The parties agree that something was1966 U.S. Tax Ct. LEXIS 65">*81 sold by reason of the syndication of * Turn-To but do not agree on what was sold. The syndication agreement purports to pass undivided ownership interests, and while the form and language of the agreement are not conclusive as to the true character of the transaction, they are of some relevance. See Comtel Corp., 45 T.C. 294">45 T.C. 294 (1965). Moreover, the actions of the parties were consistent with the sale of undivided ownership interests. Petitioner, on his records, stopped taking depreciation on the entire horse and began taking depreciation on only a four-sevenths interest. Some of the shareholders, if not all, capitalized their interests in the horse after the purchase of the shares and depreciated those interests. Petitioner, after the syndication, insured only his interest in the horse. Some of the shareholders, if not all, insured their interests in the horse after the purchase of the shares.

However, respondent contends that we should not be guided by the form of the transaction, but that its substance should determine the incidence of taxation; we agree that we should not be guided wholly by the form. Commissioner v. Court Holding Co., 324 U.S. 331">324 U.S. 331 (1945).1966 U.S. Tax Ct. LEXIS 65">*82 Respondent argues that petitioner and his veterinarian decided that * Turn-To could be bred to approximately 40 mares a year. Therefore, when the ownership was divided into 35 shares, each shareholder essentially received only the right to breed 1 mare per year to * Turn-To. The few additional seasons were used to give one season to the farm at which * Turn-To was standing and, through selected sales, to offset the expenses of * Turn-To's maintenance. Hence, there was little likelihood that a shareholder would receive any significant amount of income from * Turn-To's breeding activities or incur any significant amount of expense. The shareholders primarily received only the right to breed mares to * Turn-To. In addition, petitioner reserved five shares specifically for the purpose of taking care of the prior sale of five lifetime seasons. ⁴ Further, petitioner not only retained control of * Turn-To through his retention of a majority of the shares and his 46 T.C. 559">*567 self-appointment as syndicate manager, but he also retained possession of * Turn-To through his power to name the farm, within geographical limits, at which * Turn-To must stand.

1966 U.S. Tax Ct. LEXIS 65">*83 Respondent's argument merits serious consideration. The differences between ownership of property having a limited life and the right to the full enjoyment and use of that property for its life are not appreciable. It can be argued that there are no significant economic differences. However, the tax law treats the sale of capital assets or section 1231 assets very differently from the realization of business income, and therefore, we must place this transaction in one category or the other.

Petitioner retained effective control and possession of * Turn-To. Such retention is consistent with the sale of lifetime rights to use * Turn-To, but it is also consistent with the sale of minority ownership interests in the horse. If, then, we look only at the rights and obligations of petitioner, we see no significant differences between the sale of minority interests in * Turn-To and the sale of lifetime rights to use the horse. In the sale of both, petitioner would relinquish absolute control over the horse in that he could not disregard the interests of the purchasers. Since there are no significant differences in petitioner's rights and obligations between the sale of minority ownership1966 U.S. Tax Ct. LEXIS 65">*84 interests and the sale of lifetime rights for the use of * Turn-To, the retention of such control does not persuade us to alter the form of the transaction.

An examination of the rights and obligations of a purchaser of a minority ownership interest in * Turn-To, as opposed to the rights and obligations of a purchaser of a lifetime season in * Turn-To, does reveal significant differences. Both the purchasers of shares and the purchasers of lifetime seasons receive the right to breed one mare a year to * Turn-To. Both can sell or trade these seasons. Both receive interests that are insurable. But a shareholder shares in the expenses of maintaining * Turn-To; a lifetime season holder does not. A shareholder is entitled to share in any profits earned by the horse, including the proceeds of the sale of excess seasons; a lifetime season holder is not. A shareholder may be subject to liability for damages as a result of his ownership; a lifetime season holder is not. A shareholder must pay the Kentucky ad valorem taxes on livestock; a lifetime season holder does not. Should petitioner resign as syndicate manager, a shareholder is entitled to vote for his successor; a lifetime season1966 U.S. Tax Ct. LEXIS 65">*85 holder is not. And, each shareholder has a right of first refusal to purchase the share of any other shareholder who wishes to sell his share; an owner of a lifetime season has no such right.

We agree with respondent that, due to the arrangement of the syndicate, the rights and obligations of a shareholder may have no substantial economic value above and beyond the rights and obligations 46 T.C. 559">*568 of a lifetime season holder. However, they are substantive indicia of ownership, and, when combined with the form of the transaction, lead us to believe that the property interests transferred by the syndication agreement should be considered undivided ownership interests in * Turn-To.

Respondent next argues that even if the sale of shares in * Turn-To was the sale of undivided ownership interests in the stallion, such a sale still cannot be considered a sale or exchange of section 1231 property in view of the construction that the Supreme Court has placed upon that section and section 1221 in the cases of Commissioner v. P. G. Lake, Inc., 356 U.S. 260">356 U.S. 260 (1958); Corn Products Co. v. Commissioner, 350 U.S. 46">350 U.S. 46 (1955); and1966 U.S. Tax Ct. LEXIS 65">*86 Commissioner v. Gillette Motor Co., 364 U.S. 130">364 U.S. 130 (1960).

In the Lake case, the taxpayer corporation had a working interest in two commercial oil and gas leases. In return for cancellation of a debt to its president, the taxpayer assigned him an oil payment right in the amount of $ 600,000 plus an amount equal to interest at 3 percent a year on the unpaid balance. The oil payment right was payable out of 25 percent of the oil attributable to the taxpayer's working interest in the two leases. At the time of the assignment, it could have been estimated with reasonable accuracy that the assigned oil payment right would pay out in 3 or more years, and it did in fact pay out in a little over 3 years. In other words, the taxpayer "carved out" of his property interest a lesser interest, limited in duration and ascertainable with considerable accuracy, so that in time the taxpayer recovered the full interest to the same extent as before the assignment. The Court stated at pages 265-266:

We do not see here any conversion of a capital investment. The lump sum consideration seems essentially a substitute for what would otherwise be received at a future1966 U.S. Tax Ct. LEXIS 65">*87 time as ordinary income. The pay-out of these particular assigned oil payment rights could be ascertained with considerable accuracy. * * * cash was received which was equal to the amount of the income to accrue during the term of the assignment, the assignee being compensated by interest on his advance. The substance of what was assigned was the right to receive future income. The substance of what was received was the present value of income which the recipient would otherwise obtain in the future. In short, consideration was paid for the right to receive future income, not for an increase in the value of the income-producing property.

These arrangements seem to us transparent devices. Their forms do not control. Their essence is determined not by subtleties of draftsmanship but by their total effect. * * *

Respondent places heavy reliance on the phrase in Lake, "essentially a substitute for what would otherwise be received as ordinary income." Respondent argues that petitioner would have received, if he had retained full ownership of * Turn-To, stud fees from the sale of annual seasons that would have been taxable as ordinary income. Respondent also argues that petitioner1966 U.S. Tax Ct. LEXIS 65">*88 established his price for a share 46 T.C. 559">*569 in * Turn-To in large part on the basis of a capitalization of the expected future earnings of * Turn-To. Therefore, respondent argues, petitioner essentially received a lump-sum substitute for what would otherwise have been received as ordinary income.

We do not believe that the rationale of Lake is applicable to the present case. Simply because the property transferred will produce ordinary income, and such income is a major factor in determining the value of the property, does not necessarily mean that the amount received for the property is essentially a lump-sum substitute for ordinary income. See, United States v. Dresser Industries, Inc., 324 F.2d 56 (C.A. 5, 1963); Commissioner v. Ferrer, 304 F.2d 125 (C.A. 2, 1962), reversing in part 35 T.C. 617">35 T.C. 617 (1961); Metropolitan Building Co., 31 T.C. 971">31 T.C. 971 (1959), acq. 1959-2 C.B. 6, reversed in part 282 F.2d 592 (C.A. 9, 1960); Surrey, "Definitional Problems in Capital Gains Taxation," 69 Harv. L. Rev. 985 (1956).1966 U.S. Tax Ct. LEXIS 65">*89

