Vaughan v. CIR

• Decision Date: 21 May 1964
• Docket Number: 17836-17841.,No. 17823,17823
• Citation: 333 F.2d 714
• Parties: F. C. VAUGHAN and Mattie Vaughan et al., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Ninth Circuit

333 F.2d 714 (1964)

F. C. VAUGHAN and Mattie Vaughan et al., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 17823, 17836-17841.

United States Court of Appeals Ninth Circuit.

May 21, 1964.

Ralph R. Bailey, Frank E. Magee, and Jack H. Dunn, Maguire, Shields, Morrison, Bailey & Kester, Portland, Or., for petitioners.

Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Robert N. Anderson, Alec A. Pandaleon; and Michael Mulroney, Dept. of Justice, Washington, D. C., for respondent.

Before HAMLIN, BROWNING and DUNIWAY, Circuit Judges.

DUNIWAY, Circuit Judge.

Before us are seven petitions to review decisions of the Tax Court of the United States. They were presented to the Tax Court, and they are presented here, on a single record and a single set of briefs. Many of the facts were stipulated, but considerable testimony was also taken. The findings of fact and the opinion of the Tax Court are reported at 36 T.C. 350. Our examination of the record leads us to the conclusion that, except in one respect, the Tax Court's findings are supported by substantial evidence, and are not clearly erroneous, and we do not repeat them here, except to the extent necessary to decide the legal issues that are presented.

The basic position of the petitioning taxpayers is that the Tax Court misapplied the provisions of the Internal Revenue Code of 1939, § 117(j), added by § 151(b) of the Revenue Act of 1942, as amended by § 127 of the Revenue Act of 1943, and by § 324 of the Revenue Act of 1951. The 1951 amendment was made retroactive to years beginning after December 31, 1941. As so amended, section 117(j) which permits capital gains treatment on the sale of certain assets and within certain limits, permits such treatment for "property used in the trade or business." This term is defined in section 117(j) (1), and for the purposes of subsection (j), to include "livestock, regardless of age, held by the taxpayer for * * * breeding * * * purposes, * * *."

During the taxable years in question (1948, 1949, 1950 and 1951) taxpayers owned a herd of beef cattle. These cattle were located upon lands owned by a third party who is referred to by the Tax Court in its findings as "Milford." The headquarters ranch at Bruneau, Idaho consisted of about 1,000 acres, and the summer ranch at Battle Creek, Idaho, of about 3,600 acres. Milford also had grazing rights on about 250,000 acres of public land.

The operation was an open range operation and had a capacity of about 2,100 "count" cattle. This term includes all cattle except those which are less than six months old when turned out on the range in the Spring. At the time that the operation began there were a total of 1,520 animals in the herd, of which 1,364 were count cattle. Under Milford's agreement with the owners of the cattle (the taxpayers), he was in complete charge of the operation and was to be compensated by receiving one-half of the proceeds of all cattle sales, the other half going to the taxpayers. The agreement required that he should maintain the herd at its present size and quality by increase or by purchased replacements.

The purpose of the operation was the raising of cattle for sale for beef. The manner of the operation of the spread was the customary one in mountain and desert territory of the type here involved. All of the cattle were turned out on the open range about the middle of March, except the bulls and the cows and heifers that were with calf. On May 1 the bulls were turned out. The isolation of the bulls until that time was to prevent the birth of calves during the bad winter months of December and January. After the calves were born, the cows and calves were also turned out on the range. Thus, beginning about May 1, the entire herd was on the range and all of the cows and heifers were exposed to the bulls. Each fall, the cattle were rounded up, and the bulls, cows, steers and heifers were segregated. Based on the number and condition of the steers, and the going price, the amount to be realized from their sale was determined. Animals thought to be no longer desirable for breeding were culled from the bulls and cows, and a similar calculation was made as to probable realization from their sale. The parties knew about what Milford would need, as his share of the proceeds from sales, to carry on the operation until the next fall. The expected proceeds from the sales of steers and culls was never sufficient, and as a result, enough heifers were then selected and sold to produce the needed funds.

For obvious reasons, no one here contends that the steers were held for breeding purposes. It is conceded that they were property held "primarily for sale to customers in the ordinary course of * * * business". (Section 117(j) (1)). Such property is not entitled to capital gains treatment. The Tax Court held that the culled cows and bulls were held for breeding purposes, and allowed capital gains treatment of their sales.

It is the contention of the taxpayers that all of the heifers were a part of the breeding herd and were therefore held for breeding purposes within the meaning of the statute. They base this contention on their own testimony and that of Milford that it was the intent of all parties concerned that he should build up the herd to the full carrying capacity of the range. This, however, he was never able to do. It became apparent to all parties, in the Fall of 1947, the first time that cattle were being marketed as a part of Milford's operation, that the proceeds that would be realized from the sale of the steers and culls would not produce enough money to permit Milford to continue the operation. Therefore, each fall, a substantial number of heifers was sold. The figures, which appear in the findings of the Tax Court and are not disputed, are as follows: At the beginning of the operation there were 434 heifers in the herd. During the period of Milford's operation, 1,636 heifers were branded, making a total of 2,070 heifers available during the contract period for replacement of cows culled from the herd, addition to the herd, sale or return to the taxpayers at the end of the contract with Milford. During the operation 433 cows were culled and sold. It thus would take 867 heifers to replace the culls and the heifers...