Comm'r of Internal Revenue

This case is not covered by Casetext's citator
Tax Court of the United States.Dec 10, 1954
23 T.C. 458 (U.S.T.C. 1954)

Docket No. 39677.



Stephen W. Franken, Esq., for the petitioners. Richard D. Hobbet, Esq., for the respondent.

Stephen W. Franken, Esq., for the petitioners. Richard D. Hobbet, Esq., for the respondent.

Petitioners bought bulls and rented them for nominal amounts to neighboring diary farmers for breeding purposes. The farmers using the bulls fed and cared for them at no expense to petitioners. After about a year and a half petitioner sold the bulls for slaughtering. The principal income was derived from the sale of the bulls. Held, petitioners held the bulls for sale to customers in the ordinary course of their business and the income from the sales is taxable as ordinary income and not as a capital gain under section 117(j)(1) of the Internal Revenue Code of 1939.

Respondent determined a deficiency in income tax of petitioners in the amount of $1,254.74 for the taxable year 1948.

The question for decision is whether the bulls sold by petitioners in 1948 were held primarily for sale in the ordinary course of their trade or business or were property used in their trade or business as defined by section 117(j) (1) of the Internal Revenue Code of 1939.


Some of the facts were stipulated and are found accordingly. Others are found from the evidence.

Petitioner are husband and wife, who owned and resided on a farm in Green County, Wisconsin, during 1948. They filed their joint income tax return for 1948 with the collector of internal revenue for the first district of Wisconsin.

On their 1948 return petitioners reported $31,311.58 as the gross proceeds from the sale of bulls. As a deduction therefrom petitioners reported $19,750.26 as the cost of bulls sold. The resulting net profit of $11,561.32 was reported as a long-term capital gain. Respondent determined a deficiency upon the basis that the $11,561.32 was ordinary income.

During the year under review petitioners kept their books and records relating to the sale of the bulls on a cash basis, merely recording the cost of bulls purchased in 1948 and the proceeds from sales of bulls in 1948, whether bought that year or not. The income as reported from the sales in 1948 was determined by subtracting such cost from the gross proceeds. The amount of $19,750.26 reported as cost of bulls sold is not the actual cost of the particular bulls sold in 1948, but is the cost of all bulls purchased during that year. The sum of $31,311.58, however, does represent the actual income from all sales of bulls during 1948.

During 1946, 1947, and 1948, petitioners purchased young bulls, which were about 1 year old at the time of purchase. The purchases were from farmers in the surrounding territory who raised them for sale. Petitioners attempted to get calves from good producing dairy herds. The average price of these bulls was about $123 each.

Petitioners rented these bulls to various farmers in the area to run with and breed their dairy cows during the pasture season of 5 to 6 months. Some of the bulls were rented to the farmers who kept them with their cows to be bred in the barn during the winter.

Several of the dairy farmers rented bulls from petitioners from year to year because they did not want to raise or buy bulls and because of the cost and danger in keeping bulls on the farm for several years.

Petitioners usually charged a fee of $10 to $25 for the use of their bulls, but there were occasions when the bulls were loaned without charge. The largest fee ever derived from any one bull by petitioners was $50. In 1948 petitioners received total rentals of $2,200. While the bulls were out on rental they were fed and cared for at the expense of the farmers using them. Petitioners' only expenses were for trucking to and from the various farms and for feed for bulls not rented out.

Petitioners held their bulls for an average of 1 1/2 years, during which time the bulls would be rented out for about two pasture seasons. The holding period for each bull was determined by how unruly and dangerous it became. Petitioners did not keep sufficient records to determine the cost, holding period, or sale price of any particular bull. When sold the bulls were sold to stockyards for slaughtering. Petitioners received an average of approximately $250 per bull.

None of the bulls here involved were used for breeding petitioners' own cows, nor were they used for dairy or draft purposes.

Petitioners had been buying, renting, and selling bulls for about 20 years. Their expectation of profit was from the sale of the bulls rather than from the rentals for breeding purposes.

The bulls were held by petitioners primarily for sale in the course of their business.


BRUCE, Judge:

The question for decision is whether the respondent erred in determining that the gain realized by petitioners in the taxable year 1948 from the sale of bulls was taxable as ordinary income. Petitioners contend that those sales are to be treated as sales of capital assets, viz, ‘property used in the trade or business,‘ under section 117(j)(1), Internal Revenue Code of 1949. The petitioners claim that they were in the business of renting bulls for breeding purposes. Respondent argues that the bulls were held ‘primarily for sale to customers in the ordinary course of his (their) trade or business.’

