UNITED STATES SUPREME COURT DECISIONS ON-LINE

Respondents are ranchers who raise livestock for sale and maintain herds for breeding purposes. They sold animals from the breeding herds and reported capital gains therefrom on their federal tax returns in accord with the "unit livestock price" variant of the accrual method of accounting they had selected for their overall ranching operations. They filed refund claims with the Commissioner of Internal Revenue on the ground that they were entitled to use the more advantageous cash method of accounting in computing gain from sales of breeding stock. Respondents challenged the validity of Treas.Reg. § 1.471-6(f), which requires that a taxpayer who elects to use the "unit livestock price" method must apply it to all livestock raised, whether for sale or breeding purposes. The Commissioner rejected their claims, but was overruled by the District Court and the Court of Appeals.

Held: taxpayers employing an accrual method of accounting for their overall ranching operation may not use a cash method of accounting for their breeding livestock. Pp. 384 U. S. 109-117.

(a) Legislative and administrative history, which are consonant with accounting logic, demonstrate that the expenses of raising breeding stock were intended to be deferred by accrual method taxpayers.

(b) Congress resolved the controversy over the treatment of gains on sales of breeding stock in 1951 by amending § 117(j) of the Internal Revenue Code of 1939 to make clear that such gains were entitled to capital gains treatment. P. 384 U. S. 112.

(c) The "unit livestock price" method is sound accounting practice, and its uniform application to respondents' entire livestock operations is a reasonable exercise of the Commissioner's discretion. Pp. 384 U. S. 113-114.

(d) The application of the cash method of accounting solely to sales of breeding animals while retaining the accrual method for animals raised for sale would create a hybrid and distorted system which would defeat the Commissioner's goal of providing a unitary clubjuris

Page 384 U. S. 103

accounting method for all taxpayers, and it was within his discretion to reject such hybrid system. Pp. 384 U. S. 116-117.

344 F.2d 225, 227, reversed and remanded.