25 T.C. 109">*109 Respondent determined deficiencies in the income tax of petitioners in the amounts of $ 286.93, $ 1,313.14, and $ 7.35 for the years 1947, 1948, and 1949, respectively. Petitioners claim an overpayment of tax in the amount of $ 158.65 for the year 1947. Petitioners do not contest certain adjustments in the statutory notice of deficiency. The issue for decision is whether the Commissioner correctly determined that the gain realized on the sale of certain trotting horses during the years 1947, 1948, and 1949 was ordinary income rather than long-term capital gain within the purview of section 117 (j) of the Internal Revenue Code of 1939.

FINDINGS OF FACT.

The stipulated facts are so found.

Petitioners1955 U.S. Tax Ct. LEXIS 68">*70 are husband and wife and reside at Wilmore, Kentucky. They filed joint Federal income tax returns for each of the 25 T.C. 109">*110 calendar years 1947, 1948, and 1949 with the collector of internal revenue for the district of Kentucky.

Petitioners paid to the collector of internal revenue for the district of Kentucky income taxes in the amount of $ 778.77 for the calendar year 1947, which amount was paid by petitioners within 3 years before the execution of an agreement by both the Commissioner and the petitioners pursuant to section 276 (b) of the Internal Revenue Code of 1939 to extend beyond the time prescribed in section 275 of the Internal Revenue Code of 1939 the time within which the respondent might assess the tax, which agreement was executed within 3 years from the time petitioners filed their Federal income tax returns for the calendar year 1947.

During the calendar years 1947, 1948, and 1949 Robert B. Jewell (hereinafter referred to as Jewell) owned, operated, and resided on a farm located in Wilmore, Jessamine County, Kentucky, consisting of approximately 248 acres. The sole ownership of the farm was acquired by Jewell in 1946 upon the death of his sister. Between 1941 and1955 U.S. Tax Ct. LEXIS 68">*71 1946 Jewell and his sister jointly owned the farm and Jewell supervised the operation of it. From 1922 until her death in 1941, Jewell's mother owned the farm. From 1922 until his death in 1937, Jewell's father managed the farm and Jewell assisted. Jewell managed the farm between 1937 and 1941. During the taxable years involved Jewell's farming operations included the raising of tobacco, corn, small grains, hay, and grass, maintaining a flock of sheep, and raising Shorthorn cattle, hogs, and chickens.

During the taxable years involved Jewell was a director of the United States Trotting Association, the governing body of all harness races. He also engaged in the business of announcing and officiating at harness races, managing trotting horse sales, and as an incident thereto, selling secondhand trotting horse equipment. He owned a one-half interest in a harness horse consignment sales company which holds a sale around the first of December of each year. He acted as an agent for others in the purchase and sale of standard-bred ¹ harness racehorses for which services he was paid a commission. He occasionally purchased such horses on his own account for resale at a profit. He1955 U.S. Tax Ct. LEXIS 68">*72 owned 40 per cent of the stock and was the president of a corporation which manufactured and sold a powder for the treatment of bloodworms in horses.

Jewell and his father began raising standard-bred harness horses in 1922. Jewell's father, who managed the farm, was a horsedealer and was more interested in buying, selling, and trading horses than in breeding horses. While he was managing the farm, most of the 25 T.C. 109">*111 colts foaled were sold as weanlings. In 1929 they owned 20 brood mares; but when Jewel became the manager of the farm, the herd had diminished and deteriorated.

In 1929 Jewell purchased a mare called Calumet Castaway for $ 75. Two of her foals became world's champion trotting horses. As a result Jewell became interested in building up a herd of superior brood mares. Jewell was in the business of raising standard-bred horses for sale, and the purpose of building up the herd was to increase the sale1955 U.S. Tax Ct. LEXIS 68">*73 price of the colts. The foals of championship horses have a much greater potential selling price than other colts. For example, when Calumet Castaway was producing, her colts were worth more than the total of all other colts owned by Jewell.

