*141 Decision will be entered under Rule 50.
Petitioners were engaged in the business of breeding and raising mink for the purpose of selling their pelts. The business required the development of a breeding herd in order to obtain improved strains of mink. It was necessary to cull certain breeders from the herd, and to replace them, each year. The culled breeders were maintained in separate pens, as were the other mink that were to be pelted, until about the first of December, when their fur was in prime condition, at which time they were killed and pelted. The culled pelts were disposed of in the same manner as pelts taken from mink raised primarily for their fur. There was no market for live culled breeders. Held, the gain realized from the pelts of the culled breeders is to be considered as capital gain under the applicable statutes, section 117(j) of the 1939 Code and section 1231 of the 1954 Code.
*752 The respondent determined deficiencies in income tax against the petitioners, as follows:
| Petitioners | Docket | Year | Deficiencies |
| No. | |||
| Ben and Evelyn Edwards | 66094 | 1952 | $ 1,224.82 |
| Ben and Evelyn Edwards | 66094 | 1954 | 1,000.72 |
| Ben and Evelyn Edwards | 66094 | 1955 | 3,752.60 |
| Vernon and Hilma Worden | 68307 | 1953 | 2,427.18 |
| Vernon and Hilma Worden | 68307 | 1954 | 2,858.86 |
| Carl W. and Verna Schmidt | 68661 | 1951 | 1,811.47 |
| Carl W. and Verna Schmidt | 68661 | 1952 | 7,692.76 |
| Carl W. and Verna Schmidt | 68661 | 1953 | 3,747.52 |
| Carl W. and Verna Schmidt | 68661 | 1954 | 2,802.35 |
The only question for determination is whether the petitioners realized ordinary income or capital gain during the taxable years involved from the sale of mink pelts obtained from animals which had been held and used for breeding*143 purposes for more than 12 months.
FINDINGS OF FACT.
Some of the facts have been stipulated and are found as stipulated.
Petitioners Ben Edwards and Evelyn Edwards are husband and wife and reside on a farm near Mankato, Minnesota.
Petitioners Vernon Worden and Hilma Worden are husband and wife and reside on a farm near Litchfield, Minnesota.
Petitioners Carl W. Schmidt and Verna Schmidt are husband and wife and reside on a farm near LeSueur, Minnesota.
All petitioners filed their respective joint returns for their respective taxable years with the collector or district director of internal revenue for the district of Minnesota.
Ben Edwards, Vernon Worden, and Carl W. Schmidt will be referred to as petitioners. Each of them during his respective taxable years, operated a mink ranch on his farm.
Generally speaking, the mink ranch business consists of breeding, raising, and selling mink and mink pelts. The pelts produced and sold from a mink ranch are considered a "crop" and the rancher has an annual crop. Live breeders may be sold and are sold to other breeders, but there is no other market for live mink. There is no one engaged in the business of buying live mink for the purpose*144 of pelting them and selling the pelts.
Ordinarily the rancher has two types of mink, a breeding herd and those from which pelts are removed and sold. It is necessary for the rancher to develop a breeding herd in order to obtain improved strains of mink. The breeding mink are bred in March and produce their young, called kits, in May. The adult mink are kept in individual pens, and for breeders the pens are larger than for mink that are to be pelted. About August or September the young kits are separated from the mother mink and placed in individual pens, primarily for the purpose of protecting and producing better pelts. In the fall *753 of the year the rancher brings an expert from the mink fur industry in New York City to grade the fur of each young mink, and on occasions some of the old. This is usually a check grade for the experienced rancher who has already examined his animals, sometimes as many as three times.
The grading is based on the quality of fur and its color and is done so that the rancher may determine and select the best breeders for that use during the ensuing year. This is necessary for the production of better pelts and it is essential for the rancher*145 to maintain a good breeding herd in order to keep up with the current trends in the mink industry as to quality, colors, and new types of mink furs.
In accordance with the grading the rancher selects from the kits and the breeding herd the animals that will be used as breeders. The females and males are set apart for the breed herd in a ratio of about 5 to 1 and placed in the individual breeding pens. The other kits and the older mink culled from the breeding herd are put in the individual pelting pens. The herd is culled and replenished each year. A record is kept of each mink until it is pelted.
