
    361 F. 2d 972
    LAWRENCE B. SHEPPARD AND CHARLOTTE N. SHEPPARD v. THE UNITED STATES
    [No. 195-62.
    Decided June 10, 1966]
    
      
      Lmt/rens Williams, attorney of record, for plaintiffs. Edwin M. Buehen, Alexander M. Heron, John A. Whitney, and Jerome B. Libin, of counsel.
    
      Gilbert W. Rublo f, with whom was Assistant Attorney General Mitchell Rogovin, for defendant. Lyle M. Turner and Philip R. Miller, of counsel.
    
      Before CoweN, Chief Judge, Laramore, Durfee, Davis and CoLijiNSj Judges.
    
   Per Curiam :

This case was referred to Trial Commissioner Lloyd Fletcher with directions to make appropriate findings of fact and to submit a recommended conclusion of law. The Commissioner has filed a report containing findings, an opinion and recommended legal conclusion. The court adopts the Commissioner’s opinion and recommendations concerning “the charitable contributions issue” with minor modifications. The court rejects the Commissioner’s opinion and conclusions as to “the depreciation issue.” That part of the Commissioner’s opinion which has been adopted by the court and the court’s opinion on the second issue is as follows:

Only occasionally has the court been required to address its attention to various attributes of members of the animal kingdom. It must do so once again to resolve the dispute in this income tax refund case. The animal involved here is Star’s Pride who, in recent years, has established himself as one of the country’s great standardbred stallions. Presently, he stands at stud and is owned by Hanover Shoe Farms, Inc. (hereinafter called “The Farms”). But this was not always so, and a determination with respect to the first issue in this case requires a study of Star’s Pride’s early history.

THE CHARITABLE CONTRIBUTIONS ISSUE

Star’s Pride was foaled in 1947 with a distinguished line of standardbred ancestors. When he was a yearling colt in 1948, he was purchased by plaintiff-taxpayer, Lawrence B. Sheppard, and E. Boland Harriman as equal co-owners. Both, men have long been nationally prominent in standard-bred racing and breeding circles, and there can be no doubt of their outstanding expertise in the field. For a number of years they raced Star’s Pride as a trotter. He distinguished himself on the track and won his owners some $141,000. Then, in 1953, at the age of six, Star’s Pride was retired to stud at The Farms, the world’s largest breeding farm for harness racehorses. This farm is owned and operated by a closely-held corporation of which plaintiff is president. Fie owns 76.8 percent of its outstanding stock.

Originally, The Farms took care of and managed Star’s Pride under an informal, oral arrangement with his co-owners. In 1958, however, this arrangement was reduced to writing in the form of a lease agreement whereby The Farms, as lessee, agreed to care for and maintain Star’s Pride at its sole expense and to use him solely for 'breeding purposes. The Farms also agreed to pay the owner-lessors $100 for each live foal produced by Star’s Pride from The Farms’ mares and to offer the horse for service to “outside” mares at a fee to be agreed upon between the lessors and lessee from season to season, such “outside” fees to be divided equally among the parties. In addition, it was agreed that the lessors could breed their own mares to Star’s Pride at no charge. The lease was executed on January 1, 1958, for an original term of five years with a right of renewal in The Farms for an additional five-year term.

Star’s Pride’s initial stud fee was set at $750, a rather impressive fee for an, as yet, unproven stallion. A period of time is required to determine the true value of a breeding horse because his success will be measured by the performance of 'his “get,” or offspring. For the first five years of his life at stud, Star’s Pride’s record was rather disappointing, and during this early period his “book” (reservations for breeding services) was never filled. Then, in 1958, the situation suddenly changed.

In August 1958, a 3-year-old filly by Star’s Pride, named Emily’s Pride, won the $107,000 Hambletonian Stake which, for a 3-year-old standardbred horse, is comparable to the winning of the Kentucky Derby by a thoroughbred horse. In addition, another of Star’s Pride’s get won second place in the Hambletonian. Emily’s Pride went on to win tbe 1958 $58,000 Kentucky Futurity, and as a result of her victories was named the Harness Horse of the Year. Meanwhile, a 2-year-old colt, by Star’s Pride, named Diller Hanover, was winning many of the two-year-old trotting classics in the country, and became the winter favorite for the 1959 Hambletonian.

The attentions of the standardbred horse experts immediately focused on Star’s Pride. The spectacular successes of his get in 1958 caused a flood of applications to The Farms for his breeding services. By 1960, Star’s Pride had advanced to second place in the national standings of trotters. His book has been “full and closed” for every breeding season since 1958.

During 1958, the plaintiff was also observing Star’s Pride’s progress with great interest. Despite some earlier misgivings about the horse’s future, he was now convinced that, with proper development, Star’s Pride could become one of the top-ranking stallions of the country. His interest was further sharpened by the fact that The Farms (which he controlled) already owned Hoot Mon, a great stallion descended from one dominant trotting line (Scotland), and by the fact that Star’s Pride was descended from the other dominant trotting line (Volomite). He decided that The Farms should acquire Star’s Pride, not only to perpetuate the Volomite Line but also to interbreed with the get of Hoot Mon from the Scotland line.

From his extensive experience, plaintiff had long ago concluded that it was not possible to develop the full potential of a stallion at stud without having complete ownership and control of the horse. Accordingly, sometime prior to June 1959, plaintiff determined that, as a first step, The Farms should attempt to acquire Harriman’s one-half interest in Star’s Pride. On behalf of The Farms, plaintiff negotiated with Harriman who agreed to sell his interest for $100,000 plus a specified number of future free breeding services by Star’s Pride for the Harriman mares. This proposal was agreeable to plaintiff, and he followed it through with a formal offer to Harriman on June 12,1959.

On June 15, 1959, The Farms received a telegram from Daniel Green, Executive Director of the New York Chapter of the American Bed Cross, advising that Harriman’s interest in Star’s Pride and The Farms’ offer of June 12, 1959, had been assigned to it, and accepting The Farms’ offer to purchase such interest. Subsequently, The Farms received a letter of confirmation from Green, and thereupon issued its check for $100,000 to the Bed Cross. On June 17,1959, Green acknowledged receipt of The Farms’ check and forwarded Star’s Pride’s registration certificate, properly endorsed to show the transfer to The Farms of the interest previously owned by Harriman. On the same day, Harriman and The Farms executed a written agreement which specified in detail the breeding services from Star’s Pride which The Farms was to reserve for Harriman’s mares. As of June 17, 1959, the fair market value of those breeding services was at least $50,000.

At about this time, plaintiff was also considering making substantial charitable contributions to the Sisters of St. Joseph in the City of Philadelphia (hereinafter called the “Sisters”) and to The University of Pennsylvania (hereinafter called the “University”). The Sisters owned and operated St. Joseph’s Academy, a small school in Pennsylvania which plaintiff’s children and grandchildren had attended and in which he had a deep interest. In early June 1959 plaintiff became aware of a serious financial problem at the Academy arising out of a threat by State fire safety officials to close the school unless extensive remodeling and renovation to its building were accomplished by the fall of 1959. The estimated cost for the required improvements was $50,000, and it did not appear that the Sisters, within the time allowed, would be able to raise any such sum. Plaintiff decided to defray the cost by a personal contribution.

Meanwhile, plaintiff had also learned of plans by The University of Pennsylvania to build new facilities for its School of Veterinary Medicine. He also had a deep interest in the welfare and progress of that School, and he intended to make a substantial contribution to its new construction program.

