Court Opinion

ID: 4624752
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:55:48.084917+00
Date Added: 2024-06-11T07:59:55.587121
License: Public Domain

Anderson Fowler and Genevieve B. Fowler, Petitioners, v. Commissioner of Internal Revenue, RespondentFowler v. CommissionerDocket No. 77439United States Tax Court37 T.C. 1124; 1962 U.S. Tax Ct. LEXIS 169; March 22, 1962, Filed *169 Decision will be entered for the respondent.  Petitioners are the owners and operators of a racing stable, the primary purpose of which is the racing of horses at public tracks for profit.  Some of the horses raced by them have been acquired by purchase and some they raised.  Petitioners and three others, also operators of racing stables, purchased a young stallion with two purposes in mind, first, to race him in stake races for purses, and at an appropriate time thereafter to use him as a sire in their breeding operations.  The horse so acquired was sold by the purchasers approximately 11 months after he had been acquired.  During the time he was owned and held by them he was raced twice in stake races for purses. He was unsuccessful in both races, and was never used for breeding purposes.  Held, that the horse in question was property owned and used by petitioners in their business within the meaning of section 1231(b)(1) of the Internal Revenue Code of 1954, and under section 1231(a), the loss sustained on his sale is to be considered as a capital loss.  Rollin A. Hunter, Esq., for the petitioners.John J. Hopkins, Esq., for the respondent.  Turner, Judge.  TURNER *1124  The respondent determined a deficiency in income tax against the petitioners for the taxable year 1955 in the amount of $ 1,148.77.  The question is whether a loss sustained upon the sale of a racehorse is to be considered*171  as a loss from the sale of a capital asset, within the meaning of section 1231 of the Internal Revenue Code of 1954, the determination of the question turning on whether the horse was held by petitioners for breeding purposes within the meaning of section 1231(b)(3).FINDINGS OF FACT.Some of the facts and some evidence has been stipulated and the facts stipulated are found as stipulated.Petitioners are husband and wife.  They reside on a 250-acre farm, owned by them, at Peapack, New Jersey.  They filed a joint income tax return for 1955 with the district director of internal revenue at Newark.Petitioners are the owners and operators of a racing stable under the name of Glenelg Stable. Their racing colors are silver hoops over navy blue, with old rose sleeves and cap.  The primary purpose and objective of their operation is the racing of their horses for purses at public racetracks.The races at public tracks generally fall into three categories: Stake races, allowance races, and claiming races.  Stake races command the largest purses, and are the races in which the best horses are entered and raced. Claiming races command the smallest purses, *1125  and horses capable of *172  competing in stake and allowance races are not normally raced in claiming races.  A feature of a claiming race is that in entering his horse in such a race an owner agrees that the horse may be claimed by any other owner at the price fixed for that race.  If, however, a horse which has been claimed wins the race, the purse belongs to the owner at the time the horse is entered in the race.  Most of the races listed on most, if not all, racing programs are claiming races, and, as a consequence, most of the horses being raced are raced in claiming races.  The cheaper horses are usually run at the smaller tracks and the claiming prices at such tracks are lower than claiming prices at the major tracks. It is not unusual that the purse in a claiming race is closely comparable to the price for which a horse running in the race may be claimed.In the operation of Glenelg Stable, some of the horses are bred and the foals are raised and trained, the intent and purpose being to race them for purses under the Glenelg colors.  Except when the Glenelg horses are being raced at various racetracks or are being trained at training tracks, they are quartered and trained at the farm at Peapack.In addition*173  to its use in the operation of Glenelg Stable, the farm is also operated as a dairy farm.  Part of the acreage is used for pasture and part for growing crops.Petitioners began their Glenelg Stable operations by the purchase, in August of 1947, of a filly by the name of Wilhemine for $ 19,000.  She was raced five times in 1948 and 1949, and thereafter bred for the production of foals, up to and including 1955.  She was bred five times and produced three foals: Tamarac, a filly, and Race Ace and Wild and Wooly, both colts. Wilhemine was sold in 1958 for a price not shown.In 1950, a filly by the name of Toquilla was purchased as a yearling for $ 3,000.  