Gatlin v. Commissioner

1960 T.C. Memo. 23, 19 T.C.M. 131, 1960 Tax Ct. Memo LEXIS 267

• Court: United States Tax Court
• Decided: February 19, 1960
• Docket: Docket No. 70420.
• Status: Unpublished

Opinion

H. L. Gatlin and M. L. Gatlin, Husband and Wife v. Commissioner.

Gatlin v. Commissioner

Docket No. 70420.

United States Tax Court

T.C. Memo 1960-23; 1960 Tax Ct. Memo LEXIS 267; 19 T.C.M. (CCH) 131; T.C.M. (RIA) 60023;

February 19, 1960

---

S. George Voss, Esq., for the respondent.

---

TRAIN

Memorandum Opinion

TRAIN, Judge: The respondent determined a deficiency in the petitioners' income tax for the year 1953 in the amount of $289.20 and additions to tax for the same year under sections 294(d)(1)(A) and 294(d)(2) of the Internal Revenue Code of 1939 in the respective amounts of $39.70 and $26.46.

The issues for decision are:

(1) Whether the allowable depreciation on milk cows used in the operation of the petitioners' dairy farm for the years 1950 through 1953 should reduce the adjusted basis of these animals for purpose of determining the gain on their sale in 1953;

(2) Whether the petitioners' daughter, Lou Ann Timon, qualified as petitioners' dependent for the taxable year 1953; and

(3) Whether petitioners are liable for the addition to tax under 294(d)(1)(A) for failure to file a declaration of estimated tax.

The respondent has conceded the issue with respect to the addition to tax under section 294(d)(2). Commissioner v. Acker, 361 U.S. 87 (1959).

All of the facts are stipulated and are hereby found as stipulated.

Petitioners are husband and wife residing at Mansfield, Louisiana. They filed their 1953 return with the district director, New Orleans, Louisiana.

In 1950, the petitioners purchased 20 milk cows to be used in the operation of their dairy farm. These milk cows were so used from the date of acquisition until they were sold in 1953. The petitioners did not claim depreciation on these cows on their 1950, 1951, 1952, or 1953 income tax returns, nor were the cows included in their inventory for the purpose of determining profits.

Section 23(1) of the 1939 Code states that there "shall" be allowed as a deduction "a reasonable allowance for exhaustion, wear and tear * * * (1) of property used in the trade or business, or (2) of property held for the production of income."

The milk cows held by the petitioners for dairy purposes fall within the definition of property used in their trade or business under section 117(j)(1), 1939 Code, which states:

"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(1) * * *. Such term also includes livestock * * * held by the taxpayer for * * * dairy purposes, and held by him for 12 months or more from the date of acquisition. * * *"

It has long been held that the allowable amount of depreciation must be deducted from the original cost in determining the amount of gain or loss on the sale of property. United States v. Ludey, 274 U.S. 295 (1927).

In reporting farm income on a basis where inventories are not used to determine profits, the farmer must include in his gross income (Regulations 118, sec. 39.22(a)-7(a)):

"The profit from the sale of livestock or other items which were purchased after February 28, 1913, is to be ascertained by deducting the cost from the sales price in the year in which the sale occurs, except that in the case of the sale of animals purchased as draft or work animals or solely for breeding or dairy purposes and not for resale, the profits shall be the amount of any excess of the sales price over the amount representing the difference between the cost and the depreciation theretofore allowed (but not less than the amount allowable) in respect of such property as a deduction in computing net income. [Italics supplied]."

To arrive at the adjusted basis of the milk cows in question it is necessary to determine the depreciation which is allowable each year, whether or not it is claimed. Virginian Hotel Co. v. Helvering, 319 U.S. 523 (1943); William R. Collins, 18 T.C. 99, 104 (1952), affd. 203 F. 2d 565 (C.A. 6, 1953). Furthermore, the basis must be reduced by the amount allowable even though the petitioners might not have realized any tax benefit had they claimed the depreciation determined. Virginian Hotel Co. v. Helvering, supra.

Consistent with the rules set out above, the petitioners realized gain on the sale of the cows in question as follows: