Rev. Rul. 66-191

Advice has been requested regarding the effect, for Federal income tax purposes, of a sale of livestock under the circumstances described below.

For several years prior to 1964, the taxpayers were members of a partnership engaged in the business of breeding cattle. During the taxable year 1963, the partnership sold a large number of cattle solely because of the existence of severe drought conditions, even though feed for the cattle could have been purchased. For approximately two months prior to the sale, the cattle were maintained in a commercial feed lot for fattening purposes.

During the taxable year 1964, the partnership was dissolved and the assets were distributed to the individual partners. One of the taxpayers purchased cattle in 1964 as replacements for his share of the cattle sold by the partnership on account of drought.

The specific issues in the instant case are (1) whether the sale of livestock by the partnership is an involuntary conversion under section 1033(a) of the Internal Revenue Code of 1954, and (2) whether the partners may individually make the nonrecognition of gain election under section 1033(a) of the Code.

Section 1033(a) of the Code provides, in part, that if property is compulsorily or involuntarily converted into cash, and the taxpayer within the prescribed period purchases property similar or related in service or use to the property so converted, at the election of the taxpayer any gain on the conversion shall be recognized only to the extent that it exceeds the cost of the replacement property.

Section 1033(f) of the Code provides that the sale or exchange of livestock held by a taxpayer for draft, breeding, or dairy purposes in excess of the number the taxpayer would sell if he followed his usual business practices shall be treated as an involuntary conversion if such livestock are sold or exchanged solely on account of drought.

Section 1.1231-2 of the Income Tax Regulations provides, in part, that the purpose for which livestock are held is ordinarily shown by the taxpayer's use of the animal. However, a draft, breeding or dairy purpose may be present if an animal is disposed of within a reasonable time after its intended use is prevented or made undesirable by reason of accident, disease, drought, or unfitness of the animal for such purposes. In Gene Cluck, et ux. v. Commissioner , 29 T.C. 7 (1957), acquiescence, C.B. 1958-1, 4, affirmed per curiam, 261 F.2d 267 (1958), certiorari denied, 359 U.S. 945 (1959) the taxpayer fattened breeding cattle for several months prior to their sale. The court held that breeding-herd animals continue to be breeding-herd animals when sold under these circumstances.

Since drought conditions existed in the instant case and since section 1033(f) of the Code merely requires drought conditions and does not make an exception in those cases where a taxpayer is able to purchase feed for his cattle, the act of placing the cattle in the feed lot prior to their sale did not change the purpose for which the cattle had previously been held. Accordingly, the sale of the breeding-herd in the instant case was made solely on account of drought within the meaning of section 1033(f) of the Code.

Section 703(b) of the Code provides, in substance, that any election affecting the computation of taxable income derived from a partnership shall be made by the partnership, except that the election under section 901 of the Code, relating to taxes of foreign countries and possessions of the United States, shall be made by each partner separately.

Accordingly, since the partnership in this case sold the cattle the nonrecognition of gain election under section 1033(a) of the Code and the replacement of the converted property can only be made by the partnership. The purchase of cattle by one of the partners does not constitute a replacement by the partnership. Since the partnership did not make replacement, gain realized on the sale in 1963 of livestock held by the partnership for breeding purposes of 12 months or more from the date of acquisition is subject to the provisions of section 1231(a) of the Code. See section 1231(b)(3) of the Code.