United States v. Catto

PETITIONER:United States

DECIDED BY: Warren Court (1965-1967)
LOWER COURT: United States Court of Appeals for the Fifth Circuit

CITATION: 384 US 102 (1966)
ARGUED: Mar 22, 1966 / Mar 23, 1966
DECIDED: Apr 26, 1966

Facts of the case


  • Oral Argument – March 23, 1966
  • Audio Transcription for Oral Argument – March 23, 1966 in United States v. Catto

    Audio Transcription for Oral Argument – March 22, 1966 in United States v. Catto

    Earl Warren:

    Number 535, United States, Petitioner, versus John Catto, Jr. et al.

    Mr. Levin, you may proceed with your argument.

    Jack S. Levin:

    Thank You, Your Honor.

    Mr. Chief Justice, may it please the Court.

    This is an income tax case.

    It presents the question whether cattle ranchers and others who are in the business of raising livestock can deduct as incurred the costs of raising their livestock which they used for breeding purposes or whether they can be required by the Commissioner to defer the deduction of such expenses until the livestock, the breeding livestock, are sold, and deduct the expenses against the proceeds of sale in computing gain.

    The respondents argued that they should be entitled to a deduction for their costs of raising breeding livestock as these expenses are incurred.

    Despite the requirement in the Treasury Regulations that they defer such costs and deduct them from the proceeds derived from selling such animals in computing gain.

    Potter Stewart:

    The same as a — is that the same as increasing the basis on the sale?

    Jack S. Levin:

    Yes, Your Honor, if we —

    Potter Stewart:

    It’s not exactly the same concept, isn’t it?

    Because the peculiar tax laws are applicable to these people, isn’t that right?

    Jack S. Levin:

    Well, it is I would say, just about the same concept.

    Potter Stewart:

    The same result.

    Jack S. Levin:

    Yes, the same sections require it.

    There are two questions with regard to a deduction, to an expense which you incur.

    The first question is the time of the deduction.

    That is when you will deduct what you have deducted at the time you incur it or whether you will postpone it until you —

    Potter Stewart:

    At some later time.

    Jack S. Levin:

    — disposed of an asset and deducted that.

    The second question is the type of income against which that expenditure will be offset.

    That is whether ordinary income or capital gain.

    And these are the two question which we must answer in this case, which regard to the costs of raising breeding livestock, stated as Your Honor has stated it, whether they get a deduction as they expend their money for raising their livestock, their breeding livestock, or whether they must add the expenses to the basis of the livestock and then deduct them from the sales proceeds in computing gain from the sale of that livestock.

    This is livestock, which typically they raised from birth.

    And if they deducted all of the expenses of raising them —

    Potter Stewart:

    That’d be a zero base?

    Jack S. Levin:

    — when they sold them, they would have a zero basis.

    That’s right.

    There are nine cases consolidated here.

    Respondents and all of them raised livestock, mostly cattle but including some sheep and goats, and they hold these livestock for sale.

    Jack S. Levin:

    As an incident to their business of raising livestock for sale, they also raise breeding cattle, breeding livestock, which they used to produce their beef animals.

    A rancher’s income derived from selling beef animals is ordinary income.

    It’s like the cost — it’s like the income from selling shoes to a manufacturer of shoes.

    A — the rancher’s income from selling his breeding cattle is capital gain, like the shoe manufacturer’s income from selling his shoe machinery because the breeding cattle are used in his trade or business to produce his inventory, that is his beef animals.

    All of the respondents have elected the accrual method of accounting.

    And during the years here in question, they complied with the Treasury Regulations, which required them to defer the costs of raising both their beef animals and their breeding animals.

    They deferred these costs and with regard to the animals sold and the years here in question, they deducted those deferred costs in computing their gain, which in the case of beef animals was ordinary income and the case of breeding animals, was capital gain.

    Thereafter, the respondents filed claims for refund in which they argued that the Treasury Regulations were invalid.

    And that they were really entitled to deduct the costs of raising their breeding cattle as incurred.

    They said that they were content to continue to defer the cost of raising their beef cattle, but that they wanted to deduct the costs of raising breeding cattle as incurred.

    Thus, having a zero basis as Mr. Justice Stewart pointed out, so that when they sold their breeding cattle, they would have capital gain to the extent of 100% of the sales proceeds, whereas when they sold their beef cattle they were perfectly content to report only the gain, that is the excess of the sales proceeds over the accumulated costs of raising as ordinary income gain.

    Although two circuits have rejected this argument that the regulations were invalid, the Fifth Circuit in this case reluctantly held the regulations invalid.

    It did so in two per curiam opinions, in which it stated that it felt bound by its previous opinion in Scofield versus Lewis.

    The Fifth Circuit said, “While we are fully cognizant of the anomaly of allowing such tax treatment of the capital asset and appreciate the appealing conceptual arguments of the Government, we regard Scofield is controlling until its legislative or judicial demise.”

    With regard to every business expenditure, as I’ve said before, there are these two questions, that is the timing of the deduction and the type of income against which is to be offset.

    Normally, all taxpayers –this is not referring here the necessarily ranchers or farmers — but all taxpayers, are required to accumulate rather than to deduct immediately the cost of producing assets.

    And that is true whether those assets are inventory or a capital gain.

    Then they offset the — these costs against the proceeds derived from the sale of the assets.

    If their assets were inventory, they get — their net income produced by offsetting the accumulated cost of producing the asset against these sales proceeds, are ordinary income.

    If that asset happens to be a capital asset, such as a machine used to produce inventory, they have capital gain.

    Byron R. White:

    But is that really and all-inclusive categorization — what about a truck for this inventory as used to haul things?

    Jack S. Levin:

    That’s a capital asset.

    It’s a 1231 asset at —

    Byron R. White:

    I understand that —

    Jack S. Levin:

    — that’s in the nature of a capital asset.

    Byron R. White:

    But you would — you wouldn’t insist that you capitalize all the expenses are running the truck —

    Jack S. Levin:


    Byron R. White:

    — would you?

    Jack S. Levin:


    If the taxpayer —

    Byron R. White:

    Now, how about a cow, how about a five-year-old cow?

    Jack S. Levin:

    I’d like — I’ll take both —

    Byron R. White:

    We’ll just handle it now.

    Jack S. Levin:

    Five-year-old cow —

    Byron R. White:

    How about the five-year-old cow on —

    Jack S. Levin:

    Once — once the breeding animal reaches maturity, all of the costs of maintaining it as a working serviceable asset, are immediately deductible.

    Those are not in question here, just as the cost of running the truck, are deductible.

