Opinion ID: 348408
Heading Depth: 1
Heading Rank: 3

Heading: Cattle

Text: 52 During the taxable years at issue and at all relevant times Duda maintained a brief cattle operation composed of two herds, a commercial herd and a purebred or Brahman herd. The purpose of the commercial herd is to raise cattle for sale as beef. The ostensible purpose of the purebred herd is systematically to improve the strain of Duda's commercial herd through cross-breeding. Cattle produced from the purebred herd are either retained for the purebred herd, put into the commercial herd to increase the quality of the beef operation, or sold. 53 Duda asserts that it decides which offspring of the purebred herd it will retain and which it will cull according to objective criteria designed to select the most qualified breeding animals. For example, Duda weighs and grades each purebred calf at the end of four months, eight months, and again between fourteen and twenty months. Through its grading system Duda can determine prior to an animal's actually producing offspring whether it is of sufficiently high quality for use as a breeder in Duda's program to improve its herd. Any animal found wanting is sold either to another rancher for breeding purposes or directly to the slaughterhouse. So it goes. 54 Duda claims that until it culls certain cattle from its purebred herd, it holds them primarily for breeding purposes. All cattle in issue were between 12 and 36 months old when sold. Duda claims that all had been determined to be unqualified for breeding purposes in its purebred or commercial herds. Accordingly, taxpayer sought capital gains treatment on the sale of these cattle pursuant to § 1231 of the Code. The government contended that because Duda knows in advance that each year it will cull and sell some of its purebred animals, it holds those animals for sale to customers in the ordinary course of business. Accordingly, the government taxed Duda's gain on sale as ordinary income. 55 In Duda' tax refund suit below, the jury found by special verdict that Duda was not holding the purebred cattle in dispute primarily for breeding purposes. The court, however, granted Duda's motion for judgment notwithstanding the jury's verdict.
56 The question whether Duda held the cattle primarily for breeding purposes or primarily for sale has factual underpinnings, but this ultimate issue is inherently a question of law. This court has so characterized the question whether a taxpayer's primary purpose was investment or sale with respect to real estate, Biedenharn Realty Co., Inc. v. United States, 526 F.2d 409, 416 n. 25 (5th Cir.) (en banc), cert. denied, 429 U.S. 819, 97 S.Ct. 64, 50 L.Ed.2d 79 (1976); United States v. Winthrop, 417 F.2d 905, 910 (5th Cir. 1969), and franchise rights, Devine v. Commissioner of Internal Revenue, 558 F.2d 807 (5th Cir. 1977), and we see no reason not to apply this principle to cattle as well. But see Gotfredson v. Commissioner of Internal Revenue, 217 F.2d 673, 677 (6th Cir. 1954); McDonald v. Commissioner of Internal Revenue, 214 F.2d 341 (2d Cir. 1954) (whether cattle held for breeding was question of fact). 57 Accordingly, our power to review the ultimate legal determination below is plenary and not limited by the clearly erroneous rule. Biedenharn Realty Co., Inc. v. United States, supra, 526 F.2d at 416 n. 25. By the same token, the usual standard of review regarding a judgment notwithstanding the jury's verdict, see Boeing Co. v. Shipman, 411 F.2d 365, 374-76 (5th Cir. 1969) (en banc), is inapposite with respect to this ultimate issue. 58 We begin by noting the case by case nature of our review. As we said in United States v. Winthrop, supra : 59 In analyzing a case of this sort no rubrics of decision or rubbings from the philosopher's stone separate the sellers garlanded with capital gains from those beflowered in the garden of ordinary income. Each case and its facts must be compared with the mandate of the statute. In so doing we note that the enunciations of the Supreme Court are clarion as they enjoin us to construe narrowly the definition of a capital asset and as a corollary interpret its definitional exclusions broadly. 60 417 F.2d at 911 (citations omitted). 61 In determining whether Duda held its purebred cattle primarily for sale, we shall consider the following factors: substantiality and frequency of sales, solicitation and advertising efforts, and the method by which the taxpayer differentiates between the cattle it sells and those it retains in its breeding herd. 62 Evidence at trial showed that purebred cattle are not bred into the Brahman herd until they are 20 months old, that the taxpayer extensively advertised purebred cattle for sale, that taxpayer annually sold up to half of the calves produced from the purebred herd, and that taxpayer would occasionally sell for breeding purposes animals that qualified for taxpayer's own breeding herd if it had available other suitable animals. 63 There can be little dispute that Duda's substantial sales and extensive advertising efforts weigh against Duda's claim that it held purebred cattle primarily for breeding purposes. Taxpayer was continually making sales of young animals, some of which were sold in utero. Its sales approximated half of its annual calf crop. Taxpayer regularly advertised its cattle in various livestock publications. For example, one advertisement read as follows: 64 Visit our ranch and see our cattle. No matter what your Brahman requirements, we can supply just the right animal to fit your situation. 