At no time did plaintiff intend to make his contributions to the Sisters and the University in the form of cash. From prior experience he was well aware of the legitimate tax advantages which flow to a donor through the making of deductible charitable contributions in the form of gifts in kind of appreciated property. Originally, he had planned to make the gifts in the form of certain shares of stock. By the middle of June, however, he had changed his mind and decided that, if acceptable to the prospective donees, he would donate to each of them one-third of his one-half interest in Star’s Pride. At this point it is important to bear in mind that this decision in no way indicated a lessening of plaintiff’s confidence in Star’s Pride’s potential greatness. To the contrary, the gravamen of his plan was that, immediately following the gifts of the two one-sixth interests in Star’s Pride, he would cause The Farms to offer to purchase those interests from the donees for $50,000 each. Thereafter, he intended to sell his remaining one-sixth interest directly to The Farms, also for $50,000. Since The Farms had already acquired the Harriman interest, the end result would be that desired by plaintiff, namely, 100 percent ownership of Star’s Pride by The Farms subject only to the Harriman breeding rights.

On June 16,1959, plaintiff carried out his plan. He wrote letters to the Sisters and to the University offering to each, as a gift absolute, one-third of his right, title, and interest in Star’s Pride, which he described as a one-sixth interest in the horse with a current market value of $50,000. He attached no conditions or obligations to these offers. However, on the same day, in the case of the University, and on the following day, in the case of the Sisters, he sent each donee a letter from The Farms, signed by him as president, by which The Farms offered to purchase the interest of each donee for the sum of $50,000. Each letter contained a paragraph advising that, if the offer was found acceptable, the proper officers of the respective donees should execute and return an enclosed form of bill of sale, upon receipt of which The Farms would make immediate payment.

The significant facts surrounding the offer of gift by Mr. Sheppard and the offer of purchase by the Farms are the following: On receiving the letter offering the gift, the Mother Superior of the Academy called the Mother Superior General who was authorized to receive and convey property on behalf of the Order. The latter questioned the propriety of a Catholic school’s keeping a horse which was directly involved in a betting scheme. Upon hearing this, the Mother Superior of the Academy called Mr. Sheppard who said he would see what he could do. It was on the next day that she received the Farms’ offer which she took to the Mother Superior General who accepted for the Order. The University, however, maintained a somewhat more cautious, or perhaps more orderly, policy regarding the acceptance of gifts of an unusual nature which might contain restrictions. It did not wish to become involved with donors who had ulterior motives or to lend its tax-exempt status to any person who was trying to use it illegally. Consequently, the offer was not accepted by the University until careful inquiry was made by Dean Allam of the School of Veterinary Medicine to Mr. Gordon, Treasurer of the University. Mr. Gordon in turn consulted with Mr. Pemberton, the Business and Financial Vice President and Dr. G. P. Harnwell, President of the University. Pursuant to this policy, Dr. Harnwell asked Mr. Gordon whether the horse was a valuable one and whether the University by accepting the offer would incur any obligation of any kind to the donor or with respect to the subject matter of the gift. On receiving Mr. Gordon’s assurance that, in his understanding, the horse would be a valuable one and that the gift would be unrestricted, Dr. Harnwell expressed the view that the University would accept it. As was customary in matters of this sort, Mr. Gordon also telephoned Calvin H. Rankin of the firm of Drinker, Biddle and Reath, in Philadelphia, counsel for the University. The University communicates with Mr. Bankin for advice and counsel on matters pertaining to gifts on an average of twice a day. Mr. Bankin advised Mr. Gordon, on the basis of the conversation between Mr. Sheppard and Dean Allam, that the proposed gift would not be objectionable from a legal or tax standpoint. Mr. Gordon then informed Dean Allam of his discussions, and Dean Allam informed Mr. Sheppard’s secretary that the University would be willing to accept the gift.

On June 17 each donee accepted The Farms’ offer, executed and delivered the bill of sale, and later received payment from The Farms in due course. As the recited facts demonstrate, the record is clear that neither donee acted under any legal obligation, express or implied, to accept The Farms’ offer of purchase as a condition to accepting plaintiff’s gift. However, neither donee “looked the gift horse in the mouth.” They made no independent investigation of the value or earnings potential of Star’s Pride, nor did they solicit offers from any other sources. Instead, they relied implicitly on plaintiff’s integrity and international reputation for expertise in the field of standardbred horses.

As for plaintiff, he had no real doubt that, despite the absence of any prior commitment by the charities, The Farms would be able to acquire the donated interests for cash. He was aware that, because of their construction programs, they wanted money, not an interest in a breeding stallion. He was also aware that, once the interest was beyond his effective control, there was a possibility that either donee (particularly the University) might shop around for a better offer from other persons interested in standardbred horses. He was willing to assume that risk, however, because he was ready to have The Farms outbid any possible competitor.

On June 17, plaintiff also sold his own remaining one-sixth interest in Star’s Pride to The Farms for $50,000 and reported the same on his 1959 income tax return as capital gain. On the same return he claimed a charitable contribution deduction of $50,000 for his gift to the Sisters and a like deduction for his gift to the University. The Commissioner of Internal Bevenue disallowed both deductions in their entirety as not being valid gifts.

The Government no longer disputes the validity of the gifts. In its trial brief it “acknowledges” that the plaintiff neither solicited nor received any preliminary commitment from the donees to the effect that they would sell their newly acquired interests in Star’s Pride to The Farms, and sums up its argument as follows:

* * * Bather, we contend that while taxpayer is entitled to a charitable deduction in the amount claimed by virtue of his gifts to the Sisters and to the University, in reality the donations represent nothing more than his transfer to them of a portion of the proceeds of his sale of his entire interest in Star’s Pride to the Farms. Viewing the transaction in that light, taxpayer, is thus entitled to the charitable deduction claimed but is nonetheless taxable on the gain realized on the transfer to the Farms of his complete interest, rather than just a portion thereof.

Basic to the Government’s position is its reliance on the applicability here of the so-called “step transaction” doctrine. This doctrine is but one application of the overworked maxim that truth and substance must prevail over form and appearance. Southern Pacific Co. v. Lowe, 247 U.S. 330 (1918) ; Commissioner v. Court Holding Co., 324 U.S. 331 (1945). The argument is that the substance, or reality, of taxpayer’s transactions with Star’s Pride, as described above, amounted simply to a sale by the taxpayer of his entire one-half interest in the horse to his controlled corporation for $150,000, out of which sum taxpayer kept $50,000 and directed the corporation to pay the balance in equal shares to the two charities. In defendant’s view, the court should look only to the end result and ignore entirely the preliminary, or intervening, step whereby the taxpayer conveyed two-thirds of his interest in Star’s Pride to the charities. The court cannot agree that, in the circumstances of this case, it is permissible to disregard what was done in fact and to substitute in its stead a fictitious, but taxable, transaction which never occurred.

The starting point is a long-established rule of tax law as to the virility of which the parties are in full agreement and which is well stated in defendant’s brief, as follows:

It is quite true, * * *, that Congress, in an effort to encourage contributions to charitable organizations, has seen fit to permit a donor to deduct the full value of any gift of appreciated property without reporting as income from an exchange the appreciation in the value of the property which is thereby transferred.

This has been the law for decades. See L.O. 1118, II-2 Cum. Bull. 148 (1923). The taxpayer here was well aware of it, and the record is clear that he planned his charitable gifts so as to take full advantage of the rule. However, for the court to approve of his actions, says defendant, would be to create a “wholly new and startling concept,” namely, that a taxpayer may take advantage of the above rule even when, “in reality, he does not part with control over the property supposedly conveyed.” Defendant contends that judicial sanction of any such rule would lead to widespread tax avoidance.

As an abstract proposition, no doubt defendant’s contention is well-founded. The grave difficulty with it, as applied to this case, is that it assumes as a fact something which on this record is not true, namely, that plaintiff did not actually part with his interest. But, to use defendant’s word, the “reality” of the present situation is that the taxpayer did in fact part with two-thirds of his interest in Star’s Pride when he made the gifts here involved.

