Scofield v. Lewis

The appellees, A.J. Lewis and Grace M. Lewis, husband and wife, were members of a partnership which conducted two ranching operations in West Texas. They will be called taxpayers in this opinion. For Federal income tax reporting the taxpayers were on a cash basis and the partnership was on an accrual basis. The partnerships operation was organized for the purpose of breeding high quality cattle and sheep. From year to year the partnership sold the steer calves and the mutton sheep produced by its breeding herd. It also sold, from time to time, from its breeding herd, when required by age, disease, drought or other necessitous circumstance, some of its cows and ewes as well as some of the bulls and bucks and heifers which were unfit for breeding stock or which could not, for some other reason, be retained. During the tax years here involved, 1946 through 1949, no animals were sold which had not been held for six months except baby calves which were, of necessity, sold with their mothers. Operating on an accrual basis, the partnership carried its livestock which it raised for the markets on an inventory basis and these animals were valued under the unit-livestock-price method. For 1939 and years subsequent, including the years 1946 through 1949 here involved, the breeding stock was carried on the inventory. This was done in compliance with the Commissioners Regulation which provided that "A taxpayer who elects to use the unit-livestock-price method must apply it to all livestock raised, whether for sale or for breeding, draft, or dairy purposes." Under the unit-livestock-price method heifers were valued by the partnership at $40, yearlings at $45, two-year-olds at $50, and three-year-olds and over at $55, with the annual inventory increases treated as ordinary income. Ewe lambs were given similar treatment. The taxpayers returned their gains on the sales of breeding stock through 1949 as ordinary income.