CLuck v. Commissioner

29 T.C. 7, 1957 U.S. Tax Ct. LEXIS 69

• Court: United States Tax Court
• Decided: October 9, 1957
• Docket: Docket No. 54527
• Status: Published

Opinions

OPINION.

Murdock, Judge:

The only dispute here is as to the amount of a net operating loss deduction of the petitioner for 1951 resulting from the carryback of a net operating loss for 1952. Secs. 23 and 122, I. E. C. 1939. A net operating loss for 1952 is the excess of the deductions allowed for that year over the gross income with the exceptions, additions, and limitations provided-in section 122 (d), which provides in paragraph (5) that “[deductions otherwise allowed by law not attributable to the operation of a trade or business regularly carried on by the taxpayer shall * * * be allowed only to the extent of the amount of the gross income not derived from such trade or business.” The only questions for decision here are whether the deductions for loss on the sale of the breeding-herd animals and on tbe sale of a combine were “attributable to tbe operation of a trade or business regularly carried on” by the petitioner.

The Supreme Court in Dalton v. Bowers, 287 U. S. 404, was considering the language of an earlier provision identical to that in section 122 (d) (5), and it quoted with approval the following portion of the opinion of the Court of Appeals, for the Second Circuit:

By the statute, allowing the deductions and carrying over the loss for two years, Congress intended to give relief to persons engaged in, an established business for losses incurred during a year of depression in order to equalize taxation in the two succeeding and more profitable years. It was not intended to apply to occasional or isolated losses.

Since then other courts have laid down a general rule that a sale of a part or all of the assets used in a trade or business regularly carried on is not attributable to the operation of that business if the sale was connected with the partial or total termination of the regular business rather than with the operation thereof. A Memorandum Opinion of the Court of Appeals for the Ninth Circuit in Puente v. Commissioner, 199 F. 2d 940, affirming a Memorandum Opinion of the Tax Court dated August 20, 1951, is particularly apropos and is as follows (at p. 940) :

Petitioners seek to set aside an order of the Tax Court denying their claim that a loss sustained by them in the year 1945 on a foreclosure sale of their dairy herd and equipment used by them in the operation of their dairy business in 1944 and 1945 could be carried back to the taxable year under § 122 (d) (5) of the Internal Revenue Code, 26 U. S. C. A. § 122 (d) (5). They Concede that the issue presented is substantially the same as that in the following cases which have been decided adversely to the taxpayers: Lazier v, United States, 8 Cir., 170 F. 2d 521, 9 A. L. R. 2d 324; Sic v. Commissioner, 8 Cir., 177 F. 2d 469, certiorari denied 339 U. S. 913, 70 S. Ct. 572, 94 L. Ed. 1339; Merrill v. Commissioner, 2 Cir., 173 F. 2d 310; Baruch v. Commissioner, 2 Cir., 178 F. 2d 402; Pettit v. Commissioner, 5 Cir., 175 F. 2d 195; and Smith v. United States, 6 Cir., 180 F. 2d 357.

Petitioners have presented reasons why they think those cases were wrongly decided. We have considered with care the petitioners’ arguments. They do not persuade us. In our judgment the decisions cited were required by the terms of the section referred to.

The decision of the Tax Court is affirmed.

The court, in the Lazier case, said (170 F. 2d 521, 526):

One reasonably may believe that in providing for the carrying forward and carrying back of “net operating losses,” Congress was concerned with “net operating losses” sustained in the normal operation of a business regularly carried on by a taxpayer and was not concerned with losses attributable to the total or partial liquidation of the physical properties used in the conduct of the business. * * *

The other opinions cited in the Puente case are to the same effect. See also Bratton v. United States, 230 F. 2d 952, involving a lumberman who sold his mill at a loss; Joe B. Luton, 18 T. C. 1153, appeal dismissed (C. A. 4); Jay Burns, 21,T. C. 857, reversed on other grounds 219 F. 2d 128; and see also Helen Goble, 23 T. C. 593, in which this whole subject was discussed and the above line oí cases distinguished on the ground that the sales by Helen Goble in the regular course of her business did not materially reduce the scope of activities or materially change its nature or the manner in which it was conducted.

It is not necessary to decide here whether the petitioner’s activities in connection with the breeding herd, the commercial herd, and the wheat-farming operations constituted one single business or three separate businesses, because in any event the losses from the sales here m question of the 250 cattle in 1952 are attributable to the partial liquidation, at least, of one important part of that business.

The contentions of the petitioner’s counsel that the breeding animals were changed into a part of the commercial-herd activity of the petitioner when he decided to fatten them and sell them, is not supported by the petitioner’s testimony, by his books of account and returns, or by decided cases. He regarded the activities as separate at all stages and so indicated in his testimony, records, and returns. The cases hold that breeding-herd animals continue to be breeding-herd animals until sold under such circumstances. O’Neill v. United States, an unreported case (44 A. F. T. R. 931, 52-2 U. S. T. C. Par. 9462, S. D. Cal. 1952), affirmed per curiam 211 F. 2d 701; Fawn Lake Ranch Co., 12 T. C. 1139; Albright v. United States, 173 F. 2d 339; Franklin Flato, 14 T. C. 1241, affirmed on another issue 195 F. 2d 580; Charles E. Reithmeyer, 26 T. C. 804. See also Regulations 118, section 39.117 (j)-2 (b), providing that a breeding animal disposed of within a reasonable time after its intended use for such purpose is prevented by accident, disease, or other circumstance is still regarded as an animal held for breeding purposes.

The Commissioner did not err with respect to the loss on the sale of the 250 breeding cattle in 1952. However, he erred in disallowing the loss on the sale of the combine as an operating loss, since that loss was purely incidental to the farming business and did not result in any substantial diminution of that business.

Reviewed by the Court.

Decision will be entered wider Rule 50.