The proof is clear and convincing that there were no pre-arrangements or commitments entered into between taxpayer and the two charities, nor did he place any conditions upon, or tie any strings to, his gifts. Legally speaking, the charities were as free to deal with their donated interests as any other owner would be. As a matter of fact, the Mother Superior testified that the Academy would have sold to someone else had the bid price been higher, after Mr. Sheppard had been notified. She testified she relied on his judgment in the matter and felt she owed him, as the donor of the gift, this respect.

Indeed, the defendant does not appear to controvert this, but it points vigorously to the taxpayer’s candid testimony to the effect that, in his own mind, he felt confident The Farms’ offer to purchase the interests from the charities would be accepted by them. That the reasoning which led him to this unilateral conviction was entirely sound is perhaps best demonstrated by the alacrity with which both charities accepted The Farms’ offer.

The fact remains, despite defendant’s refusal to face it, that following the gifts there was a period of time, albeit short in duration, when plaintiff had lost control of two-thirds of his interest in Star’s Pride. During that period he was exposed to the possibility, however remote he might have considered it, that The Farms might not succeed in purchasing the donated interests short of increasing the amount of its offers.

The compelling answer to defendant’s contention here, then, is that, under the circumstances of this case, the “form” and the “substance” were identical. This must necessarily follow from defendant’s concession- — a realistic one under this record — that plaintiff’s gifts were valid ones and were made with no prearrangements or conditions. Defendant asks too much of the step transaction doctrine when it says that, despite the reality of plaintiff’s gifts and the subsequent purchase by The Farms, there was nonetheless a sale by plaintiff to The Farms of his entire interest in Star’s Pride. Such an application of the doctrine would twist two actual transactions into two transactions which never in fact occurred, a sort of “let’s pretend” approach. But, as Mr. Justice Holmes once remarked, “a fiction is not a satisfactory reason for changing men’s rights or liabilities.” Holmes, Collected Legal Papers, 49 (1921). Useful as the step transaction doctrine may be in the interpretation of equivocal contracts and ambiguous events, it cannot generate events which never took place just so an additional tax liability might be asserted.

The case of United States v. General Geophysical Co., 296 F. 2d 86 (5th Cir., 1961), cert. denied 369 U.S. 849 (1962), primarily relied on by defendant, is not to the contrary. There several stockholders of a closely-held corporation desired co retire their stock. This was accomplished by the stockholders transferring their stock to the corporation in return for which they received cash and 47 percent of the corporate properties, the total being equal to the agreed fair market value of the surrendered stock. A few hours later the corporation bought back its properties from the stockholders by issuing them its secured notes. The cost of the properties when reacquired by the corporation was considerably greater than their original basis to the corporation because of the reacquisition at then fair market values. Accordingly, in computing its depreciation deductions, the corporation claimed that it had acquired a new and stepped-up basis for those properties. However, the court did not believe that by the transactions with its withdrawing stockholders, the corporation had genuinely severed its ownership of the properties involved. It stated at 296 F. 2d 89-90:

The facts of these transactions will not support a holding that the corporation had terminated its ownership for these purposes. It parted with bare legal title to the property for a few short hours. It made no physical delivery of any of the assets. Its control and use of the property were never interrupted. Even the surrender of its legal title was made under circumstances creating a strong expectation that it would be returned shortly. True, the stockholders may have had complete legal freedom to refuse to resell the assets to the corporation, but there was almost no likelihood that they would do so. It was a foregone conclusion that they would resell the assets to someone, since the very reason for the original redemption was that the stockholders did not wish to continue ownership of the assets and management of the business. And since the assets were already integrated into the operations of the taxpayer and represented 47% of its assets, the taxpayer was the logical, and as a practical matter, the only possible purchaser. That the stockholders had already drawn up papers for the resale, in case they decided to make one, undoubtedly strengthened the confidence with which the taxpayer could look forward to the reacquisition of the properties. There was never the whisper of a suggestion that the company was to cut down on its operations, as would be inevitable if it permanently parted with 47% of its assets, including three rigs. The most that can be said is that the taxpayer gave to the bank and Mrs. Johnson the power to divest it of its ownership of certain properties; they held that power for a few hours and then returned it. The transactions, from the corporation’s standpoint, were more like an option than a sale, and the option expired quickly without having been exercised.

Significant differences between General Geophysical and the present case are at once apparent. Here the property transfer was to independent and unrelated third parties, not to withdrawing stockholders of a corporate property owner. The severance by plaintiff of two-thirds of his ownership in Star’s Pride was clear and distinct as opposed to the court’s finding that the transaction in General Geophysical was more like an option than a sale. Further, all similarity between the two cases dissolves into the fact that, unlike General Geophysical, the asset involved here did not come bade to the original oioner. It was conveyed by the plaintiff to the charities as a gift and then, in turn, sold by the charities to The Farms — an entirely different taxpayer.

Defendant also relies on the Kimbell-Diamond doctrine which holds that when stock in a corporation is purchased for the purpose of acquiring its underlying assets and that purpose is continued until the assets are taken over, no independent significance taxwise attaches to the several steps of a multiple step transaction. The final step (such as liquidation, reorganization, merger, dissolution, etc.) is therefore viewed not as independent of the stock purchase but simply as one of the steps in a unitary transaction, the purchase of assets. See Kimbell-Diamond Milling Co. v. Commissioner, 14 T.C. 74, aff’d per curiam, 187 F. 2d 718 (5th Cir., 1951), cert. denied 342 U.S. 827 ; Georgia-Pacific Corporation v. United States, 264 F. 2d 161 (5th Cir., 1959).

Thus, the teaching of Kimbell-Diamond and related cases is that, under appropriate circumstances, a court will telescope two or more transactions into a single transaction by disregarding intermediate steps. However, the Government does not appear actually to be contending for any such compression. As plaintiff points out, the two transactions here were: (1) the donation of the property by plaintiff to the charities, and (2) the sale of that property by the charities to The Farms. The Government does not attempt to disregard intermediate parts of the two transactions and compress the two transactions into one. Bather, the Government seeks to transmute them into two entirely different transactions: (1) a sale of the property by plaintiff to The Farms, and (2) a donation by him of the sale proceeds to the charities. Thus, the Government’s theory in no way compresses or simplifies the transactions. The Government merely winds up with two different transactions under its hypothetical approach, each involving as many steps as were present in the two transactions as they actually occurred. Accordingly, the KimbeTl-Diamond line of cases is inapposite here.

More in point here is the Tax Court’s recent decision in The Humacid Co., 42 T.C. 894 (1964). There, one Hunt-singer was the majority stockholder of a holding company and also was the owner of five unregistered promissory notes issued by a wholly-owned subsidiary of the holding company. The subsidiary had a net operating loss carryover which was due to expire at the close of the taxable year. Huntsinger decided to utilize the balance of the subsidiary’s loss carryover by having the subsidiary make bargain purchases of its notes, thereby realizing income which would be absorbed by the about-to-expire loss carryover. However, in order to avoid the possibility of ordinary income to himself, Hunt-singer sold two of the subsidiary’s promissory notes to a business acquaintance, at a price equal to 80 percent of their face value. As an integral part of this purported sale transaction, the business acquaintance entered into an agreement with the subsidiary which (1) gave the subsidiary an option to purchase the notes from him at any time within a stated period for a price equal to about 86 percent of their face value and (2) obligated the subsidiary to purchase the notes from him for that amount by no later than the end of that period.

In addition, Huntsinger endorsed and assigned the other three notes which he held (in face amount aggregating $41,000) to three charitable institutions, as absolute and unconditional gifts.

