*144 Decisions will be entered under Rule 50.
1. Certain petitioners were members of a partnership which had owned and operated a beef cattle ranch. Prior to the taxable years in issue the partnership had sold the ranch and range rights to M who also "leased" the herd of beef cattle. Under the "lease," M agreed to run the herd as an operating cattle unit and sell cattle from it, dividing the proceeds of the sales equally between M and the partnership. At the close of the agreement, M was to return to the partnership an equal number, by sex and age, of cattle. Held, the income so derived by the partnership constituted the proceeds of sales of cattle and not the payment of rent by M; held, further, the partnership, not M, "held" the cattle during the term of the agreement, as that term is used in section 117(j)(1) of the 1939 Code; held, further, the partnership held all cows, bulls, and heifers over 24 months old for breeding purposes, and all younger heifers primarily for sale to customers in the ordinary course of business.
2. At the termination of the "lease agreement" with M in 1951, the partnership was unable to find suitable facilities for continued operations. *145 It sold most of the animals which had been the subject of the agreement and which were returned to it upon the termination of the agreement. Held, none of the heifers so sold by the partnership were held by it for breeding purposes, inasmuch as none of them were over 24 months old.
*351 In these consolidated proceedings respondent has determined deficiencies in income tax of the petitioners and additions to tax under sections 293(a), 294(d)(1)(A), and 294(d)(2), I.R.C. 1939, as follows:
| Additions to tax -- | ||||
| Year | Deficiency | |||
| Sec. 293(a) | Sec. 294(d)(1)(A) | Sec. 294(d)(2) | ||
| Docket No. 57161 -- F. C. Vaughan and Mattie Vaughan | ||||
| 1947 | $ 4,630.43 | $ 231.52 | ||
| 1948 | 3,633.06 | 181.65 | ||
| 1949 | 3,883.30 | 194.17 | ||
| 1950 | 7,278.68 | 363.93 | ||
| Docket No. 57162 -- Floyd C. Vaughan | ||||
| 1947 | 5,862.32 | 293.12 | ||
| 1948 | 6,947.25 | 347.36 | ||
| Docket No. 57163 -- Floyd C. and Katherine D. Vaughan | ||||
| 1949 | 5,656.44 | 282.82 | ||
| 1950 | 10,081.59 | 504.08 | ||
| Docket No. 57164 -- P. W. Vaughan | ||||
| 1947 | 666.03 | 33.30 | ||
| 1948 | 448.22 | 22.41 | ||
| 1949 | 1,190.75 | 59.54 | ||
| 1950 | 1,070.56 | 53.53 | ||
| Docket No. 69942 -- P. W. Vaughan | ||||
| 1951 | 12,516.96 | 625.85 | $ 1,383.76 | $ 1,186.08 |
| 1952 | 179.85 | 9.50 | 88.47 | 61.11 |
| 1953 | 144.00 | 7.20 | 8.64 | |
| Docket No. 69943 -- F. C. Vaughan and Mattie E. Vaughan | ||||
| 1951 | 12,662.42 | 633.12 | 1,149.08 | 984.93 |
| 1952 | 2,456.60 | 129.04 | 594.25 | 401.25 |
| 1953 | 5,914.37 | 295.72 | 548.42 | 365.61 |
| Docket No. 69944 -- Floyd C. and Kathryn L. Vaughan | ||||
| 1951 | 21,766.80 | 1,088.34 | 2,253.45 | 1,931.53 |
| 1952 | 1,657.56 | 82.88 | 221.67 | |
| 1953 | 1,258.51 | 62.93 | 75.51 |
*146 *352 Extensive stipulations resolving most of the issues, including additions to tax, raised by the pleadings have been filed by the parties, with the result that only two issues remain for our consideration. They are: (1) Whether certain of the petitioners who were members of a partnership known as Vaughan Bros. derived capital gains or ordinary income upon sales of certain cows, bulls, and heifers, which the partnership owned during the years 1947 through 1950, but which were subject to a cattle "lease agreement," and (2) whether the sale by the partnership in 1951 of certain heifers, at or in anticipation of the termination of the "lease agreement," resulted in capital gains or ordinary income to the partner petitioners.