She was trained and raced in claiming races.  She raced six times during 1952, and won a total of $ 6,825.  On May 5, 1952, she ran in a claiming race, and was claimed for $ 3,500.On August 19, 1950, petitioners purchased Spangled, a filly, likewise as a yearling, for $ 11,500.  From April 1952 to May 1955, Spangled was bred four times and produced two foals: Roommate, a colt, on April 10, 1954, and Spangled Banner, a filly, on April 29, 1955.  Spangled was trained but never raced. She is still owned by petitioners.  One of her foals*174  developed into a stake horse and thus ran in the better races.On January 1, 1952, petitioners purchased Belle Watling, a filly, for $ 9,116.41.  She was raced four times in 1952, and won a total of $ 100.  She was raced six times in 1953, winning a total of $ 525.  She was sold on March 1, 1953, for $ 4,000.  She was not used by petitioners *1126  for breeding purposes.  Petitioners had concluded that she had no "racing class," had developed some bad characteristics and would not make a good brood mare.On August 20, 1952, petitioners purchased Triplay, a filly, as a yearling, for $ 400.  She won $ 350 in six races in 1953.  She was sold on September 1, 1953, for $ 1,000.  She was not used by petitioners for breeding purposes.On November 4, 1953, petitioners purchased Libba, a mare, at a cost of $ 30,000.  Libba was in foal at the time of purchase, and foaled on April 15, 1954.  The foal, a colt, was given the name of Assemblyman.  Libba was bred in 1954, and again in 1955, but did not produce a foal. She is still owned by petitioners.On January 1, 1954, petitioners purchased Queue, a mare, for $ 5,000.  Queue was in foal when purchased.  She foaled on April 11, 1954, and *175  the foal, a colt, was given the name of Third Base.  She produced a second foal on March 17, 1955.  The foal, a filly, was given the name of Inquiry.  Queue was sold on some undisclosed date.Also on January 1, 1954, petitioners purchased Fiercely, a mare, for $ 5,000.  Fiercely was in foal when purchased.  She produced two foals for petitioners: Covey Rise, a filly, on March 19, 1954, and Caloosa, a filly, on March 17, 1955.  Fiercely was raced two or three times before being sold on some undisclosed date.On August 10, 1954, Superupper, a filly, was purchased by petitioners as a 2-year-old for $ 4,400.  She was raced seven times in 1954, winning a total of $ 4,425.  She was claimed in a claiming race on January 10, 1955, for $ 4,000.  She was not used by petitioners for breeding purposes.On August 15, 1954, petitioners purchased Red Abbey, a colt, as a yearling, for $ 7,000.  He bowed a tendon after he was acquired, and was never raced by petitioners.  They sold him in 1956 for $ 350.On November 1, 1954, petitioners purchased a one-fourth interest in Royal Devon, a colt, for $ 10,750.  He was purchased as a yearling and was trained at a racetrack.  He showed poorly in training, *176  and on November 21, 1955, was sold at a public sale, petitioners receiving $ 800 for their interest.J. C. Brady, brother-in-law of petitioner Anderson Fowler, was the owner of Doc Walker, a gelding.  In 1954, Doc Walker bowed a tendon, after which he was turned over to petitioners, under an agreement that petitioners would care for and race the horse, or sell it.  Doc Walker was not raced in 1954 or 1955.  He ran in two races in 1956, and was claimed for an undisclosed price in the second of the two races.On November 9, 1955, petitioners acquired a one-twentieth interest in Faultless, a studhorse, for $ 1,500, which interest entitled them to one service a year from Faultless.  They still own that interest.*1127  The petitioners raised and trained for racing the various foals produced as above set forth.  The horses so raised and trained, with the exception of Assemblyman, were sold in 1956, 1957, or 1958.  Except for Tamarac most, if not all, of the horses raised and sold were being raced in claiming races and were claimed.  Tamarac was raced three times in 1955 and broke down.  She was then bred, but did not produce a foal. The names of the dams, the names of the foals, the*177  years of birth, the years of sale, and the selling prices, were as follows:DamFoalBirth dateSale dateAmountTamarac (F)19521956$ 700WilhemineRace Ace (C)195419574,000Wild and Wooly (C)195519583,000Roommate (C)195419575,700SpangledSpangled Banner (F)195519576,000Covey Rise (F)195419564,900FiercelyCaloosa (F)195519582,000Third Base (C)195419564,750QueueInquiry (F)195519579,000The horses so raised and sold were treated by petitioners on their income tax returns as sales of property used in their business of racing, subject to depreciation, and held for more than 6 months.  The gains were accordingly reported as capital gains.In December 1954, petitioner Anderson Fowler and his brother-in-law, J. C. Brady, for themselves and J. M. Roebling and Townsend B. Martin, purchased a 2-year-old colt by the name of Darubini.  