Eight days before the close of the taxable year, the subsidiary exercised its option and redeemed the two notes held by Huntsinger’s business acquaintance. Eleven days after Huntsinger had assigned the other three notes to the charities, the subsidiary under Huntsinger’s control wrote to each of the charities, offering to redeem the three notes they held for 80 percent of their face value. Each of the charities accepted the offer and the subsidiary redeemed the notes shortly before the close of the year.

With respect to Huntsinger’s transaction with his business acquaintance, the Tax Court concluded that there had been “no real sale” of the notes, and that his business acquaintance had merely served as a “conduit” through whom the redemption occurred. With respect to the charities, however, the court found that Huntsinger had made valid, absolute, and unconditional gifts of all his right, title, and interest in those three notes, and that their redemption was, in fact, a redemption from the charities and not from Huntsinger. In rejecting the 'Government’s argument that the charitable organizations were mere conduits of income .belonging to Huntsinger, the court said:

The law with respect to gifts of appreciated property is well established. A gift of appreciated property does not result in income to the donor so long as he gives the property away absolutely and parts with title thereto before the property gives rise to income by way of a sale. [Citing cases.]

The Humacid case is persuasive authority in plaintiff’s favor. The Tax Court’s careful analysis of the different treatment to be accorded a conditional transaction as opposed to one with no strings attached militates strongly against defendant’s contention that plaintiff’s unconditional gifts of interests in Star’s Pride should be ignored.

The court is not unmindful of the tax benefits which flow from affording full recognition to the plaintiff’s admittedly tax-motivated transactions in this case. Such motivation demands special analysis and scrutiny, but its presence is essentially immaterial except as an eye-opening mechanism or interpreter of equivocal conduct. It will not negative the effect of transactions which have really occurred. Commissioner v. Brown, 380 U.S. 563 (1965). As Mr. Justice Douglas has said:

* * * Congress may be strict or lavish in its allowance of deductions or tax benefits. The formula it writes may be arbitrary and harsh in its applications. But where the benefit claimed by the taxpayer is fairly within the statutory language and the construction sought is in harmony with the statute as an organic whole, the benefits will not be withheld from the taxpayer though they represent an unexpected windfall. Lewyt Corporation v. Commissioner of Internal Revenue, 349 U.S. 237, 240 (1955).

Other cases which, although differing in their factual situations, provide substantial support for plaintiff’s position here are Campbell v. Prothro, 209 F. 2d 331 (5th Cir., 1954) ; Richardson v. Smith, 102 F. 2d 697 (2d Cir., 1939) ; Granite Trust Co. v. United States, 238 F. 2d 670 (1st Cir. 1956) ; Apt v. Birmingham, 89 F. Supp. 361 (N.D. Iowa, 1950) ; and Stuart A. Rogers, 38 T.C. 785 (1962). Cf. S. M. Friedman, 41 T.C. 428 (1963). Accordingly, for all of the foregoing-reasons, the plaintiff should prevail on the charitable contributions issue.

THE DEPRECIATION ISSUE

The second issue, while involving a relatively small amount of tax dollars in the present case, is one of nationwide significance to taxpayers and the fisc alike. It brings into question the propriety of any depreciation deduction on an asset in the year that the asset is disposed of for an amount that exceeds its adjusted basis. During the past few years, a storm of controversy has raged over this issue to a point where the United States Supreme Court determined to resolve the question by granting the writ of certiorari in the case of Fribourg Navigation Company v. Commissioner 335 F. 2d 15 (2d Cir., 1964), rev'd, 383 U.S. 272 (1966), discussed further below.

The issue arises in this case on these facts. During 1958 and 1959, plaintiff owned over 30 standardbred horses which he held for breeding and racing purposes. In the computation of depreciation allowances on these horses, plaintiff estimated their useful lives in accordance with the recommendations contained in Internal Revenue Service Bulletin F. Because of the fact that at the end of its useful life a horse has practically no market value, plaintiff estimated salvage values on Ms borses at zero. Although, he customarily held his horses until the end of their useful lives, he occasionally sold horses which did not meet his performance standards, or in some instances when a particular horse showed promise, he would sell it to The Farms for special development.

During 1958, plaintiff sold five of his horses, prior to the end of their estimated useful lives, at prices in excess of their adjusted bases after giving effect to normal depreciation allowances for the year. In 1959, five other horses were sold, prior to the end of their estimated useful lives, also at prices in excess of their adjusted bases after giving effect to normal depreciation allowances for the year. Moreover, with respect to four of the five horses sold in 1959, the sales prices exceeded adjusted bases after giving effect to depreciation taken even in the year prior to sale.

Although 'he did not challenge the correctness of the estimated useful lives used by plaintiff, the Commissioner of Internal Eevenue took the position that the sales price of each horse represented its salvage value and that any depreciation claimed in the year of sale, or in years prior to sale, which reduced adjusted basis below sales price (“salvage value”) could not be allowed.

In its brief, the defendant 'has conceded that the Commissioner was not authorized to disallow depreciation deductions claimed in years prior to the year of sale. This concession leaves for decision the sole question of whether, when a de-preciable asset is sold prior to the end of its estimated useful life in the taxpayer’s business, the fact that it is sold at a price in excess of its adjusted basis deprives the taxpayer of a depreciation deduction for the year of sale.

Commissioner Fletcher in his opinion held that the taxpayer was not entitled to recover on this issue, relying on the Second Circuit’s opinion in Fribourg Navigation Co. v. Commissioner, supra. Since the Commissioner’s opinion was filed in this case the Supreme Court reversed the lower court in the Fribourg case, 383 U.S. 272 (1966), holding that the taxpayer can deduct depreciation in the year of sale below salvage value as set by the sale price. The Government has now conceded that this taxpayer is entitled to recover on the depreciation issue.

Accordingly, defendant’s disallowance of plaintiff’s depreciation deductions on the horses here involved for the year of their sale is overruled and plaintiff is entitled to recover on this issue.

Findings of Fact

1. Plaintiffs, Lawrence B. Sheppard and Charlotte N. Sheppard, are husband and wife, residing in Hanover, Pennsylvania. They filed j oint Federal income tax returns for the taxable years 1958 and 1959 with the District Director of Internal Bevenue in Philadelphia, Pennsylvania.

2. On December 15, 1960, plaintiffs paid to the United States additional income taxes asserted by the Commissioner of Internal Bevenue to be owing for 1959 in the amount of $88,060.17, plus interest thereon of $3,522.41, and additional income taxes asserted to be owing for 1958 in the amount of $6,819.33, plus interest thereon of $681.93, an aggregate of $99,083.84. This suit seeks the refund of those payments.

THE CHARITABLE CONTRIBimONS ISSUE

3. At all times here pertinent, Mr. Sheppard has been chairman of the board of directors of The Hanover Shoe, Inc. (manufacturer of “Hanover” shoes) and of Sheppard & Myers, Inc. (retailer of “Hanover” shoes), and has been president and a director of Hanover Shoe Farms, Inc. (breeding farm for harness racehorses) and of the First National Bank & Trust Company of Hanover.

4. Mr. Sheppard has had a lifelong interest in breeding and racing standardbred horses (i.e., harness racers, trotters,. and pacers), has driven many horses in competition, and long has been active in promoting harness racing as a sport and as a business. He was one of the founders and is a past president of the United States Trotting Association, an organization formed to promote and to some extent supervise harness racing in the United States and presently is serving as honorary president of that association. He served as the first chairman of the Pennsylvania Harness Bacing Commission from January 25, 1960, until July 1963, and continues to serve as an advisor to the Commission.

