*19 Decisions will be entered under Rule 50.
Petitioners formed a partnership in 1941. On October 1, 1941, the partnership purchased 10 pairs of chinchillas. Largely from the descendants thereof, the partnership pelted about 30 or 40 pairs and sold 93 pairs up to October 1, 1946. On that date the entire remaining herd, 127 pairs, descended from the 10 pairs, was sold, but later in 1947, 53 pairs were repossessed, so that only 74 pairs were disposed of. Held, on the facts, that of the 74 pairs actually disposed of all but 58 animals were breeding stock and their sale resulted in capital gain, and that the 58 animals were not shown to be breeding stock and the sale is held to result in ordinary income. Section 117 (j), Internal Revenue Code.
*966 These cases, duly consolidated, involve income taxes as follows: In Docket No. 30819 for the calendar year 1947 in the amount of $ 3,707.98 and in Docket No. 31342 for the calendar year 1947 in the amount of $ 3,560.06. The only question presented is whether certain income from the sale of chinchillas, by a partnership of which the petitioners were members, is to be taxed as ordinary income, or as capital gain, within the provisions of section 117 of the Internal Revenue Code. A stipulation of a portion of the facts involved was filed and the stipulation is adopted by reference and the facts therein set forth are found. Those portions thereof considered necessary of statement in connection with the determination of the issue will be set forth together with other evidence in our
FINDINGS OF FACT.
The petitioner William Wallace Greer, Jr., resides at New Market, Virginia, and filed his individual income tax return for the calendar year 1947 with the collector of internal revenue for Virginia; and the petitioner Edward E. Hale, who resides in West Virginia, filed his individual income tax return for the year 1947 with the collector of internal revenue for West Virginia.
*21 On October 1, 1941, the petitioners formed a partnership under the name of Greer-Hale Chinchilla Ranch located at New Market, Virginia. The partnership filed its income tax return for the fiscal year beginning October 1, 1946, and ending September 30, 1947, with the collector of internal revenue for Virginia. Its partnership operations were reported on the cash receipts and disbursements basis on a fiscal year ended September 30. The physical assets of the partnership included two buildings for the housing of chinchillas. The buildings contained approximately 500 pens each suitable for occupancy by one pair of animals. The buildings were built and equipped before animals were bred. The petitioners figured on building their business to a point of 200 pairs of chinchillas. On October 1, 1941, the partnership acquired ten pairs of chinchillas at a total cost of $ 28,768.42. The ten original pairs were capitalized on the partnership books and depreciation taken thereon. With the exception of the ten original pairs, the other animals owned by the partnership were expensed on the partnership books. The majority of the animals on the ranch were the descendants of the original ten*22 pairs and were raised by the partnership. The partnership registered the trade name "Soft Gold" for the fur in Canada and the United States. Petitioner Greer transacted all sales of animals for the partnership. Between 1941 and prior to October 1, 1946, six pairs out of the original ten pairs died and one pair was sold prior to October 1, 1946. The partnership sold animals in each of its fiscal years ending September 30, 1943 through *967 1950, the average sale being in lots of two to three pairs. Thirty or forty pelts from chinchillas were sold between the end of 1941 and October 1, 1946. The sale was to one buyer. No records were offered as to the number of animals killed each year during the course of the partnership business. The principal source of the partnership income was the sale of chinchilla animals. The partnership did not claim capital gain on the sale of any animals from the fiscal years ended September 30, 1940 through 1950, except in this matter.
The method of operation by the partnership and its business purpose was the same from the beginning through 1950. Some of the animals which had been owned by the partnership were entered in shows, but not by*23 the partnership, and only after the partnership had disposed of them. The ultimate aim of the partnership was the pelting of chinchilla furs of the finest kind. At the beginning of business the petitioner Greer figured that it would take 10 or 12 years before the commencement of pelting operations. The partnership is not yet in the pelting business and at the time of trial it was not known how soon the partnership would be in a position to sell pelts. The fur of the chinchilla as opposed to its frame is the important factor in determining the quality of the animal. The partnership did not retain inferior animals. They were either sold or destroyed or given for cancer research. From October 1941 to October 1, 1946, the partnership sold a total of 93 pairs of chinchillas, including animals purchased from others and resold. None were sold in 1941 and 1942. Thereafter sales were as follows: 2 pairs in 1943, 21 pairs in 1944, 15 pairs in 1945, and 55 pairs in 1946 prior to October 1. Chinchillas are always sold in pairs. Branding of chinchillas is for the benefit of the seller. The brand does not appear when the animal is pelted. Branding is done at the average age of about*24 six months. Registration and the listing of pedigree affects the sale value of the animal but not the value of the fur.
