Tenney v. Commissioner

DANIEL G. TENNEY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Tenney v. Commissioner Docket No. 99690. United States Board of Tax Appeals 42 B.T.A. 1049; 1940 BTA LEXIS 918; October 22, 1940, Promulgated *918 Cattle purchased after February 28, 1913, for breeding purposes and so used, held, depreciable assets, and the purchase price of any of such cattle as perish, during the taxable year, less any depreciation allowable thereon, may, if not compensated for by insurance or otherwise, be deducted as a loss. William S. Hammers, Esq., for the petitioner. Clay C. Holmes, Esq., for the respondent. DISNEY *1049 In this proceeding the petitioner requests redetermination of the deficiency proposed by the Commissioner for the calendar year 1936 in the amount of $2,965.72. However, the amount thereof in dispute is only $2,595.51. The only errors assigned are (1) that the Commissioner erred in his determination of the amount of depreciation on farm buildings deductible in 1936, in that he failed to include in the cost thereof the sum of $2,500 expended by petitioner in 1933 for the erection of a calf pen, and (2) that the Commissioner erred in reducing from $10,100 to $1,971.25 the loss claimed to have been sustained by petitioner on the death in 1936 of certain cattle purchased for breeding purposes, the difference of $8,128.75 allegedly representing*919 depreciation sustained in prior years. The first error assigned is now eliminated, counsel for the petitioner admitting in his brief that the Commissioner did include with other farm buildings the cost of the calf pen and allowed proper depreciation thereon. Therefore, there remains for our determination only the issue which is indicated by the second assignment of error. Counsel for respondent in his brief states that he "accepts and adopts the findings of fact contained in petitioner's brief", but asks *1050 that certain additional facts be found, and such as we deem justified by the record are included in our statement of findings of fact set forth herein. FINDINGS OF FACT. We adopt as a part of our findings of fact the findings of fact proposed by the petitioner and agreed to by counsel for the respondent, as follows: 1. The Petitioner is an individual, with residence at 630 Park Avenue, New York, N.Y. 2. The notice of deficiency on which the appeal is predicated was mailed to Petitioner on June 21, 1939, and asserts a deficiency in Petitioner's income tax for the calendar year 1936, in the amount of $3,965.72, of which $2,595.51 is in dispute. 3. *920 In 1919 Petitioner acquired from the estate of his father, C. H. Tenney, deceased, two farms, a few miles apart, one near Salem, N.H. and the other at Methuen, Mass. From the same source, he acquired also a small herd of cattle and started in the business of breeding Guernsey cattle. 4. To avoid disintegration from inbreeding and to strengthen and improve the blood line and type of the animals raised, Petitioner has from time to time imported from the Island of Guernsey, or purchased from other sources, some pure-bred Guernsey cattle. 5. Petitioner's books have always been kept on the cash receipts and disbursements basis, and no inventory of live stock raised, or produce grown, is carried or used in determining the profit or loss from the business. 6. It has been the consistent practice of Petitioner, in the instance of purchased cattle, to carry the cost of the animal on the books without change until it is resold, killed or dies. 7. In the income tax return filed by the Petitioner for the calendar year 1936, he reported a loss from his farming operations. 8. The Farm Return filed by Petitioner for 1936 shows that there was included in the amount of loss reported*921 on the income tax return the sum of $10,000.00 representing loss sustained on purchased cattle. 9. The Respondent, in his determination of Petitioner's income tax liability for 1936, reduced the loss of $10,000.00 claimed by Petitioner by the sum of $8,128.75, which amount, he states, represents adjustment of cost basis due to depreciation sustained in prior years. 10. At the same time he allowed as depreciation on the purchased cattle for the year 1936, the sum of $1,036.00, although no such deduction had been taken or claimed in the return. 11. Losses on purchased cattle, similar to that deducted in the return for 1936, have been reported in the returns for prior years, 1926 to 1933, inclusive, without adjustment for depreciation, and none has been made by Respondent. 