5. Mr. Sheppard acquired his first harness horse in 1911, and in the ensuing years acquired other harness horses in whole or in part. About 1922, Mr. Sheppard began to increase his holdings of harness horses. Later, in 1926, Mr. Sheppard, his father, and Mr. C. N. Myers formed a partnership to breed and race trotting horses, and transferred their horses to the partnership. In May 1926, the partners purchased the entire stable of the A. B. Coxe estate at Paoli, Pennsylvania. This transaction made their stable the largest aggregation of harness horses in the East, and formed the nucleus of an enterprise breeding some of the world’s finest trotting and pacing horses. About this time the partners began using the “Hanover” name on their horses. The par-nership substantially discontinued the racing of horses about 1943 and was thereafter devoted almost exclusively to breeding. In 1949, Mr. Sheppard purchased his father’s interest in the partnership, and together with Mr. Myers dissolved the partnership and formed Hanover 'Shoe Farms, Inc. (hereinafter called “The Farms”) to succeed to the partnership’s property and business. About 1953, The Farms ceased all racing activity and has since engaged solely in breeding.

6. The Farms has been the world’s largest breeding farm for harness racehorses for many years. In 1959, The Farms owned or had under lease 14 stallions which serviced, at The Farms, 188 brood mares owned by The Farms. In addition, 352 brood mares owned by customers were serviced by these stallions at various stud fees. In June of 1959, after all foals were bom, the horse population was 989, including mares (and their foals) sent by owners from various places throughout the United States and several foreign countries to be bred with The Farms’ stallions. In November of 1959, The Farms sold 125 of its own yearlings at auction.

7. The Farms’ success in breeding harness horses is demonstrated by the fact that, year after year, in the important races throughout the country, Hanover-bred horses typically vie for top honors. Consistent production of fast racers is achieved by skillful matching of sires and dams. A great deal of information is available for both stallions and mares and is carefully considered. Ancestry of stallion and mare is important as showing that desirable racing characteristics are established family traits. Both mares and stallions have their own racing records, since in harness racing the fillies (females) are often as fast as the colts (males). Most important of all is the ability consistently to transmit racing ability to offspring. This ability can be proven only after a number of years of breeding experience, which are required before the results are reflected in racing.

8. Under the rules of standardbred racing, all foals are deemed to have their birthdays on J antiary 1 of the calendar year in which they are born. Since most of the major stake races are open only to horses of a specified age (i.e., 2-year-olds or 8-year-olds), foals born near the beginning of the calendar year gain an advantage over foals born later in that year. Since the gestation period for horses is 11 months, the breeding season begins each year about the middle of February (to avoid the risk of a foal being born in December rather than in January) and generally is concluded by the middle of July. Stud fees for the following breeding season typically are fixed during the latter part of July of the preceding calendar year, after which advertising brochures are distributed and reservations for a stallion’s services in the next calendar year’s breeding season are made by the owners of mares.

9. Stallions vary in the frequency with which they can be used for breeding purposes. The list of reservations for the services of a particular stallion is known as the stallion’s “book.” When the maximum number of reservations has been made for the services of a stallion for the coming season — generally somewhere between 20 and 80 reservations— the stallion’s book is said to be “full and closed.” The owners of valuable stallions exercise a high degree of selectivity, breeding their stallions to very high quality mares only. A place in the book of a leading stallion thus can be quite valuable for the owner of a mare, assuring him of the right to obtain a breeding service for his mare.

10.At all times here relevant, the outstanding stock of The Farms was owned as follows:

Percent
Lawrence B. Sheppard (plaintiff)- 76.8
Patricia S. Williams (adult daughter of Air. Sheppard)— 4.7
Charlotte S. DeVan (adult daughter of Mr. Sheppard)- 4.4
W. H. Melhorn (officer)_ 3.5
Delvin Miller (horseman)- 2.7
John F. Simpson (horseman)_ 2.7
B. J. Nolt (officer)- 1.4
W. Todd DeVan (husband of Charlotte S. DeVan)- 1. 3
R. M. Laird (officer)_ .7
A. C. Mudge_ . 7
Paul E. Spears (officer)_ .5
James C. Harrison (officer)_ .3
Theron E. Sentz (employee)- . 3
Total _100.0

Neither Mrs. Sheppard nor any minor children or grandchildren of the Sheppards owned any stock of The Farms. Mr. Sheppard served as president and a director of The Farms during the taxable years involved here. The other officers and/or directors at all relevant times were B. M. Laird, J. C. Harrison, W. IT. Melhorn, P. E. Spears, and B. J. Nolt.

11. Shortly before The Farms was formed (1949), Mr. Sheppard again began to acquire harness horses individually and in conjunction with others. During the years 1958 and 1959, he individually owned, either in whole or in part, approximately 30 harness horses, including stallions, racehorses, brood mares, and foals. Some of these horses were held for breeding purposes while others were held for racing. Similarly, Mrs. Sheppard regularly holds a few harness horses for breeding and racing.

12. One acquisition made by Mr. Sheppard in 1948 was a one-half interest in a standardbred yearling colt named Star’s Pride, for the sum of $1,475. The other one-half interest in Star’s Pride was acquired at the same time by Mr. E. Boland Harriman of New York, who also has long been nationally prominent in standardbred racing and breeding circles.

13. Star’s Pride, foaled in 1947, bad a distinguished genealogy. One of his grandsires was Volomite, sire of four winners (1943,1944,1946, and 1959) of the Hambletonian Stake (the most prestigious and lucrative of the numerous annual trotting races) and one of the outstanding stallions of all time. Star’s Pride’s sire was Worthy Boy, a son of Yolomite. Worthy Boy also sired Mainliner, winner of the 1951 Ham-bletonian. Star’s Pride’s other grandsire was Mr. McElwyn, who sired two Hambletonian winners. Star’s Pride’s great-grandsires included Peter Yolo, Peter the Brewer, and Guy Axworth, who collectively sired a total of seven Hamble-tonian winners.

14. Between 1949 and 1953, Mr. Sheppard and Mr. Harri-man raced Star’s Pride as a trotter. During this period, Star’s Pride won a number of trotting classics, including the $54,000 Kentucky Futurity in 1950, second most important of the annual trotting races. Star’s Pride also finished second in the 1950 Hambletonian, and in 1952 set the world’s record for trotting a mile on a one-mile track while racing, a record which stood until 1962, when it was broken by Ma-taster, a son of Star’s Pride. Star’s Pride’s total winnings from racing amounted to $140,969.36.

15. In 1953, at the age of six, Star’s Pride was retired to stud, and Mr. Sheppard and Mr. Harriman leased him to The Farms for breeding purposes under an oral agreement. Star’s Pride’s initial stud fee was set at $750. Oxdy three of The Farms’ stallions in 1953 had a service fee higher than $750. The highest was $2,000, and two other stallions had a service fee of $1,000. Six others had fees ranging from $300 to $500, and one other had a fee of $750. While the racing performance of a stallion’s get is probably the single most important factor in determining the stallion’s stud fee, the success of one or two offspring does not in and of itself establish a sire as an outstanding stallion capable of commanding a substantial fee. During the periods in suit, only a handful of standardbred stallions had commanded service fees of $2,000 or more.

The oral agreement of lease referred to above was subsequently reduced to writing in 1958. Under the lease agreement, the lessee (The Farms) was obligated to care for and maintain Star’s Pride at its sole expense but bad no responsibility for any injury to him. The horse was to be used by The Farms solely for breeding purposes, The Farm being required to pay the lessors (Sheppard and Harriman) $100 for each live foal produced by Star’s Pride from mares owned by or leased to The Farms. In addition, The Farms agreed to offer the horse for service to mares other than those owned or leased by The Farms at fees to be determined from season to season by agreement between the lessors and lessee. All fees for such services to “outside” mares, when collected, were to be divided equally between the lessors and The Farms. Each lessor reserved the right to breed his own mares to Stai’’s Pride without any charge. The written lease was executed on January 1, 1958, for a term of five years with the right to renew the lease under the same terms and conditions for an additional five-year period commencing January 1, 1963.