Until October 1, 1946, the partnership sold only animals that were felt not to be necessary in the herd for the future breeding program and not essential to the breeding herd. The partners had to sell something to exist. Greer would sell anything that he felt he could let go without disturbing the herd for the future. In furs it is necessary to line breed, which is the only way the desired product can be gotten. Animals which were excessive in certain lines and not necessary to the maintenance of the herd or important to keep in the herd or that the partners did not particularly want to keep in the herd to breed, were sold. Animals were advertised for sale and commissions were paid to agents selling the animals. An advertisement by the partnership in The Rider and Driver contained the expression "Now Offering Premium Chinchilla Breeding Stock"; another stated *968 "South American Chinchillas Now Being Offered." The advertisements contained the invitation "Write for Pamphlet."
On October 1, 1946, the partnership sold the entire chinchilla herd consisting*25 of 127 pairs to Dominion Chinchilla Ranchers, Ltd., hereinafter called the "Canadians," for $ 100,005. The 127 pairs sold to the Canadians did not include any animals being handled by the partnership for other people. The animals sold were descendants of the original breeding herd. Between June 1, 1946, and August 31, 1946, the partnership had sold about 33 pairs of chinchillas. The 33 pairs included an older pair and others that could be dispensed with and were not essential to keep and some very young animals just mated. The last sales before October 1, 1946, were very young animals just mated in the month sold. From October 1, 1946 to August 1, 1947, the partnership did not own any chinchillas of its own but had charge of some which it was trying to sell for other people who wished to quit the chinchilla business. It did not repurchase any chinchillas during that period. The partnership intended, with the sale to the Canadians, to go out of the chinchilla business.
The sale price of the entire herd was secured by a deed of trust upon the animals. Under the arrangement with the Canadians the chinchillas were left on the ranch of the partnership of New Market, Virginia, *26 to be removed from time to time. Beginning September 4, 1946, and through July 22, 1947, the Canadians removed 74 pairs paying, through May 1947, $ 52,626 under the deed of trust. In July 1947 it appeared to the taxpayers that valuable animals were being removed in violation of the terms of the deed of trust resulting in an unfavorable reduction of the collateral. A foreclosure sale was therefore advertised under the deed of trust, to take place August 5, 1947. Prior to that date and about July 22, 1947, agreement was reached between the partnership and the Canadians whereby the Canadians retained the 74 pairs of chinchillas and the petitioners retained the $ 52,626 and received back the title to the other 53 pairs involved in the transaction with the Canadians. The Canadians vacated the partnership premises about July 22, 1947. Of the 74 pairs of chinchillas delivered to the Canadians, three pairs were from the original herd, 1 23 individual chinchillas had on October 1, 1946, been held for less than 6 months, 58 animals had not produced before October 1, 1946, 81 animals had not produced before June 1946, and 15 pairs produced only one litter between June 1, 1946 and October*27 1, 1946, inclusive. Eight pairs and one animal, out of the 74 pairs, were *969 on the partnership records marked "never sell." The 23 held less than 6 months are among the 58 not producing before October 1, 1946. The partnership records show that of the 58, 13 pairs and one animal were mated after October 1, 1946, and one pair was never mated. Chinchillas must be at least 90 days old before their qualities can be determined. Animals which have produced are worth more than those which have not. A chinchilla will continue to produce throughout its life if it has normal health. Some animals have produced up to 14 years of age. The ordinary life span is 10 to 11 years. Ordinarily chinchillas are about a year of age before producing litters. Of the 58 which had not produced to October 1, 1946, seven animals were less than one year, but more than six months of age; and of the 58, six had the notation "never sell" on their records.
*28 The Commissioner in determining the deficiencies increased partnership income as reported by $ 14,549.51 and decreased capital gain as reported by $ 7,274.75 with the explanation that the sale of 71 pairs of chinchillas by the partnership during the fiscal year ended September 30, 1946, resulted in ordinary income and not capital gain subject to the provisions of section 117 (j) of the Internal Revenue Code.
OPINION.