The pelting mink are treated and cared for in the same manner. They are fed the same kind of food, but the kits eat more than the culled breeders. The fur is at its peak for pelting in the late fall, and the pelting is done from about the first until the middle of December. They are killed with cyno-gas and skinned. Sometimes a rendering company will purchase the carcasses and sometimes the rancher pays to have them carried away. The carcasses have little or no value.
The pelts are placed in plastic bags, 20 to 25 to a bag, and the bags are then stored in a freezer until the pelts*146 are ready to be fleshed and dried. It is a much slower process to flesh and dry the pelts than it is to kill and skin the animals. As the culled breeders are older than the others, they reach their prime for pelting about 2 weeks earlier and consequently they are for the most part pelted approximately 2 weeks before the kits are pelted. During those 2 weeks their pelts are fleshed and dried and often packed and shipped before the others are ready. However, some pelts from the older mink are stored in the plastic bags with the other pelts and the two kinds may be commingled and shipped to New York City, where all of petitioners' pelts are sold at auction, usually by the Hudson Bay Company. The pelts are packed in cartons or boxes furnished by the Hudson Bay Company and shipped from the middle of December to the middle of January. One hundred to 150 pelts are packed in a box. The company usually starts its sales around the middle of December.
Generally there is no segregation in the shipping and marketing of the breeder and kit pelts. The auction house makes no distinction between them, and pelts from both may be sold in the same bundles. The pelts are placed in bundles according*147 to similarity in color.
*754 The sales from pelts make up the greater part of income of the mink rancher who receives the proceeds of the sale of his pelts from the auction house, less the commission charged.
Petitioners Ben and Evelyn Edwards, Docket No. 66094, reported the sales of breeder mink pelts and live breeding mink as capital gains, as follows:
| Year | Pelts | Live mink |
| 1952 | $ 7,568.75 | $ 3,000 |
| 1954 | 10,880.00 | 945 |
| 1955 | 20,999.98 | 8,395 |
All of these mink had been held for more than 12 months before the date of sale.
They also reported the sales of live nonbreeding mink and nonbreeder mink pelts as ordinary income, as follows:
| Year | Amount |
| 1952 | $ 58,016.40 |
| 1954 | 86,531.70 |
| 1955 | 109,078.10 |
Substantially all of the amounts were derived from the sale of pelts.
Petitioners Vernon and Hilma Worden, Docket No. 68307, in 1953 sold kit pelts for $ 42,667.19 at a cost of $ 8,003 and realized a profit therefrom of $ 34,664.19. In 1954 they sold kit pelts for $ 56,394.86. The proceeds of these sales were reported as ordinary income.
In each of the taxable years they sold pelts from culled breeders, as follows:
| 1953 | 1954 | |||
| Female | Male | Female | Male | |
| Number sold | 1,300 | 800 | 200 | |
| Date acquired | 1951 | 1952 | 1952 | |
| Sale price | $ 19,500 | $ 14,400 | $ 7,000 |
*148 They reported the proceeds from these sales as long-term capital gains.
Petitioners Carl W. and Verna Schmidt, Docket No. 68661, reported the sales of breeder mink pelts and live breeding mink as capital gains and for the amounts as follows:
| Year | Pelts | Live mink |
| 1951 | $ 4,871.00 | $ 44,942.00 |
| 1952 | 21,868.29 | 23,868.00 |
| 1953 | 13,250.00 | 28,677.50 |
| 1954 | 13,025.00 | 19,207.50 |
All of these mink had been held for more than 12 months before the date of sale.
*755 They also reported the sales of live nonbreeding mink and nonbreeder mink pelts as ordinary income and for the amounts as follows:
| Year | Amount |
| 1951 | $ 100,935.03 |
| 1952 | 109,341.48 |
| 1953 | 86,326.85 |
| 1954 | 94,912.57 |
Substantially all of the amounts were derived from the sale of pelts.
There is no market for mink culled from the breeding herd except through the sale of their pelts.
OPINION.
Since the tax years in these proceedings include 1951 through 1955, the applicable sections of the Internal Revenue Code of 1939 and 1954 are 117(j) 1 and 1231, respectively, and they are in substance the same with respect to the issue common to and presented in each proceeding. The question to be determined is whether*149 the gain from the sale of the pelts of culled breeder mink is entitled to the capital gains treatment.