In 1941, when Jewell and his sister became the owners of the farm, they started to try to build up the quality of their breeding herd. Jewell could not afford to purchase top brood mares on the open market, and his plan was to build up the herd over a long period of time through selective breeding. Under this plan only horses having or developing all of the desired characteristics would be retained, and the rest would be sold. Prior to 1943 most of the colts were sold as weanlings. Thereafter all of the colts bred on the farm were registered, nominated for future racing engagements, and given preliminary training. None were sold until they were yearlings. If a horse was retained, Jewell turned it over to someone else to train for racing.

A standard-bred horse is judged by five factors -- breeding, soundness, conformation, tractability, and speed. The colts bred by Jewell were observed daily, and by a year or a year and a half Jewell was1955 U.S. Tax Ct. LEXIS 68">*74 able to tell whether they possessed the first four desired qualities. Speed could only be determined by racing; and before a horse would be considered acceptable by Jewell for breeding purposes, it must prove its speed on the track. Jewell could not afford to race more than 1, and possibly 2 horses per year. The only horse raced by Jewell during the taxable years involved was Jean Wehrley, which was raced in 1947 and 1948. Jewell's primary purpose in racing horses was to build up their reputation, thereby increasing the value of their progeny.

During the years 1945 to 1949, inclusive, the colts foaled and the number sold as yearlings were as follows:

25 T.C. 109">*112 Of the 4 colts retained, Jacques, which was foaled in 1947, was given away as a 4-year-old. Jinneh, which was foaled in 1948, was trained as a yearling but was sold as a 2-year-old because she developed a mysterious lameness. Joppa, which was foaled in 1949, was retained permanently as a brood mare. Jehosheba, which was also foaled in 1949, was raced. She did not prove a winning horse and1955 U.S. Tax Ct. LEXIS 68">*75 was sold as a 3-year-old.

The colts foaled on the farm which were disposed of during the taxable years involved were as follows:

Johnny Vinegar's dam had been bred with the hope of producing a filly, as she produced better fillies than stallions. As a stallion which was related to a lot of the other horses on Jewell's farm, Johnny Vinegar could not be bred to most of Jewell's mares. Also, the stallion must be a little better than the mares. Therefore, when Johnny Vinegar was foaled, Jewell did not intend to retain him unless he developed into a really outstanding horse. When he developed a little unsoundness consisting1955 U.S. Tax Ct. LEXIS 68">*76 of a couple of splints on his leg, it was decided that he would be sold.

Jocose was out of Leola the Great. It was decided that she would be sold when she developed a spavin which is a growth on the hock resulting from a strain.

Jalapa was the full sister of Jean Wehrley which became one of the best racing horses in Jewell's herd. After Jean Wehrley had won a number of races in the summer of 1947, Jewell started handling Jalapa, at which time she was more than 6 months old, and found that she showed a tendency to be hot in the field, which means that she was a little irritable and not very tractable. And as Jewell already had her full sister which won races, he decided to sell Jalapa at that time.

Jettsam was the last foal of Calumet Castaway. He was by Guy Abbey, the sire of a World's Champion trotting horse. Jewell thought that Jettsam would be a great sire and racehorse. Jewell trained 25 T.C. 109">*113 Jettsam more than any of the other horses involved. However, he developed the habit of hitting his knee and by November 1948 he had a big knee. Accordingly, Jewell decided that he would be sold, at which time Jettsam was more than 6 months old.

James VI was out of the same mare 1955 U.S. Tax Ct. LEXIS 68">*77 as Johnny Vinegar. He developed very bad conformation being low in the back and high behind. He also began abusing himself which made it necessary that he be gelded rendering him useless to Jewell in his business.

Jereboam was by Captain Dewey. Petitioner had two full sisters and a half-sister of Jereboam in his herd. Jereboam also began abusing himself and had to be gelded.

Joyous Day began growing about the time she was weaned, and she became as big as a draft horse. She was what Jewell referred to as a "mutt." She also developed spavins and splints.

Kiss 'N Tell was owned jointly by Jewell and another. Jewell owned a one-fourth interest. When Jewell's partner wanted to sell her, Jewell had no choice but to agree. Jewell did not think she was good enough to warrant his purchasing her considering the price at which she was sold.