16. The following table summarizes Star’s Pride’s breeding record for the 1953-1957 breeding seasons:

17.Stud fees are earned by The Farms when a live foal is produced which stands and nurses, or when the mare is removed from The Farms’ premises, or is sold. The fees are generally collected in the year following the year of breeding. The following table shows the stud fees collected by The Farms for Star’s Pride and the portion of the fees (plus Farms-bred foal fees) received by the lessors, for each of the years 1953-1957:

18.The following table shows the number of yearlings sired by Star’s Pride which were foaled by The Farms’ mares for each of the years 1955-1957, together with the average and total sales prices received by The Farms for such yearlings:

19. During 1957, get of Star’s Pride won a total of $104,551 from racing, ranking Star’s Pride 25th in the nationwide standings for trotting stallions. Star’s Pride’s get had one major stakes winner in 1956 and 1957, a three-year old named Philip Frost, who won three important stakes races.

20. Prior to 1958, Star’s Pride had sired several dozen foals, but with the exception of Philip Frost, none had raced successfully. Also, prior to 1958, The Farms had been unable to fill Star’s Pride’s “book” (reservations for breeding). During this earlier period, Mr. Sheppard was looking for a horse of the “Volomite” line (such as Star’s Pride) but at this time he did not believe that Star’s Pride “was the horse that we wanted.” In August 1958, however, a three-year-old filly by Star’s Pride, named Emily’s Pride, won the $107,000 Hambletonian, and a three-year-old colt by Star’s Pride, named Little Bocky, won the second heat of that classic, earning second place. Emily’s Pride also won the 1958 $53,-000 Kentucky Futurity. As a result of her victories in the Hambletonian and the Kentucky Futurity, Emily’s Pride was named both Three-Year-Old-Trotter of the Year and Harness Horse of the Year by the United States Trotting Association Polls. In 1958, Emily’s Pride also tied a world’s record for three-year-olds. Moreover, in 1958, a two-year-old colt by Star’s Pride, named Diller Hanover, won the $42,000 Horseman Stake, the most important two-year-old trotting classic, as well as sis other trotting classics for two-year-olds. These victories made Diller Hanover the winter favorite for the 1959 Hambletonian.

21. In 1958, get of Star’s Pride won a total of $428,604 from racing (which was more than four times their winnings in 1957), ranking him 7th in the national standings for trotters. In addition, 22 yearlings by Star’s Pride were sold in 1958 for a total of $92,000, or an average of about $4,200 per yearling, which was sufficient to raise Star’s Pride from 20th to 10th in the national standings on this basis. For the 1958 'breeding season, Star’s Pride earned a total of $8,250 in service fees paid by outside customers, and sired 8 live foals by The Farms’ mares.

22. A significant result of Star’s Pride’s success as a stallion in 1958 was a sudden increase in applications for his breeding services. During the 1958 breeding season (February-July) Star’s Pride had been booked to a total of only 19 “outside” mares (i.e., mares not owned by The Farms). In August 1958, at the time of the running of the 1958 Hamble-tonian, less than 10 applications for Star’s Pride’s services for the 1959 breeding season had been received by The Farms. Beginning on the day after Emily’s Pride’s victory in the 1958 Hambletonian and continuing for several weeks thereafter, The Farms received a flood of applications for Star’s Pride’s services for the ensuing year. Twenty-nine outside mares were booked with Star’s Pride for the 1959 breeding season, and his reservations book was quickly filled. However, Star’s Pride’s service fee for the 1959 breeding season had been set at $750 in July 1958, prior to the running of the Hambletonian; hence, as a practical matter, The Farms could not increase the fee for the 1959 breeding season above the already-established $750.

23. In 1959, the get of Star’s Pride enjoyed another outstanding year. In the fall of 1959, as expected, Diller Hanover won both the Hambletonian and the Kentucky Futurity and as a result of these victories was named Three-Year-Old-Trotter of the Year. Star’s Pride thus became one of two living trotting stallions (the other being Hoot Mon, referred to in finding 26, infra) who had sired two Hambletonian winners, and the only trotting stallion in history to sire two Hambletonian winners in successive years. Moreover, get of Star’s Pride won a total of $489,455 from racing events mostly after June 16,1959, ranking sixth in the country for trotters.

24. In 1959, Star’s Pride’s success at stud was also reflected by the following: in the fall of that year, 19 of his yearlings were sold for a total of $184,600, an average of $9,716 per yearling, which placed Star’s Pride third in the national ranking among trotters in this category; for the 1959 breeding season, Star’s Pride earned $15,000 in customers’ service fees, and 23 live foals, get of Star’s Pride, were produced by The Farms’ mares. Star’s Pride’s service fee was raised at the first opportunity, in July 1959, from $750 to $2,000 for the 1960 breeding season. Again, a large number of applications for Star’s Pride’s breeding services was received; 36 outside mares were booked for 1960, and many other applications were turned away.

25. The record which the get of Star’s Pride had established during 1958 and 1959 reasonably guaranteed him a place among the nation’s top stallions for years to come. Gradually, and especially toward the end of this period, it became relatively certain that, barring unforeseen events, substantial amounts of income would be generated by him each year from service fees and yearling sales, and the figures for subsequent years confirmed this. Thus, for the 1960 breeding season, Star’s Pride earned $40,750 in service fees, had eight yearlings sold by The Farms for a total of $55,400 (an average of $6,925 per yearling), and had an average price for all yearlings sold, including those of outside owners, of $9,850 per yearling, ranking him second in the national standing of trotters. In July 1960, for the 1961 breeding season, Star’s Pride’s service fee was raised to $5,000, equal to the highest fee ever charged for services of a trotting stallion. In 1960, Star’s Pride earned a total of $101,000 in service fees, plus $190,100 from the sale of 22 Farms’ yearlings. Moreover, both in 1960, and again in 1961, get of Star’s Pride earned over $600,000 from racing. Since 1958, Star’s Pride has had a “full and closed” book for every breeding season.

26. During and following the racing season of 1958, Mr. Sheppard became increasingly convinced that Star’s Pride had tremendous potential as a trotting sire, and that he was rapidly increasing in market value. It appeared to Mr. Sheppard that with proper development Star’s Pride could become one of the top-ranking stallions in the country. For many years two stallions — Scotland, the sire of 5 Hamble-tonian winners, and Volomite, sire of 4 Hambletonian winners — had been dominant in the breeding of successful American trotters. By 1959, Hoot Mon, son of Scotland, had become a great stallion standing at The Farms at a $5,000 service fee. Mr. Sheppard felt that The Farms needed also an outstanding stallion from the Volomite line to perpetuate that line and to interbreed with the get of Hoot Mon and others of the Scotland line. By early 1959, Mr. Sheppard, in his capacity as president of The Farms, had changed his earlier opinion and concluded that Star’s Pride, who was a grandson of Volomite, was the stallion The Farms needed for this purpose.

27. The full potential of a stallion at stud is not realized automatically or by accident, but only through careful breeding with the finest available mares. Mr. Sheppard, as president and major stockholder of The Farms was anxious to have The Farms capitalize on Star’s Pride’s potential by undertaking his full development at stud. Since proper development of a stallion necessarily involves the diversion of many of the 'best available mares from established stallions and other younger stallions, The Farms’ policy consistently has been to undertake full development of a stallion only if it has ownership of the horse. With these considerations in mind, Mr. Sheppard determined prior to June 1959 that The Farms should attempt to purchase Mr. Harriman’s one-half interest in Star’s Pride.

