OPINION.
Leech, Judge:
The only question presented is whether the respondent erred in determining that the gain realized by petitioner in the taxable year 1943 from the sale of certain cattle from its breeding herd was taxable as ordinary gain. Petitioner contends that the sales from its breeding herd are to be treated as sales of capital assets under the provisions of section 117 (j) of the Internal Revenue Code.1 The respondent relies solely upon two department rulings contained in I. T. 3666 and I. T. 3712, the material parts of which are set forth in the margin.2 While in I. T. 3666 it is recognized that livestock used for draft, breeding, or dairy purposes is property used in a trade or business of a character subject to depreciation within the meaning of section 117 (j) of the code, if held for more than six months, it provides that “culls” from the breeding herd in the regular course of business are considered to be “property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business,” and, therefore, the sale of such animals is not to be treated as the sale of a capital asset.
I. T. 3712 amplifies the phrase “culled from the breeding herd” and prescribes a prima facie test. If the number sold from the breeding herd exceeds the number of raised animals added during the same year, it will be presumed that the excess number sold consisted of animals held for breeding purposes and, if held for more than six months, the gain or loss is subject to section 117 (j) ; but, if the number of raised animals added to the breeding herd is greater than the number sold during the year from the breeding herd, none of the animals Sold will be considered capital assets subject to the provisions of section 117 (j).
By letter dated August 4,1947, the respondent issued a special ruling explaining that:
The prima facie presumption that sales made from the breeding or dairy herd which do- not 'reduce the size of the herd because of addition of raised animals result in ordinary income is always subject to rebuttal and should not be applied arbitrarily. The classification of “culls” was intended to include all animals sold from the breeding herds that represent regular sales made from such source in the ordinary operation of the taxpayer’s business,
In the case of Albright v. United States, 173 Fed. (2d) 339, these departmental rulings were directly involved, and the court concluded that, as applied to the facts there involved, they were “contrary to the plain language of section 117 (j) and to the intent of the Congress expressed in it.”
In the Albright case, the taxpayer maintained a dairy herd of 36 dairy cattle, of which an average of 18 to 20 head were producers of milk which was sold to local creameries. Calves which were not needed for the maintenance of the dairy herd at the desired number were sold on the market. Dairy cows which, by reason of age, injury or disease, were unfit for use in the dairy herd or which, because of decreased milk production, were economically less desirable for that purpose than available young stock, were sold and replaced by young stock raised by the taxpayer. He regularly maintained also a breeding herd of 10 sows and 1 boar. Each year the taxpayer sold his breeding herd, replacing it with an equal number of young sows raised by him and with another boar purchased from a neighboring farmer. The evidence was that this was the usual practice in the hog-raising industry. During 1945 the taxpayer sold 6 cows, 10 sows, and 1 boar. In 1946 he sold 8 cows, 2 bred heifers, 10 sows, and 1 boar. In his income tax returns the taxpayer treated the amounts received from the sale of cows removed from the dairy herd and from the sale of his breeding herd of swine as capital gains. The respondent ruled that such sales were productive of ordinary income, and determined deficiencies for each year. The taxpayer paid the deficiencies and sued for a refund. From a judgment in favor of the United States, an appeal was then taken. The Circuit Court reversed, with directions to enter judgment for the taxpayer.
In the instant case the basic operation of petitioner is the raising of cattle. It maintains complete and accurate records. It keeps two basic accounts, separately classifying its breeding cattle and cattle held for sale in the ordinary course of its business. It does not sell heifer calves. A heifer calf born in the spring is valued at the end of the year at a price of $27.50; a yearling heifer is valued at $40, and the increased value is reported as ordinary income. When the heifers are two years old, petitioner selects the better ones to be placed with its breeding herd. Those selected are then transferred from the ordinary cattle account to the breeding cattle account and given a value of $48.50, which value they retain. This $8.50 increase is reported as ordinary income for that year. The remaining heifers not selected for the breeding herd remain in the ordinary cattle account and if sold at a price in excess of the value at which they are then carried, such excess is returned as ordinary income. Because of the various factors which enter into the selection of heifers to be transferred to the breeding herd, and those factors which enter into the determination of the cattle to be sold from the breeding herd, the size of the breeding herd varies from year to year. Some years the breeding herd is reduced and sometimes increased. In the taxable year the number of heifers added to the breeding herd exceeded the number sold therefrom. Because of such circumstances the respondent determined that all the sales from the breeding herd constituted property held by petitioner for sale to customers in the ordinary course of petitioner’s business, and that petitioner is not entitled to the benefits of section 117 (j) of the code.
