*232 Decision will be entered for the respondent.
Held, petitioners failed to show that respondent erred in determining that substantial quantities of cattle, less than 26 months old, never used in the breeding herd, and sold in part as the result of extensive advertising, were cattle held for sale to customers in the ordinary course of petitioners' business of selling cattle.
*1006 This proceeding involves the following deficiencies in income tax:
| Year | Deficiency |
| 1948 | $ 2,762.16 |
| 1949 | 245.39 |
| 1950 | 3,469.14 |
| 1951 | 4,350.26 |
The sole issue is whether cattle raised and sold by petitioners during the years in issue were held for sale to customers in the ordinary course of business or were held for breeding purposes, within*233 the meaning of section 117 (j). 1
*1007 At the hearing petitioners conceded that certain of the cattle which they originally had contended were held for breeding purposes were, in fact, held for sale.
Some of the facts were stipulated.
FINDINGS OF FACT.
The stipulated facts are so found and are incorporated herein by this reference.
John L. Clark, hereinafter referred to as the petitioner, and his wife, Elvira C. Clark, were residents of Warrenton, Virginia, during the years in issue and filed their joint income tax returns with the former collector of*234 internal revenue at Richmond. In addition to gross income received from farming operations, petitioner reported the following amounts of income from other sources during the years in issue:
| Year | Source | Amount |
| 1948 | Rayshow Inc | $ 27,000.00 |
| Radio Program Production Company | 65,161.98 | |
| Total | $ 92,161.98 | |
| 1949 | Transamerican Broadcasting & Television Corporation | $ 2,400.00 |
| Radio Program Production Company | 49,893.91 | |
| Total | $ 52,293.91 | |
| 1950 | Transamerican Broadcasting & Television Corporation | $ 15,600.00 |
| Radio Program Production Company | 33,000.89 | |
| Total | $ 48,600.89 | |
| 1951 | Transamerican Broadcasting & Television Corporation | $ 15,600.00 |
| Partnership | 30,538.28 | |
| Total | $ 46,138.28 |
On his returns for such years, he claimed the following net losses from farming operations:
| Year | Net loss |
| 1948 | $ 70,484.37 |
| 1949 | 55,949.87 |
| 1950 | 51,243.94 |
| 1951 | 35,320.10 |
In 1939, petitioner began raising purebred Aberdeen-Angus cattle on an 800-acre farm near Richmond, Virginia, known as Hollyfield. In 1945, petitioner planned to expand his cattle-raising operations, and toward that end purchased a 3,400-acre farm, thereafter known as Clark Ranch, near Warrenton, *235 Virginia, together with a herd of cattle which was incorporated into his Hollyfield herd.
Petitioner was a member of the Virginia Angus Association and the American Aberdeen-Angus Association. During the years in issue, he advertised cattle for sale in cattle breeders' magazines and *1008 elsewhere. The amount which he spent for advertising during such years was as follows:
| 1948 | $ 2,273.63 |
| 1949 | 1,951.73 |
| 1950 | 338.25 |
| 1951 | 256.78 |
When petitioner sold the 800-acre farm near Richmond and moved to Warrenton, the following advertisements appeared in The Southern Stockman and in The Fauquier Democrat (the Warrenton, Virginia, newspaper):
The Southern Stockman, April 1945.
Hollyfield Has Moved
Recently we purchased Ravenswood Farm along with 200 of their good breeding cows and 100 head of young stock. These cattle have been combined with the entire Hollyfield herd and are all at our new location -- Clark Ranch -- six miles west of Warrenton, Virginia, on the Lee Highway. Here you will find the largest selection of high quality purebred Aberdeen-Angus cattle in the East -- cows with calves at side, open and bred heifers, and young bulls.
All are sensibly priced and *236 carry the well-known Hollyfield guarantee. Phone or write Dave Canning. Inspect the cattle at any time.
CLARK RANCH
Formerly Hollyfield Farm
Warrenton, Virginia
Phone: Warrenton 283-W
The Fauquier Democrat, March 1945.
Hollyfield
Has Moved to
Warrenton
We recently purchased Ravenswood along with 200 of their good brood cows and 100 head of young stock. These cattle have been combined with the entire Hollyfield herd, and are all at our new location -- "CLARK RANCH" -- just west of Warrenton on Lee Highway. Here you will find an excellent selection of high quality purebred Aberdeen-Angus cattle.