FINDINGS OF FACT.
Petitioners F. C. Vaughan and Mattie (Mattie E.) Vaughan, his wife, Floyd C. Vaughan and Katherine D. (Kathryn L.) Vaughan, his wife, and P. W. Vaughan resided during the taxable years in issue at Baker, Hereford, and/or Vale, Oregon, and timely filed individual or joint income tax returns with the district director (collector) of internal revenue, Portland, Oregon.
F. C. Vaughan and his two sons, Floyd C. and P. W. Vaughan, organized a *147 partnership known as Vaughan Bros. in 1940 for the purpose of operating a cattle ranch near Bruneau, Owyhee County, Idaho. The partnership, sometimes hereinafter referred to as Vaughan Bros., owned in fee simple some 3,600 acres of land and held grazing rights from the Federal and State governments aggregating approximately 250,000 acres. Vaughan Bros. conducted livestock operations, and operated the ranch, continuously from 1940 to May 1945. In May 1945, the partnership contracted to sell the ranch, all range rights, and cattle. The vendees took over operation of the ranch, sold some 850 to 900 cattle, but because of difficulties in securing financing, rescinded the purchase, with the partnership's consent, and returned the ranch, range rights, and remaining portion of the herd to the partnership in October 1945.
On or about May 15, 1946, Vaughan Bros. sold the ranch, rangeland, and range rights to Milford J. Vaught (hereinafter referred to as Milford). Because Milford was unable and unwilling to meet the partnership's price for the cattle, the partners and Milford 2 at about the same time entered into a "lease agreement."
*148 The "lease agreement" recited that:
1. The lessors were owners of branded Hereford cattle classified as follows: *353
| 790 | range cows. |
| 306 | heifers coming 2 years old. |
| 102 | weaner calves. |
| 128 | heifers. |
| 156 | sucking calves. |
| 11 | registered bulls, 2 years old. |
| 3 | registered bulls, 3 years old. |
| 4 | registered bulls, 4 years old. |
| 7 | registered bulls, 5 years old. |
| 13 | aged bulls. |
| 1,520 | total. |
2. "[The] parties hereto desire to provide for the operation of such cattle" under the terms of the lease on the range properties the lessors sold the lessees.
3. The lessors were owners of the dash running "M" brand.
4. The parties contemplate operation of the cattle and increase and accretion thereto as "an operating cattle unit" in connection with the described range and properties.
The parties to the agreement further agreed that:
1. The lessors lease and let the cattle, replacements, and increase for operation by lessees for the 5-year term from April 1, 1946, to April 1, 1951.
2. The parties do not intend to create a partnership, and neither party is to be liable for the debts of the other, absent written agreement, and all operations by the lessees shall be as independent contractors.
*149 3. The lessees are to care for and operate the cattle as a range and ranch herd as a unit, and to maintain the herd at its present size and quality by increase or by purchased replacements to be paid for by the parties jointly.
4. The cattle shall be run on the lands and ranges sold to the lessees, a requirement which shall be a covenant running with the land.
5. The cattle shall not be removed from the county "except in the normal course of the marketing of the beef and other cattle which shall be produced for sale or which in the normal operation of said herd should be sold from the culling thereof."
6. The cattle shall be run by the lessees, whose right so to do is not assignable, but shall be run under the lessors' brand and the lessees shall run no other cattle, except as specified in the agreement.
7. The range fees and costs of bulls for the herd shall be borne equally by the parties.
8. The lessees are to furnish all feed and labor necessary to the operation of the herd, and pay all operating expenses.
9. The lessors and the lessees each are to receive one-half of the proceeds from the sales of all cattle which shall be produced from the *354 herd, and one-half of the*150 surplus of the cattle, after replacement of the original herd.
10. The lessees shall have the right to sell and market cattle from the herd as are produced for market, as in Milford's judgment is in the best interest of the parties, but he shall confer and counsel with the lessors in this regard, all checks and drafts in payment therefor being made payable jointly to F. C. Vaughan and Milford.
11. Title to all cattle operated under the agreement shall remain in the lessors, except for cattle sold under the terms of the agreement.
