12 T.C. 875">*876 This proceeding involves income tax deficiencies for the taxable years ended December 31, 1945, and December 31, 1946, in the amounts of $ 297.84 and $ 215.15, respectively.

The single question presented is whether the gain realized by the petitioner in 1945 and 1946 from the sale of certain animals from his dairy and hog herds is taxable as ordinary income or as capital gain under the provisions of section 117 (j) of the Internal Revenue Code.

FINDINGS OF FACT.

Petitioner Isaac Emerson is an individual who during the taxable years involved operated a 320-acre farm in Dodge County, Minnesota. Petitioner kept his business records and filed his Federal income tax returns on the cash receipts and disbursements basis with the collector1949 U.S. Tax Ct. LEXIS 187">*189 of internal revenue for the district of Minnesota.

During the years in question petitioner realized farm income from the sale of hogs, cattle, milk, grain, eggs, and poultry, his chief source of income being the sale of hogs and cattle which he raised.

Since 1925 petitioner has maintained a herd of Holstein cattle for the production of milk. Each year the cows in this herd which are no longer profitable for dairy purposes are selected and sold for slaughter. The herd is maintained at approximately the same size from year to year by replacing the culls with young stock either raised by the petitioner or purchased by him for dairy purposes. Each year a number of the calves produced by this herd are retained to later replace culls, and the others are sold. The dairy herd contains no purebred, pedigreed or registered stock.

Petitioner maintained his hog herd in the following manner: In October of each year he would select from the young pigs which had been born the previous spring certain gilts to retain as breeders. These gilts were bred in January. After their litters were born, the sows would remain with their young for a period of from 8 to 10 weeks, after which the sows would1949 U.S. Tax Ct. LEXIS 187">*190 be turned out with the feeder hogs and conditioned for market. At the close of the breeding season, the boar is turned out with the feeder hogs for conditioning and later sold for slaughter. The petitioner customarily raises only one litter from a sow and thereafter disposes of her in the same manner as a feeder hog.

In 1945 petitioner sold from his dairy and hog herds 2 bulls, 1 boar, 10 sows, and 11 cows, all of which, with the exception of 2 of the sows, 12 T.C. 875">*877 were held by petitioner longer than 6 months. The total amount received from the sale of these animals, excepting the 2 sows not held for more than 6 months, was $ 2,123.67. The total gain, after deducting cost and making adjustments for depreciation previously taken on some of these animals, was $ 1,855.57.

In his 1945 income tax return petitioner by mistake reported the proceeds of the sale of 10 cows and 1 boar, or $ 640.86, both as ordinary income and as long term capital gain. Respondent concedes that a proper adjustment should be made for this error in accordance with the determination of the principal issue herein.

In 1946 petitioner sold 12 cows and 7 sows, all of which had been held by him for a period longer1949 U.S. Tax Ct. LEXIS 187">*191 than 6 months. The total gain realized from the sale of these animals was $ 1,509.26.

The live stock in question was held by petitioner primarily for dairy or breeding purposes.

The sale by petitioner in the calendar years 1945 and 1946 of the live stock in question did not result in a reduction of the petitioner's cattle and hog herds. In the deficiency notice, respondent bases the deficiencies for both years upon the following determination:

It is determined that these animals do not qualify as assets to which the provisions of section 117 (j) of the Internal Revenue Code may be applied and that the gain from the sale of such animals constitutes ordinary income * * *

OPINION.

The sole issue presented is whether the profit realized by petitioner in 1945 and 1946 from the sale of certain animals from his dairy and hog-breeding herds constituted ordinary income or capital gain under the provisions of section 117 (j) (1) of the Internal Revenue Code. ¹

1949 U.S. Tax Ct. LEXIS 187">*192 The precise question here presented was recently decided by the Court of Appeals for the Eighth Circuit in Albright v. United States, 173 Fed. (2d) 339. The facts in that case were, except for minor details, identical with those presented in the present proceedings. There the taxpayer in 1945 and 1946 sold certain cows from his dairy herd and hogs from his breeding herd, treating the profit from such sales as capital gain. The Commissioner determined 12 T.C. 875">*878 that the profits from the sales were taxable to the farmer as ordinary income. The Circuit Court stated in regard to the provisions of section 117 (j):

In order for the taxpayer to come within the provisions of section 117 (j) permitting him to treat the sales from his dairy and breeding herds as sales of capital assets, the burden is upon him to show: (1) that the animals sold were used in his trade or business; (2) were subject to allowance for depreciation; (3) were held for more than six months; (4) were not property of the kind includible in the inventory of the taxpayer if on hand at the close of the taxable year; and (5) that the animals were not held by the taxpayer primarily for1949 U.S. Tax Ct. LEXIS 187">*193 sale to customers in the ordinary course of his trade or business.