*150 The identical question was presented in Cook v. United States, 165 F. Supp. 212">165 F. Supp. 212. There the facts were very much like the facts presented in these proceedings. The ranchers' business consisted of breeding and raising mink for the purpose of selling pelts; the business required development of a breeding herd in order to obtain improved strains of mink; this necessitated culling of certain breeders from the herd; the culled breeders were maintained in separate pens until late November or early December, when their fur was in prime condition, at which time they were killed and pelted; and the cured pelts were disposed of in the same manner as pelts taken from mink raised primarily for their fur.
*756 There, as here, the Government admitted that the culled breeders met all the requirements of the statute for property used in the trade or business and that had the culls been sold live, the proceeds of the sale could have been given capital gains treatment. It contended, as respondent contends here, that when the culled animals were killed and pelted the pelts lost their character as "property used in the trade or business," as provided by the applicable*151 statute. The taxpayer, as the petitioners claim here, contended that the killing and pelting of the culled breeders were necessary steps in the process of conditioning their pelts for market and hence the sale of the pelts did not alter the fact that the culled mink were breeding stock within the definition of the statute.
The same contentions presented by respondent here were presented there by the Government and they are first, the business of the mink rancher was the raising of mink for the sale of their pelts; the pelts of the culled mink are, consequently, property includible in inventory if held at the close of the tax year, and property held primarily for sale to customers in the ordinary course of business; and second, the pelts of culled breeder mink are not "livestock held by the taxpayer for draft, breeding, or dairy purposes."
The court rejected those contentions and held for the taxpayer. Respondent argues that the decision is erroneous and should not be followed; that it is contrary to Revenue Ruling 57-548, 22 C.B. 54">1957-2 C.B. 54, which is respondent's interpretation of section 1.1231-2 of the Income Tax Regulations, as of December*152 31, 1957, which is relative to section 1231 of the 1954 Code; that the decision is based primarily on Albright v. United States, 173 F. 2d. 339, which is distinguishable in that the animals culled from the dairy herd were sold live; and that "livestock," though expanded by the regulations (T.D. 6253) to include fur-bearing mink, is not to be expanded to include mink pelts. He also refers to Kahua Ranch, Ltd. v. United States, 165 F. Supp. 210">165 F. Supp. 210, where the taxpayer, in the business of selling meat at Kohala, Hawaii, made sales of culls from its breeding herd to retailers, slaughtered the animals for them, retaining the hides for such service, and *757 upon delivery of the meat billed the purchaser according to the dressed weight of the carcass; but it shipped other culls to another of its ranches on the island of Oahu where it slaughtered the culls, stored the meat in its icehouse, and upon demand sold the carcasses to retailers (butchers) in Honolulu, the court holding that the proceeds from the sale of the meat under the circumstances first described constituted capital gains while in the second instance the*153 proceeds were ordinary income. Respondent sees in the second instance an analogy with the instant proceedings, and objects to the distinction the District Court made between the two businesses.
*154 In Cook v. United States, supra, the court stated that "[the] analogy fails, since the existence of independent slaughter-houses in the meat industry provides a market for live slaughter animals which does not exist in the mink industry. The practice of selling animals to such middlemen is so universal in the meat industry, that a farmer who engages in this part of the business may well be held to be engaging in a separate business from that of raising the animals for sale in which business the culled animals could be found to be property held primarily for sale to customers in the normal course of trade or business."
We are of the opinion that the reasoning of the court in the Cook case is sound.
As shown by the court, respondent's first argument was presented in other cases where the taxpayer attempted to qualify as property used in the trade or business, property of the same kind sold by the taxpayer in his normal trade or business. See Carl Marks & Co., 12 T.C. 1196">12 T.C. 1196 (securities); United States v. Bennett, 186 F. 2d 407 (livestock); Nelson A. Farry, 13 T.C. 8*155 (housing); A. Benetti Novelty Co., 13 T.C. 1072">13 T.C. 1072 (slot machines). As stated by this Court in Latimer-Looney Chevrolet, Inc., 19 T.C. 120">19 T.C. 120 (company or demonstrator cars), at page 125, "These cases point out that it is not the nature of the property itself which is determinative of [the] case but rather the purpose for which the property is held." It was so held also in Albright v. United States, supra, where the court held that section 117(j)(1) was applicable to the sale of culls from a dairy herd though respondent argued to the contrary.
