid method is correct, then whether the Commissioner erred in failing to take into account 17,000 bushels of wheat allegedly on hand at the beginning of 1946.
(a) SoRelle maintained a farm and a ranch which were about 42 miles apart. He kept a breeding herd of cows and bulls on the ranch and a herd of ordinary beef cattle on the farm. The calves produced by the breeding herd were weaned when 4 to 6 months old and were placed with the ordinary herd on the farm. The ordinary herd also contained heifers and steers purchased by SoRelle for fattening and resale. Most of SoRelle's income was derived from the sale of beef cattle from the ordinary herd. Considerably smaller sums of income were realized from sales of sheep, hogs, rye, wheat, and wool. He also sold cows and bulls culled from the breeding herd when, because of age or infirmity, they had ceased to be satisfactory for breeding purposes.
From 1939 through 1947, SoRelle's books were kept by bookkeepers whom he employed on a part-time basis. The same bookkeepers prepared all his returns for those years, except the original 1947 return and the amended returns for 1946 and 1947,...
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