Although the partnership sold 127 pairs of chinchillas to the Canadians, under the later agreement all were returned except 74 pairs. Of these 74 pairs the respondent concedes that three pairs were from the original breeding herd and therefore that the gain from the sale of the three pairs is a capital gain; and the petitioners on their part concede, and from the facts we find, that 23 individual animals were less than six months old at the time of sale. Petitioners, therefore, concede that the 23 individual animals are not covered by their contention that the sale comes within section 117 (j) of the Internal Revenue Code. Thus, we see that only 119 animals are involved in this matter. The question as to that number is whether the sale resulted in ordinary income *29 or capital gain within section 117, which is in necessary part set forth in the margin. 2
*30 *970 It appears now to be settled law that breeding animals, from a breeding herd, if they have been held for more than six months, are capital assets within section 117 (j), Internal Revenue Code, and that the profit from their sale is taxable as capital gain and not as ordinary income, Albright v. United States, 173 F. 2d 339; United States v. Bennett, 186 F. 2d 407; Isaac Emerson, 12 T. C. 875; Fawn Lake Ranch Co., 12 T. C. 1139; Franklin Flato, 14 T.C. 1241">14 T. C. 1241. Therefore, as in Walter S. Fox, 16 T. C. 854, we have here a factual question as to whether the animals sold (and as to which neither party makes concession) were breeding animals or were, on the other hand, held primarily for sale to customers in the ordinary course of business. Under the Bennett and Albright cases, sales of breeding animals, from a breeding herd but not necessary thereto, are not sales of animals primarily held for sale to customers in ordinary course of business. We must decide therefore whether the*31 animals here sold were breeding animals. The fact that the entire herd was sold to the Canadians does not demonstrate sale of capital assets. Grace Bros., Inc., 158">10 T. C. 158, affd. 173 F.2d 170">173 F. 2d 170.
The record before us is not as satisfactory as might be. It fails to include many of the details furnished in other cases on the same subject. For the petitioners, there is testimony to support the theory that the sales made throughout the years were only of such animals as were not essential to development of the breeding herd, contended to be intended eventually for pelting; but the respondent complains that this was only conclusion on the part of petitioners and that no evidence indicates standards to determine animals unfit for breeding purposes. The petitioners rely on the fact that such testimony on their part was uncontradicted. Contradiction need of course not lie in testimony, but may arise from other inconsistent evidence. We have, therefore, examined all evidence to ascertain, if possible, from the record whether all or any of the herd sold are properly to be considered breeding stock. It is apparent from the cases*32 that if so, even if they are "culls," their sale results in capital gain rather than ordinary income.
The record before us discloses purchase in 1941 of a breeding herd of ten pairs of chinchillas, with the purpose of developing a herd, one sale, in an early year, of 30 or 40 pelts, the destruction or devotion to cancer research of some unfit animals, the sale of chinchillas, after considerable advertising and payment of commissions, each year after *971 1942, totaling about 93 pairs, up to October 1, 1946, including about 55 pairs sold in 1946; and finally the sale of the remaining 127 pairs on October 1, 1946, of which only 74 pairs were actually taken, since 53 pairs were by agreement returned to ownership of the partnership.
After analysis of all the evidence here, we have come to the conclusion that most but not all of the 74 pairs of chinchillas sold to the Canadians were breeding stock and therefore sale resulted in capital gain and not ordinary income. Though we are conscious that much of the testimony for the petitioners is not as well substantiated by other evidence as might be desired, and though there are many facts indicating more or less current sales of chinchillas, *33 in and after 1942, and although only a few of the animals involved were definitely indicated on the partnership records as not to be sold, we are convinced from the evidence as a whole that the partnership had an objective of building up a herd of about 200 pairs of chinchillas for the primary purpose of eventually selling the pelts. The partnership registered a trade name not for the chinchillas but for the fur, and we think from all of the facts before us that the profit for which the partners hoped was from sale of fur rather than chinchillas. It is true that they sold a considerable number, after the first 2 years, and advertised and paid commissions for sales, but the question here for determination is essentially: What was the primary purpose; and we think such primary purpose lay in the ultimate sale of fur, rather than the sale of animals. Under the evidence, only animals, in effect, which were considered unnecessary or unfit for the development of the breeding herd were sold. Finances were needed and in comparison with the number of chinchillas sold on October 1, 1946, a large number were sold prior to that date. Nevertheless, the fact of such sales does not overcome, *34 we think, the fact that the larger and final purpose was the development of a valuable herd, and if the sale here involved was of breeding animals, the result is capital gain. The respondent stresses the petitioners' failure to set any definite standard of differentiation between breeding stock and other animals, and it is true that the petitioners suggest