    That is minor repairs —

    Byron R. White:

    Well, what is —

    Jack S. Levin:

    — new set of tires —

    Byron R. White:

    — what is in issue here?

    Jack S. Levin:

    What is in issue here is the cost of raising the breeder from birth to the time it reaches maturity.

    Just as if the man in the business of hauling goods for hire (Voice Overlap) fills himself a truck.

    Byron R. White:

    Raising it to where (Voice Overlap) —

    Jack S. Levin:

    It’s put into service.

    Byron R. White:

    — first —

    Jack S. Levin:

    Put into service.

    The parallel with the trucking example would be, if a man was normally in the business of running trucks, builds himself a truck in his back room.

    All of his expenses of buying the wheels, the engine, the chassis, the body, the labor which goes into it, all of these expenses would clearly be capitalized.

    These respondents concede.Once he puts the truck into operation and begins to use it, then his expenses are immediately deductible as the cost of merely maintaining the assets in a sense —

    Byron R. White:

    Now the grown cow, you don’t require in inventory.

    Jack S. Levin:

    Once the cow reaches maturity, the taxpayers, the respondents may write off all of their expenses of feeding and caring for the animal, keeping it operating so to speak.

    Byron R. White:

    And get the depreciation too.

    Jack S. Levin:

    They can take depreciation so long as their basis for the animal is in excess of salvage value, expected salvage value.

    However, because of the peculiarities of livestock accounting, the taxpayers, the ranchers frequently find themselves with a basis which is so low, merely the expenses of raising the animal, that they are less than what the animal will eventually bring.

    Because when it’s — when they finish, whether it is a breeding animal, they sell it as a beef animal and they get the full — the full selling price from it.

    There are some other technicalities in the depreciation area, which raised questions, which are not now before this Court, there is no depreciation question.

    The Commissioner has frequently denied depreciation deductions if taxpayers include their breeders in inventory.

    That is a troublesome — somewhat troublesome concept, which I don’t think is in issue in this case at all.

    There’s no claim for depreciation.

    Byron R. White:

    So we’re just talking about bringing the cattle in this — from the time it’s born from the time puts in — they put to service?

    Jack S. Levin:

    Birth to maturity, when it’s put into service.

    Now, in the — as I’ve said, taxpayers and virtually all industries are required regardless of the method of accounting or regardless of whether we’re talking about inventory or capitalize assets accumulate deferential sale, the costs of manufacturing the asset.

    Now, in the early 1920s, the Commissioner recognized that many small farmers and ranchers were unable to perform that the bookkeeping, and accounting, and allocation tasks necessary to accumulating the costs — properly accumulating the cost of raising crops and livestock.

    So, it created in the regulations two methods of livestock accounting.

    He created first, a simplified cash method of accounting under which he relaxed the normal rule of capitalization.

    The regulations provide that with respect to taxpayers, ranchers and farmers who elect the simplified cash method of accounting, they may expense as incurred, take a deduction as incurred, for all of the cost of raising their crops and their livestock.

    They need to accumulate no basis.

    However, as the taxpayers who elect the more sophisticated accrual method of accounting, and this method of accounting was made available because it is a much more accurate method.

    It prevents normally income from going up and down as a cash method taxpayer would have it and tends to equalize income.

    Therefore, the big ranchers normally prefer the more accurate accrual method of accounting, big ranchers and farmers.

    As to the accrual method of accounting, he’ll — he continued the normal rules under which the rancher or farmer would continue to defer and accumulate until sale the cost of raising crops and livestock.

    Until 1942, from the early ‘20s when these regulations were adopted, until 1942, this created only one difference between the cash and accrual rancher.

    That is a question of timing, when he deducted the cost of raising his livestock at the time incurred or at the time the animal sold.

    However in 1942, Congress enacted Section 117 (j) of the Code, the Internal Revenue Code in 1939, it’s now Section 1231.

    This section granted capital gain treatment for the first time to ranchers — well, it granted capital gain treatment to, is to gains from the sale of property used in the trade or business.

    The Commissioner quickly conceded that at least as to some breeding cattle, they were property used in the trade or business and they were entitled to capital gain.

    The Court shortly overruled the Commissioner’s distinctions and said, no all breeding cattle, all breeders are entitled to capital grain — gain treatment.

    And Congress codified this view into Section 1231 in 1951.

    Now, after this amendment to the Code, the gain from breeders constituted capital gain.

    The gain from beef animals constituted ordinary income.

    And this created a second difference between cash and accrual-method taxpayers.

    Cash-method taxpayers deducted all the cost of raising their breeders as incurred against ordinary income.

    Accrual-method ranchers deferred the costs of raising their breeders and deducted them at the time of sale against the sales proceeds.

    In other words, they deducted them against capital gain.

    To illustrate in a simple example, the difference between these two, a cash — in accrual-method taxpayer who raised a breeder for $100 and then sold it $150, we have no deduction at the time he incurred the $100 of costs.

    That is over perhaps a five-year period or three-year period of raising the animal to maturity.

    At the time he sold the animal for $150, he would deduct his $100 of costs, which he’d accumulated as a cost basis, against the $150 of sales proceeds, and he would report it $50 capital gain.

    The cash-method rancher on the other hand, would deduct the $100 of costs as he incurred, having a $100 deduction against ordinary income.

    When he sold the breeder, he would have $150 of capital gain because he would have no basis accumulated to offset against the sales proceeds.

    Jack S. Levin:

    Now, what this — what resulted from this was a distortion in the income of the cash basis taxpayer.

    The accrual-method rancher was reporting his income precisely correctly.

    He did have $50 capital gain.

    The cash-method rancher reported that transaction as if he’d had a $25 loss.

    Here’s what I mean by that.

    He took a $100 deduction from his ordinary income at the time he incurred the expenses, he had a $150 gain, capital gain on the sale of the animal.

    But capital gain is taxable at a maximum rate of one-half of your normal ordinary income rate.

    In other words, the maximum rate that can be assessed against capital gain is to divide your capital gain by two and put half of it in ordinary income.

    So in other words, the cash basis rancher — when he really had a $150 capital gain, put that into ordinary income as a $75 gain.

    One-half of capital gain is taxable as ordinary income.

    So, he had a $100 deduction at the time he raised the animal and a $75 gain at the time he sold it.

    He thus had, letting the two together, a $25 loss on the transaction.

    Now, the Commissioner shortly recognized that this was not the way in which a cash method taxpayer should ideally be treated.

    He recognized, however, that he had given this requirement of accumulation or deferral of cost away with regard to the cash basis taxpayer or rancher in the first place, in order to give them a simple method of accounting.

