This petition for review of a decision of the Tax Court of the United States involves the tax treatment under I.R.C. § 117(j) of the proceeds from sale of cattle from a dairy and breeding herd. From the facts found the following appears.
The taxpayer, James M. McDonald, during 1946 was the owner of a dairy and breeding herd of pure bred Guernsey cattle. It was one of the best herds of Guernsey cattle in the country, a status achieved after some 13 years of careful selective breeding. It was the taxpayer’s practice, after carefully controlling the mating of his animals, to cull as rapidly as possible those calves which did not measure up to the high standards of his herd. Some calves were rejected at *342 birth, but the great majority were screened out during the periodic inspections which commenced at the seventh month. When unsatisfactory characteristics developed, sometimes only in the animal’s offspring or grandchildren, the animal was sold. Nature being what it is, many more bulls than heifers were thus disposed of. Taxpayer had never retained a fixed percentage of calves, but had kept as many each year as proved suitable. In addition to the animals thus raised he had purchased animals from other herds in further efforts to improve his strain. The size of his herd had grown in every year but two, since its inception in 1933.
In 1946 the taxpayer sold 201 animals of varying ages, some of which had been raised, and others acquired by purchase. The proceeds from those which he had held less than six months he reported as ordinary income; the rest he reported as capital gain. The Commissioner determined that all of these receipts were taxable as ordinary income, and filed a notice of deficiency. On review the Tax Court held,
The question of purpose for which an animal is held is essentially one of fact. United States v. O’Neill, 9 Cir.,
The case of Fox v. C. I. R., supra, dealt with a similar situation. The taxpayers in that case raised Aberdeen Angus cattle-for use in their breeding herd and for-sale as breeders. It appears that the-age at which they sold their young; animals depended on the varying preferences and desires of purchasers. This differs sharply from the practice herein,, which was to cull animals for sale as. rapidly as they evidenced undesirable.characteristics. 1 So these facts of the-Fox case would afford some basis for a. conclusion that there the animals were-held for sale.
In justice to the Tax Court, however,, which relied on this case in denying the-motion to vacate or revise its decision,, we must grant that this circumstance: *343 was given little weight in the opinion of the Fourth Circuit Court of Appeals. The opinion emphasized the regularity and high proportion of sales and the failure to test breeding qualities before disposing of the animals. And it pointed very strongly to the results reached by the Tax Court herein.
We think, however, that this view penalizes breeders with skill sufficient to detect and cull inferior animals even before they have been bred. True, an affirmative judgment that an animal is superlative cannot be made without examination of its offspring. But the evidence is compelling that a negative judgment can often be made on the basis of such factors as brightness of eyes, width of nostrils, size of muzzle, length of neck, sharpness of shoulders, depth of chest and spring of ribs, straightness of back, width and level of rump, and, in the case of a cow, size of udder and its firm attachment to the body. Thus younger animals can be accurately culled, and the animals which the taxpayer sold were selected in this manner. Before an animal had been thus weeded out it was part of the regular herd, held for dairy and breeding purposes until it should prove unfit. See O’Neill v. United States, D.C.S.D.Cal., 5 CCH 1952 Fed. Tax Rep. jj9462, affirmed United States v. O’Neill, 9 Cir.,
Of course it was in the taxpayer’s contemplation that many or most of the animals would be found wanting and be sold. The operation might perhaps even have proved unfeasible without the income thus derived. And in a very real sense the taxpayer could have said at any moment that most of his calves were held for possible sale. But this was not the motive behind their retention, and legislative history of the new law shows that motive is to be controlling. And it is this new law which is and must be decisive.
Prior to this 1951 amendment the Commissioner had first refused to recognize that livestock could qualify for treatment under the capital gains provision, and then had ruled that only unusual reductions of herd would suffice. A series of adverse rulings in the courts, Albright v. United States, 8 Cir.,
When Congress undertook to amend § 117(j)(l), it was made fully cognizant of this situation by representatives of livestock and breeding associations. Hearings before Committee on Finance on H.R. 4473, Revenue Act of 1951, Part 3, pp. 1538,1837, 2396; Sen.Rep. No. 781, 82d Cong., 1st Sess. 41-42. And it is manifest that the section was drafted with an eye to the breeders’ complaints. Thus in defining property “used” in the business the amendment speaks of livestock “held” for an appropriate purpose, and adds the further proviso that it apply “regardless of age.” The intent to repudiate the Commissioner’s view is obvious, even without the specific statements in the Report of the Senate Committee on Finance, supra. And it is equally clear that the animal need not be mature and need not have been put to its intended use.
Hence we cannot accept the Tax Court’s ruling that the animals must be *344 24 months old, the age at which they have presumptively had offspring. Equally we disapprove the view that an animal is held for breeding purposes only if there is an expectation and intention that it produce offspring. Life is replete with situations (advertising, war, reproduction) where many are employed in the hope that one will succeed. Yet the purpose subserved by the many is clear. This does not mean that every farmer can obtain the benefit of the capital gains provision for his entire calf crop merely by selecting one of the better looking animals every time he needs a replacement for his producing herd. This taxpayer, however, has made a thoroughly convincing record that his retention of calves was a necessary factor in building his champion herd. He is entitled to the benefit of I. R. C. § 117(j) (1) in its new and revised form.
There remains the Commissioner’s alternative position in the Tax Court that if the proceeds of these sales are treated as capital gains, then the taxpayer’s statutory gross income would be reduced, thereby increasing his operating loss deduction which has been continuous from the beginning of his operations. See United States v. Benedict,
Reversed and remanded.
Notes
. Counsel for the taxpayer raises another possible distinction in his claim that the appreciation in value of beef calves more than covers the cost of their maintenance, whereas the reverse is true with dairy calves. If this is so it is strongly persuasive that the motive for holding these dairy calves was not sale, but inclusion in the breeding herd. The Tax Court, however, made no finding on this point; and since the record is inconclusive, we. disregard it.
. Albright v. United States, supra, 8 Cir.,