28. At about this same time, Mr. Sheppard was also considering the making of substantial charitable contributions to the Sisters of St. Joseph in the City of Philadelphia and to The University of Pennsylvania.

29. The Sisters of St. Joseph in the City of Philadelphia (“Sisters”) is a Roman Catholic teaching order, which owns and operates a school, St. Joseph’s Academy, in McSherrys-town, Pennsylvania, near Hanover. Contributions to the Sisters qualify for the additional charitable contributions deduction allowed under Sec. 170(b) (1) (A) of the 1954 Internal Revenue Code. Mr. and Mrs. Sheppard have long had a deep interest in, and admiration for, St. Joseph’s Academy, which has been attended by all four of their children and by several of their grandchildren.

30. In late May or early June 1959, while visiting at St. Joseph’s Academy, Mrs. Sheppard was told by Sister Virgo Regina, who was Senior Prefect of the Academy, that the Pennsylvania Department of Labor had inspected the existing building at the Academy and had found it to be unsafe. She was advised that the school would not be permitted to open in the fall of 1959 unless extensive remodeling and renovation of the building were accomplished to comply with the Department’s fire safety requirements, which the Department was strictly enforcing as an aftermath of several tragic school fires elsewhere. Sister Virgo Regina explained to Mrs. Sheppard that the Sisters were faced with a serious financial problem in seeking to comply with the Department’s order. Mrs. Sheppard said that she was confident Mr. Sheppard would assist the Sisters.

31. Mrs. Sheppard related her conversation with Sister Virgo Regina to Mr. Sheppard. Mr. Sheppard investigated the matter in early June 1959, and was advised that the renovation could be accomplished for $'50,000. Mr. Sheppard later consulted Father Gottwald, a local priest, concerning procedures for making a donation to the Sisters, indicating that he was contemplating the gift of an interest in a horse.

32. Shortly after his conversation with Mr. Sheppard, Father Gottwald telephoned the Academy and informed Sister Virgo Eegina of Mr. Sheppard’s intention to make a donation to the Sisters. Father Gottwald stated that he understood Mr. Sheppard would offer the Sisters a gift of an interest in a horse; that there would probably be papers to sign; and that the Sisters should not hesitate to do so. Sister Virgo Eegina then telephoned Mother Miriam Loretto, Mother Superior of the House and Principal of the Academy, who wa« away from the Academy at the time, and informed her of Father Gottwald’s message, expressing the belief that their prayers had been answered.

33. Within the next day or two, Mr. Sheppard visited the Academy to determine the extent of the remodeling and renovation to be undertaken. While visiting the Academy, Mr. Sheppard told Sister Virgo Eegina not to worry because he intended to help the Sisters. Pie inquired whether they had ever been interested in horses. This was the first indication to the Sisters from Mr. Sheppard himself that they were likely to become the beneficiaries of an interest in a horse.

34. The University of Pennsylvania is an educational institution. Its School for Veterinary Medicine teaches the science of veterinary medicine and engages in research in connection therewith. Contributions to the University qualify for the additional charitable contributions deduction allowed under Sec. 170(b) (1) (A) of the 1954 Internal Eev-enue Code.

35. Mr. Sheppard’s interest in horses had led him to develop a long-standing personal and business interest in the advancement of the science of veterinary medicine and in the education of competent people in the field. As a result of his interest, Mr. Sheppard had become acquainted with the officials at The University of Pennsylvania School of Veterinary Medicine. Prior to June 1959, Mr. Sheppard had learned of plans by the University to build new facilities for its School of Veterinary Medicine. Mr. Sheppard intended to make a substantial contribution to that construction program.

36. Mr. Sheppard did not consider making his contemplated donations to the Sisters of St. Joseph and The University of Pennsylvania in cash. Instead, he believed that it would be advantageous from a tax standpoint to make the contemplated donations through gifts in kind of appreciated property, and he had tentatively planned to make these gifts in the form of certain Texas Oil Company stock. By about the middle of June 1959, however, Mr. Sheppard had decided to make appropriate portions of his interest in Star’s Pride the subject matter of his contemplated gifts to The University of Pennsylvania and to the Sisters of St. Joseph, if such gifts were acceptable to the prospective donees, and if The Farms succeeded in acquiring Mr. Iiarriman’s interest in the horse.

37. About June 11, 1959, Mr. Sheppard, acting on behalf of The Farms, telephoned Mr. Harriman in New York to tell him of The Farms’ desire to purchase his interest in Star’s Pride. He inquired whether Mr. Harriman would sell his interest in Star’s Pride to The Farms, free of the lease. They discussed a possible price of $100,000. Mr. Harriman expressed interest, but asked Mr. Sheppard to give him, a written, transferable offer. Mr. Sheppard did so on behalf of The Farms by letter to Mr. Harriman dated June 12,1959. Subsequently, in other telephone conversations, Mr. Harri-man told Mr. Sheppard that he thought The Farms’ $100,000 offer for his interest would be agreeable, if in addition, The Farms would agree to reserve a specified number of future free breeding services with Star’s Pride for his mares. Mr. Sheppard indicated that The Farms would be willing, in addition to paying $100,000, to agree to reserve for Mr. Harri-man’s mares (a) four free services by Star’s Pride in each of the first five years beginning with I960, (b) two free services in each of the next five years, and (c) the additional right to two paid services at the advertised service fee in each year, beginning with 1960 and continuing for as long as Star’s Pride stood at stud. These rights were to be non-assignable, non-transferable, and non-negotiable, except in the event of Mr. Harriman’s death, in which case his wife would succeed to the balance of rights during the remainder of her life. In one of these conversations, Mr. Harriman indicated to Mr. Sheppard that he had decided to make a gift of his interest in Star’s Pride (other than the breeding services to be reserved for his mares) to the New York Chapter of the American Ned Cross. At this time, Mr. Harriman and his wife were both 63 years of age. Mr. Harriman, who had been ill the previous year, was in average health. His wife’s health was excellent.

38. On June 15,1959, The Farms received a telegram from Daniel Green, Executive Director of the New York Chapter of the American Eed Cross, advising that Mr. Harriman’s interest in Star’s Pride and The Farms’ offer of June 12, 1959, had been assigned to it, and accepting The Farms’ offer to purchase such interest. Subsequently, The Farms received a letter of confirmation from Mr. Green, and issued its check for $100,000 to the Bed 'Cross. On June 17, 1959, Mr. Green acknowledged receipt of The Farms’ check and forwarded Star’s Pride’s registration certificate, properly endorsed to show the transfer to The Farms of the interest previously owned by Mr. Harriman. On the same day, Mr. Harriman and The Farms executed a written agreement which specified in detail the breeding services from Star’s Pride which The Farms was to reserve for Mr. Harriman’s mares, as detailed in the preceding finding. As of June 17,1959, the fair market value of those breeding services was at least $50,000.

39. There is no relationship of blood, marriage, or otherwise between The Farms or the Sheppards and E. Eoland Harriman. The negotiations and transactions described in findings 37 and 38 were conducted at arm’s-length. In said negotiations and transactions, Mr. Harriman and the New York Chapter of the American Eed Cross were willing sellers, and The Farms was a willing buyer. None of the parties to said negotiations and transactions were under any compulsion to buy or sell, and Mr. Harriman and The Farms had reasonable knowledge of all relevant facts.

40. Prior to the transactions described in findings 37 and 38, E. Eoland Harriman and Lawrence B. Sheppard were the co-owners of Star’s Pride, and no one else had any interest therein, except The Farms which had a leasehold interest under the written agreement described in finding 15, supra.

