Rev. Rul. 64-239

Advice has been requested whether, under the circumstances described below, gain or loss is recognized to a ranching corporation from a sale of its breeding livestock pursuant to a plan of complete liquidation.

The taxpayer is a corporation engaged in the business of ranching. At its election, the taxpayer values its inventory of livestock by the unit-livestock-price method, including its breeding animals. The taxpayer adopted a plan of complete liquidation and within 12 months it distributed all of its assets. The taxpayer sold its livestock held for breeding purposes to various persons during the 12-month period at a substantial gain. These animals would have been inventoried by the taxpayer if they had been on hand at the close of the taxable year.

Section 337(a) of the Internal Revenue Code of 1954 provides that, if a corporation adopts a plan of complete liquidation on or after June 22, 1954, and, within the 12-month period beginning on the date of the adoption of the plan, all of the assets of the corporation are distributed in complete liquidation, less assets retained to meet claims, then no gain or loss shall be recognized to such corporation from the sale or exchange by it of `property' within the 12-month period.

Section 337(b) of the Code provides, in part, that, for the purposes of section 337(a) of the Code, the term `property' does not include stock in trade of the corporation or other property of a kind which would `properly be included in the inventory of the corporation if on hand at the close of the taxable year.'

Section 471 of the Code provides that, whenever the use of inventories is necessary in order clearly to determine the income of any taxpayer, they shall be taken by such taxpayer on such basis as the Secretary of the Treasury or his delegate may prescribe.

Section 1.471-6(a) of the Income Tax Regulations provides that a farmer may make his return upon the inventory method instead of the cash receipts and disbursements method. It is optional with the taxpayer which of these methods of accounting is used but, having elected one method, the option he exercised will be binding for the year for which the option is exercised and for subsequent years unless the prior consent of the Commissioner of Internal Revenue is secured to change to another method.

Under section 1.471-6(g) of the regulations, a livestock raiser who uses the `unit-livestock-price method' of inventory valuation may, at his election, include in inventory animals held for draft, breeding and dairy purposes.

From the foregoing it would appear that, if the livestock, in this case, is considered property which would ordinarily properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, the gain on the sale of such livestock will be recognized to the corporation for Federal income tax purposes. See section 337(b) of the Code.

In Fawn Lake Ranch Company v. Commissioner , 12 T.C. 1139 (1949), acquiescence, C.B. 1953-1, 4, appeal dismissed, 180 Fed.(2d) 749 (1950), the issue was whether the Commissioner erred in treating the gain from the sale of cattle from the taxpayer's breeding herd as ordinary income, rather than capital gain. In holding that the taxpayer realized capital gain, under section 117(j) of the 1939 Code (now section 1231 of the 1954 Code) rather than ordinary income, from the sale of cattle from its breeding herd, the Tax Court of the United States stated, in part, as follows:

* * *. Since cattle held for breeding purposes are treated as property `used in a trade or business,' as distinguished from `property held primarily for sale to customers,' such cattle, of course, would not ordinarily `properly' be includible in the inventory of the taxpayer. The inclusion of such cattle in inventory has been solely by a ruling of the respondent and then only for convenience in accounting.

Similarly, the fact that livestock held for draft, breeding or dairy purposes is inventoried does not render such livestock property of a kind which would `properly' be included in the inventory of the corporation if on hand at the close of the taxable year. This is demonstrated by the fact that such livestock is considered, under section 1231(b)(3) of the Code, as property used in the trade or business, notwithstanding that the livestock is inventoried.

Even though livestock raisers may elect to account for breeding animals through inventories under section 471 of the Code, such animals are not treated as property which would `properly' be included in inventory for the purposes of section 337(b) of the Code. Accordingly, assuming that the breeding animals are not held primarily for sale to customers in the ordinary course of business, it is held that no gain is recognized to the corporation, in the instant case, from the sale of its breeding livestock pursuant to the plan of complete liquidation qualifying under section 337 of the Code.