Petitioner's share of the purchase price was $ 15,761.42.  Each of the four individuals owned and operated racing stables, in which were mares and fillies. Two of the four owned stallions. On November 11, 1955, Darubini was sold at a loss in a sale at Belmont Park, New York.  Petitioners*178  received $ 2,250 for their interest, sustaining thereby a loss of $ 11,547.42.The four parties mentioned were the same four who on November 1, 1954, had purchased Royal Devon.  They had studied catalogs of the sales to be held at Newmarket, England, and had agreed upon certain horses on which they would bid.  Fowler and Brady attended the Newmarket sales, but did not buy any one of the horses previously agreed on because of the high price range.  Darubini was one of the horses entered in the sales, and they were impressed with his pedigree, his conformation, and with his racing record as a 2-year-old.  He had been raced three times as a 2-year-old and had finished second in the Dewhurst Stakes, winning a purse of approximately $ 5,656.  In buying Darubini, it was the purpose of the purchasers to race him in stake races and if he should prove himself to be a winning racehorse, to use *1128  him later as a stud. In one letter, written on December 22, 1954, and having to do with the cabling of funds in payment for Darubini, Brady had expressed the view that "with a little luck we may have bought a good race horse. I am sure he will make a good sire." In a second letter, written*179  the same date and having to do with the supplying of Darubini's pedigree, he stated with respect to Darubini that "if he stays sound, I feel sure he will run well.  I have great confidence in him as a prospective sire."Darubini was left in England and placed in the hands of Robert I. Colling to be trained and raced. He was to be entered in one or more stake races in England the following year.  He was in fact entered in two races in 1955, but failed to place in the money in either race.  It was concluded by some, possibly three, of the owners that he would not be a successful racehorse, and such being the case, he had no potential as a studhorse. He was shipped to the United States in October of 1955 and sold as stated above.  He was purchased at the sale by one of the four owners.  He ran in several races, but was not a winner.  He was resold at a public sale for $ 4,000.  The purchaser at that sale had him gelded, and he was thereafter successful in steeple chases, winning approximately $ 50,000.Prior to their acquisition of the one-twentieth interest in Faultless in November of 1955, petitioners did not own a studhorse or have an interest in one.  Their mares were serviced *180  by stallions belonging to others.  A feature of owning a studhorse, aside from the servicing of mares also owned, is that exchanges of services of stallions can be arranged, whereby the mares of an owner of a studhorse may be serviced by studhorses of other owners.Assemblyman, foaled by Libba on April 15, 1954, was raised and trained by petitioners, and was raced both as a 2-year-old and as a 3-year-old.  His winnings amounted to approximately $ 90,000.  Thereafter he was unable to race, 1 and in his fourth year he was placed in stud on a farm in Maryland.  As of the date of trial, 20 mares were listed in Assemblyman's service book.The petitioners were not in the business of breeding and raising horses for sale and they did not hold any of the horses owned by them primarily for sale in the ordinary course of their business.  In breeding and *181  raising horses, it was their purpose to race the horses raised.A racehorse which has a good pedigree, good conformation, or physical structure or build, and has established a good racing record is regarded as a fine breeding prospect.  There are times when horses with bad conformation are used as sires. And at times horses which do not have established racing records are used for breeding purposes *1129  because of confidence in their pedigrees. On the other hand, horses which have been successful in winning races, be they stallions, mares, or fillies, are generally regarded as potential breeding prospects.Darubini had a fine pedigree, "wonderful" conformation, and as a 2-year-old had finished second in a stake race.  His dam, Dodoma, was a half-sister of Nasrullah which had become a leading sire in the United States.  She was also the dam of Nilo, now a leading sire in Australia, and of Diabarretta, one of the great fillies in England.On their income tax returns for the years 1952 through 1958, the receipts reported by the petitioners from the operation of Glenelg Stable consisted solely of the proceeds of racing purses, the amounts of which were as follows:1952$ 6,825.0019531,075.0019544,425.001955325.00195627,390.00195796,306.0419587,110.00*182  In their income tax return for 1955, the petitioners reported their income from their dairy herd operations in the "Schedule of Farm Income And Expenses," which is designated as Schedule F.  