    The Commissioner was reluctant to withdraw it and to immediately begin requiring the cash-method rancher to accumulate, in other words, to take away from a simple method of accounting.

    But after a couple of years of pondering the situation, a relatively few years in which it was determined that all breeders are illegible for capital gain, the Commissioner then wished to require cash-method ranchers to accumulate the cost of raising breeders, recognizing that this would withdraw some of the simplicity of their methods.

    However, a careful examination of the status of the legislative history and the Code at that time convinced the Commissioner that he was precluded by Congress from doing this.

    For 30 years, cash-method ranchers at that time was 30 years, had been permitted to deduct as incurred the cost of raising breeders.

    During this period, the Code had been reenacted in numerous times.

    Moreover, and of even more significant, is the fact when Congress in 1951, specifically codified in Section 1231 the concept that all breeders are entitled to capital gain treatment under this Section.

    The legislative history showed that Congress recognized that there were two methods of accounting for breeders.

    One, the cash simple method and the other, the accrual more sophisticated method.

    And that Congress recognized that some ranchers would compute gain one way and other ranchers the other way and approved this method.

    The Commissioner would have rightly or wrongly felt himself bound by this legislative history and the statutory reenactment over 30 years.

    He felt that he could not administratively withdraw from the cash-method taxpayers the right to deduct their expenses as incurred.

    Therefore, he went to Congress.

    The Secretary of the Treasury in 1952 wrote a letter to Congress, requesting legislation which would require cash-method ranchers to accumulate the cost of raising breeders.

    At approximately the same time, representatives of the livestock industry went to Congress and a bill was introduced, authorizing accrual-method ranchers to write off their costs as incurred.

    In other words, just exactly what the respondents are here requesting.Congress took no action on either one of these proposals.

    Instead, in 1954, two years later, Congress reenacted the relevant code provisions verbatim in the Internal Revenue Code of 1954.

    Jack S. Levin:

    Thus, we have continued through to today —

    Byron R. White:

    What’s the evidence that the livestock industry with the Congress?

    There was a bill introduced.

    Jack S. Levin:

    A bill was introduced, yes Your Honor.

    Byron R. White:

    Yes, but — is that — what’s the evidence to this originated with the livestock industry?

    Jack S. Levin:

    Well, I suggest Your Honor that — I don’t have any specific evidence.

    However, I think that it was introduced by representatives or congressmen who were representing those areas.

    I don’t have their names —

    Byron R. White:

    I don’t understand.

    I can imagine they originated with Treasury.

    Jack S. Levin:

    No, I do know that.

    That much, I do know.

    That the Treasury’s proposal was to make cash basis ranchers accumulate as to accrual basis ranchers.

    Whereas, industry and in — in numerous meetings, I think the Treasury was advocating that accrual-method ranchers —

    Byron R. White:

    Were there any — were there any hearings on the bills?

    Jack S. Levin:

    So far as I know, there were no hearings on the bills.

    No, I have no evidence that there were hearings on the bills.

    So that the situation as it existed until the last several years, is that ranchers and farmers who had elected the simplified cash method of accounting, deducted their cost of raising both breeders and beef animals as incurred and reported the entire proceeds from the sale of beef animals as ordinary income, the entire proceeds from the sale of breeders as capital gain.

    Ranchers who had elected the more sophisticated and accurate accrual method of accounting, accumulated those expenses with regard to both — both beef animals and breeders and report that the gain achieved by deducting the accumulated cost from the sales proceeds as ordinary income in this case of beef animals and capital gain in the case of breeders.

    Byron R. White:

    Well, is there anybody who’s starting out on the livestock business ever deliberately accused in the accrual method these days?

    Jack S. Levin:

    I think some do.

    I have no specific figures.

    Byron R. White:

    Why would they —

    Jack S. Levin:

    I think some still do.

    Byron R. White:

    Why would —

    Jack S. Levin:

    Well —

    Byron R. White:

    — they ever?

    Jack S. Levin:

    One reason to do it is that the accrual method of accounting still has certain advantages, it has certain disadvantages but it has certain advantages.

    In cases of draught, large forced sales and other such circumstance, a cash-method rancher would have a great bunching of his income in one year, which might push him up into the 70% bracket.

    Whereas the accrual-method rancher who might be able to spread out his income by accurately reflecting his gains, would maintain a more constant income which would keep him perhaps in the 30% or 40% bracket, whatever it is.

    Jack S. Levin:

    And that is worth a good deal of money to spread your income so as to remain in a 40% bracket instead of having a bunch, so that one year you’re in a 20% bracket, the next year, you’re in the 70% bracket.

    The respondents are perfectly content to remain in the accrual method of accounting, they do not request permission to change to the cap measured — method of accounting.

    They’re perfectly content to re — continue accumulating the cost of their beef animals, in fact they wished to do so.

    They do not wish to switch.

    They wished to deviate from the accrual method of accounting only with regard to their beef animals or with regard to their breeding animals.

    And in — with regard to the breeding animals, they wished to use the same procedures which have always been allowed to cash basis taxpayers.

    This Court has many times rejected attempts by taxpayers to combine the advantages of more than one method of accounting and avoid the disadvantages of each.

    And stated many times, the taxpayers who select the method of accounting must used the — take the advantages and disadvantages of each method.

    And here, as I pointed out in answer to Mr. Justice White’s question, each method has some advantages and some disadvantages, in the simplified method and the more sophisticated method.

    Respondents made three specific tax on the regulations.

    First they say, that Section 1231 of the Code itself, forbids the Commissioner from requiring them to accumulate the cost of raising breeders.

    They argued that Section 1231 was intended to give ranchers capital gain treatment on the full proceeds from the sale of breeding animals.

    We submit that the clear language of that section shows that it grants preferential capital gain treatment only to the “gains” recognized from the sale of breeding livestock.

    The word ‘gain’ is defined in the — elsewhere in the Code, as the excess of the sales proceeds over the accumulated or other cost basis of the animal — or of the asset sold.

    The full sales proceeds would thus constitute the gain, that is the capital gain, only if the ranchers were right, respondents were right, that they didn’t have to accumulate the costs of raising the animal.

    Thus, their argument with regard to the meaning of Section 1231, leads into the question of what do the regulations require and what did Congress understand the regulations to require when it enacted 1231.

    Their next argument is that even that if it would be consistent with 1231 to require them to accumulate the basis of breeding animals, the regulations do not in effect — do not in fact require them to do this.

    They concede that with respect to most industries, that general principles of the Code enunciated in Sections 263, 471 and certain other sections cited specially in our reply brief, require taxpayers to accumulate the costs of manufacturing creating or constructing assets, and that this applies to both inventory assets and capital assets.