12. Upon termination of the agreement, the lessors shall receive replacement of the herd as previously listed and classified, with the balance of the cattle divided equally between the parties in a manner specified.
13. Full performance by the lessees is a condition precedent to any right to share in the cattle or proceeds of sales.
14. The lessors may terminate the agreement prior to its expiration upon failure of the lessees to correct any default within 30 days after notice.
The Vaughan Bros. operation had its winter headquarters at the T Ranch, near Bruneau, Idaho. The winter headquarters comprised some 1,000 acres of farm, meadow, pasture, and buildings. *151 The range stretched to the south in a widening area to a point near the northern boundary of Nevada. Summer headquarters for the operation, the Battle Creek Ranch, lay about 50 miles south of Bruneau, and comprised about 50,000 acres of pastures and buildings. Because much of the Vaughan partnership's acreage was desert range, and because the number of cattle that could be grazed on the Federal ranges was limited, the partnership could graze about 2,100 head of count cattle. Count cattle include all cattle, except calves less than 6 months of age on January 1 of the year for which the Federal grazing permit is issued. During the term of the agreement Milford secured permission to graze additional count cattle on the Federal grazing lands.
During the years in issue, the cycle of operation of the herd of range cattle commenced each year on or about March 15, when dry cows, cows with suckling calves, weaner heifers, older heifers, and all the steers then remaining in the herd were turned out on the range. "Calvy" heifers and cows were held a while longer at the winter headquarters, and then were also turned out on the range with the rest of the herd. The herd bulls were not turned*152 out on the open range with the rest of the herd until about May 1 of each year.
The terrain over which the cattle grazed was an open-range operation as distinguished from a fenced range or irrigated pasture operation. Because of the nature of the operation and the terrain, heifers could not be segregated from the rest of the herd on the open range, *355 although "open" or unbred heifers brought a higher price on the beef cattle market than did bred, or possibly bred, heifers.
From March 15 to November 15, all of the cattle stayed out on the open range, during which time all cows and heifers were exposed to the bulls. A heifer is capable of breeding when it is 8 or 9 months old, but such an occurrence is rare and exceptional. Normally heifers in good condition will begin to breed when they are approximately 14 to 15 months old. Since the period of gestation for cattle is 9 months, few heifers drop calves before they are 24 months old. Of those heifers that do breed and calve early, many will not breed the succeeding year.
The first cattle roundup following the spring turnout, the calf roundup, was made in June of each year, at which time all calves located were branded and*153 otherwise attended to as circumstances might require. After a period during which hay for winter feeding was harvested, the beef roundup commenced. This occurred in August or September when the cattle were in "bloom," or best condition, prior to the drying up of natural range feed and resultant weight loss by the cattle.
The purpose of the beef roundup was to gather those animals intended for sale as beef cattle. Cows with unbranded calves were also gathered so that the calves might be branded. Not all animals were gathered in the beef roundup. Good cows, particularly those obviously with calf, were not rounded up. Many cows, however, were gathered; more, in fact, than were intended for sale. Practically all the heifers were gathered, as were all the steers.
When the animals were gathered, unbranded calves were branded and turned back out on the range. The animals were then segregated by placing the steers, cows, and heifers in separate pastures. The number, weight, and approximate market price of the steers were calculated. Next, the cows were inspected and the culls, animals less desirable for retention in the herd, were selected for sale, while the better animals were*154 returned to the range. Finally, sufficient heifers were selected for sale which, with proceeds from the sale of steers, would produce sufficient income for continued operations. Heifers which were obviously pregnant were placed in the breeding herd because buyers of feeder cattle would not buy them. Thus, some inferior heifers were retained because they were pregnant, and some better heifers were sold because not visibly pregnant. The pregnancy of heifers becomes apparent in about the seventh month of the gestation period. The characteristics upon which a determination is made as to whether a heifer will be valuable as a replacement in the herd do not develop until the heifers are 18 to 24 months old.
The majority of all yearly sales, up to 95 percent of them, was made in September or October, during, or shortly after, the beef *356 roundup, principally because the cattle were then in the best condition. Most of the sales were made to buyers who came to the ranch for that purpose, and the rest of the cattle were shipped to various cattle markets in Idaho.