They reported their income from the operation of their racing stable on Schedule C, for the reporting of "Profit (Or Loss) From Business Or Profession." The loss of $ 11,547.42 on the sale of Darubini was deducted in full as a loss from the sale or exchange of property other than a capital asset. Superupper had been owned by petitioners for less than 6 months when she was sold in a claiming race in January of the taxable year, and the loss sustained on the sale was likewise deducted in full.  Royal Devon had been owned for more than 12 months when he was sold in November of 1955, and the loss sustained was reported as a capital loss on Schedule D, for the reporting of gains and losses from sales or exchanges of property.The respondent in his determination of deficiency disallowed the deduction of the loss from the sale of Darubini, and determined that the loss was to be considered as a loss from the sale of a capital asset held for more than 6 months, and was to be allowed only in the amount*183  of $ 5,773.71.OPINION.In case of the sale or exchange of property used in the trade or business of a taxpayer, the general rule, as prescribed by section 1231(a) of the Internal Revenue Code of 1954, 2 is that the gains and losses therefrom shall be considered as gains and losses from sales or exchanges of capital assets held for more than 6 months, if the recognized gains exceed the recognized losses from such sales or exchanges.  If on the other hand such gains do not exceed such losses, the *1130  gains and losses shall not be considered as gains and losses from sales or exchanges of capital assets. For the purposes of section 1231(a), the term "property used in the trade or business" is defined by section 1231(b).  2 As so defined, the general rule is declared in section 1231(b)(1) to be that 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 * * *, held for more than 6 months," but does not include property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.  Where, however, the property in question consists of livestock*184  held by the taxpayer "for draft, breeding, or dairy purposes," section 1231(b)(3)2 specifies a holding period of 12 months if such livestock is to qualify as property used in the trade or business, for the purposes of section 1231(a), instead of a period of 6 months as under the general rule.*185  That the recognized gains by petitioners from the sale of capital assets during the taxable year exceeded the recognized losses from such sales, is not in question.  Neither is there any question as to the amount of the loss sustained by them upon the sale of the racehorse Darubini.  The question accordingly is whether or not Darubini was property used by petitioners in their trade or business within the meaning of section 1231.  If so, the loss on his sale must be considered as a loss from the sale or exchange of a capital asset, as respondent has determined, and not as a loss from the sale or exchange of property which is not a capital asset, as claimed by petitioners on their return.*1131  We are not confronted in this case, as we have been in most of the decided cases involving the sale of livestock, with the question of whether or not the animals sold had been held primarily for sale in the course of the taxpayers' trade or business.  The facts show that in owning and operating Glenelg Stable, the primary and ultimate purpose of petitioners was the racing of horses for profit, namely, for purses at public tracks, and that they acquired some of the horses used in their operations*186  by purchase and some they raised.  There is no contention that petitioners were in the business of acquiring or raising horses primarily for sale and petitioners specifically disavow that their business was that of acquiring, raising, or holding horses for sale.  In short, the parties appear to be agreed that Darubini was not acquired for resale, but for use in petitioners' business of operating Glenelg Stable and that he was in fact used therein.  