The Court in Lake was faced with the problem whether a transfer of part of a capital asset is itself the transfer of a capital asset. That part was defined and delineated by the taxpayer in such a manner as to consist essentially of only the rights to income. The transferee assumed few of the risks identified with the holding of a capital asset; he assumed only a nominal risk of his oil payment right decreasing in value and none of the possibility of the oil payment right increasing in value. On the other hand, the taxpayer, after the transfer, retained essentially all of the investment risks involved in his greater interest to the same extent as before the transfer.

In other words, since we are attempting to ascertain whether a capital asset is being transferred, it is often easier to see if the investment risks identified with the holding of such an asset are transferred. In Lake, essentially what was transferred was the right to receive ordinary income, and few of the risks involved in holding the property or asset that was the source of the income were transferred. However, in this case, petitioner transferred all investment risks in a three-sevenths interest in * 1966 U.S. Tax Ct. LEXIS 65">*90 Turn-To. If the value of * Turn-To had subsequently increased (and there is evidence that it did), petitioner would not have shared in this increase to the same extent as he would have before the syndication. The shareholders, as to their interests, would have received all of the benefit of an increase in the value of * Turn-To. Likewise, the shareholders, as to their interests, would have received all of the burden of any decrease in the value of * Turn-To.

The second case on which respondent relies, 350 U.S. 46">Corn Products Co. v. Commissioner, supra, involved a taxpayer which purchased and sold corn futures as an integral part of its business. The taxpayer entered into these futures transactions to assure an adequate supply of corn and to protect its manufacturing operation against a price increase in this principal raw material. The Court stated that "Congress intended 46 T.C. 559">*570 that profits and losses arising from the everyday operation of a business be considered as ordinary income or loss rather than capital gain or loss."

The corn futures which were bought and sold by Corn Products Co. were property not specifically excluded from the statutory 1966 U.S. Tax Ct. LEXIS 65">*91 definition of capital assets. However, the taxpayer had not purchased the corn futures for investment purposes and then sold for the purpose of terminating such investments. Rather, the taxpayer had bought and sold the corn futures as an integral part of its business. The transactions were business operations and not capital transactions.

Respondent attempts to use Corn Products by arguing, once again, that petitioner did not sell ownership interests but sold lifetime breeding rights. Respondent then states that selling breeding rights, either year-by-year or for the life of the horse, was an integral part of petitioner's breeding business, and the acquisition of shares by the shareholders was at least partly made to assure them access to * Turn-To for all future years.

Corn Products was not concerned with the purposes of the purchasers of the corn futures from the taxpayer. So here, we are not concerned that the shareholders may have purchased shares in * Turn-To to assure themselves seasons furnished by the stallion. Instead, we are concerned with the horse-breeding business of the petitioner and the relationship between the sale of the syndicate shares and that business. 1966 U.S. Tax Ct. LEXIS 65">*92 In Corn Products, the Supreme Court concluded that the purchase and sale of the corn futures were not capital transactions because the company engaged in such transactions in order to further its trade or business. However, we find no such purpose on the part of the petitioner in selling the syndicate shares. He purchased a horse, raced the horse as long as it was fit for this purpose, retired the horse to stud, and several years thereafter sold ownership interests in the horse. Thus, in the transaction with which we are concerned, the petitioner was merely liquidating a part interest in livestock held for breeding purposes, and was not selling property for the purpose of furthering his horse-breeding business.

