United States v. Bennett, 13184

• Citation: 186 F.2d 407
• Decision Date: 08 January 1951
• Docket Number: 13309,No. 13184,No. 13327.,13184,13327.
• Parties: UNITED STATES v. BENNETT (two cases). FINCH et al. v. ARNOLD, Acting Collector of Internal Revenue et al. (two cases). BIRKBECK v. THOMAS. RITCHIE et al. v. THOMAS.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

186 F.2d 407 (1951)

UNITED STATES v. BENNETT (two cases). FINCH et al. v. ARNOLD, Acting Collector of Internal Revenue et al. (two cases). BIRKBECK v. THOMAS. RITCHIE et al. v. THOMAS.

Nos. 13184, 13309, No. 13327.

United States Court of Appeals Fifth Circuit.

January 8, 1951.

Carlton Fox, Ellis N. Slack, Lester L. Gibson, Sumner M. Redstone, Special Assts. to the Atty. Gen. and Theron Lamar Caudle, Asst. Atty. Gen. and Henry W. Moursund, U. S. Atty., San Antonio, Tex., for the United States.

Muckleroy McDonnold, San Antonio, Tex., for appellees Bennett.

E. D. Treadwell, Jr., Arcadia, Fla., and Lawrence Rogers, Kissimmee, Fla., for Amicus Curiae.

Harry C. Weeks, Frank B. Appleman, Fort Worth, Tex., for appellant Finch and others.

Carlton Fox, Ellis N. Slack, Special Assts. to the Atty. Gen., Theron Lamar Caudle, Asst. Atty. Gen., Frank B. Potter, U. S. Atty., Fort Worth, Tex., O. Morris Harrell, Asst. U. S. Atty., Dallas, Tex., for appellee Arnold.

Harry C. Weeks, Frank B. Appleman, Fort Worth, Tex., for appellants Birkbeck and Ritchie.

Theron Lamar Caudle, Asst. Atty. Gen., Ellis N. Slack, Carlton Fox, Special Assts. to the Atty. Gen., Frank B. Potter, U. S. Atty., Fort Worth, Tex., O. Morris Harrell, Asst. U. S. Atty., Dallas, Tex., for appellee Thomas.

Before HUTCHESON, Chief Judge, and HOLMES and RUSSELL, Circuit Judges.

HUTCHESON, Chief Judge.

Concerned with the application of Sec. 117(j), 26 U.S.C.A. to sales of draft and work animals and of cows and bulls culled from their breeding herds, these appeals are from judgments in suits by cattle breeders for refunds of income taxes overpaid by them in the Ritchie and Bennett cases for the years 1942 and 1943, and in the Finch case for the years 1947 and 1948.

Specifically the question presented by each appeal is whether, as contended by the collector, the gains from such sales were ordinary income, or, as contended by the taxpayer, were capital gains under the section because the sales were of: "property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 23(l), held for more than 6 months, which is not (A) property of a kind which would properly be includible in the inventory of the taxpayer if on hand at the close of the taxable year, or (B) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business." Sec. 117(j) (1), Title 26 U.S.C.A.

In the Bennett case, the judgment was for the taxpayer, and the collector appealed.

In the Ritchie and Finch cases, the judgment was for the collector and the taxpayers appealed.

While the undisputed facts stipulated or sworn to in each of the cases exhibit small and unsubstantial variances, in substance they are the same.

Each of the taxpayers was, in the years in question, engaged in the business not of stocking and feeding cattle for sale as beef cattle but of breeding cattle to sell the calves, and these sales constituted the main source of their income. Such sales are not in question here.

In addition, however, to making these sales, taxpayers, as a matter of regular practice and in the normal course of their breeding business, from time to time, culled from the breeding herds such of the cows and bulls as had lost their usefulness as breeders, and, without separating them from the rest of the herd or holding them for feeding and fattening, sent them, immediately after culling, to market with the regular market herd. It is the sales of these culls which are in question here.

At all the ranches the general practice was not to raise but to buy the breeder bulls. All of them, however, raised substantially all of their breeding cows, and the practice as to these was, when they were about two years old, to place the heifers deemed to be suitable for breeding in the breeding herd.

It was in evidence that while the producing life of cows and bulls in the breeding herd varied, the average life of the cows was about six to eight years, of the bulls, three.

In addition to the sales of the culled cattle, some of the ranches sold some work, or draft, horses or mules in the tax years in question.

It was generally true that the main horse herd on the ranches consisted of horses and a few mules for use of the cowboys and other employees. The brood horse herd was mainly to furnish horses for the main horse herd. The brood mares were sold when they had reached the limit of their productivity.

In the Finch case, Finch testified in answer to a direct question that he did not hold the animals in the breeding herds for sales to customers in the regular course of his cattle business, that he only sold them by culling them when their productive period was past, and this was the general effect of the testimony in the other cases.

In one of the cases, sixteen of the cows sold from the breeding herd reduced it by that much, and the collector, under the authority of I.T. 3712 C.B. 176, a departmental bulletin interpreting 117(j), treated as capital gains the gains realized from these sales.

Here, as appellant in two of the cases and appellee in another, the collector admits that the taxpayers are in compliance with the other provisions of Sec. 117(j) as set out above. He denies, however, that they are in compliance with provision (B), quoted supra. He insists that on the face of the statute, and in accordance with I.T. rulings #3660 and 3712, the cattle whose sale is in question were property held by the taxpayer "primarily for sale to customers in the ordinary course of his trade or business".

Taxpayers insist that in using the word "primarily" in the statute, the congress used it in its accepted meaning of "primus" or first and not, as the collector contends, to mean its opposite extreme, "ultimus" or last.

In support of his position that, generally speaking, gains from the sales in question are not capital gains, the collector points to I.T. 3666,...