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United States District Court, Eastern District of Illinois

November 19, 1955


The opinion of the court was delivered by: Wham, Chief Judge.

Plaintiffs, Austin Cole and Margaret Cole, hereinafter referred to as "taxpayers", filed this action to recover personal income taxes paid for the taxable year ending December 31, 1948. After the filing of the original joint return for the said year, taxpayers filed an amended return and a claim for refund for income taxes erroneously paid, founded upon the fact that they had inadvertently reported the same income twice upon their 1948 tax return. An examination of the returns by defendant's examining officer, Howard F. Ludwig, revealed that the taxpayers were correct in their contention and that a refund was due the plaintiffs. However, this adjustment was partially offset by the examining officer who determined that plaintiffs' treatment of certain receipts from the sale of cattle as capital income was incorrect and that said receipts should properly be classified as ordinary income. The difference in the amount of tax resulting from the divergent theories is $3,581.35, which is the amount the taxpayers seek to recover in this action.

A trial was had before the court and after lengthy extensions of time, written briefs and arguments have been filed for the respective parties.

From the evidence presented at the trial it appears that the taxpayer, Austin Cole, in addition to other business activities, owned and operated the Knollwood Farm at Chester, Illinois. Beginning in 1931 he started in the cattle breeding and dairy business and in the ensuing years by selective breeding succeeded in establishing a dairy herd of registered Jersey cattle which was recognized throughout the Middlewest as very excellent. Milk produced by the herd was sold by the taxpayers, the receipts listed as ordinary income by the taxpayers and the operating expenses of the farm were deducted from this amount of income.

The facilities available at Knollwood Farm were limited and proper care could be provided for a maximum of only seventy-five to one hundred head of cattle at any one time. Fewer could be cared for in the winter than in the summer. The facilities available for caring for producing milk cows were sufficient to maintain an average of only twenty-five to thirty milking cows. To maintain the milk producers in the herd at that strength it was necessary to maintain some spares also.

When the herd, through natural increases, exceeded the maximum number which could be cared for on the farm it was necessary to dispose of some of the cattle. This was accomplished by a public auction sale usually held at the farm. Such a sale was conducted by the taxpayers in September 1948. Because of the high quality of the cattle to be sold the sale was advertised in the Jersey Bulletin, a magazine circulated nation wide among persons interested in Jersey cattle, and a detailed catalog was prepared for distribution to prospective purchasers giving full information regarding the pedigree and production figures of the subject of the sale and its ancestors.

At the sale in September 1948, the taxpayers sold forty-six animals for a total price of $27,284.17. Of the animals sold two bulls and sixteen cows were over two years of age. No question is raised by the defendant as to the taxpayers' right to consider the receipts from the sale of these animals as capital gain. However, the receipts from the sale of fourteen bulls which had never been used for breeding purposes and from fourteen heifers which had never been bred, all of which were less than twenty-three months of age, were disallowed by defendant as capital gain and were considered to be ordinary income. Three of the animals sold in the latter group were under six months of age and the taxpayers concede in their computation of refund due that the receipts from the sales of these three calves are ordinary income and not subject to capital gain treatment.

A review of the income of Knollwood Farm from the sale of milk and from the sale of cattle from 1940 through 1952 discloses the following figures:

Year       Milk Sales       Cattle Sales

  1940       $1,637.19        $1,145.04
  1941         3,451.14          1,678.80
  1942         5,371.96          3,224.65
  1943         8,180.07          5,581.83
  1944         9,332.66          7,306.84
  1945        11,252.16          6,335.76
  1946        10,600.86         28,538.51
  1947        10,694.32          5,575.56
  1948        12,548.91         27,284.17
  1949         6,257.39          2,244.38
  1950         9,904.91          4,756.39
  1951        11,283.12          6,676.56
  1952         4,947.46         37,444.36*fn1

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