Juggernaut was out of Leola the Great. When he was about a year old, Jewell first noticed that he was having trouble breathing as the passage in his muzzle was not big enough. He was sold for that reason.

Linda Sue was also a partnership mare. Jewell owned a one-fourth interest. When Jewell's partner insisted on selling, Jewell did not think he1955 U.S. Tax Ct. LEXIS 68">*78 would be justified in buying her.

Justification was also a partnership mare with Jewell owning a one-half interest. She was another horse which Jewell considered a "mutt." She was all head. She had developed this and other bad characteristics by the time she was 4 or 5 months old, and by that time Jewell had decided that she would not qualify for his breeding herd.

All 8 of the above horses sold by Jewell which were solely owned by him had been bred to put in Jewell's breeding herd if they were good enough. However, Jewell knew at the time they were foaled that by a year and a half or earlier most of the colts would develop some undesirable quality or would not show sufficient promise to warrant their retention. Jewell also knew that he had no need for all 4 of the stallions foaled in 1947 and that in no event would he be likely to retain in any one year more than 2 yearlings, which was the maximum he could afford to race.

All of the above 11 horses sold were too young to breed at the time of their sale and had not been bred. None of them had been raced. 25 T.C. 109">*114 Two, Jettsam and James VI, were advertised in trade magazines prior to their sale. All were committed to consignment1955 U.S. Tax Ct. LEXIS 68">*79 sales and sold at public auctions. Such sales were held intermittently at various places.

In addition to the horses foaled on the farm Jewell purchased Miss Annie for $ 300 in 1947 and Hi-Lo's Bella for $ 400 in 1948. Both were weanlings when purchased and were sold as yearlings in November of 1948 and 1949, respectively, for $ 671.50 and $ 675, respectively. They were sold because they did not possess the desired qualities. Ethel Girl was purchased as a brood mare for $ 181 in 1947. She was 6 or 7 years old at that time. She refused to breed and was sold in November 1948 for $ 630. Respondent determined that the gain on the sale of these 3 horses was taxable as long-term capital gain under section 117 (j) of the Internal Revenue Code of 1939.

Throughout the taxable years involved Jewell owned only 1 stallion, Captain Dewey, which he actually used for breeding purposes. He received no stud fees during those years. He owned 4 or 5 brood mares throughout the taxable years involved. In 1951 his brood mares were Leola the Great, which was sold by Jewell as a weanling in 1928 with the proviso that she would be returned at the end of her racing career; Jean Wehrley, which was 1955 U.S. Tax Ct. LEXIS 68">*80 sold as a weanling in 1942 under the same conditions and was repurchased by Jewell before she began to make a record for herself on the track; Camilla Abbey, which was purchased by Jewell in 1946 for $ 550; and Joppa, which was foaled on the farm in 1949 and retained continuously by Jewell. In 1951 Jewell also owned a part interest in 4 other brood mares.

Jewell held Jalapa, Jettsam, and Juggernaut primarily for breeding purposes for a period of over 6 months before the defects appeared which caused them to be culled, and each was sold within a reasonable time after the defect appeared. Petitioners reported the gain on the sale in 1947 of Johnny Vinegar, Jocose, and Jalapa as ordinary income. They reported the gain on the sale in 1948 and 1949 of the other 8 horses foaled on the farm as long-term capital gain. Respondent determined that the gain realized on the sale of all 11 of the horses was ordinary income.

OPINION.

The question presented is whether horses foaled on Jewell's farm and sold as yearlings during the taxable years involved were held for breeding purposes and were, 1955 U.S. Tax Ct. LEXIS 68">*81 therefore, "property used in the trade or business" within the purview of section 25 T.C. 109">*115 117 (j)(1), Internal Revenue Code of 1939. ¹1955 U.S. Tax Ct. LEXIS 68">*82 As all of the horses involved were held more than 6 months, if they were held primarily for breeding purposes as petitioners contend, the gain on their sale is taxable as long-term capital gain. ² However, if they were held primarily for sale as respondent contends, the gain is taxable as ordinary income.