In each of the instant proceedings it is undisputed that the breeder mink were held primarily for use in the rancher's business. That the breeders' pelts were conditioned for sale and sold in common with the other pelts held primarily for sale in the ordinary course of business is immaterial. Cook v. United States, supra,Albright v. United States, supra,Latimer-Looney Chevrolet, Inc., supra,United States v. Bennett, supra.See*156 also Retz v. Birmingham, 98 F. Supp. 322">98 F. Supp. 322 (sows and cows); Isaac Emerson, 12 T.C. 875 (dairy- and hog-breeding herds); Fawn Lake Ranch Co., 12 T.C. 1139">12 T.C. 1139 (breeding cattle).
*758 Respondent's other contention is that the pelts of the culled breeders are not "livestock held by the taxpayer for * * * breeding * * * purposes" and when the breeders were killed and pelted they did not retain the character of section 117(j)(1) or section 1231 property. On this question the reasoning of the court in the Cook case is also convincing and persuasive and is applicable here. In rejecting the same contention the court stated:
The evidence establishes that sound business practice requires the culling of large numbers of mink from the breeding herd each year, and that the only appreciable market for these culls is the pelt market. In order that the culls be put in a marketable condition they must be killed and pelted. Yet, the [respondent] maintains in so rendering the animal what was admittedly section 117(j)(1) property becomes something else. [Respondent's] construction of the statute, *157 in which he draws support from Revenue Ruling 57-548, penalizes sound business methods by ignoring the economic realities of the mink farming industry. Resort to the statute must be had to see whether it requires this result.
The statute is not ambiguous; the congressional intent is clear; and rulings of the Treasury Department which purport to construe the statute are to be disregarded when their effect is to deny capital gains treatment to a taxpayer otherwise within the statute [Albright v. United States, supra]. The 1951 amendment which specifically includes "livestock * * * held by the taxpayer for draft, breeding, or dairy purposes" in the definition of "property used in the trade or business" was enacted to remove "uncertainties" in the application of the statute to livestock used in the trade or business created by rulings of the Treasury Department. The legislative history of the amendment indicates congressional approval of the Albright decision. The history further shows that the term "livestock" is to be given a broad and not a narrow construction. [H. Rept. No. 585, 82d Cong., 1st Sess., vol. *158 2, U.S. Cong. & Adm. Serv., p. 1813; S. Rept. No. 781, 82d Cong., 1st Sess., vol. 2, U.S. Cong. & Adm. Serv., pp. 2011, 2012.]
It is undisputed that the culled breeder mink here involved meet all the conditions imposed by section 117(j)(1). [Respondent's] construction of the statute, in effect, adds thereto the further condition that the property be sold in the same form as that in which it was held by the taxpayer. Nothing in the statute permits such inference unless it is the word "livestock" itself. Yet the history of the amendment shows that it was not intended to restrict the ambit of the existing statute, but to remove restrictions in its application resulting from Treasury Department rulings.
We conclude, as did the District Court, that respondent's determination that the proceeds of the sale of pelts of culled breeder mink were ordinary income is not in accord with a reasonable interpretation and application of the statute and in its operative effect is contrary to the intent, purpose, and requirements of the said sections 117(j) and 1231 of the 1939 and 1954 Codes, respectively.
Because of the other adjustments agreed upon by the parties, recomputation of the deficiencies*159 will be required.
Decision will be entered under Rule 50.
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. -- 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, * * *. 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. * * *
(2) General rule. -- If, during the taxable year, the recognized gains upon sales or exchanges of property used in the trade or business, * * * exceed the recognized losses from such sales, exchanges, and conversions, such gains and losses shall be considered as gains and losses from sales or exchanges of capital assets held for more than 6 months. * * *↩
2. Rev. Rul. 57-548:
Section 1.1231-2 of the Income Tax Regulations provides that for the purposes of section 1231 of the Code, the term "livestock" shall be given a broad, rather than a narrow interpretation and includes cattle, hogs, horses, mules, donkeys, sheep, goats, fur bearing animals, and other mammals. Under the broad interpretation of "livestock", the mink under consideration, as well as other fur bearing animals, are property used in the trade or business for the purposes of section 1231 of the Code, provided they are held by the taxpayer for breeding purposes and are held for 12 months or more from the date of acquisition.
However, when animals are periodically taken from the breeding herd and killed for their pelts, the character of the animals has been changed. They are no longer of the type specified for possible capital gain treatment under section 1231 of the Code and the pelts therefrom constitute property of a kind which would properly be includible in inventory 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, as is the case where such animals are raised for their pelts, i.e↩., not for breeding.