    They concede that this principle applies to require them to accumulate the cost of raising their beef animals.

    However, they say, the Commissioner has relaxed this requirement with regard to their breeding animals.

    As I explained earlier, it is our position the Commissioner relaxed this requirement only with regard to the cash method taxpayer where it makes sense to relax the requirement in order, solely in order, to give the cash-method rancher and farmer a simplified method of accounting.

    Abe Fortas:

    Mr. Levin, as you understand that, is it the contention of respondent that there is a conflict in the regulations to whom what is provided with respect to accrual-method taxpayers in the case of breeding cattle, and what’s required in the case of cash-method taxpayers from the case of breeding cattle, is that your last point?

    Jack S. Levin:

    Well, my last point is this.

    We recognize that the regulation —

    Abe Fortas:

    I said the one you made just a moment ago.

    Is that the conflict in — upon which your respondent relies (Voice Overlap) —

    Jack S. Levin:

    Do you mean the conflict with Section 1231 of the Code?

    Abe Fortas:


    Jack S. Levin:


    With regard to Section 1231 of the Code, it is their position that the regulations wholly aside, Code Section 1231 was intended to and thus give them capital gain treatment on the entire proceeds from the sale of a breeding animal, that the force of the Code is to prevent the Commissioner from enacting any regulations to the contrary.

    Abe Fortas:

    Let me see if I can put it this way.

    I appreciate the effort that you’re making to simplify this situation for us.

    But the question that I want to find out is whether respondent’s contention as you understand it, is that the Commissioner earn in providing this particular method for cash basis taxpayers with respect to breeding cattle and at the same time, has deny it to accrual-method taxpayers.

    Jack S. Levin:

    I don’t think they’re arguing that there’s any constitutional infirmity in that.

    This —

    Abe Fortas:

    I understand that.

    Jack S. Levin:

    What they are arguing, I think, is that their first argument was that Section 1231 of the Code was intended to forbid the Commissioner from doing this.

    Their second argument is that when they turn to the regulations, they said the regulations have relaxed the usual requirement that you must capitalize the cost of creating an asset, not only with respect to cash-method ranchers but also with respect to accrual-method ranchers with respect to their breeding animals.

    Abe Fortas:

    Well, that’s precisely what I’m trying to get at, do you understand them to say that the regulation properly read would enable them to do this?

    Jack S. Levin:


    Abe Fortas:

    Or do you understand them to be arguing that if the regulation has to be read to deprive accrual method of taxpayers in this opportunity, then the regulation is discriminatory or not in accordance with the statutory mandate or what not?

    Jack S. Levin:

    Well, the argument with which I’m dealing now is the former.

    That is they properly read the regulation support the respondents rather than the Commissioner.

    And in — I would like now to turn directly to that question and deal with the language of the regulations, which is not easy.

    It’s complex language and it’s set out in a number of different sections which interlocked.

    And if I may, I would like to state just one or two points with regard to ranch and farmer accounting before I get to that.

    I’ll try to make it very short.

    In ranching and farming, it is particularly difficult to ascertain which expenses have been incurred with regard to which assets.

    In other words, the farm hands or ranch hands, may as a group, at one time work on growing crops, on the corn crop.

    But another time, they may work on — they may spend their time caring for the breeding animals, at another time they may spend their time caring for the beef animals.

    If and — if an accrual rancher was to apply an exact method of accounting, he would have to keep records to show what percentage of each man’s time was spent on what type of animal, he would have to break down the salary and allocate it, so on with all the other expenses.

    The Commissioner recognized, as do respondents, that ranch and farm operators are particularly unsuited to keeping this type of detailed records.

    Therefore, early back in the 1920’s, there grew up to practice, not then recognized in the regulations but subsequently specifically adopted by the regulations, which permitted accrual farmers and ranchers to use an estimated method of accounting it, estimated cost method of accounting.

    Under this estimated method, a livestock raiser would estimate the amount it costs him to raise a cow or a steer from birth to one year old, from one year old to two-year old, to three years old, etcetera.

    He would then value his inventory according to those estimates.

    In other words, if he estimated that it costs him $10, in salaries, feed, medical care, etcetera, to raise a cow from birth to one year old.

    And then at the end of the year, he had on hand ten one-year old cows, he would value those at $100.

    That was an estimated method of accounting.

    Then he would use — this is called the unit-livestock price method of accounting, now that has been adopted specifically by the regulations and authorized by the regulations, and all of the respondents are on this estimated cost method of accounting as our most livestock raisers.

    Now, this estimated cost method of accounting, requires a two-step procedure in order to use it on an income tax return.

    Jack S. Levin:

    First, the rancher takes a deduction for all of this expenses, he deducts the cost of labor, he deducts the cost feed, he deducts all of his expenses.

    He then adds to his income which in effect reduces the amount of the deduction.

    He adds to the income the amount which his estimated raising costs are, with regard to the livestock still on hand.

    In other words, if a taxpayer estimates that it cost him $10 a year to raise a cow, the beginning of the year let’s assume for simplicity has nothing on hand, no cows on hand.

    At the end of the year, he has ten one-year-old cows on hand.

    So he estimates that his inventory at the end of the year cost him $100 to raise during that year, ten one-year-old at the end of the year at $10 per year raising costs.

    Let’s assume that during that year, he incurred a $110 worth of expenses for labor, feed, etcetera.

    He takes $105 deduction on his income tax return.

    He then adds to his income the increase in the estimated cost basis of the animals on hand, that is a hundred dollars.

    And it nets out to give him a deduction of $5.

    Now, if all of these expenses have been incurred in relation to raising these animals, it would show that his estimates were off a little, but that they were fairly accurate.

    Now, this example illustrates one very important point.

    That this estimated method of accounting, which is a two-step affair, take a deduction for all your expenses then add to income, which in effect reduces the deduction by the increase in your estimated costs of cattle on hand, this estimated method does not create ordinary income.

    What it does is to offset a portion of the deduction, which was allowed by the first step.

    In other words, going back to my hypothetical, the taxpayer instead of having a $105 deduction has to put a $5 deduction.

    Adding that $100 back to income, his increase in cattle on hand does not create a hundred dollars worth of income.

    Byron R. White:

    Just a mechanical way of accumulating basis?

    Jack S. Levin:

    That’s precisely correct, Your Honor.

    It’s a mechanical way of accumulating basis.

    Now, to illustrate, assume that the cattle I was talking about, the ten one-year olds or something, they’re all beef, they’re all breeding animals, all animals with regard to which the taxpayer’s entitled to capital gain.

    Respondents argue that this little mechanical example I just went through would have made them recognize $100 worth of ordinary income in the year in which they raised those cattle.