The third case on which respondent relies, 364 U.S. 130">Commissioner v. Gillette Motor Co., supra, involved a temporary taking of the taxpayer's property by the Government. During the latter part of the Second World War, the Government took over the control and operation of Gillette's facilities for approximately 10 months. Gillette was awarded compensation for the takeover, based on the fair rental value of the facilities. Gillette argued that1966 U.S. Tax Ct. LEXIS 65">*93 the takeover by the Government was a transfer of what is now section 1231 property, but the Court stated that though a property interest was transferred, such interest was merely an incident -- the right to use the facilities -- of the underlying physical property. The Court then stated that this property interest, even 46 T.C. 559">*571 though not specifically excluded from the definition of property used in the trade or business, was not the type of property to which Congress had intended to accord capital gain treatment. The Court noted that the taxpayer had no investment in the property interest transferred, and the interest was "manifestly not of the type which gives rise to the hardship of the realization in one year of an advance in value over cost built up in several years."

The Gillette case is fully consistent with Lake. In Gillette, there was not a complete termination of even a part of the taxpayer's investment in its facilities with the risks involved in such an investment. No substantial investment risks were transferred to the Government, which indicates that there was no transfer of a capital or income-producing asset. The Court stated that if the Government1966 U.S. Tax Ct. LEXIS 65">*94 had taken a fee in the property, the result would have been different. In other words, some investment risks would have been transferred to the Government.

In the present case, substantial investment risks involved in the ownership of * Turn-To were transferred to the shareholders. We accordingly believe that petitioner did transfer the type of asset that Congress intended to receive capital gain treatment. The value of * Turn-To increased over a substantial period of time, and the interests transferred were of the type that gives rise to the hardship of the realization in 1 year of an advance in value over cost built up in several years.

Respondent makes a further argument as to why petitioner's gain from the sale of the syndicate shares should be denied capital gain treatment. This argument is that where property is purchased to reach underlying assets to be used in a trade or business, or for ordinary business purposes, the property is not, in the hands of such a purchaser, a capital asset. John J. Grier Co. v. United States, 328 F.2d 163 (C.A. 7, 1964); Western Wine & Liquor Co., 18 T.C. 1090">18 T.C. 1090 (1952), acq. 1966 U.S. Tax Ct. LEXIS 65">*95 1958-1 C.B. 6, appeal dismissed 205 F.2d 420 (C.A. 8, 1953). Respondent would apply this argument here since the primary purpose of the shareholders in acquiring shares was to obtain access to * Turn-To. However, we are not here concerned with whether the syndicate shares would be capital assets in the hands of the shareholders. The cases cited by the respondent dealt with the purpose of the taxpayer in acquiring the property in question. Thus, those cases are only relevant in classifying the interests of the syndicate shareholders; they are not relevant in determining what kind of interests were sold by the petitioner.

A further argument is made by respondent that even if the shares in the syndicate do represent ownership of a horse held for breeding purposes, the shares themselves were not held for breeding purposes but were held primarily for sale to customers in the ordinary course of petitioner's business. We believe that we have disposed of this argument by our holding that petitioner did sell undivided ownership 46 T.C. 559">*572 interests in a horse held for breeding purposes. We cannot find that an undivided ownership interest1966 U.S. Tax Ct. LEXIS 65">*96 is of a different character from a whole ownership interest. In effect, respondent here seems to be arguing that petitioner was not holding * Turn-To for breeding purposes but primarily holding the horse for sale, by way of the sale of shares, in the ordinary course of his business. But we have found as a fact -- a fact to which respondent stipulated -- that * Turn-To was held for breeding purposes.

Respondent makes other arguments, regarding section 1231, based on the assumption that what petitioner transferred was in substance not undivided ownership interests in * Turn-To but future breeding rights to the horse. Since we have found that petitioner did, in substance, transfer undivided ownership interests in * Turn-To, it is not necessary to discuss the validity of these arguments. * Turn-To was livestock held by petitioner for breeding purposes and held by him for 12 months or more from the date of acquisition. Since the sale of undivided ownership interests in * Turn-To was the sale of property used in the trade or business, we conclude that it was a sale of a section 1231 asset.

In order to reflect the agreement of the parties concerning other adjustments in the notice of1966 U.S. Tax Ct. LEXIS 65">*97 deficiency,

Decision will be entered under Rule 50.