Starting in the late fall, after the beef roundup and sales, and continuing through January of the following year, all*155 of the cattle were gathered from the open range and placed in the fields, or "feed yards," of the winter headquarters at Bruneau. The gathering continued until approximately February 1, when it was discontinued on the theory that any cattle still out on the open range would survive the winter.
During the process of gathering the cattle for the winter, the cattle were segregated by classes. During March and April, the bulls were separated from the cows and heifers to prevent calving during the coldest months of December and January. The cycle of operation was completed with the birth of the greatest percentage of calves in February and March with a few births in early April. There was also a much smaller crop of calves born in the fall months.
During the years in which Milford operated the cattle, Vaughan and/or Floyd visited the ranch at least twice a year, and at least one of them was present at each beef roundup and selection of animals for sale.
At the start of the contract period on April 1, 1946, the number of count cattle on hand and subject to the contract totaled 1,364, classified as set forth in the agreement (except for 156 suckling calves which were not considered count*156 cattle). This total was considerably less than the operating capacity of the ranch, which was in the neighborhood of 2,100 head of cattle, as well as considerably less than the number of count cattle on hand when the Vaughan partners undertook to sell the ranch and herd in 1945.
In the operation of the herd, bulls were normally purchased when they were about 2 years old, used for breeding purposes for approximately 6 years, and sold when they were 7 or 8 years of age. Some bulls were sold at an earlier age if they developed defects which rendered them unsuitable for retention in the breeding herd. During the contract period, bulls were sold, as follows:
| Year | Number |
| 1946 | 0 |
| 1947 | 11 |
| 1948 | 0 |
| 1949 | 15 |
| 1950 | 9 |
| Total | 35 |
During the years 1946 through 1949, 28 bulls were purchased under the contract. No bulls were purchased in 1950. All bulls sold were *357 held by the partnership for breeding purposes for more than 6 months.
During the contract period the number of cows culled from the breeding herd and sold as undesirable for retention was as follows:
| Year | Number |
| 1946 | 78 |
| 1947 | 100 |
| 1948 | 54 |
| 1949 | 144 |
| 1950 | 57 |
| Total | 433 |
All cows sold were *157 held by the partnership, Vaughan Bros., for breeding purposes for more than 6 months.
The number, average weight, and age range of heifers sold during the contract period were as follows:
| Date | Age (in months) | ||||
| Number | Average | ||||
| sold | weight | ||||
| Year | Month | Over | Not over | ||
| 1946 | September | 133 | 757 | 24 | 28 |
| 1947 | August | 135 | 842 | 24 | 36 |
| August | 1 | (1) | (1) | (1) | |
| September | 94 | 692 | 18 | 24 | |
| 1948 | September | 1 | 450 | 12 | 15 |
| (1) | 1 | (1) | (1) | (1) | |
| 1949 | (1) | 206 | 612 | 15 | 18 |
| December | 1 | 375 | 10 | 12 | |
| (1) | 89 | 562 | 14 | 18 | |
| (1) | 99 | 703 | 18 | 24 | |
| (1) | 53 | 453 | 12 | 15 | |
| 1950 | September | 1 | 645 | 18 | 22 |
| September | 1 | 620 | 17 | 20 | |
| September | 2 | 740 | 24 | 28 | |
| Total | 817 |
During the contract period, the dollar amount of total cattle sales, steer sales, heifer sales, and the percentage of total sales and steer sales which heifer sales constituted, were as follows:
| Percent of | Percent of | ||||
| Year | Total sales | Steer sales | Heifer sales | total | steer |
| sales | sales | ||||
| 1946 | $ 34,922.00 | $ 11,431.25 | $ 15,093.75 | 43.22 | 132.04 |
| 1947 | 80,221.16 | 40,416.93 | 22,528.10 | 28.08 | 55.74 |
| 1948 | 76,950.78 | 51,791.28 | 15,862.75 | 20.61 | 30.63 |
| 1949 | 80,651.10 | 36,220.85 | 22,751.36 | 28.21 | 62.81 |
| 1950 | 99,296.55 | 48,932.13 | 36,940.52 | 37.20 | 75.49 |
| Total | 372,041.59 | 188,792.44 | 113,176.48 | 30.42 | 59.95 |
| Average | 74,408.32 | 37,758.49 | 22,635.30 | 30.42 | 59.95 |
*158 During the period of the contract, the number of heifers branded totaled approximately 1,636 animals.