We are now offering 30 cows with calves at side at $ 350.00 each. 30 heifers at $ 250.00 each. All carry the well known Hollyfield guarantee. Dave Canning will be glad to show these cattle at any time. Write or phone.
CLARK RANCH
Warrenton, Virginia
Warrenton 283-W
The July 1946 issue of The Eastern Breeder contained a full page advertisement with pictures advertising petitioner's breed of bulls held for sale at the Clark Ranch. The advertisement invited prospective purchasers to:
*1009 Stop by and see what this ideal Angus combination is doing for us and see how we handle a*237 large herd in ranch fashion here in Old Virginia. We always have herd sire prospects, commercial bulls, and females of all ages for sale. It will pay you to pay us a visit.
In the August 1946 issue of The Eastern Breeder, petitioner had a full page advertisement which included a picture of one of his prize bulls, and which read as follows:
Welcome
Dr. W. E. Wolcott
As a neighbor and as an
Aberdeen-Angus Breeder
We are pleased . . .
That Dr. W. E. Wolcott, who recently purchased Clovercroft Farm at Warrenton, Va., should choose his foundation herd of 20 nice females from us. He selected as his herd sire, J Bar C Commander, a promising son of Grenadier 2nd of Winton out of a Blackcap cow, a descendant of Envious Blackcap B. 6th. Dr. Wolcott is already a successful dairyman in his native state of Iowa, and we wish for him the same success in the Angus business with this grand foundation group.
ANOTHER SON OF "THUNDER" (Hollyfield Commandomere 4th) went to the herd of O'Sullivan Brothers, Brandy, Va. This good son of "Thunder" and, thereby, a grandson of Eileenmere 310th by Eileenmere 85th, is an excellent breeding prospect and should uphold his promise for he was personally*238 selected by Sam O'Sullivan as a future herd sire.
THANK YOU FOR YOUR BUSINESS, GENTLEMEN
Our best wishes go with your purchases and we have every confidence that the cattle will meet your expectations.
Visitors are always welcome
Clark Ranch
Warrenton, Virginia
John L. Clark (On U. S. 211, 7 miles west of Warrenton) Dave Canning
In the October 1948 issue of The Southern Stockman, petitioner had a full page advertisement with pictures of pedigreed bulls, and urged prospective purchasers to attend the sales at Warrenton, Virginia, on October 25 and at Charlottesville on October 26. For the Warrenton sale on October 25, 1948, petitioner had prepared 5" x 8" cards advertising the cattle which he would offer at that sale.
In the February 1949 issue of The Aberdeen-Angus Journal, petitioner had a full page advertisement which read as follows:
Naturally We're Flattered
Everyone stood around gaping with admiration as 20 velvety-smooth heifers strode briskly up the loading chute for the trip to Mac Buhrman's Centre Farm near Richmond.
To the inexperienced eye, these heifers were truly cattle of distinction, but Mac's father was there too when the picking was done.
*1010 The senior Mr. *239 Buhrman is a leader in promoting the interests of beef breeders in Virginia and knows as much about cattle as anyone. His procedure is simple and direct. He wants the best without any nonsense.
He and Mac picked 20 of the best heifers we've ever raised -- and we are glad.
We feel deeply honored that Mac chose J Bar C heifers to mate with the great bull he got from us last year, and we are not unmindful of the confidence Mr. Buhrman, Senior has placed in us. Both of the Buhrmans have bought J Bar C cattle many times before. Faith comes with experience and we could ask for no finer tribute than the patronage of men who know cattle best.
Buhrman and Sons is the big John Deere dealer in Richmond. Call him up, he'll take you out to the farm and show you cattle that are traditionally right -- the square, squat and smooth kind with top quality all the way through. He's proud of them too.
CLARK RANGE [sic] Warrenton, Virginia
Located 7 miles west of Warrenton on U. S. Rt. 211
Breeders of pure Aberdeen-Angus Cattle
". . . tended as nature intended . . ."
John L. Clark, Owner
Rae Giersdorf, Manager
When prospective purchasers of petitioner's cattle visited the ranch their selection*240 was not limited to any particular group of livestock. They were permitted to select and purchase whichever cattle they wished.