65 The third and most important factor Duda's criteria for deciding which animals to retain is more problematic. When the number or age of animals culled from a breeding herd depends entirely on the desires of prospective purchasers, it is clear that the animals are held primarily for sale in the ordinary course of business. See Fox v. Commissioner of Internal Revenue, 198 F.2d 719 (4th Cir. 1952). When a taxpayer culls and sells animals from a breeding herd solely because they do not measure up to the high standards of the herd, this suggests that he holds the animals primarily for breeding purposes. McDonald v. Commissioner of Internal Revenue, supra, 214 F.2d at 343. 66 We shall consider first Duda's criteria for determining the age at which to sell purebred cattle. Many of the cattle Duda sold were too young to have been bred into the breeding herd. The government points out that Duda sold largely to South American ranchers who desired younger and lighter calves for their reduced shipping weight. This suggests one possible motive for Duda's selling young animals that would weigh against capital gains treatment. It is more than counterbalanced, however, by other considerations. Duda had an independent interest in selling young animals, thereby saving on feed and storage costs, as long as by selling young animals it was not sacrificing superior breeders. Although one cannot be certain whether an animal is superior until it is actually bred, Duda's selling some animals before they could be bred is consistent with capital gains treatment if Duda was able to distinguish superior from inferior breeders without breeding them. 67 In short, that Duda sold cattle before they were bred into the Brahman herd cannot independently preclude its receiving capital gains treatment. Treas.Reg. § 1.1231-2(b)(1) provides that a breeding purpose may exist even when a taxpayer disposes of an animal within a reasonable time after its intended use is prevented or made undesirable by reason of . . . unfitness of the animal for such purpose . . . . The evidence showed that Duda segregated all purebred cattle before they were either sold or bred into the herd and afforded each special treatment as potential breeding stock. Duda possessed the expertise to cull as unfit for its own purebred herd certain cattle at a relatively early stage, prior to observing the results obtained from actually breeding them. Consequently, it would be unfair to penalize Duda for its skill in detecting and culling inferior animals at an early stage. 68 If the superiority of an animal had been the only criteria Duda used to decide which cattle to retain, we would agree that Duda might be holding the animals primarily to improve its breeding herd. Consequently we reject the government's contention, that the taxpayer's ability to predict that it would sell many of its breeding cattle each year alone justifies the inference that Duda held the cattle for sale. We agree with the Second Circuit that such a rule 69 penalizes breeders with skill sufficient to detect and cull inferior animals even before they have been bred. True, an affirmative judgment that an animal is superlative cannot be made without examination of its offspring. But the evidence is compelling that a negative judgment can often be made on the basis of . . . (various objective criteria). Thus younger animals can be accurately culled, and the animals which the taxpayer sold were selected in this manner. Before an animal had been thus weeded out it was part of the regular herd, held for dairy and breeding purposes until it should prove unfit. . . . 70 Of course it was the taxpayer's contemplation that many or most of the animals would be found wanting and be sold. The operations might perhaps even have proved unfeasible without the income thus derived. And in a very real sense the taxpayer could have said at any moment that most of his calves were held for possible sale. But this was not the motive behind their retention, and legislative history of the new law (the predecessor to § 1231(b)(3)(B)) shows that motive is to be controlling. 71 McDonald v. Commissioner of Internal Revenue, 214 F.2d 341, 343 (2d Cir. 1954). But see Gotfredson v. Commissionner of Internal Revenue, 217 F.2d 673 (6th Cir. 1954); Fox v. Commissioner of Internal Revenue, 198 F.2d 719 (4th Cir. 1952). 72 In the case at bar, however, the jury had additional evidence. It knew not merely that Duda sold purebred cattle that were unfit for its breeding herd, but also that Duda would sell purebred cattle that were perfectly fit for its breeding herd. See Record on Appeal at 196. In other words, Duda had an additional criterion regarding which cattle to retain and which to sell. The inferiority for breeding purposes of a given animal was a sufficient but not a necessary condition of Duda' selling it. If the animal was a superior breeder, Duda had other superior breeders, and a customer wished to buy it, Duda would sell. Thus the additional criterion regarding the sale or retention of a superior animal was customer demand. This distinguishes the instant case from McDonald, supra. It cannot be said of Duda, as the McDonald court said of the taxpayer in that case, that it initially retained all of the cattle here involved with the hope that they would measure up to (its) high standard. Duda knew from the outset that if all cattle met its high standard, it would still try to sell some of those excellent breeders. 73 In light of Duda's substantial sales, extensive advertising, and responsiveness to customer demand, we think the jury correctly found that Duda's primary motive was to hold the cattle for sale. Accordingly, the order of the district court granting Duda's motion for judgment notwithstanding the jury's verdict is reversed and the cause remanded to the district court with instructions to reinstate the jury's verdict.