    I submit that we have demonstrated that it doesn’t require them to recognize a hundred dollars worth of earning.

    It merely prevents them from taking $100 worth of deductions, makes them accumulated.

    Byron R. White:

    Well, it does as compared to the cash basis taxpayers.

    Jack S. Levin:

    It does with regard to cash basis taxpayer.

    Byron R. White:

    That’s their point.

    Jack S. Levin:

    No, I don’t think that is their point, Your Honor.

    Byron R. White:

    Well then, that’s one of their points.

    Jack S. Levin:

    Yes, Your Honor, that is one of their points.

    Now, as is frequently the case with regard to income tax regulations, the Commissioner has put various provisions which must be read together in different parts of the Code.

    Jack S. Levin:

    Back in the ‘20s, when he first created these two methods of accounting, he put the regulations under two headings.

    One group of the regulations are under deductions, the other group are under methods of computing income.

    But read together, they are this two-step procedure which I’ve just outlined.

    Under deductions, the regulations says that the costs of raising livestock may be deducted — may be treated as expense deductions.

    Now, read alone, read literally, that regulation supports the respondents.

    It says that the cost connected with raising livestock may be treated as an expense deduction.

    And they cite that regulation throughout their brief, and it’s there.

    It’s there, it’s in 160-12 of the regulations today.

    It’s been there since the early ‘20s.

    But when the Commissioner put that regulation in, he also put in a second regulation which was intended to be read together with it.

    And that regulation is the one that requires you to add that to income in effect for an accrual-method taxpayer offset a part of that deduction.

    That regulation that respondents tediously ignore, that’s we cite it, especially in our reply brief, we set it forth extensively.

    Now, the second regulation, which is found in Section 61-4 of the regulations, states that with regard to a cash-method rancher, he doesn’t have to do anything.

    He doesn’t have to make any adjustment on account of raising costs with regard to cattle still on hand, because he supposed to have the simplified method of accounting, he just takes the deduction.

    However, it goes on the state, in part B of the Reg. 61-4 that with regard to an accrual-method rancher, he must add that to income, the increase in the estimated costs of raising the animals, which are still on hand.

    In other words, it effectuates that two-step procedure.

    Take a deduction then add that to income, the estimated costs of the animal still on hand.

    Now, this is true regardless of whether the animals are treated as — let me restate it.

    This is true regardless of whether the rancher has elected to include his breeding animals in his inventory or not.

    This is a — this is a method — this is a question which we consider purely mechanical, for accounting convenience.

    Back in ‘20s, ranchers typically included breeding animals in their inventory.

    It was just a convenient way of keeping a sheet of paper to said inventory, beef animals, breeding animals.

    If they don’t elect to keep their breeding animals in inventory, they must nevertheless prepare a sheet of paper to his capital assets and estimate the amount, which the cost of raising these capital assets has increased and add that back to income.

    The Commissioner and the Regulations specifically says that if a rancher wishes, he can include his breeders in inventory or he may treat them as capital assets, whichever he prefers.

    In either event, he’s entitled to capital gain and it makes no real difference.

    It’s primarily a question of convenience and mechanics.

    Now, respondents make a third argument — the third and last argument.

    Is that even if accrual-method ranchers have always been required to accumulate the cost of raising their breeding animals, nevertheless, there is — these respondents should be excused from that requirement because they had no “meaningful choice”.

    By this, they mean, that at the time they chose the accrual method of accounting, it was not yet recognized that breeders would be entitled to capital gain.

    Most of them made their choice, and I’ll deal with the point of most of them in just a moment, before 1942, before the statute was amended.

    Jack S. Levin:

    In effect, they’re arguing that they bought a pig in a poke, and that they have no meaningful choice when they made their selection.

    Now, there are three answers to this argument.

    The sure answer is that respondents have elected the more accurate accrual method of accounting.

    It had certain advantages and certain disadvantages at the time they elected it.

    There are certain advantages and certain disadvantages today.

    And they may not revoke their election, merely because it changed in the law, alters one of the advantages or disadvantages, relative advantages or disadvantages of one method of accounting in relationship to the other.

    As this Court’s said in a similar case, Helvering versus Wilshire Oil, cited and discussed on pages 11 and 12 of our reply brief, “Tax statutes and tax regulations have never been static.

    Experienced changing needs, changing philosophies, inevitably produce constant change in each.

    One making an election between accounting methods takes the risk that the method of treatment of an item might be changed by Congress.”

    In that case, this Court refused to allow the taxpayer to make a new election to give up this election between the two methods to take the other one, merely because the law was changed with regard to one of the relative advantages and disadvantages.

    In this case, just as in Wilshire when respondents elected the accrual method of accounting, they took the risk that the method of taxing gain on the sale of breeding animals might be changed by Congress.

    Now, a second separate and complete answer to —

    What was the (Inaudible)

    Jack S. Levin:

    Well, if this were not so.

    Then every time Congress amended the Internal Revenue Code, which is frequent — frequently every year, every two years, there would be some change in the relative advantages and disadvantages of various methods of accounting.

    For example, every time Congress lowered or increased the rate of taxing ordinary income as they do frequently, it would make a difference in the relative advantages of the cash and accrual method of farm accounting, because if they raised the rates on cash — if they raised the rates an ordinary income, it would make the cash method more attractive, vis-à-vis the accrual method of accounting.

    Well, why shouldn’t the taxpayer (Inaudible)

    Jack S. Levin:

    I don’t say he shouldn’t be.

    I think Congress has made that choice.

    Congress has set out, set forth in the statute, Section 446 (c) a procedure for changing an election.

    Wherever there’s an election, allowed by the Code, and it’s not otherwise stated in the statute, Congress has said that a taxpayer may change his method of accounting if he obtains the permission of the Commissioner first.

    Byron R. White:

    What year is this case?

    Jack S. Levin:

    This case relates variously through years ‘54 through ‘58 or so.

    Byron R. White:

    Then these taxpayers continue to use the election — the — this method in ‘42 run through the —

    Jack S. Levin:


    Yes, no complaint about it up until ‘54 was the earliest year of complaint.

    Now, Congress thus has proscribed the procedure.

    The Commissioner can allow changes in elections.

    If — now, what are the standards by which the Commissioner generally grants changes in elections?

    The standard is typically, before a taxpayer can obtain a change in an election of a method of accounting, he must show that he has a business purpose.

    Jack S. Levin:

    He must show that there’s something more than a slight change in the relative tax advantages of various methods.

    He must show that there is a business reason for making the change.

    For example, if a rancher, who had an inventory of cattle, say $30,000 came and say, “I’m on the accrual method, I want to make it change to the cash method.”