From 1939 until 1948, petitioner's sister-in-law, Rae Giersdorf, was employed by petitioner to maintain farm records, including those identifying calves when born as to particular grade and classification and registration of the animals. During the years in issue she was the manager of the Clark Ranch.
During the years in issue petitioner had only one herd of cattle. Set forth below is the inventory of both raised and purchased Aberdeen-Angus cattle, male and female, as of January 1 during each of the years in issue:
| Purchased | Raised | Total | |||||
| Jan. 1 | Grand | ||||||
| total | |||||||
| Females | Males | Females | Males | Females | Males | ||
| 1948 | 247 | 8 | 170 | 76 | 417 | 84 | 501 |
| 1949 | 152 | 7 | 166 | 54 | 318 | 61 | 379 |
| 1950 | 117 | 5 | 179 | 66 | 296 | 71 | 367 |
| 1951 | 91 | 5 | 153 | 69 | 244 | 74 | 318 |
During the years in issue petitioner purchased 4 bulls and sold 5 bulls which had been purchased. During the same period, 310 bull calves were born on the ranch and 324 bulls or bull calves were sold. Set forth below are the female calves born on petitioner's*241 ranch during the years in issue, the number which died, and the number of raised heifers sold during such period: *1011
| Raised cattle | |||
| Year | |||
| Born | Died | Sold | |
| 1948 | 79 | 3 | 80 |
| 1949 | 81 | 2 | 66 |
| 1950 | 61 | 3 | 87 |
| 1951 | 69 | 57 | |
| Total | 293 | 8 | 290 |
Under the record-keeping system employed since 1939, petitioner's manager could determine at the time a calf was born whether or not its pedigree was such as to classify the calf as one which did not conform to the standard of quality desired for use as a breeder on the ranch. Petitioner never needed more than 9 or 10 bull herd sires. The principal way petitioner had of improving the bloodline of his herd was by purchasing bulls from other breeders.
The American Aberdeen-Angus Association does not permit the breeding of heifers less than 9 months old and bulls less than 16 months old. In actual practice, petitioner did not breed heifers less than 18 months old.
On their returns for the years in issue, petitioner reported the gain from a substantial number of bulls and heifers as capital gains from the sale of animals held for breeding purposes. The respondent determined that all animals less than 26 months of age*242 were held for sale to customers in the ordinary course of business and were not a part of petitioner's breeding herd. At the hearing, petitioners conceded that some of the animals originally claimed as a part of the breeding herd were, in fact, held for sale, and that the income therefrom was taxable to them as ordinary income. Set forth below are the number of animals sold during the years in issue and the proceeds from their sale, which animals petitioner contends were held for breeding purposes and which respondent determined were not so held:
| Year | Heifers | Bulls | Total sales |
| proceeds | |||
| 1948 | 32 | 4 | $ 7,980.00 |
| 1949 | 30 | 2 | 11,221.45 |
| 1950 | 46 | 3 | 15,300.00 |
| 1951 | 14 | 3 | 7,400.00 |
All such cattle were held by petitioner primarily for sale to customers in the ordinary course of business and were not held for breeding purposes.
OPINION.
Section 117 (j) of the 1939 Code, as amended by section 324 of the Revenue Act of 1951, includes, within the definition of property used by a taxpayer in his trade or business, livestock *1012 held for breeding purposes. The section further provides that the gain from the sale of animals so held is taxable at capital gains rates*243 rather than as ordinary income.
Whether a taxpayer holds cattle for breeding purposes is a question of fact. (C. A. 4, 1955); (C. A. 6, 1954), affirming Memorandum Opinion of this Court dated August 31, 1953, certiorari denied ; (C. A. 2, 1954), reversing ; (C. A. 4, 1952), affirming ; ; . The respondent determined that the livestock in question here were not so held. That determination is presumptively correct and we think the petitioners have failed to show that they were not in the business of selling cattle and that the cattle here in issue were not held for sale to customers in the ordinary course of*244 such business.
