United States v. Cook, 16132

• Decision Date: 08 October 1959
• Docket Number: 16134,16146,16145,No. 16132,16133,16147.,16132
• Citation: 270 F.2d 725
• Parties: UNITED STATES of America, Appellant, v. Clement F. COOK, Appellee (two cases). UNITED STATES of America, Appellant, v. Wilfred L. COOK, Appellee (two cases). UNITED STATES of America, Appellant, v. Wilfred L. COOK and Patricia Cook, Appellees (two cases).
• Court: U.S. Court of Appeals — Eighth Circuit

270 F.2d 725 (1959)

UNITED STATES of America, Appellant, v. Clement F. COOK, Appellee (two cases).

UNITED STATES of America, Appellant, v. Wilfred L. COOK, Appellee (two cases).

UNITED STATES of America, Appellant, v. Wilfred L. COOK and Patricia Cook, Appellees (two cases).

Nos. 16132, 16145, 16133, 16146, 16134, 16147.

United States Court of Appeals Eighth Circuit.

October 8, 1959.

Carolyn R. Just, Atty., Dept. of Justice, Washington, D. C. (Howard A. Heffron, Acting Asst. Atty. Gen., Lee A. Jackson, Robert N. Anderson and Louise Foster, Attys., Dept. of Justice, Washington, D. C., Fallon Kelly, U. S. Atty., and Hyam Segell, Asst. U. S. Atty., St. Paul, Minn., were with her on the brief), for appellant.

Joseph A. Maun, St. Paul, Minn. (Jerome B. Simon and Bundlie, Kelley & Maun, St. Paul, Minn., were with him on the brief), for appellees.

Before GARDNER, VOGEL and VAN OOSTERHOUT, Circuit Judges.

VOGEL, Circuit Judge.

These cases, consolidated for the purposes of trial, concern the proper tax treatment to be accorded income resulting from the sale by taxpayers of mink pelts derived from minks culled from their breeding herd. No issues of fact are presented. It is conceded that the business of the taxpayers during the years in question consisted of raising minks for the purpose of selling mink pelts; that this business required the development and maintenance of a breeding herd; that in order to obtain and maintain improved mink strains it was necessary to cull out of the herd minks which were no longer suitable for use as breeders; that the minks in question had been culled out of the herd for this reason; that they had been held by the taxpayers for more than 12 months prior to their pelting and sale and had been utilized during that time solely for breeding purposes; that there was no market for live, culled breeder minks except as pelts; and that the minks in question were killed and pelted in order to be put in a marketable condition.

The taxpayers reported the income received from the sale of such pelts as gain from the sale of capital assets used in their trade or business under § 117(j) of the Internal Revenue Code of 1939, as amended.¹ The Commissioner of Internal Revenue determined that the taxpayers owed deficiencies on the basis that the proceeds from the sale of these pelts should have been treated as ordinary income. These deficiencies were paid by the taxpayers, who thereafter made timely claims for refunds. Suits were brought in the United States District Court for the District of Minnesota. In Cook v. United States, D.C.Minn.1958, 165 F.Supp. 212, the District Court held that the taxpayers were entitled to the refunds claimed, from which holdings the United States has appealed to this court.

Section 39.117(j)-2 of Treasury Regulations 118 provides that:

"For the purpose of section 117 (j), the term `livestock\' shall be given a broad, rather than a narrow, interpretation and includes cattle, hogs, horses, mules, donkeys, sheep, goats, fur-bearing animals, and other mammals. It does not include chickens, turkeys, pigeons, geese, other birds, fish, frogs, reptiles, etc." (Emphasis supplied.)

In view of this regulation, the appellant concedes that the term "livestock" has been extended to include minks raised for commercial purposes. It is claimed, however, that "* * * the Commissioner has properly refused to classify the pelts of such animals as `livestock'." The Commissioner's position is set forth in Revenue Ruling 57-548, 1957-2 Cum. Bull. 54-55, which, in discussing the corresponding section in the 1954 Internal Revenue Code, explains that —

"when animals are periodically taken from the breeding herd and killed for their pelts, the character of the animals has been changed. They are no longer of the type specified for possible capital gain treatment under section 1231 of the Code and the pelts therefrom constitute property of a kind which would properly be includible in inventory if on hand at the close of the taxable year or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, as is the case where such animals are raised for their pelts, i. e., not for breeding."

Thus, the Commissioner claims here that:

"* * * when culled breeding animals are killed and pelted, the product which the taxpayer then has to sell is not of the same character as the culled live animal. Therefore such product is not the type specified by Section 117(j) for capital gain treatment."

And that:

"The privilege of having income taxable at capital gain rates is allowable to the taxpayer here only if he can show that his partnership sold `livestock\' which had been held for breeding purposes, but that requirement can not be met because only pelts from the dead mink were sold. Thus the income involved here, which was realized under exactly the same conditions as the income from those pelts which were admittedly held primarily for sale in the ordinary course of the partnership\'s business, should be treated exactly like the income from the latter pelts, namely, as ordinary income."

In reaching its conclusion, the court below relied upon this court's decision in Albright v. United States, 8 Cir., 1949, 173 F.2d 339. In that case, taxpayer was a farmer engaged in the production and sale of hogs. In accordance with the customary practice of that business, he annually culled out and sold his entire breeding herd. However, the sale did not occur until after the culled animals had been first allowed to return to "marketable condition". 173 F.2d at page 345. This court held that the proceeds from that subsequent sale qualified for capital gains treatment and, consequently, that the processing for market of the no longer useful breeding hogs did not constitute their being primarily held for sale in the ordinary course of taxpayer's business.

As in the Albright case, the minks here were not marketable immediately upon being removed from the breeding herd and we conclude, similarly, that taking the minimum steps necessary to render them saleable did not change their character within the meaning of section 117(j) (1).

Appellant seeks to distinguish the Albright case on the grounds that it was decided before the addition to section 117(j) (1) of the sentence relating specifically to "livestock". Appellant's present position is that, if the culled minks had been sold live, the returns therefrom would qualify under the statute as capital gains, but inasmuch as they were killed and pelted by the taxpayers, the product sold had changed in character and no longer fell within the statutory term and thus constituted a sale in the ordinary course of taxpayers' business.

As this court pointed out in Albright, section 117(j) was intended to provide relief for all taxpayers having to sell assets used in their trade or business. Further, it is clear from the legislative history² that the addition of the term "livestock" to the section was not intended to limit such relief, but rather to clarify the right of farmers and other animal raisers to it. Finally, it is conceded that there is no market for live culled minks and that...