12. The purpose of the purchase of an animal is to improve the herd by bringing in the blood of that animal. Age is not taken into account when a cow is purchased. The age makes no difference, if from the animal you believe that you can acquire the results desired, i.e., elimination of defects, increased production, or improvement in type. 13. There is no limit of time for keeping an animal in*922 the herd. If the animal is not a satisfactory cross in the herd, it is not kept. 14. The Petitioner started the cattle breeding business with a small herd of cattle acquired in 1919 from the estate of his father. *1051 15. * * * The animal purchased appreciates in value, very frequently, due to the progeny produced. A cow 9 or 10 years old at the time of purchase might appreciate a great deal in value on account of the progeny she might produce. A breeding cow may become more valuable with age. A 12 year old cow may increase in value much more rapidly than a two year old cow, due to the progeny she produced prior to the time of her purchase. The following additional facts are found by us: The petitioner was primarily engaged in the breeding of cattle for profit. None of the cattle constituting his herd in 1936 - the year in issue - was a part of the herd he acquired in 1919 from his father's estate. The dates of the purchase or acquisition of any of the cattle owned by petitioner in 1936 or their ages in any year while owned by him are not disclosed by the record. The cattle constituting petitioner's herd during his ownership had a determinable span of life, *923 which diminished each year they were retained by him. The "use" to which the cattle were put was breeding. The cattle, the loss of which gave rise to the present controversy, died in 1936 and were not compensated for by insurance or otherwise. All cattle constituting the herd during petitioner's period of ownership were acquired subsequent to February 28, 1913. Cattle used for breeding purposes are subject to depreciation. OPINION. DISNEY: The Revenue Act of 1936, bearing upon the issue for our determination, is, in part, as follows: SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: * * * (1) DEPRECIATION. - A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence. * * * SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS. (b) ADJUSTED BASIS. - The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis determined under subsection (a), adjusted as hereinafter provided. (1) GENERAL RULE. - Proper adjustment in respect of the property*924 shall in all cases be made - (B) in respect of any period since February 28, 1913, for exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent allowed (but not less than the amount allowable) under this Act or prior income tax laws. * * * Regulations 94 provide in part as follows: ART. 23(a)-11. Expenses of farmers. - * * * Amounts expended in purchasing work, breeding, or dairy animals are regarded as investments of capital, and may be depreciated unless such animals are included in an inventory in accordance with article 22(a)-7. * * * ART. 23(e)-5. Losses of farmers. - * * * If live stock has been purchased after February 28, 1913, for any purpose, and afterwards dies from disease, *1052 exposure, or injury, or is killed by order of the authorities of a State or the United States, the actual purchase price of such livestock less any depreciation allowable as a deduction in respect of such perished live stock, may be deducted as a loss if the loss is not compensated for by insurance or otherwise. * * * ART. 23(1)-10. Depreciation in the case of farmers. - * * * A reasonable allowance for depreciation may also be claimed*925 on live stock acquired for work, breeding, or dairy purposes, unless they are included in an inventory used to determine profits in accordance with article 22(a)-7. Such depreciation should be based on the cost or other basis and the estimated life of the live stock. * * * The record shows that the petitioner in computing his net income for 1936 did not include his cattle then owned in any inventory or allow any depreciation for their exhaustion, wear, and tear as a deduction, as contemplated by the statute and required by the regulations, in respect of said cattle or those that died and for which he claims a loss. The fact that for some years prior to 1936 the petitioner made his income tax returns in the same manner as in 1936, and that depreciation, ratably or otherwise, had never been deducted in determining the profit or loss from the sale or other disposition of any of the cattle nor had any adjustment for the same been made or required by the Commissioner on account thereof, did not preclude the Commissioner from taking proper action in 1936 with respect to the return for that year. It is well settled that depreciation must be deducted in arriving at profit or loss*926 realized or sustained on disposition of a depreciable asset. It was held in , that the aggregate amount of depreciation which the taxpayer was entitled to deduct in his income tax returns in prior years should be applied in reduction of the base. See also . No evidence indicates that petitioner did not have income from which to deduct depreciation, under . We have found as a fact that the animals constituting