The number of steers and heifers sold under the contract and the percentage of heifer sales to steer sales were as follows: *358
| Year | Steers sold | Heifers sold | Percentage |
| 1946 | 123 | 133 | 108.13 |
| 1947 | 300 | 136 | 45.33 |
| 1948 | 301 | 96 | 31.89 |
| 1949 | 287 | 207 | 72.13 |
| 1950 | 289 | 245 | 84.78 |
| Average | 260 | 163.40 | 62.85 |
Until heifers were in excess of 24 months of age, they were held by petitioners primarily for sale to customers in the ordinary course of business. Heifers over 24 months old were held by petitioners primarily for breeding purposes.
By its terms the contract between the partnership and Milford expired on April 1, 1951. At that time the herd of cattle was to be returned to the partnership in the same number, sex, age, and classification as at the beginning of the term. The cattle on hand in excess of those to be returned were to be divided equally between the partnership and Milford.
At the termination of the contract in 1951, the Vaughan partnership did not have available facilities sufficient to accommodate all of the animals to which*159 it was entitled. Certain range lands had been leased in Oregon to accommodate some of the animals; but despite a 2-year search, the partnership had been unable to locate satisfactory facilities to which to remove the entire replacement herd and increase for further operation. No agreement could be reached with Milford to continue running some of the cattle.
Selection of cattle for the replacement herd and division of the increase in the herd commenced in January 1951 and was completed on or about April 1, 1951, the termination date of the agreement. There were 1,837 animals on hand at the expiration of the agreement.
During the first 4 months of 1951, the partnership sold to Milford cattle of the classification, ages, and for prices as follows:
| Age | |||
| 1 Cattle *160 | Total price | ||
| From -- | To -- | ||
| 250 cows | 6 years | 10 years | 2 $ 50,000 |
| 12 steers | (3) | (3) | 2,400 |
| 4 23 suckers | 1 day | 14 months | 1,150 |
| 5 340 weaners (mixed) | 12 months | 18 months | 51,000 |
| 22 bulls | 2 years | 8 years | 6,600 |
| 150 cows | 4 years | 8 years | 41,250 |
| 50 heifers | 20 months | 24 months | 11,250 |
| Total | 163,650 |
Except for the 400 cows and 22 bulls, none of the animals sold by the partnership to Milford in 1951 were held for breeding purposes.
*359 At, or in anticipation of, the expiration of the contract with Milford, the partnership removed 646 cows and heifers, 150 suckling calves, and 12 bulls to Oregon in 1951.
Of the animals removed to Oregon, the partnership sold animals in 1951 of the classification, and approximate ages to purchasers as follows:
| Age | |||
| Cattle | Purchaser | ||
| From -- | To -- | ||
| 202 cows | 4 years | 9 years | I. C. Barlow. |
| 100 suckling calves | 1 day | 14 months | I. C. Barlow. |
| 60 heifers | 12 months | 15 months | Robert F. Vaughan. |
| 52 steers | 12 months | 15 months | Robert F. Vaughan. |
Of these animals, only the 202 cows sold to I. C. Barlow were held by the partnership for breeding purposes.
OPINION.
Petitioners contend that the proceeds of all sales of cows, bulls, and heifers during the term of their agreement with Milford are taxable as capital gains derived from the sale of animals held*161 for breeding purposes within the meaning of section 117(j)(1) of the Internal Revenue Code of 1939. 3
*162 Respondent first contends that the agreement between the partnership and Milford was a lease, creating a lessor-lessee relationship, and consequently that any income derived by the partnership thereunder must necessarily be ordinary income. It was not. The income which the partnership derived was the product of the sale of animals, not the product of the agreement (regardless of the label applied to the agreement). It is true that had Milford been obligated to pay the partnership rent for the use of the cattle, such rental payments would constitute ordinary income but we can find no such obligation in the agreement. The only duty which the agreement placed upon Milford *360 as to the payment of money was the duty to transmit to the partnership one-half of the proceeds of sales of cattle. We hold, therefore, that the amounts in question were not ordinary income arising as rentals from a lease, but constituted, rather, proceeds of sales of cattle, the taxable nature of which must be taxed as proceeds of sales.
