DocketNumber: Docket No. 54527
Judges: Fisher,Train
Filed Date: 10/9/1957
Status: Precedential
Modified Date: 10/19/2024
Deductions -- Net Operating Loss -- Termination of Part [ILLEGIBLE WORD] Business --
*7 The Commissioner determined a deficiency of $ 7,602.78 in the income tax of the petitioners for 1951. The issues for decision are whether the Commissioner understated the petitioners' net operating loss for 1952 for the purpose of the 1951 net operating loss deduction by regarding as nonoperating losses a loss of $ 15,776.13 on the sale of *70 breeding-herd cattle and a loss of $ 598.96 from the sale of a combine.
FINDINGS OF FACT.
The petitioners are husband and wife, they resided in Gruver, Texas, and they filed a joint return for 1951 with the collector of internal revenue for the second district of Texas.
Gene has been engaged in the farming and ranching business since about 1934. He farmed about 2,100 acres mainly in growing wheat. He had a combine which was "pretty well used" in cutting and threshing his wheat, and he decided to sell it because he believed it would be cheaper to hire transient combine owners to do the work. The sale of this combine resulted in no appreciable diminution in his wheat-farmingactivity. He sold the used combine in 1952 at a loss of $ 598.96.
*8 The loss on the sale of the combine was attributable to the operation of the farming business regularly carried on by the petitioner.
The petitioner has regularly bought, fattened, and sold cattle. He usually keeps such cattle for from 6 months to a year and then sells them on the market to packers. He calls this his commercial cattle business.
The petitioner decided early in 1951 to acquire a herd of breeding cattle. He had not had any breeding cattle *71 during a number of years prior to 1951, but earlier he had owned breeding cattle. He regarded his activities in connection with the breeding herd as separate from his commercial cattle business. The connection, if any, between the two is not shown in this record.
The petitioner purchased 288 cows and 10 bulls in 1951 at a total cost of $ 63,638.51 as a breeding herd. All but 15 of the cows and 6 of the bulls were purchased on or before March 1, 1951. The last purchases were 14 cows and 6 bulls on December 1, 1951.
A veterinarian, after testing the petitioner's herd of breeding cattle on February 16, 1952, advised the petitioner that some of the cows inthe herd had Bang's disease, which incapacitates cows as breeding animals by causing them to abort, to have premature calves, and the like.
The petitioner, upon being advised that Bang's disease was in his herd, decided to discontinue his breeding operation, to fatten the breeding cattle, and to sell them for beef as soon as possible. He sold 250 of them in 1952, 6 died in that year, and he sold the remaining 42 in 1953. He has had no intention to replace and he has not replaced his breeding herd.
The petitioner's commercial herd of cattle *72 consisted of 1,001 animals on January 1, 1951, and during that year 713 were purchased, 76 calves were born, and 1,558 were sold. His inventory of cattle at the beginning of 1952 consisted of the breeding herd of 298 animals purchased during 1951 and 232 in the commercial herd left over from 1951. The commercial herd was increased during that year by 186 purchased and 185 calves born and was reduced by the sale of 193 animals. There were on hand, at the beginning of 1953, 42 breeding animals and 410 commercial-herd animals.
The petitioners on their return for 1951 reported $ 120,563.34 gross profit from cattle sales of $ 375,126.53, grain salesof $ 385.96, and net income of $ 49,937.02.
The petitioners on their return for 1952 reported $ 24,200.34 gross profit from "Cattle Sales -- Commercial" of $ 32,330.06, grain sales of $ 23,878.88, and a total loss of $ 23,433.51 after deducting a loss from breeding sales computed as follows: *9
Cattle sales -- Breeding | $ 29,341.85 | |||
Less: Cost of sales: | ||||
Cost | $ 53,686.25 | |||
Less: Depreciation sustained | 8,568.27 | 45,117.98 | ||
Gross (Loss) -- Breeding sales | ($ 15,776.13) |
The total deductions for depreciation taken on the 1951 and 1952 returns included depreciation *73 of $ 9,945.60 on the 288 cows and 10 bulls purchased in 1951 for breeding purposes.