    The Commissioner would as a matter of course allow to make that change because the costs of keeping the records necessary to the accrual method are disproportionate regarded the small amount of the inventory concerned.

    But with other taxpayers, such as the respondents here, where they have inventories of cattle of quarter million dollars or so, it would make a very, very substantial change in the — difference in the computation of income.

    The Commissioner would like to see both cash and accrual methods ranchers required to accumulate the cost of raising breeders.

    That is, the Commissioner submits, the proper way to do it.

    Abe Fortas:

    Mr. Levin, do you make a point of the failure of the taxpayer here to apply for a permission to change his method?

    Jack S. Levin:

    Well, yes I — and I want to make it in this way, Your Honor.

    A second answer — and giving a second answer to this argument that they had no meaningful choice, they say that they had no meaningful choice between the cash and accrual methods of accounting.

    Now, the second answer is that if they had no meaningful choice and if we’re wrong in our first answer, the Wilshire case is to be overruled.

    Then, all these respondents would be afforded as a chance to choose again between the cash and accrual methods of accounting.

    This, they do not want to do.

    They state in their briefs that they are perfectly content to remain on the accrual method of accounting.

    They affirmatively wish to keep on accumulating the basis of beef animals so as to even out their income, get the advantage of the accrual method of accounting.

    They don’t want to switch.

    They’ve never asked for permission to switch to the cash method of accounting.

    And they don’t — do not now asked for it even retroactively.

    What they want to do is to remain on the accrual method of accounting as to their beef animals, but to get all the advantages which are offered solely in order to give a simplified method of accounting to the cash taxpayer, to get all the advantages that the cash-method taxpayer that it has, that is to write off the expenses of raising breeders.

    Abe Fortas:

    The respondents say that they haven’t applied because it would be idle, as I read their brief.

    Jack S. Levin:

    Well —

    Abe Fortas:

    Now, that your point is that they haven’t applied because they don’t want a — to shift their accounting method, what they want is something that is not provided for in the procedures of the regulations and that is to use part of each method, is that right?

    Jack S. Levin:

    Yes, Your Honor.

    Our answer is twofold there.

    First, on page 42 of the Wardlaw brief, they state respondents are now using the accrual method of accounting and they expect to continue to use it.

    They are not seeking to switch to the cash method of accounting.

    And second, we say that the Commissioner will grant at this time now.

    Now, we’ll grant ranchers permission to change from the accrual to the cash method of accounting if they demonstrate a business reason for the switch.

    This is the uniform standard applied with regard to virtually all elections, the revocation and reelection between methods of accounting between various elections of other — you must show business reason for it.

    Now, these taxpayers —


    Jack S. Levin:

    The right to avoid taxes may not be a good business reason to switch from one method to the other.

    The right to save taxes, of course, is just another aspect of the right to avoid taxes.

    It’s a question of emphasis perhaps.


    Jack S. Levin:

    Well, at the time Congress enacted that 1951 statute, recognizing specifically the accrual-method taxpayers that all ranchers were — would get capital gain.

    The legislative history shows that they recognized that some ranchers were on one method, the accrual method, and that they had to accumulate basis.

    And that cash ranchers were on the other method, and that they didn’t have to accumulate basis.

    At that time, Congress showed no aversion to this dichotomy.

    They recognized I think the simplified method of accounting was granted to those taxpayers who did not feel themselves able to go through the accounting mechanics of accumulating basis.

    And who did not want the more accurate and sophisticated method of accounting which would enable them to have certain other advantages.

    These respondents admit that they want to continue with those advantages.

    If there is to be a general amnesty, and I don’t think that this case raises the question because these taxpayers don’t ask for it.

    If there is to be general amnesty, and all taxpayers are now to have an election between the cash and accrual method of accounting if they had no choice when they made their first election, is for Congress to do it.

    The Secretary of the Treasury, in the letter he wrote to Congress, it’s on page 9 of the record, set forth this dichotomy.

    Told Congress, we are not going to grant taxpayers who are in the accrual method of accounting, permission to switch to a cash method solely because they want to avoid or save whichever way you phrase a taxes by the switch.

    Byron R. White:

    Mr. Levin, has it — would all accrual-basis taxpayers use the unit price for — unit cost method?

    Jack S. Levin:

    Not all of them.

    That the vast majority to —

    Byron R. White:

    What’s the other one?

    Jack S. Levin:

    The other method which is most use is called the farm-price method.

    It is less advantageous for ranchers — for the taxpayer than the unit-livestock method because it requires them to accumulate an amount of costs which is equal to the market value of the proper livestock.

    Byron R. White:

    — (Voice Overlap) of the way accumulating basis.

    Jack S. Levin:

    That’s another mechanical way of accumulating basis.

    But the amount of basis accumulated under the farm-price method is, as we point out in our reply brief —

    Byron R. White:

    Technically, this taxpayer who grows his own cows, never get depreciation?

    Jack S. Levin:

    That’s correct.

    He writes off his entire cost of raising the cow as he incurs it, as he incurs it.

    There’s no need to depreciate.

    He only gets one deduction for $1 of costs.

    Jack S. Levin:

    Either you write it off as you incur it or you accumulate it and then depreciate it, whatever the un-depreciated remainder is, you offset against the proceeds of sale.

    A dollar of cost produces a dollar of deduction at some time —

    Byron R. White:

    And if it an old cow —

    Jack S. Levin:

    — the question is when.

    Byron R. White:

    And if it an old cow didn’t bring some price, the accrual-method taxpayer will get all of his cutback through depreciation.

    Jack S. Levin:

    Through depreciation or through a loss on the sale, his loss on the sale would be covered by Section 1231 which would give him an ordinary loss, gives capital gain but ordinary loss.

    Earl Warren:

    Very well, Mr. Levin.

    Mr. Gregory.

    Claiborne B. Gregory:

    Mr. Chief Justice, Honorable Court.

    I represent the Wardlaw taxpayers in this case and they are — they were joined with the United States versus Catto for purposes of this appeal.

    I’d like to know one little point before I get into my argument.

    The Government’s attorney has talked about these various accounting method but he knows as well as I do that there aren’t any generous accounting methods that would enable any taxpayer not to pay the full tax on every dollar of income.

    You can’t — they don’t add up that way.

    This case began as a conflict between two regulations of the Commissioner, Regulation 162-12 and Regulation 471-6 (f).

    Now, this was the conflict that was litigated in the Lewis case, the Ekberg case and is the way this case was litigated in the Court of Appeals below.

