Wilson v. United States

• Citation: 376 F.2d 280
• Decision Date: 14 April 1967
• Docket Number: No. 134-64.,134-64.
• Parties: Cliff C. WILSON et al. v. The UNITED STATES.
• Court: U.S. Claims Court

376 F.2d 280 (1967)

Cliff C. WILSON et al. v. The UNITED STATES.

No. 134-64.

United States Court of Claims.

April 14, 1967.

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Cliff C. Wilson, Osie B. Wilson, Martha E. Robinson, and Alfred P. Miller, pro se.

Michael I. Sanders, Washington, D. C., with whom was Asst. Atty. Gen. Mitchell Rogovin, for defendant. Philip R. Miller, Washington, D. C., of counsel.

Before COWEN, Chief Judge, and LARAMORE, DURFEE, DAVIS, COLLINS, SKELTON and NICHOLS, Judges.

OPINION

PER CURIAM:

With minor modifications, the court is in agreement with Trial Commissioner Mastin G. White's findings and recommended opinion. Accordingly, the court adopts the findings and opinion, as so modified, as the basis for its judgment in this case.

Commissioner White's opinion,^* as modified by the court, is as follows:

The plaintiffs in this case are Cliff C. and Osie B. Wilson (who are husband and wife), Alfred P. Miller (who is a nephew of Cliff C. Wilson), and Martha E. Robinson (who is a niece of Cliff C. Wilson). All the plaintiffs are residents of Texas.

In the present action, the plaintiffs seek to recover refunds of Federal income taxes previously paid for the several years during the period 1958-1961.

During the 4-year period mentioned in the preceding paragraph, the plaintiffs (along with six other relatives of Cliff C. Wilson who are not parties to the present litigation) were partners in Cliff C. Wilson & Partners, a partnership which owned and operated a cattle ranch in Hemphill County, Texas. Cliff C. and Osie B. Wilson owned a one-ninth interest, Alfred P. Miller owned a one-ninth interest, and Martha E. Robinson owned a one-ninth interest in Cliff C. Wilson & Partners. Cliff C. Wilson was the managing partner of Cliff C. Wilson & Partners.

Cliff C. Wilson & Partners, in addition to being engaged in the cattle ranching business itself, owned a one-half interest in Starnes, Wilson & Co., a partnership which operated a cattle ranch in Ellis County, Oklahoma, during part of the period previously mentioned. The other one-half interest in Starnes, Wilson & Co. was owned by Kenneth D. and Mary Verne Starnes, who were husband and wife. Kenneth D. Starnes was the managing partner of Starnes, Wilson & Co. Mary Verne Starnes is a niece of Cliff C. Wilson. During the period 1958-1961, Mrs. Starnes was a partner in Cliff C. Wilson & Partners.

Cliff C. Wilson & Partners owned the land in Oklahoma on which Starnes, Wilson & Co. operated its ranching business.

First Count of Petition

The question presented to the court in the first count of the petition is whether, as contended by the plaintiffs, Section 1013 of the Internal Revenue Code of 1954 (26 U.S.C. section 1013) "is unconstitutional in application to the sale of capital i. e., breeding livestock which had been valued in inventory under the Farm Price accrual method. It is our opinion that the plaintiff's attack on the constitutionality of Section 1013 of the 1954 Code must fail, and, accordingly, that their claims set out in the first count of the petition must be rejected.

The question concerning the constitutionality of Section 1013 of the 1954 Code is raised by the plaintiffs because some of their claims directly involve the taxability of proceeds received in 1958 and 1959 from a sale of breeding cattle by Starnes, Wilson & Co. in 1958, and other claims indirectly involve the taxability of the proceeds from a sale of breeding cattle by Cliff C. Wilson & Partners in 1957. All the breeding animals with which we are concerned in the present case had been held for 12 months or more from the date of acquisition and, accordingly, they were by statutory definition "property used in the trade or business," so that any gain derived from their sale could constitute capital gain rather than ordinary income (26 U.S.C. § 1231(b) (1) and (3)).

A rancher is permitted to use either a cash-receipts-and-disbursements method or an accrual method of accounting. If he uses an accrual method, he must also maintain an inventory account and he must value his livestock for the inventory either by the farm-price method or by the unit-livestock-price method.

The two partnerships previously mentioned, Cliff C. Wilson & Partners and Starnes, Wilson & Co., each elected to use an accrual-inventory method of accounting for all its livestock; and each partnership, at all times subsequent to the inception of the partnership's business, consistently valued its livestock in accordance with the farm-price method of inventorying livestock. The farm-price method provides for a valuation of livestock in the inventory at market price, less direct costs of disposition.