Petitioner contends that when, in the normal course of its business, it transfers the two-year-old heifers into its breeding herd, they are being held for breeding purposes and are to be considered capital assets under the pertinent statute; that, having become part of the breeding herd, they are not held primarily for sale to customers in .the ordinary course of business.
In the Albright case, supra, the Circuit Court said:
Section 117 (j) was intended as a relief measure applicable alike to all taxpayers within its provisions, Leland Hazard v. Commissioner, 7 T. C. 312. That it was so intended is clearly expressed in the report of the Committees of the House of Representatives and of the Senate in charge of the bill. See H. Rep. No. 2333, 77th Cong., 2d Sess., pp. 53-54 (1942-2 Cum. Bull. 372, 415) and S. Rep. No. 1631, 77th Cong., 2d Sess., p. 50 (1942-2 Cum. Bull. 504, 545). The section provided an entirely new method of reporting gains and losses on the sale of noncapital assets used in the trade or business of the taxpayer. * * * The Commissioner has ruled that livestock held by a farmer for dairy, breeding, or draft purposes are, while so held and used, depreciable assets, not primarily held for sale' to customers in the ordinary course of his business. Nothing in the language of the section justifies the inference that a farmer should be denied the right to treat the profits received from the sale of such livestock when they are no longer profitable or fit for use in the farmer’s business as productive of capital gains and not of ordinary income.
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OPINION.
Leech, Judge:
The only question presented is whether the respondent erred in determining that the gain realized by petitioner in the taxable year 1943 from the sale of certain cattle from its breeding herd was taxable as ordinary gain. Petitioner contends that the sales from its breeding herd are to be treated as sales of capital assets under the provisions of section 117 (j) of the Internal Revenue Code.1 The respondent relies solely upon two department rulings contained in I. T. 3666 and I. T. 3712, the material parts of which are set forth in the margin.2 While in I. T. 3666 it is recognized that livestock used for draft, breeding, or dairy purposes is property used in a trade or business of a character subject to depreciation within the meaning of section 117 (j) of the code, if held for more than six months, it provides that “culls” from the breeding herd in the regular course of business are considered to be “property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business,” and, therefore, the sale of such animals is not to be treated as the sale of a capital asset.
I. T. 3712 amplifies the phrase “culled from the breeding herd” and prescribes a prima facie test. If the number sold from the breeding herd exceeds the number of raised animals added during the same year, it will be presumed that the excess number sold consisted of animals held for breeding purposes and, if held for more than six months, the gain or loss is subject to section 117 (j) ; but, if the number of raised animals added to the breeding herd is greater than the number sold during the year from the breeding herd, none of the animals Sold will be considered capital assets subject to the provisions of section 117 (j).
By letter dated August 4,1947, the respondent issued a special ruling explaining that:
The prima facie presumption that sales made from the breeding or dairy herd which do- not 'reduce the size of the herd because of addition of raised animals result in ordinary income is always subject to rebuttal and should not be applied arbitrarily. The classification of “culls” was intended to include all animals sold from the breeding herds that represent regular sales made from such source in the ordinary operation of the taxpayer’s business,
In the case of Albright v. United States, 173 Fed. (2d) 339, these departmental rulings were directly involved, and the court concluded that, as applied to the facts there involved, they were “contrary to the plain language of section 117 (j) and to the intent of the Congress expressed in it.”
In the Albright case, the taxpayer maintained a dairy herd of 36 dairy cattle, of which an average of 18 to 20 head were producers of milk which was sold to local creameries. Calves which were not needed for the maintenance of the dairy herd at the desired number were sold on the market. Dairy cows which, by reason of age, injury or disease, were unfit for use in the dairy herd or which, because of decreased milk production, were economically less desirable for that purpose than available young stock, were sold and replaced by young stock raised by the taxpayer. He regularly maintained also a breeding herd of 10 sows and 1 boar. Each year the taxpayer sold his breeding herd, replacing it with an equal number of young sows raised by him and with another boar purchased from a neighboring farmer. The evidence was that this was the usual practice in the hog-raising industry. During 1945 the taxpayer sold 6 cows, 10 sows, and 1 boar. In 1946 he sold 8 cows, 2 bred heifers, 10 sows, and 1 boar. In his income tax returns the taxpayer treated the amounts received from the sale of cows removed from the dairy herd and from the sale of his breeding herd of swine as capital gains. The respondent ruled that such sales were productive of ordinary income, and determined deficiencies for each year. The taxpayer paid the deficiencies and sued for a refund. From a judgment in favor of the United States, an appeal was then taken. The Circuit Court reversed, with directions to enter judgment for the taxpayer.