The Commissioner, in determining the deficiency for 1951, allowed a net operating loss deduction from 1952 of $ 7,878.14, which he determined as follows:
Net loss shown on 1952 return | $ 23,433.51 | ||
Adjustments under section 122 (d) (5), Internal | |||
Revenue Code -- | |||
Section 117 (j) losses: | |||
Loss on sale of breeding herd | $ 15,776.13 | ||
Loss on sale of combine | 598.96 | ||
Nonbusiness income | 1 682.48 | ||
Total | 17,057.57 | ||
Less: Nonbusiness income | 1,502.20 | 15,555.37 | |
Net loss deduction to 1951 | 7,878.14 |
The sales by the petitioner in 1952 of 250 head of cattle purchased as a part of a breeding herd were made as a part of the termination of the petitioner's cattle-breeding activity. The loss of $ 15,776.13 sustained in 1952 from the sale of 250 cattle was not incurred in the operation of a trade or business regularly carried on by the petitioner.
All stipulated facts are incorporated herein by this reference.
OPINION.
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,
The Supreme Court in
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 *75 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
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
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
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
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 in 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 *78 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.
The *79 Commissioner did not err with respect to the loss on the sale of the 250 breeding cattle in 1952. However, he erredin 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.
Fisher,
The majority Opinion cites numerous cases, including those referred to in
In
In
*13 In
In
In
In
In
The distinction between the facts in the cases relied upon by the majority and the facts in the instant case may perhaps be highlighted in summary by reference to
There is room for doubt growing out of intricate provisions of the statute and the history of this and precedent legislation and former regulations; but we think this loss was not incurred in the operation of a trade or business, and so not an operating loss at all. The business had been abandoned. The plant was sold not in operating the business, but because the business was not to be operated any more.
In my judgment, the foregoing language of the Court of Appeals (which recognized difficulty even under the facts there presented) plainly exposes the difference between the controlling factors which produced the results there reached and the significant factors in the case before us. Here, petitioner had three phases of his business. It is true that one operational phase or function ceasedof necessity as a result of an operational catastrophe, but the cattle theretofore devoted to such function were readily transferable to, and became a practical part of, another operational function. Although at one time part of the former function, such cattle *84 were held, fattened, and disposed of in the ordinary course as part of the latter. I think this is quite different from the circumstances in
The majority Opinion points to the fact that petitioner's books and records, and his income tax return for 1952, dealt with the breeding cattle separately from the commercial cattle. Respondent, however, does not question the amount of the loss, and points to no reason why petitioner should not have continued with his existing method of keeping books and records. While the keeping of separate records is a factproperly to be taken into consideration, to my mind, viewed in the light of all of the circumstances of the case, it is by no means determinative of the issue before us. The same view may be expressed with respect to the fact that depreciation was taken. (See discussion in *85
XI. Whether the 194 heifers sold during 1943 were held for breeding purposes is a question of fact, and it is determined that they were held * * * for breeding purposes within the meaning of Section 117 (j) * * *
The Court of Appeals, affirming, held that the finding was not clearly erroneous and was supported by substantial evidence. In my judgment, neither opinion requires the conclusion that, under the circumstances of the instant case, "breeding-herd *86 animals continue to be breeding-herd animals until sold." It is of significance, also, that the issue in
The majority Opinion also cites
The majority also refer *88 to Regulations 118, section 39.117 (j)-2 (b), providing in substance that a breeding animal disposed of within a reasonable time after its intended use for such purpose is prevented by accident, disease, or other circumstances, is still regarded as an animal held for breeding purposes. The regulation is, of course, an implementation of section 117 (j), and not
It is my view, on the basis of the foregoing discussion, that the loss sustained on the sale, as commercial cattle, of the animals which had originally been part of the breeding herd must be taken into consideration as a factor in determining petitioner's net operating loss in 1952 for carryback purposes.
I agree with the majority on the issue relating to the sale of the combine.
1. This adjustment is not contested.↩