"The general and long-standing rule for all taxpayers, whether they use the cash or accrual method of accounting, is that costs incurred in the acquisition, production, or development of capital assets, inventory, and other property used in the trade or business may not be currently deducted, but must be deferred until the year of sale, when the accumulated costs may be set off against the proceeds of the sale. Under general principles of accounting, therefore, it would be expected that expenses incurred by ranchers in raising breeding livestock should be charged to capital account, even though the ranchers employed the cash method of accounting." United States v. Catto, 384 U.S. 102, 109-110, 86 S.Ct. 1311, 1315, 16 L.Ed.2d 398 (1966). However, ranchers are permitted by the tax laws and regulations to take a current deduction for the expenses incurred in raising their livestock, including their breeding animals, and this is so without regard to the method of accounting employed by a particular rancher.

In the case of a rancher who has a breeding herd and who uses an accrual-inventory method of accounting, the taking of a current deduction for the expenses incurred in raising the breeding animals is substantially counterbalanced by the requirement that the breeding animals which remain in the inventory at the end of a year be revalued, and that any increase in the inventory valuation of such animals at the end of the year over their inventory valuation at the beginning of the year be reported as ordinary income for income tax purposes. This procedure provides a simple means of capitalizing costs. Then, when breeding animals are sold by a rancher who uses an accrual-inventory system of accounting, Section 1013 of the Internal Revenue Code of 1954 provides that the cost basis to be used in determining capital gain "shall be the last inventory value thereof." Thus, an accrual-inventory rancher receives capital-gain treatment on the proceeds from the sale of breeding animals only to the extent, if any, that the proceeds exceed the last inventory valuation of the animals sold. In the meantime, such a rancher has been taxed, as for ordinary income, on the annual increments in the inventory valuation of the animals involved in the sale.

On the other hand, in the case of a rancher who has elected to use a cash method of accounting, the current deduction that is taken against ordinary income for the expenses incurred in raising breeding animals is not counterbalanced annually by any increase in the value of the breeding animals. The cash-method rancher is not concerned, from the accounting or income tax standpoint, with the value of breeding animals unless and until there is a sale or other disposition of such animals. At that time, since the expenses involved in raising the animals have not been capitalized in any fashion, the cost basis of the breeding animals for the purpose of determining capital gain is zero, and the rancher who uses a cash method of accounting with respect to his breeding animals receives capital-gain treatment with respect to all the proceeds from the sale of such animals (after the costs of the sale are deducted).

The plaintiffs contend — and seemingly with justification — that, from the overall standpoint, the rancher who uses an accrual-inventory method of accounting with respect to breeding animals which are ultimately sold generally pays a higher income tax in relation to the value of the animals than would be paid with respect to similar animals by a cash-method rancher. The plaintiffs say that this is discriminatory; and they argue that Section 1013 of the Internal Revenue Code of 1954, which limits the accrual-inventory rancher to capital-gain treatment on the partion, if any, of the proceeds from the sale of breeding animals that is in excess of the last inventory valuation of such animals, must be regarded as unconstitutional because of the discriminatory treatment thus accorded accrual-inventory ranchers.

However, it should be borne in mind that at the inception of his business, a rancher has a free choice in deciding whether he will use a cash method or an accrual-inventory method of accounting. Each method of accounting has certain advantages over the other, and the rancher must exercise his judgment in making a determination as to whether, from the long-range standpoint, he prefers a cash method or an accrual-inventory method. In view of this initial freedom of choice, the rule is well established that once a rancher has selected and used a particular system of accounting, he cannot change to a different system of accounting for income tax purposes on his own volition, and if he desires to make such a change, he must first obtain the approval of the Commissioner of Internal Revenue. Niles Bement Pond Co. v. United States, 281 U.S. 357, 360, 50 S.Ct. 251, 74 L.Ed. 901 (1930); Carter v. Commissioner of Internal Revenue, 257 F.2d 595, 600 (5th Cir. 1958); United States v. Ekberg, 291 F.2d 913, 924 (8th Cir. 1961), cert. den. 368 U.S. 920, 82 S.Ct. 242, 7 L.Ed.2d 135 (1961). No request for, or authorization for, such a change has been granted by the Commissioner in the present case.

The plaintiffs assert a supposed right on the part of an accrual-inventory...