In the instant case the basic operation of petitioner is the raising of cattle. It maintains complete and accurate records. It keeps two basic accounts, separately classifying its breeding cattle and cattle held for sale in the ordinary course of its business. It does not sell heifer calves. A heifer calf born in the spring is valued at the end of the year at a price of $27.50; a yearling heifer is valued at $40, and the increased value is reported as ordinary income. When the heifers are two years old, petitioner selects the better ones to be placed with its breeding herd. Those selected are then transferred from the ordinary cattle account to the breeding cattle account and given a value of $48.50, which value they retain. This $8.50 increase is reported as ordinary income for that year. The remaining heifers not selected for the breeding herd remain in the ordinary cattle account and if sold at a price in excess of the value at which they are then carried, such excess is returned as ordinary income. Because of the various factors which enter into the selection of heifers to be transferred to the breeding herd, and those factors which enter into the determination of the cattle to be sold from the breeding herd, the size of the breeding herd varies from year to year. Some years the breeding herd is reduced and sometimes increased. In the taxable year the number of heifers added to the breeding herd exceeded the number sold therefrom. Because of such circumstances the respondent determined that all the sales from the breeding herd constituted property held by petitioner for sale to customers in the ordinary course of petitioner’s business, and that petitioner is not entitled to the benefits of section 117 (j) of the code.
Petitioner contends that when, in the normal course of its business, it transfers the two-year-old heifers into its breeding herd, they are being held for breeding purposes and are to be considered capital assets under the pertinent statute; that, having become part of the breeding herd, they are not held primarily for sale to customers in .the ordinary course of business.
In the Albright case, supra, the Circuit Court said:
Section 117 (j) was intended as a relief measure applicable alike to all taxpayers within its provisions, Leland Hazard v. Commissioner, 7 T. C. 312. That it was so intended is clearly expressed in the report of the Committees of the House of Representatives and of the Senate in charge of the bill. See H. Rep. No. 2333, 77th Cong., 2d Sess., pp. 53-54 (1942-2 Cum. Bull. 372, 415) and S. Rep. No. 1631, 77th Cong., 2d Sess., p. 50 (1942-2 Cum. Bull. 504, 545). The section provided an entirely new method of reporting gains and losses on the sale of noncapital assets used in the trade or business of the taxpayer. * * * The Commissioner has ruled that livestock held by a farmer for dairy, breeding, or draft purposes are, while so held and used, depreciable assets, not primarily held for sale' to customers in the ordinary course of his business. Nothing in the language of the section justifies the inference that a farmer should be denied the right to treat the profits received from the sale of such livestock when they are no longer profitable or fit for use in the farmer’s business as productive of capital gains and not of ordinary income. This, however, is the effect of the ruling relied on by the Government.
It may be argued, that in the Albright case the taxpayer was on a cash basis, while petitioner actually did, in the tax year, inventory its cattle, and respondent accepted its computation of income on that basis. It inventoried them in two categories — breeding herd and ordinary cattle account. From this premise the contention might be made that, because of the fact that petitioner did inventory its cattle, it is precluded from the benefits of section 117 (j) of the Internal Revenue Code, because of condition (1) (A) in that statute, which bars its benefits in the case of “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.” Since cattle held for breeding purposes are treated as property “used in a trade or business,” as distinguished from “property held primarily for sale to customers,” such cattle, of course, would not ordinarily “properly” be includible in the inventory of the taxpayer. The inclusion of such cattle in inventory has been solely by a ruling of the respondent and then only for convenience m accounting. I. T. 3666, 1944 C. B., p. 270. And that ruling, in order to prevent a farmer who uses the inventory method of accounting and reporting'income from thereby losing the benefits of section 117 (j) of the code, included the specific provision that the fact that livestock may be so inventoried “does not render such live stock ‘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’ so as to deprive the farmer of the benefits of section 117 (a) or section 117 (j) of the Internal Revenue Code.”
We conclude on this record that the respondent erred in treating the gain realized by petitioner in the taxable year 1943 from the sale of cattle from its breeding herd as ordinary income. We, therefore, sustain petitioner.
Reviewed by the Court.
Decision will be entered under Rule 50.