It is clear that the animals in question were property used in the petitioner's trade or business of farming and that they were property of a character subject to allowance for depreciation. I. T. 3666, C. B. 1944, p. 270. ² Each of the animals (with the exception of two sows sold in 1945) had been held by petitioner for a period longer than six months. The live stock was not property of the kind includible in the inventory of the taxpayer if on hand at the close of the taxable year. Regulations 111, sec. 29.22 (a)-7; ³1949 U.S. Tax Ct. LEXIS 187">*194 I. T. 3666, supra, p. 270. ⁴

Thus, the fundamental issue between the parties centers on the question of whether or not the animals in question were held by petitioner primarily for sale to customers in the ordinary course of his trade or business.

The position of the respondent herein seems to be based on his two rulings published as I. T. 3666, supra, and I. T. 3712 C. B. 1945, p. 176,1949 U.S. Tax Ct. LEXIS 187">*195 which rulings it should be noted are not Treasury regulations and, as a consequence, do not have the force and effect that regulations are accorded.

In I. T. 3666, supra, the Commissioner, after recognizing "the inherent character of live stock used for draft, breeding, or dairy purposes as capital assets," held that the "sale of animals culled from 12 T.C. 875">*879 the breeding herd as feeder or slaughter animals in the regular course of business is not to be treated as the sale of a capital asset." To clarify his position, the Commissioner, in I. T. 3712, supra, established a so-called normal-abnormal sales test, holding that if the number of animals sold from the breeding herd during a taxable year exceeded the number of animals added to the breeding herd during the same year, it was to be presumed that the excess number sold consisted of animals held for breeding purposes and that the gain or loss from such sales was subject to treatment as capital gains or losses.

It has been stipulated herein that the petitioner's sales of live stock did not result in a reduction of his cattle and hog herds. Thus, if the Commissioner's rulings are valid, it is plain that the respondent's determination1949 U.S. Tax Ct. LEXIS 187">*196 herein is correct.

The Court of Appeals, in Albright v. United States, supra, held that the interpretations upon which the Commissioner relies "are contrary to the plain language of section 117 (j) and to the intent of the Congress expressed in it." In reaching this conclusion the court observed that:

* * * Nothing in the language of the Act indicates an intention on the part of Congress to deny the relief granted by the section to any taxpayers whose transactions meet the prescribed conditions. The Commissioner has ruled that livestock held by a farmer for dairy, breeding, or draft purposes are, while so held and used, depreciable assets, not primarily held for sale to customers in the ordinary course of his business. Nothing in the language of the section justifies the inference that a farmer should be denied the right to treat the profits received from the sales of such livestock when they are no longer profitable or fit for use in the farmer's business as productive of capital gains and not of ordinary income. This, however, is the effect of the ruling relied on by the Government.

We agree with the appellate court that a dairy farmer is not1949 U.S. Tax Ct. LEXIS 187">*197 primarily engaged in the sale of beef cattle and the sale by him of some of the stock from his dairy herd is not a sale of property held primarily for sale to customers in the ordinary course of his business.

We also agree with that part of the court's decision wherein it was held that the fact that hogs from the breeding herd were customarily conditioned for market before sale does not show that the taxpayer has not held them for the purpose of breeding or that they were held primarily for sale to customers in the ordinary course of his trade or business.

On the authority of Albright v. United States, supra, we conclude that the various animals (except for the two sows held less than six months) which were sold by petitioner from his dairy and hog-breeding herds in the years 1945 and 1946 were capital assets within the meaning of section 117 (j) of the Internal Revenue Code and that the profits realized in those years from the sale of such animals are 12 T.C. 875">*880 properly taxable as capital gains and not as ordinary income. To permit certain adjustments which are conceded by the parties to be necessary to a proper determination of petitioner's tax1949 U.S. Tax Ct. LEXIS 187">*198 liability herein,

Decision will be entered under Rule 50.

Disney, J., dissenting: I am unable to agree that within section 117 (j) (1) of the Internal Revenue Code sows sold after producing only one litter of pigs were "property used in the trade or business," under the facts in this case. A brood herd is logically property used in the trade or business, but in the case of sows it seems to me peculiarly illogical to conclude, as the majority opinion does, that they are really being held for brood purposes, though the practice was to sell them after only the first litter. My idea of a brood sow is one that will produce large numbers of pigs, and a sow that is sold after the first litter is apparently not such a brood sow. On the contrary, it seems to me that she is "property held by the taxpayer primarily for sale." The facts here indicate to me that the petitioner was holding the sows here involved primarily for sale and not for brood purposes. I, therefore, dissent.