SEC. 117. CAPITAL GAINS AND LOSSES.(j) GAINS AND LOSSES FROM INVOLUNTARY CONVERSION AND FROM THE SALE OR EXCHANGE OF CERTAIN PROPERTY USED IN THE TRADE OR BUSINESS.—(1) DEFINITION OF PROPERTY USED IN THE TRADE OR BUSINESS.— For the purposes of this subsection, the term ‘property used in the trade or business' means 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, and real property used in the trade or business, 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, or (C) a copyright, a literary, musical or artistic composition, or similar property, held by a taxpayer described in subsection (a)(1)(C). Such term also includes timber or coal with respect to which subsection (k)(1) or (2) is applicable and unharvested crops to which paragraph (3) is applicable. Such term also includes livestock, regardless of age, held by the taxpayer for draft, breeding, or dairy purposes, and held by him for 12 months or more from the date of acquisition. Such term does not include poultry.Note: The last two sentences of section 117(j)(1) quoted above were added by section 324 of the Revenue Act of 1951. Section 324 further provided that the ‘first sentence added to section 117(j)(1) by the amendment made by this section shall be applicable with respect to taxable years beginning after December 31, 1941, except that the extension of the holding period from 6 to 12 months shall be applicable only with respect to taxable years beginning after December 31, 1950. * * *’

Whether or not petitioners come within section 117(j)(1) depends on the purpose for which the property was held. Rollingwood Corporation v. Commissioner, 190 F.2d 263; Mauldin v. Commissioner, 195 F.2d 714; Nelson A. Farry, 13 T.C. 8; A. Benetti Novelty Co., 13 T.C. 1072. There is no fixed formula in making this determination. It is a question of fact.

Upon the evidence received at the hearing we have found as an ultimate fact that petitioners held the bulls primarily for sale to customers in the ordinary course of their business.

Petitioners bought bulls for approximately $123 each and sold them 1 1/2 years later for about $250. In the interim they rented their bulls out to neighboring farmers for breeding purposes for a fee of $10 to $25 and sometimes loaned them for nothing. The farmers using the bulls fed and cared for them at no expense to petitioners. Petitioner Albert Erickson testified that he expected to make his profit from the sale of a bull and not from its rental. At no time were the bulls here involved used to breed petitioners' own cows.

The rental was merely a means of raising and feeding the bulls until they were salable. Petitioners did not, nor did they expect to, make their profit from the rental. Their profit came from the increase in size and weight of the bulls. Usually petitioners could rent the bulls out for only two pasture seasons, receiving at most total fees of $50 from the bulls. In 1948 petitioners received $31,311.58 in gross sales and a net profit of $11,561.32, while receiving only $2,200 in rentals. Petitioners argue that the disparity in rental income and the proceeds from the sales should be disregarded as not controlling, citing Delsing v. United States, 186 F.2d 59. We do not find the Delsing case in point.

In that case the taxpayer held two groups of houses, one for sale and the other for rent. In one year the taxpayer sold houses from both groups, reporting income from the former as ordinary income and income from the latter as a section 117(j)(1) capital gain. The Court of Appeals for the Fifth Circuit reversed the District Court and sustained the treatment by the taxpayer. In commenting that the disparity between income from sales and from rentals was not controlling, the court distinguished the activities of the taxpayer in selling houses held for sale and selling those held for rent. Here but one herd of bulls is involved and it was held for sale.

Renting these bulls in order to realize profit while growing and fattening them for market does not establish that the primary purpose in holding them was for rental for breeding purposes. Petitioners point out that they always tried to get bulls from good stock in order to get desirable breeders; but, if petitioners had not bought good breeders they would not have been able to rent their bulls out and have them raised by someone else.

Section 117(j)(1) was not meant to apply to a situation where one of the essential or substantial objects in holding property is for sale. Rollingwood Corporation v. Commissioner, supra. The sales in this case were not merely incidental to the business of petitioner. They were the business. They were not isolated transactions. There was a definite routine established over 20 years whereby petitioners bought bulls, rented them, and sold them. Cf. Gutowsky v. Jones, 100 F.Supp.852; Brown v. Commissioner, 143 F.2d 468. Petitioners argue that the bulls were sold only when they became dangerous and were of no further use as breeders, citing Pfister v. United States, 102 F.Supp. 640, reversed without discussion on this point 205 F.2d 538; and United States v. O'Neill, 211 F.2d 701. In both of those cases the sales were forced sales necessitated by economic or administrative reasons. In the Pfister case the sale was made because of the shortage of ranch help, and in the O'Neill case water and feed conditions required the sale. Here the sales were not required by any unforeseen economic or administrative reason, but were planned. Whether the bulls were of any use as breeders is of no consequence except as their condition affected income during the holding period. Petitioners bought the bulls intending to sell them, after raising and fattening them. Renting them was but a means of getting the bulls raised and fattened at the expense of someone else.

Accordingly we hold that the $11,561.32 received by petitioners in 1948 should be taxed as ordinary income.

Decision will be entered for the respondent.