The point of disagreement is as to the use for which he was acquired and held, within the meaning of the statute, and arises from the fact that under the wording of section 1231(b)(3), livestock held for draft, breeding, or dairy purposes is to be considered as property used in the taxpayer's trade or business and the gains or losses therefrom are to be considered as capital gains or losses under section 1231(a), if such livestock has been held for 12 months or more, whereas, if the livestock was held or used in the trade or business for other than draft, breeding, or dairy purposes, then according to section 1231(b)(1), the animals sold were property used in the taxpayer's trade or business and the gains or losses from their sale are to*187  be considered as capital gains or losses under section 1231(a), if they had been held for as much as 6 months.Whether or not the horses owned by petitioners in the course of their operation of Glenelg Stable were acquired by purchase or were raised by them, most, if not all, were trained for racing and most of them were raced. Toquilla, Belle Watling, Triplay, Superupper, Doc Walker, and all of the foals raised by petitioners, except Tamarac and Assemblyman, were never used for any purpose other than racing. Red Abbey and Royal Devon were trained for racing but never raced, Red Abbey because of a bowed tendon and Royal Devon because he showed poorly in training. Both were stallions, but neither was used for breeding purposes while owned by petitioners.  Wilhemine, Fiercely, Tamarac, and Assemblyman were used both for racing and for breeding purposes, but Assemblyman is the only one of the four still owned by petitioners.  Spangled, Libba, and possibly Queue were used by petitioners only for breeding purposes, and of those, only Queue has been sold.  The facts thus show that although the primary purpose of Glenelg Stable is the earning of profits through the racing of horses at*188  public tracks for purses, a part of the operation is the *1132  breeding of racehorses, not for sale, but for training and racing; that most of the horses owned by petitioners have been used for racing only; that some have been used both for racing and breeding, and some for breeding purposes only.Although all of the horses raised by petitioners, except Assemblyman, and all of the horses purchased, except Spangled and Libba, have been sold, there was no factual basis for question, except as to Darubini, as to the treatment of gains or losses resulting from their sale as capital gains and losses, regardless of the use of the horses, since all had been held for more than 12 months, except Superupper and she had been held for less than 6 months when claimed in January of 1955.  Accordingly, except as to Darubini, it had been of no moment, for capital gain and loss purposes, whether any of the horses sold by petitioners in the course of their operations were acquired and held for racing or for breeding purposes, or for both.As for Darubini, it does make a difference, since there appears to be no question that a horse acquired and held for breeding purposes only would not, under *189 section 1231(b)(3), be property used in a taxpayer's trade or business for the purposes of section 1231(a), if not held for 12 months.  Correspondingly there appears to be no question that a horse acquired, held, and used only in the business of racing horses for purses would, under section 1231(b)(1), be property used in the taxpayer's trade or business for the purposes of section 1231(a), if he was so held for a period of 6 months.The petitioner, in his testimony, would convey the impression that the purpose to race Darubini was merely to prove his racing ability so as to establish him for stud purposes and the fact that in demonstrating his racing ability he would be earning profits for Glenelg in its horseracing operations would, from petitioner's viewpoint, be of no controlling importance.  Brady, it seems, was already certain at the time of purchase that Darubini would make a good sire, and expressed great confidence in him as a prospective sire, but at the same time indicated that he was looking forward to Darubini's use as a racehorse, stating that with a little luck, or if Darubini stayed sound, they had bought a good racehorse and that he would run well.If we understand*190  petitioner's position clearly, it is that to become an established sire of good or fine racehorses, it is essential that a stallion first be a success as a racehorse; that such success as a racehorse means the winning of stake races, and where a stallion is acquired with a view to his subsequent use as a stud, provided he is first successful in winning purses in stake races, he is held for breeding purposes within the meaning of section 1231(b)(3), and is property used in a taxpayer's business under section 1231(a) only if he has been held for 12 months, and that the general definition of property used in the *1133  trade or business, as set forth in section 1231(b)(1), which requires a holding period of only 6 months, is of no force, even though it was intended that first the horse was to be raced for profit and was to be used for breeding purposes only if he was successful in winning purses as a racehorse, and even though he was in fact used in racing for purses and for no other purpose.On the facts here, it is our opinion that the statute may not be so construed and applied.  