    And the conflict was this, Regulation 162-12, which was promulgated 45 years ago and is a very simple clear-cut regulation, stated that livestock raisers were permitted to deduct the cost of raising their breeding animals as a current expense.

    The Secretary of the Treasury noted this in 1952, and he made a very clear statement that since the early days of income tax, livestock raisers have been permitted to deduct their raising cost of their breeding animals as a current expense.

    Now, when he — when their decision was made, no doubt, they need — the unique character of this situation was just as apparent as it is today.

    But the Commissioner made the determination that those raising costs of breeding animals were to be deducted as current expenses.

    That regulation has stayed unchanged as I say for 45 years.

    And the petitioner admits that by the process of statutory reenactment, that regulation has assumed the force of law.

    At that time, how was the (Inaudible)

    Claiborne B. Gregory:

    At that time, you mean up to the time — when that regulation was first promulgated —

    Or —

    Claiborne B. Gregory:

    — and then on to 1944, the gain on the sale of animals they held for sale and the gain on the sale of animals held for breeding purposes was treated just alike.

    It didn’t make any difference whether do you have the animal in inventory or not.

    It didn’t make any difference about your accounting method or anything else.

    It was ordinary income.


    Claiborne B. Gregory:

    Yes sir.

    Claiborne B. Gregory:

    Now, in 1944, the regulation was promulgated with which this regulation I’m just talking about, conflicts.

    In 1944, Regulation 471 was promulgated and the Commissioner interpreted that regulation as saying that the cost of raising breeding animals should be capitalized.

    And that was exactly contrary to what is existing regulation said.

    And in the court below, he stated that Regulation 4471 said that breeding animals must be included in the inventory if a livestock farmer selected the unit livestock price benefit of valuing his other animals.

    Well, by putting them in inventory, he has admitted and it follows naturally that he is capitalizing the cost of raising those breeding animals.

    That’s what he said in the court below.

    Now, in his brief in this Court, his opening brief, he changed his mind and said, “That’s not so, you don’t have to put your raised breeding animals in inventory, 471 doesn’t require that.

    No other regulation requires that.”

    But 471 does require, that if you use — elect the unit-livestock price method of valuing your animals, then you’ve got to capitalize the raise and cost of all your breeding animals, whether they’re in inventory or not.

    That was his position in his opening brief.

    Yesterday, late afternoon, I was served a copy of his reply brief and I found that he has changed his position very materially again.

    This change is that he no longer rests his case on Regulation 471.

    He no longer confines his contention to livestock farmers who have selected the unit-livestock price method of valuing their inventory.

    He says now, that all livestock farmers must capitalize the cost of raising their breeding animals, all of them.

    And he doesn’t care whether they fall under 471 by election or voluntary election and anything else.

    He doesn’t care what that method of valuation is whether it’s that method or the farm-price method, he doesn’t care whether they’re on the accounting method or the cost method and he doesn’t care whether animals had put in inventory or not.

    Now, I regard this as a major change in his position which as I’ll point out in a minute, we don’t worry about it.

    But I want to note the fact that up until now, up until this reply brief, the Government has premised its claim on the proposition that Section 471 is the Section they’re talking about and that we are under Section 471 because we elected the unit livestock price, about the value of inventories.

    And because we are under there, first, we must put our animals, our breeders into inventory and that means we’ve got to capitalize our raising cost or judging by his opening brief, he said you don’t have to put a meaning but he says the same thing.

    He says, you’ve got capitalize the raising — the raising costs of your breeders.

    So, he has moved out away completely from Section 471, he is no longer confining himself to farmers who elected the unit-livestock price method.

    That was the situation in the Lewis case that was the situation in the Ekberg case.

    Now, he’s taking it across the board position, that all livestock farmers, without the qualification or limitation.

    Byron R. White:

    We’ll, how about the cash basis?

    Claiborne B. Gregory:

    He says, all livestock farmers without qualification or limitation, cash basis, accrual basis —

    Byron R. White:

    What he said in his oral argument?

    Claiborne B. Gregory:

    Well, that’s what he — that’s what he says and here’s the way he put it sir — Justice White.

    He said, “All of you are supposed to capitalize your raising costs of beef breeding animals.”

    But — and I quote his words, “But we have found that the — many ranchers and farmers are not capable of valuing cattle on hand and deferring cost properly allocable to them, so we don’t bother to ask them to capitalize their cost.”

    Abe Fortas:

    Are you referring to —

    Claiborne B. Gregory:

    That’s the reason.

    Abe Fortas:

    — to the reply brief?

    Are you referring to the reply brief?

    Claiborne B. Gregory:

    I’m quoting from the reply brief, I read it last night.

    Abe Fortas:

    Is it this four-page document?

    Claiborne B. Gregory:

    What’s that?

    Abe Fortas:

    Is this four-page document?

    Claiborne B. Gregory:

    That’s right, Justice Fortas.

    Abe Fortas:

    I haven’t been able to find that.

    Claiborne B. Gregory:

    At the bottom of page 2, last line, top of page 3.

    They say — perhaps they have the long reply brief.

    We don’t particularly object to this constant shifting of position by the petitioner.

    While we want opportunity if the Court will permit us to reply — to answer to the reply brief, we don’t object to it because we feel and we recognize that it means that he is shifting away from some position when he finds it not tenable and moving to another position which he hopes would be more tenable.

    This last shift, however, has in my opinion brought into a bad position because he is now confronting absolutely without them — any limitation, without any reliance on Section — Regulation 471, he is confronting and repudiating the Regulation 162-12 that he himself says, has assumed the statute of the — attain the status of law by constant reaffirmation by the Congress.

    And he —

    Byron R. White:

    But which — which position do you suppose the Government’s taking an oral argument, in that — the position he took in its opening brief or in his reply brief?

    Claiborne B. Gregory:

    I don’t know, I listened very carefully and I think they’re trying to embrace all the positions.

    And that’s why I’m going to try to answer all positions.

    Hugo L. Black:

    That’s customary legal procedure.

    Claiborne B. Gregory:

    Yes sir.

    But I want to point out that it seems to me that having gone as far as he has and having said that we now will require the capitalization of this raising costs in all cases, that the Government has gone so far and reviews his case really down to a question of, “Can he do this in the face of this regulation, of 45 years standing which he admits has attained the status of law, or can’t he?”

    Now, in the few minutes I have left, I’d like to touch briefly on how this problem came up and exactly what it’s all about as I see it.

    Up until 1944, there was no problem as I pointed out a few minutes ago, no attempt to make you capitalize the cost of raising the animals.

    But in 1942, when Congress decided to give capital gains treatment to the sale of breeding animals, the Commissioner concluded that there was something unfair, something wrong, with this business of deducting the cost of raising the breeding animal, and then when you sell it later on, get capital gain.