By the agreement with Milford, petitioners gave possession and control of the herd to Milford and agreed to share certain range and other expenses. In return, Milford*163 agreed to run the herd, feed it, provide labor necessary to operate it, and to share certain expenses. Milford was given powers to sell cattle in his discretion, and the proceeds of such sales were to be divided equally between petitioners and Milford.
Such contracts are variously referred to as leases, partido agreements, 4 bailments, 5 or agistments. 6 By whatever name they are known, they bear aspects of rental agreements, bailments for mutual benefit, and management contracts. The proportion of these aspects necessarily varies with each agreement and in accordance with the interpretation given them by the courts of appropriate jurisdiction.
It is clear that under Idaho law *164 the owner of livestock is not divested of his ownership of animals transferred under such an agreement. 7 It is also clear that the other party to such an agreement (by whatever label he be designated) acquires an undivided interest (in the present case, a one-half interest) in the increase at birth. 8*165 Although the lessee is the apparent owner of the animals, in that he has custody and control of them, recording of the agreement in accordance with State statute 9 prevents fraud upon subsequent secured creditors of the lessee, and preserves the owner's interest. 10 Therefore, under applicable State law, petitioners owned the cattle transferred under the agreement, and an undivided one-half interest in the increase. Likewise, it would seem they had an undivided one-half interest in any accretions to the herd.
Thus, petitioners were the owners of the cattle or interests therein. Respondent's contention that petitioners did not "hold" these cattle or interests in the cattle within the meaning of section 117(j)(1) is not supportable. "In common understanding to hold property is to own it." McFeely v. Commissioner, 296 U.S. 102 (1935). The holding period begins with acquisition of property and not with its conversion to a particular use. Kay Kimbell, 41 B.T.A. 940">41 B.T.A. 940 (1940). The holding of the owner is not defeated by the custody or possession of a bailee *361 for the custody or possession by a bailee or trustee does not commence the running of the bailee's or trustee's holding period. Howell v. Commissioner, 140 F. 2d 765 (C.A. 5, 1944). Even if petitioners had *166 given Milford an option to purchase the cattle at the end of the lease, the interest of the optionee does not commence the running of his holding period by any theory of relation-back so as to defeat petitioners' holding. Helvering v. San Joaquin Fruit & Investment Co., 297 U.S. 496 (1935).
It is stipulated that petitioners owned the cattle prior to the agreement with Milford. It is clear that, under Idaho law, petitioners did not divest themselves of their ownership of the cattle leased. Necessarily it follows that they held the cattle during the years in issue.
Respondent next contends that the partnership did not hold the animals operated under the agreement for breeding purposes. In this regard he argues that the animals were held either for lease or hire, or for sale to customers in the ordinary course of business.
The contract between the partnership and Milford was called a "lease agreement," referred to the parties as "lessors" and "lessees," and was generally couched in language similar to that used in rental agreements. As previously noted, however, the agreement imposed upon Milford no obligation to pay any rent. More important, it*167 seems clear that the agreement contemplated continued operation of the herd and required operation of the herd as an operating cattle unit. Although the agreement specifically disavows any intent to create a partnership between Vaughan Bros. and Milford, it likewise specifies that Milford's operations shall be those of an independent contractor. In this respect the agreement most nearly resembles a management contract in which Milford undertook to operate the herd for the partnership, supplying feed, range, and labor in return for a share of the proceeds of sales of cattle. Thus, we are satisfied that during the years in issue the partnership, Vaughan Bros., held the cattle for purpose of operation as a ranch and range herd and not for lease or hire.