The determination of the primary purpose for which the horses were held is a question of fact. Estate of C. A. Smith, 23 T.C. 690 (on appeal C. A. 4); Albert T. Erickson, 23 T.C. 458. In order for the horses to be held for breeding or racing it is not necessary that they be old enough to be used for either purpose. Collings' Estate v. United States, (W. D., Ky.) 138 F. Supp. 837">138 F. Supp. 837; James M. McDonald, 23 T.C. 1091 (on appeal C. A. 2); Estate of C. A. Smith, supra;McDonald v. Commissioner, (C. A. 2) 214 F.2d 341. The determination of the purpose for which the horses were held depends entirely upon the intention of the taxpayer. 138 F. Supp. 837">Collings' Estate v. United States, supra.

Respondent points out that Jewell was in the business of selling young standard-bred trotting horses either as weanlings1955 U.S. Tax Ct. LEXIS 68">*83 prior to 1943 or as yearlings after 1942, that only 1 out of the 23 colts foaled during the period from 1945 to 1949, inclusive, was retained, and that 19 were sold as yearlings. He also points to the fact that none of the horses involved were used for breeding or racing which in many cases is evidence that they were held for that purpose. Cf. Gotfredson v. Commissioner, (C. A. 6) 217 F.2d 673. Upon the basis of these facts he contends that all of the horses in question were held primarily for sale, citing Walter S. Fox, 16 T.C. 854, affd. (C. A. 4) 198 F.2d 719; Albert T. Erickson, supra.

Respondent's argument is persuasive, but in our opinion fails to recognize that Jewell was attempting to build up a breeding herd of championship trotting horses, that only a small percentage of the 25 T.C. 109">*116 colts foaled would normally qualify for such a herd, and that of the colts owned solely by Jewell none of those sold qualified for the breeding herd. Under these circumstances all of the animals sold were not necessarily held for sale just because it was known that1955 U.S. Tax Ct. LEXIS 68">*84 most of the colts foaled would be sold ( James M. McDonald, supra) or because the taxpayer's primary business was selling animals similar to those sold ( Estate of C. A. Smith, supra).

Petitioners contend, on the other hand, that all of the horses involved were held primarily for breeding purposes, citing James M. McDonald, Estate of C. A. Smith, and McDonald v. Commissioner, all supra. They rely principally upon Jewell's testimony that he was attempting to build up the quality of his breeding herd, that all of the colts involved were bred to become members of the breeding herd if they were good enough, and that all were culled because they did not possess the qualities desired in members of the breeding herd.

Neither the cases cited nor the above testimony require the conclusion requested by petitioners. In the first place the Smith and McDonald cases are distinguishable. Unlike the taxpayer in the McDonald cases Jewell's principal business was selling animals -- not using animals for dairy or racing purposes. Also, unlike the McDonald cases, Jewell did not sell1955 U.S. Tax Ct. LEXIS 68">*85 a number of the animals at birth and did not cull or sell an animal as soon as a defect appeared. He retained all of the horses until around November of their yearling year despite the fact that in some instances it became apparent by the time the horse was weaned that it would not be retained. Further, in the McDonald cases it was unprofitable to hold the cattle sold; while here, to judge from the profit derived from the 2 horses petitioner purchased as weanlings and sold as yearlings because they did not develop as expected, it was financially rewarding to hold and train the horses until they were yearlings. In the Smith case, while the taxpayer was in the business of breeding animals for sale, he had 2 herds, a sale herd and a breeding herd, and the only sales involved were unusual sales of young but fully qualified members of the breeding herd. Here we are concerned with the normal and customary sales in the ordinary course of petitioners' business from an unsegregated herd.