    That’s what he’s quarreling with, he’s quarreling with the culmination of his own regulation of 45 years standing and its interaction with the will of Congress.

    In 1942, they granted the capital gains treatment.

    Now, the — his thinking that lead him to this conclusion, I don’t know.

    But — and it may have been some of this somewhat metaphysical reasoning about — well when you maintain and shelter and feed that animal there that’s just been born, somehow you’re acquiring something.

    You know he’s not growing by nature, you’re doing it.

    And therefore, you should deduct this raising cost.

    Claiborne B. Gregory:

    Of course, the bad thing about that from his standpoint is that the Commissioner has saved this for 45 years that you do deduct it.

    He recognizes it this — this is a unique situation.

    Byron R. White:

    I thought the capital gains provisions rather contemplated the accumulation of an — of a basis and —

    Claiborne B. Gregory:

    Paying out of money to get some —

    Byron R. White:

    When they ascertain one of the — of cost of an item.

    Claiborne B. Gregory:

    They do.

    They contemplate that you go out and acquire something or to buy something or buy something to bill something, generally, not addressed to anything of an inanimate things.

    Of course, this same situation has risen in connection with raise — with fruit trees, no problem.

    The Government doesn’t seem to make issue out of them but it’s the exact same problem.

    And they permit the cost of raising the fruit trees, watering them, fertilize them, taking care of them, that’s their current expense, then when you sell them, capital gain.

    Exactly the same, exactly the same —

    Byron R. White:

    Apparently — they apparently agree with you as soon as your cow gets old enough to produce a calf.

    Claiborne B. Gregory:

    Yes, but that’s too late.

    By then, he’s put the value, the full value that animal in the inventory and taxed it to his ordinary income.

    It’s all done.

    Byron R. White:

    All he’s done, it’s accumulated some basis for it.

    Claiborne B. Gregory:

    He’s accumulated basis but he’s taxed it to you as ordinary income.

    Byron R. White:

    Well, all that means is that you can’t — you can’t deduct a capital cost, that’s all.

    Claiborne B. Gregory:


    You are permitted to deduct the cost of raising animals, that is immediately taken the words —

    Byron R. White:

    Sure, yes.

    Claiborne B. Gregory:

    — that by increasing the value of animal and so is tax to you is ordinary income.

    If it weren’t built up like that, you’re raising cost would constitute a deduction in — against other ordinary income.

    But if not, well he does it, you never get a nickel of other than ordinary income treatment in the average case of raising a breeding goat or a breeding sheep.

    You don’t, because —

    Byron R. White:

    Well, do you think — do you think if you went out and bought a cow — bought a cow, let’s say an adult cow, that you ought to be able to deduct it from ordinary income or not?

    Claiborne B. Gregory:

    You don’t.

    You, of course, would (Voice Overlap) —

    Byron R. White:

    Well, do you think you shouldn’t be able to do it?

    Claiborne B. Gregory:


    Claiborne B. Gregory:

    I don’t think you shouldn’t be able to do it.

    And you can’t, not under the law.

    That’s —

    Byron R. White:

    Why did you — why should you be able to deduct the cost of raising — of raising the calf to a cow?

    Claiborne B. Gregory:

    Because it’s a current form of expense, just like the Commissioner decided years ago —

    Byron R. White:

    Well, that’s just restating your position, unless you’re giving any reasons.

    Claiborne B. Gregory:

    Well, I just don’t think it’s an acquisition cost.

    Did you acquire that animal raised on your farm?

    Do you acquire him each year?

    You acquired him when he is born.

    You sustained him after he was born.

    For sustaining animals, you get a deduction.

    Nature says he grows because he is young.

    But that doesn’t make it an acquisition, you’re not acquiring that animal every year, you acquire him once when he is born.

    You sustain him or maintain him thereafter.

    Just as a man in a manufacturing business, sustains and maintains a big machine over here.

    He orders, and services, and keeps it good shape.

    It doesn’t have within it (Inaudible) of growth, true, and that’s the only difference.

    Byron R. White:

    Do you think if you bought some calves, you bought some calves and paid some price, they’ve paid a price for it and that they aren’t procuring anything and you go ahead and do — you feed them and you keep some of them as cows.

    Now, you’re saying that you should deduct all of that — your purchase price for the calf and also the — the cost of your feed and labor between the time you buy a calf up the time it turns into a cow?

    Claiborne B. Gregory:


    If you buy an immature animal but you won’t put in your breeding herd, I think just like I’ve said, I think you should not be denied the right to deduct the current expense, what you have put out to sustain that animal.

    Byron R. White:

    But you wouldn’t — you wouldn’t claim the deduction for the money you pay out for the immature calf?

    Claiborne B. Gregory:


    No, I wouldn’t.

    Potter Stewart:

    Any distinction in this case between ordinary breeding animals and those that are called — called out of the breeding herd?

    Claiborne B. Gregory:

    No, I don’t —

    Potter Stewart:

    That’s not here in this case?

    Claiborne B. Gregory:

    No, that’s not involved.

    Potter Stewart:

    Distinctions had — that’s raised other problems, has it?

    Claiborne B. Gregory:

    That’s right.

    I have only a moment or two left but I’d like to point out that — this concept that the Government through that Act and through the Commissioner, adopted in 1921, that could deduct raising costs and the Government now wishes to say that as to cash-method farmers, you can — you have to cap — you don’t have to capitalize, and as to accrual-method farmers, you do have to capitalize.

    The Government has offered only one explanation of why this Regulation 162 has been applied to deny this right to the accrual-method farmer and grant it to the cash-method farmer.

    And here’s explanation has been that we — the Commissioner has denied this because he has given the word may in the regulation which says you may deduct these expenses and administratively circumscribed compass.

    And that is about all he said by way of justification, that’s all it said until his reply brief.

    And it is submitted in the words to this Court in the recent case that these — that this administratively circumscribed compass is hardly a persuasive response to the question of why the Commissioner gives one practice to the cash farmer and another practice to the accrual-method farmer.

    Now, in his reply brief, the Government apparently has gotten away from this because he does make this any longer, he says under 162, everybody capitalizes except the accrue — the cash-method farmer and we can’t think of any way to figure out where his cost are, so he doesn’t have to capitalize.

    That has never been a difficulty in the tax law before in determining values and determining other difficult questions.

    They were determined, and was done.

    But here, for some reason, he seizes on the accrual-method farmer and says he must capitalize and the cash-method farmer doesn’t have to.

    Earl Warren:

    We’ll recess now, Mr. Gregory.