no standard other than the experience of the partnership. In the case of the chinchillas here involved, and the purpose of developing fine fur, we have concluded that reliance on such experience and the lack of clearer definition of what was considered breeding stock and what was not and therefore could be sold, is not fatal to the petitioners' contention. As we understand the situation as to chinchillas, shown in this case, the sole test of fitness, and of the desired result, was fine fur and the animals producing the best fur were those which it was desired to propagate. The matter was one of "line breeding" which we think reasonably connotes the perpetuation of the lineage of an animal which produced fur of the *972 desired quality; and since the almost fabulous value of chinchilla fur makes it obvious that the fur and*35 not the animal in any other respect is the desired object of any one interested in them, there appears ample reason for the sale, even in comparatively large numbers, of chinchillas which, though breeding animals, do not tend to produce a line which will bear fur of the fineness desired by the particular operator. Such animals would be "culls" within the meaning of the Albright case, supra, even though they might bring a high price from someone satisfied to produce a fur of lesser fineness than the seller desired. Under all of the evidence before us, we have concluded that the sales made, prior to October 1, 1946, represented such culling from a breeding herd and do not demonstrate that the primary purpose was the mere production of animals for sale in the ordinary course of business. It is clear that at the end of 5 years the petitioners had sold only 93 pairs (aside from 30 to 40 pelts and some animals killed or given to cancer research) as against 127 pairs still on hand, which tends to indicate in our opinion the soundness of the theory that the eventual object was to breed a larger herd. We conclude that in the main the animals sold were not primarily held for sale*36 to customers in the ordinary course of business.
This does not mean, however, that all of the 74 pairs not returned to the petitioners were shown to be in that category. To be so placed they must under the Albright and Bennett cases be breeding animals. Even the general test of experience of the petitioners required time and observation. Under the evidence, though the previous sales left the partnership in general with breeding stock which was sold to the Canadians, examination of the facts discloses that (in addition to the 23 animals petitioners concede were not six months of age) some animals included in the sale of October 1, 1946, and not returned, do not meet the test of being breeding stock. It is obvious, we think, even from the manner in which the partnership operated the chinchilla herd, that some animals were breeding animals, and some were not. The amount of sales before October 1, 1946, with no claim, previous to this case, that they were of capital assets, and the marking of only 17 animals as "never sell," shows that the partnership did not then consider its whole herd as composed of breeding animals. Not only, as above seen, does the sale on October 1, *37 1946, of the herd as a whole not demonstrate that all were breeding animals, but taken with the previous treatment of the matter by the partnership, tends to indicate that some animals therein, at least, were not breeders. Here there was not, as in some cases, segregation of the breeding stock from others; and the petitioners fail to furnish criteria for distinguishing breeding stock from the remainder. Under such circumstances, convinced that all animals sold were not breeders, we must arrive at the best classification possible under the evidence. In Walter S. Fox, supra, and following *973 it in James M. MacDonald, 17 T. C. 210, in cases involving cattle we excepted from the breeding herd, otherwise found, young female animals of less than 26 months that had not produced and males of less than 34 months, and of unproven breeding qualities, on the theory that they were not yet breeding animals. In this case the evidence indicates that ordinarily chinchillas are about a year of age before producing litters, also that 58 animals had not produced before October 1, 1946, among which 13 pairs and one animal had not*38 even been mated on October 1, 1946, and one pair was never mated, according to the partnership records. The 58 animals included the 23 less than six months of age, also included seven others less than one year of age at that date. In our view, the 58 animals can not soundly be said to be breeding animals. They had not proved themselves as breeders, and might, under the evidence, be eliminated before they ever did so. To sustain petitioners' contention they must be "used in the trade or business" (emphasis added) and they can not realistically be so regarded. We hold that 58 animals were not shown to be breeding animals and that the remaining 90 animals were breeding animals and capital assets, the sale of which resulted in capital gain, while that from the 58 animals was ordinary income.
Decisions will be entered under Rule 50.
Footnotes
1. The respondent so concedes in contending that only 71 pairs produced ordinary income, although the stipulated facts as to the 74 pairs indicate that only one animal was born before October 1, 1941, the date of acquisition of the ten pairs.↩
2. SEC. 117. CAPITAL GAINS AND LOSSES.
(a) Definitions. -- As used in this chapter --
(1) Capital assets. -- The term "capital assets" means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property, used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 23 (l), * * *
* * * *
(j) * * *
(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. * * *↩