Petitioner's manager, Rae Giersdorf, was the principal witness who testified at the hearing. She was thoroughly conversant with the operation of petitioner's ranch, and, pursuant to discussions with petitioner and acting on instructions from him, was familiar with his objectives in operating the ranch. Her testimony, however, was contradictory in several important aspects and in direct conflict with other evidence in the record. She testified first, that petitioners had only one herd of cattle and that the herd was exclusively a breeding herd which petitioner intended to build to 1,500 head before he actually began selling breeder cattle to other livestock breeders. This testimony seems to us wholly incompatible with the extensive advertising which petitioner did prior to and during the years in issue. We are satisfied that during the years in issue, as well as before, petitioner was actively engaged in the business of selling Aberdeen-Angus cattle. The witness's testimony, to the effect that when a prospective purchaser came to the farm he was free to select from the one herd any cattle which he wished, is wholly inconsistent with the notion that petitioner had*245 for sale only culls and inferior animals which could not be incorporated into his superior quality herd or animals which had outlived their usefulness as breeders. We think it also significant that petitioner's inventory of cattle continually declined during the years in issue rather than increased, as was his alleged intention according to the testimony of witness Giersdorf.
The petitioners have attempted to draw a close parallel between the facts of the case here with those in , and , wherein we found that the livestock there in issue were, in fact, held by the taxpayers as a part of their breeding herds, and that the gain from the sale of such livestock was *1013 capital gain. We think the facts on which our conclusions in those cases rested are clearly distinguishable from those before us here. Suffice it to say that the petitioners here have failed to demonstrate that the cattle in issue were held for breeding purposes. To the contrary, we are satisfied from all of the evidence here that the substantial volume of sales, the extensive advertisement of cattle*246 available for sale, and, indeed, the whole method of petitioner's operation, was the conduct of the business of selling cattle and not exclusively that of maintaining a breeding herd from which a few culls and inferior animals were sold from time to time. ;
We are not unmindful of the fact that at the hearing, witness Giersdorf testified that each head of cattle here in issue was held as a member of the breeding herd prior to its sale. In the face of all of the other evidence before us, this testimony amounts to nothing more than an attempt by petitioners to bring themselves within the benefits of section 117 (j) merely for the asking. That, of course they may not do. They must demonstrate, by convincing evidence, that the livestock in question were, in fact, held as a part of the breeding herd.
Petitioners made no suggestion that any of the cattle here in issue were ever actually used in the breeding herd. While we have rejected the use test as the sole determinant of whether cattle were held for breeding purposes within the meaning of *247 the statute, , we continue to believe that actual use of an animal is the most persuasive evidence that it was held as a member of a breeding herd. See
We are satisfied that Congress, by the enactment of section 324 of the 1951 Act, did not intend to give more liberal treatment to livestock than to any other asset held by any other taxpayer for use in his trade or business. Petitioners here attempt to construe the statute as meaning that any animal, regardless of age, which they say was held as a part of the breeding herd is entitled to capital gains treatment, irrespective of what other evidence in the record may show. In answer to that contention, we think what the Court of Appeals said in , is particularly appropriate:
We do not give to the words "regardless of age" the construction urged by the petitioner that all new born heifers and bulls are treated as capital assets from the time of birth. We construe it as meaning that the sale of cattle from the herd, after having *248 served in the herd, is the sale of a capital asset, even though the animal is still comparatively young, has not exhausted its usefulness, and is sold at a younger age than is usually the case. Such construction is consistent with the purpose of the amendment to settle the Commissioner's contention to the contrary, and as made by him in the cases referred to. The amendment still requires that the cattle be "held by the taxpayer for * * * dairy [or breeding] purposes."
*1014 We are satisfied that section 117 (j), as it applies to livestock, is not to be given more liberal treatment than when applied to any other asset covered by the section. We note the admonition of the Supreme Court in , at page 52:
the capital-asset provision of § 117 must not be so broadly applied as to defeat rather than further the purpose of Congress. . Congress intended that profits and losses arising from the everyday operation of a business be considered as ordinary income or loss rather than capital gain or loss. The preferential treatment*249 provided by § 117 applies to transactions in property which are not the normal source of business income. It was intended "to relieve the taxpayer from * * * excessive tax burdens on gains resulting from a conversion of capital investments, and to remove the deterrent effect of those burdens on such conversions." . Since this section is an exception from the normal tax requirements of the Internal Revenue Code, the definition of a capital asset must be narrowly applied and its exclusions interpreted broadly. This is necessary to effectuate the basic congressional purpose. * * *
Decision will be entered for the respondent.
Footnotes
1. 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. -- * * * 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.↩