Sproul v. Commissioner , 15 T.C.M. 104 ( 1956 )

Fred C. Sproul, Jr. v. Commissioner.

Sproul v. Commissioner

Docket No. 51753.

United States Tax Court

T.C. Memo 1956-20; 1956 Tax Ct. Memo LEXIS 275; 15 T.C.M. (CCH) 104; T.C.M. (RIA) 56020;

January 25, 1956

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Profit on the sale in 1947 of a herd of ewes held to give rise to long-term capital gain.

John P. Dwyer, Esq., First National Bank Building, Albuquerque, N.M., for the petitioner. Richard C. McLaughlin, Esq., for the respondent.

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VAN FOSSAN

Memorandum Opinion

VAN FOSSAN, Judge: Respondent determined a deficiency of $8,601.82 in petitioner's income tax for the year 1947, consequent on his holding that a gain of $30,201.45 received by petitioner on the sale of 1,875 ewes was taxable as ordinary income and not as long-term capital gain, petitioner having returned it as long-term capital gain. Respondent added the sum of $15,100.73 or 50 percentum of the gain to petitioner's adjusted gross income. No question is raised by either party as to the correctness of the amount of gain. Petitioner filed his return in the District of Wyoming.

The determinative question underlying the present case is whether the 1,875 ewes, held by petitioner for more than six months and sold in 1947, constituted livestock held for breeding purposes for more than six months within the meaning of Section 117(j)(1) of the Internal Revenue Code of 1939. If so held, petitioner correctly reported his taxable gain. The case presents and is to be determined by a single question of fact.

[Findings of Fact]

In 1945 petitioner, who had always been in the sheep-raising business, returned to Wyoming after his military service and he thereupon, in July 1945, purchased from his father 1,002 yearling ewes, paying $7.00 per head. These ewes were run on range land which petitioner leased from his father, who in turn leased the land from a Mrs. Montgomery. The number of 1,000 head is not an economical sized herd to run for the reason that one sheepherder with one wagon can handle from 1,800 to 2,500 sheep.

In the fall of 1945, petitioner, seeking to create a herd of profitable and economical size and type, traded the 1,002 yearling ewes for approximately 1,600 yearling lambs. In the fall of 1946, he culled 244 of such lambs and sold them for the market at $4,67 per head, reporting the gain as ordinary income. In the fall of 1946, petitioner traded the remainder of his herd, then classed by him as breeding ewes, for approximately 2,100 yearling lambs. Petitioner, in the spring of 1947, culled and sold 252 of such lambs, leaving 1,875 head which petitioner classified as breeding ewes.

In August 1946 petitioner's father advised him that he was going to lose the lease which he held from Mrs. Montgomery, which meant that petitioner's lease from his father was also about to be lost. Petitioner had built a home on the leased land and had erected lambing sheds for use in the sheep business. Petitioner and his father searched unsuccessfully throughout 1946 and until the fall of 1947 to find other range land. At this time petitioner had 1,875 head of stock carried as breeding ewes, all capable of being bred. He had intended to breed the herd in the fall of 1947, but was deterred from so doing by the threatened loss of his lease and the failure to find a new range.

Faced with this situation, petitioner sold his entire herd of 1,875 ewes, in the fall of 1947, for $23.10 per head, at a total profit of $30,201.45. These ewes had been owned and held by petitioner for more than six months.

[Opinion]

Petitioner's purpose in culling the herd and trading his stock in 1945 and 1946 was to build up the herd to profitable size and superior grade. He expected to convert the herd into actual breeding stock in 1947. The man to whom petitioner sold bred the herd in 1947. Under the above facts, we are convinced that petitioner held the 1,875 yearling ewes for breeding purposes for more than six months and that he correctly returned profit on their sale as long-term capital gain. See Regs. 111, Section 29.117-7. Petitioner is sustained.

Decision will be entered under Rule 50.