Respondent's argument that some of the cattle, the sale of which produced the income here in issue, were not held by the Vaughan partnership for breeding purposes, but were rather held for sale to customers in the ordinary course of business is of merit. As set forth in our Findings of Fact, many heifers were in fact sold during the years of operation under the agreement to permit Milford sufficient funds, including funds from the*168 sale of steers, for continued operation. In the first year of operation the amount realized by the sale of heifers exceeded the amount derived from steer sales. Over the life of the agreement, heifer sales equaled 30 percent of the total derived from the sale of animals, and 60 percent of the amount derived from the sale of steers.
*362 Petitioners argue that it was the intent of Vaughan Bros. and of Milford to endeavor to retain as many heifers as possible that the size of the breeding herd might be increased. Their actions, however, do not manifest such an intent. At the opening of the contract period, there were on hand 306 heifers coming 2 years old and 128 yearling heifers, a total of 434. During the contract period 1,636 heifers were branded, producing a cumulative total of 2,070 heifers available during the contract period for replacement of heifers at the termination of the contract, replacement of cows culled from the herd, and addition to the herd or sale. During the period, 433 cows were culled and sold from the herd. Of the total number of heifers available during the period, 867 animals were required for replacement of cows and original heifers, leaving 1,203*169 heifers available for sale or addition to the herd. During the period of the contract, 817 heifers, or 67.91 percent of the number of heifers available during the period for sale or addition to the herd, were sold. Although the range could accommodate some 2,100 head of count cattle (during the period of the agreement Milford obtained permission to increase the number of count cattle grazed on the Federal ranges), the number of cattle on hand at the termination of the agreement was only 1,837, a figure appreciably less than the sustaining capabilities of the range.
Petitioners argue that all female cattle were members of the breeding herd from the time of their birth. In this regard they rely upon their intent in holding the cattle, and the fact that they were exposed to the bulls from the time of birth. We have already discussed the matter of their intent, reaching the conclusion that their actions do not coincide with the claimed intent. As to the contention that the heifers were members of the breeding herd because they were exposed to the bulls, it seems clear that such fact standing alone does not support the conclusion which the petitioners urge upon us. Exposure to bulls*170 was a meaningless act, except in rare and exceptional cases, until the heifers were at least 14 months old.
In determining whether the heifers were a part of the breeding herd or held primarily for sale to customers, we find it significant that essentially the only criterion applied in determining at the fall beef roundup which heifers were to be sold was whether they were so obviously pregnant as to render them unattractive to the buyers of slaughter or feeder animals. The number of heifers sold each year was determined by the anticipated requirement by Milford of operating funds for the coming year. The designation of the particular animals to be sold was based upon a determination of which animals buyers would purchase.
It is well settled that the sale of animals culled from the breeding herd of a beef cattle operation results in capital gains under section 117(j)(1) of the 1939 Code, rather than ordinary income. United *363 v. Bennett, 186 F. 2d 407 (C.A. 5, 1951); Albright v. United States, 173 F. 2d 339 (C.A. 8, 1949); Fawn Lake Ranch Co., 1139">12 T.C. 1139 (1949). *171 Similarly, the sale of an entire breeding herd of beef cattle produces capital gains rather than ordinary income. Franklin Flato, 14 T.C. 1241 (1950). The problem lies in determining whether the animals, the sale of which produced the disputed income, were in fact members of the breeding herd. Biltmore Company v. United States, 228 F. 2d 9 (C.A. 4, 1955); Gotfredson v. Commissioner, 217 F. 2d 673 (C.A. 6, 1954), affirming a Memorandum Opinion of this Court; Walter S. Fox, 16 T.C. 854 (1951), affd. 198 F. 2d 719 (C.A. 4, 1952).
"The determination of which animals, if any, were held by the petitioners for breeding purposes is essentially a question of fact," Estate of C. A. Smith, 23 T.C. 690">23 T.C. 690, 706 (1951). Although such factors as the ultimate use of the animals, their age, and the regularity of sales bear upon the matter, the important thing is no single factor or combination of factors, rather it is the purpose for which the animals are held. Sec. 117(j)(1), 1939 Code; Fox v. Commissioner, 198 F. 2d 719, 722.*172
The facts here show that customarily heifers commenced breeding when 14 or 15 months old. The gestation period was 9 months. At any time during the period from 14 to 24 months, the heifers were subject to sale if not visibly pregnant. Animals over 24 months old were kept either because they were pregnant at the time of the fall sales, or because they appeared especially valuable replacements for the herd. As in the Fox case the record presents insufficient facts from which we may precisely ascertain the purpose for which each heifer sold was held prior to sale. We are left then only with the possibility of determining that intent in terms of the age of the heifers, and we hold, as we have set forth in our Findings of Fact, that heifers over 24 months of age were held for breeding purposes and that all younger heifers were held primarily for sale to customers in the ordinary course of business.