Not only are the cases upon which petitioners rely distinguishable, but the facts to which Jewell testified do not constitute a sufficient basis for holding that all of the horses involved were1955 U.S. Tax Ct. LEXIS 68">*86 held primarily for breeding. First, little weight can be attributed to the fact that during the period involved Jewell was attempting to build up, rather than merely to maintain, a high quality breeding herd. The purpose of building up the herd could continue indefinitely as perfection is never possible; and, even if perfection were attained, Jewell's mode of operation would not necessarily change. He would still have to retain at 25 T.C. 109">*117 least as many animals as he retained during the period involved in order to perpetuate the herd. Also, the purpose for which the horses were bred does not determine whether they qualify under section 117 (j) (1). It is the purpose for which they were being held at the time of sale that is controlling. Cf. Curtis Co., 23 T.C. 740 (on appeal C. A. 3); J. C. Bradford, 22 T.C. 1057 (on appeal C. A. 6). Furthermore, it does not follow from the fact that none of the horses sold were qualified for the breeding herd that all of the horses sold were held for breeding prior to their sale.

The primary fallacy in the arguments of both parties is that they are based upon the proposition 1955 U.S. Tax Ct. LEXIS 68">*87 that Jewell's general intention with respect to the colts foaled determines the purpose for which all were held. While there is no over-all rule which will apply to all animals or even to any particular type of animal, we think in the instant case each horse was unique and the purpose for which each was held must be determined separately.

We have found as a fact that Jalapa, Jettsam, and Juggernaut were held primarily for breeding purposes. Each was held for breeding purposes for more than 6 months before the defect appeared which caused it to be culled, and each was sold within a reasonable time after the defect appeared. See James M. McDonald, supra.³

1955 U.S. Tax Ct. LEXIS 68">*88 With respect to the other horses involved, we do not think petitioners have proven that they were held primarily for breeding purposes. Kiss 'N Tell, Linda Sue, and Justification were owned jointly by Jewell and another. Jewell owned a one-fourth interest in the first two and a one-half interest in the latter. The first two were sold because Jewell's partner insisted. It was not shown that the partner ever intended that these two horses would be used for breeding purposes. Jewell might have intended to buy them for breeding purposes if it developed they were good enough and he could get them cheap 25 T.C. 109">*118 enough. However, that is not the same as holding them for breeding purposes. The latter, Justification, was not only a partnership mare, but by the time she was 4 or 5 months old Jewell knew that her conformation was so bad she could not be used for breeding.

Johnny Vinegar, James VI, and Jereboam were all stallions which were related to a number of Jewell's brood mares and could not be bred to those mares. Also, Jewell used only 1 stallion in his breeding herd. The stallion must be better than the mare, and under the circumstances would have had to be a very outstanding1955 U.S. Tax Ct. LEXIS 68">*89 horse before it would have been retained. As none of the three were exceptionally well bred, Jewell knew at the time each was foaled that there was little, if any, chance it would be retained. Also, it was not shown when the various defects which developed in these three horses became apparent. Under the circumstances we cannot find that any of these horses were held for breeding purposes. Cf. Laflin v. United States, (D. Nebr.) 100 F. Supp. 353">100 F. Supp. 353, 100 F. Supp. 353">357.

The remaining horses are Joyous Day and Jocose. Joyous Day began growing at a rapid rate about the time she was weaned and became as big as a draft horse. Jewell knew while she was still young that her conformation was such that she could not be used for breeding purposes. Thereafter she was being held for sale. Jewell decided to sell Jocose when she developed a spavin. There is no evidence in the record as to when this occurred. It may well be that an expert in the breeding and raising of standard-bred or thoroughbred race horses would know the earliest age of a horse at which a defect of this nature would develop and become noticeable. We, however, are compelled to take the record as the1955 U.S. Tax Ct. LEXIS 68">*90 parties have made it. Consequently, there is nothing to show that Jocose was not held primarily for sale from the time she was a very young colt until she was nearly 2 years of age. Since it was not shown that either Joyous Day or Jocose was disposed of within a reasonable time after the defects appeared which caused them to be culled, rather than held and trained for a considerable period of time in order to build up their sale price, it is impossible to find that either was being held primarily for breeding purposes at the time she was sold.

Decision will be entered under Rule 50.