petitioner's herd were depreciable assets within the meaning of the Federal revenue law and now state reasons for such finding. The petitioner alleges and the record shows that the loss claimed by petitioner to have been sustained by the death of certain cattle in 1936 was of "cattle purchased for breeding purposes" and that the cattle were so used in petitioner's business. It is reasonable, in fact evident, that the animals had a more or less definite life and that such life was diminished each year the cattle were retained and used by petitioner, whether*927 he retained them for a few or many years. It is entirely possible, as contended for petitioner, that some of the animals acquired or purchased by petitioner may have increased in value due to the excellence of the progeny they produced, but that does not change the fact that the particular animal had become older and that a portion of its *1053 productive life, for which it was acquired and used, had been expended. The same arguments made in behalf of petitioner might be applied to orchards of various kinds which might increase in value due to the trees becoming older and larger and to their increased production of a very high type of fruit. However, the Board has recognized the depreciable character of orchards and has allowed depreciation. See (as to vineyard and peach orchard) ; (as to lemon grove) ; (as to apple and pear orchard) . Though it may be that the present contention was not made, depreciation has been applied to live stock in various cases, e.g., *928 (247); ; ; ; ; . In support of his contention the petitioner's counsel cites , wherein the Board held the Commissioner erred in computing depreciation with respect to a dairy herd and including such depreciation as a factor in his determination of gain realized from the sale of an interest in certain property. However, the Board said: "The petitioner has proved that there was no diminution and that on the contrary there was a continuous and very appreciable increase in the actual productive capacity of the herd from year to year during the whole period of his ownership * * *." In the instant case, the petitioner has not proved that there was no diminution of "actual productive capacity" of his herd during the whole or any part of the period of his ownership, as was done in the case above cited. Moreover, in the cited case the facts indicated an*929 "accounting procedure by the petitioner that is equivalent to making annual additions to a reserve for depreciation and simultaneously charging all the cost of maintaining the standard of the herd against such reserve. The effect was the measurement of annual depreciation by the cost of replacements for each year." Similar facts do not appear herein and we can not consider the case controlling in the present question. In view of the facts heretofore set forth herein and the authorities cited, we are of the opinion and hold that the animals constituting petitionerhs herd and those dying in 1936, for which a deductible loss is asserted, were depreciable assets. The next question for our determination is whether or not the Commissioner asserted proper depreciation for deduction. The determination of the Commissioner is presumed to be correct and the burden of showing his determination is arbitrary, excessive, or erroneous is on the petitioner. : . However, where the Commissioner's determination is shown to be without rational foundation and *1054 *930 excessive, it will not be necessary for the taxpayer to prove he owes nothing, or if liable at all, to show the correct amount, in order to prevent the enforcement of the Commissioner's determination. . In the light of the record in the instant case, we do not think it has been shown that the Commissioner's determination is without rational foundation or excessive. The petitioner did business and kept his books on a cash receipts and disbursements basis in determining the profit or loss from his business and assumed that his cattle were not subject to depreciation. In this record he has failed or neglected to show the date of the acquisition of any of the cattle, or any of their ages, or the length of time that any of the cattle upon which he claimed losses on account of their deaths in 1936, were a part of the herd. Just what investigation the Commissioner may have made touching the above and other facts before reaching his determination, reducing petitioner's alleged loss on account of death of cattle from $10,100 to $1,971.25 and allowing $1,036 depreciation for the year 1936 - though none had been claimed in the return*931 - the record does not show. In the absence of material evidence in the record of the character above indicated, we do not think it can be said that the determination of the Commissioner has been overcome or found to be invalid. Therefore, his determination is approved. Decision will be entered under Rule 50.