We are satisfied that the purchasers of Darubini hoped and felt that they were acquiring a horse which*191  would first make money for them in winning purses in stake races, and at an appropriate time in the future could be used by them to sire other racehorses. It may be noted at this point that Assemblyman had earned approximately $ 90,000 in purses for the business by the time he was retired to stud and that though he was so retired as a 4-year-old, his retirement at that time was because he was "unable" to race.  The facts are definite, we think, that Darubini was acquired and was held and used in the horseracing operations of the purchasers, and under section 1231(b)(1), he was property used in their trade or business when sold, because held for more than 6 months, and such application of the statute is not, in our opinion, dissipated or forestalled because they had in mind a later use which, under section 1231(b)(3), would likewise qualify Darubini as property used in the trade or business of the owners for the purposes of section 1231(a), if he should be held 12 months before being sold.  In interpreting the statute for application here, a question which suggests itself is could capital gains treatment have been justifiably denied if the result of the sale had been a gain rather*192  than a loss.In most, if not all, of the cases cited, the question has been whether the animals sold had been held for breeding purposes or primarily for sale to customers in the ordinary course of the taxpayer's business.  In Robert B. Jewell, 25 T.C. 109">25 T.C. 109, the taxpayer, in the course of his business of raising and training harness horses for sale, did from time to time enter and race some of his horses for purses at public tracks. The question posed and decided, however, was whether or not the particular horses sold had been held by the taxpayer for breeding purposes, or primarily for sale to customers in the ordinary course of his business.  On the facts, it was held that certain of the horses were held for breeding purposes and certain of the horses were held primarily for sale, and that as to others, the decision was against the taxpayer for failure of proof.  There was no question as to whether any of the horses sold were held for racing purposes or for breeding purposes.  Such a question would have been of no moment since under the statute then applicable the holding period was 6 months in either case.  In Estate of Ben H. Collings, 138 F. Supp. 837">138 F. Supp. 837,*193  Collings was *1134  engaged in raising saddle or gaited horses for sale, and one of the activities in his business operations was that of entering and showing his horses in horse shows.  There was no indication that profits were to be earned or derived from the winning of events in such shows, but rather, that the motive and purpose was to establish the quality of Collings' horses as fine saddle horses, to the end that he would realize profit on the raising, training, and selling of the horses produced in his breeding operations.  None of the cases cited stands for the proposition for which petitioners here contend.We conclude and hold that Darubini, having been acquired by petitioner and his associates for racing purposes in their horseracing operations and having been held and so used by them for more than 6 months, was property used by petitioners in their trade or business, and under section 1231(a), the loss sustained on his sale is to be considered as a capital loss.Decision will be entered for the respondent.  Footnotes1. That Assemblyman was retired to stud when he was unable to race, is from the testimony of petitioner Anderson Fowler.  He did not explain what caused his inability to race.↩2. SEC. 1231.  PROPERTY USED IN THE TRADE OR BUSINESS AND INVOLUNTARY CONVERSIONS.(a) General Rule. -- If, during the taxable year, the recognized gains on sales or exchanges of property used in the trade or business, plus the recognized gains from the compulsory or involuntary conversion (as a result of destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation or the threat or imminence thereof) of property used in the trade or business and capital assets held for more than 6 months into other property or money, 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.  If such gains do not exceed such losses, such gains and losses shall not be considered as gains and losses from sales or exchanges of capital assets. * * ** * * *(b) Definition of Property Used in the Trade or Business.  -- For purposes of this section -- (1) General rule. -- 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 167, held for more than 6 months * * *, which is not -- * * * *(B) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business * * ** * * *(3) Livestock. -- 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.  * * *↩