From our discussion above, and as set forth in our Findings of Fact, the sale of cows culled from the breeding herd and of bulls used for breeding purposes constituted sales of animals used for breeding purposes which the partnership had held for the requisite time, and petitioners' *173 appeal as to the proceeds of these sales is sustained.
As stated in respondent's brief:
It is manifestly apparent that the same conditions prevailed in 1951 as previously existed with respect to the heifer sales in 1948, 1949, and 1950. It follows therefore that the same conclusions should also apply with respect to the heifer sales in 1951.
We agree with this statement, have so found, and do accordingly so hold.
Decisions will be entered under Rule 50.
Footnotes
1. Proceedings of the following petitioners are consolidated herewith: Floyd C. Vaughan, Docket No. 57162; Floyd C. and Katherine D. Vaughan, Docket No. 57163; P. W. Vaughan, Docket No. 57164; P. W. Vaughan, Docket No. 69942; F. C. Vaughan and Mattie E. Vaughan, Docket No. 69943; and Floyd C. and Kathryn L. Vaughan, Docket No. 69944.↩
2. The agreement recites that it is "by and between F. C. VAUGHAN and MATTIE VAUGHAN, husband and wife, and FLOYD C. VAUGHAN, a bachelor, parties of the first part, hereinafter called the Lessors, and MILFORD J. VAUGHT and AGNES M. VAUGHT, husband and wife, parties of the second part, hereinafter called the Lessees."↩
1. Not shown by record.↩
1. Disposition of 7 cows, apparently to Milford, and the price paid, if any, is not shown of record.↩
2. Includes an unspecified amount paid for the dash running "M" brand.↩
3. Not shown of record.↩
4. Presumably suckling calves.↩
5. Comprised of 170 steers and 170 heifers.↩
3. SEC. 117. CAPITAL GAINS AND LOSSES.
(j) Gains and Losses From Involuntary Conversion and From the Sale or Exchange of Certain Property Used in the Trade or Business. --
(1) Definition of property used in the trade or business. -- 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(l), held for more than 6 months, and real property used in the trade or business, held for more than 6 months, which is not (A) 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, or (B) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or (C) a copyright, a literary, musical, or artistic composition, or similar property, held by a taxpayer described in subsection (a)(1)(C). Such term also includes timber or coal with respect to which subsection (k)(1) or (2) is applicable and unharvested crops to which paragraph (3) is applicable. Such term also includes livestock, regardless of age, held by the taxpayer for draft, breeding, or dairy purposes, and held by him for 12 months or more from the date of acquisition. Such term does not include poultry. [The last two sentences were added by section 324 of the 1951 Revenue Act.]↩
4. Martinez v. Garcia, 43 Ariz. 243">43 Ariz. 243, 30 P. 2d 501↩ (1934).
5. Mahoney v. Citizens Nat. Bank, 271 Pac. 935↩ (S. Ct. Idaho 1928).
6. Arrington Bros. & Co. v. Fleming, 117 Ga. 449">117 Ga. 449, 43 S.E. 691">43 S.E. 691↩ (1903).
7. Continental Nat. Bank of Salt Lake City v. Naylor, 39 Idaho 267">39 Idaho 267, 228 Pac. 266 (1924); Price v. Grice, 10 Idaho 443">10 Idaho 443, 79 Pac. 387↩ (1904).
8. Mahoney v. Citizens Nat. Bank, supra↩.
9. Idaho Code, sec. 25-2001↩.
10. Continental Nat. Bank of Salt Lake City v. Naylor, supra;Hare v. Young, 26 Idaho 682">26 Idaho 682, 146 Pac. 104↩ (1915).