41. Meanwhile, on June 11, 1959, Mr. Sheppard had telephoned M. W. Allam, Dean of the School of Veterinary Medicine of The University of Pennsylvania, had told the Dean that he was considering making a gift to the School of Veterinary Medicine, and had inquired whether the University would accept a gift of a partial interest in a standardbred stallion. Dean Allam replied that he thought the University would accept the gift, but that he would inquire of the responsible officials to be sure. Dean Allam thereupon asked the advice of William P. Gordon, Treasurer of the University, with respect to Mr. Sheppard’s inquiry. Mr. Gordon, in turn, consulted Henry R. Pemberton, the Business and Financial Vice-President, and Dr. G. P. Harnwell, President of the University.

42. The University maintains a cautious policy regarding the acceptance of gifts of an unusual nature or which might contain restrictions. It does not wish to become involved with donors who have ulterior motives, or to lend its tax-exempt status to any person who is trying to use it illegally. Pursuant to this policy, Dr. Harnwell asked Mr. Gordon whether the horse was a valuable one and whether the University by accepting the offer would incur any obligation of any kind to the donor or with respect to the subject matter of the gift. On receiving Mr. Gordon’s assurance that, in his understanding, the horse would be a valuable one and that the gift would be unrestricted, Dr. Harnwell expressed the view that the University would accept it. As was customary in matters of this sort, Mr. Gordon also telephoned Calvin H. Rankin, Esquire, of the firm of Drinker, Biddle and Reath, in Philadelphia, counsel for the University. The University communicates with Mr. Rankin for advice and counsel on matters pertaining to gifts on an average of twice a day. Mr. Rankin advised Mr. Gordon, on the basis of the conversation between Mr. Sheppard and Dean Allam, that the proposed gift would not be objectionable from a legal or tax standpoint. Mr. Gordon then informed Dean Allam of his discussions, and Dean Allam informed Mr. Sheppard’s secretary that the University would be willing to accept the gift.

43. Shortly thereafter, Dean Allam received through the mail a letter from Mr. Sheppard, dated June 16, 1959, tendering to The University of Pennsylvania School of Veterinary Medicine as a gift absolute, one-third of his right, title, and interest as a co-owner of Star’s Pride, in fee, with all rights incident to such ownership. On that same day, Dean Allam also received a letter from The Farms, signed by Mr. Sheppard as president, also dated June 16,1959, offering to purchase the said interest in Star’s Pride for $50,000.

44. Both of these letters were referred to Mr. Gordon, who, on the afternoon of June 18, 1959, telephoned Mr. Kankin and read to him (a) Mr. Sheppard’s letter tendering the gift, (b) The Farms’ letter offering to purchase the interest in the horse, and (c) the enclosed bill of sale, in order to ascertain whether there was any legal or tax objection to acceptance of the gift. Mr. Bankin inquired whether the three documents were the only written instruments involved, and whether there was any oral understanding, express or implied, that the gift was conditioned upon acceptance of the offer to purchase made by The Farms. Mr. Gordon replied that there were no other documents and no oral understandings. After consulting with other partners in the tax department of his firm (pursuant to a standing rule of the firm, no opinion may be given without the concurrence of another partner), Mr. Bankin advised Mr. Gordon that the gift was tendered as an absolute gift in fee, that it was unconditional, and that the offer of purchase was independent of the offer of gift, and that the University could exercise its judgment as to whether to accept Mr. Sheppard’s offer of the gift and, if it did accept the gift, whether to accept The Farms’ offer to purchase.

45. Except as hereinabove recited, there were no oral discussions between Mr. Sheppard or anyone on his behalf and any representative of the University relating to Mr. Sheppard’s offer to make the gift or relating in any way to The Farms’ offer to purchase the donated interest. All written communications by which the transactions were carried out are a part of the record in this case. The University of Pennsylvania was under no legal obligation whatsoever, either express or implied, to accept the offer of purchase by The Farms, as a condition to accepting the gift or otherwise.

46. Upon receipt of Mr. Bankin’s advice, a decision was made to accept Mr. Sheppard’s proffered gift. On behalf of the University, Mr. Gordon signed the acceptance on the donation letter, and the gift was entered on the University’s book of original account.

47. Thereafter, Mr. Gordon executed the bill of sale as of June 17,1959 transferring the University’s interest in Star’s Pride to The Farms for $50,000. When the University decided to accept The Farms’ offer for the interest in Star’s Pride, the University had an immediate need for cash to finance its construction program. Detailed facts as to the horse’s attributes, the purpose for which it had been (or was being) used, the lease under which it was held at The Farms, and its earnings potential were not explored by the University prior to the acceptance of The Farms’ offer to buy. No University representative or official undertook to ascertain those facts. No effort was made by the University to offer its interest in the horse for sale to any possible purchasers other than The Farms. The Farms’ offer of purchase was accepted in sole reliance on Mr. Sheppard’s valuation of the interest at $50,000. No attempt was made to verify this representation of value because the cognizant officials of the University considered Mr. Sheppard to be a man of absolute integrity with an international reputation for expertness in all matters having to do with standardbred horses.

48. On June 16, 1959, Mr. Sheppard telephoned Mother Miriam Loretto and told her that his secretary would deliver an envelope to the Academy. Within a short time, Mr. Sheppard’s secretary arrived with an envelope containing a letter from Mr. Sheppard dated June 16, 1959, tendering to the Sisters of St. Joseph as a gift absolute, one-third of his right, title and interest as a co-owner of Star’s Pride, in fee, with all rights incident to such ownership. On receiving the letter, Mother Loretto called her superior, Mother Superior General M. Divine Shepherd, in Chestnut Hill, near Philadelphia, who had authority to receive and convey property on behalf of the Order, and made an appointment to take the letter to Mother Shepherd the next day so that she might formally execute the acceptance thereof, as requested in the letter. In their telephone conversation, Mother Shepherd cautioned Mother Loretto that the religious community could not retain an interest in a horse which would bring in betting money. Upon hearing this, Mother Loretto promptly telephoned Mr. Sheppard and asked him what the Sisters could do to sell their interest in Star’s Pride. Mr. Sheppard replied by simply stating that he would see what he could do. At this time, the Sisters did not know that The Farms would offer to purchase their interest in the horse.

49. In the morning mail on the following day, June 17, the Sisters received a letter from The Farms, signed by Mr. Sheppard as president, offering to purchase the Sisters’ interest in Star’s Pride for $50,000. The Sisters had no knowledge regarding the racing or breeding attributes of Star’s Pride. They did not know for what purpose the horse had been (or was being) used, nor did they possess any facts which would have indicated to them what the horse’s present, past, or potential earnings power might be. They did not know that the horse was under lease to The Farms. In transferring their interest in Star’s Pride to The Farms, they made no effort to offer the horse for sale to any other prospective purchasers, nor did they attempt to obtain any verification or confirmation as to Mr. Sheppard’s representation of value.

50). Except as hereinabove recited, there were no oral discussions between Mr. Sheppard or anyone on his behalf and any of the Sisters or anyone on their behalf relating to Mr. Sheppard’s offer to make the gift or relating in any way to The Farms’ offer to purchase the donated interest. All written communications by which these transactions were carried out are a part of the record in this case. The Sisters of St. Joseph were under no legal obligation whatsoever, either express or implied, to accept the offer of purchase by The Farms, as a condition to accepting the gift or otherwise.

51. On the afternoon of June 17, Mother Miriam Loretto took both Mr. Sheppard’s letter tendering the gift and The Farms’ letter offering to purchase the Sisters’ interest in Star’s Pride, together with the form bill of sale which had been enclosed with it, to Mother Superior General Mary Divine Shepherd in Chestnut Hill. On behalf of the Sisters, Mother Shepherd formally accepted the gift of the above-described interest in Star’s Pride by signing the acceptance on the donation letter and returning it to Mother Loretto for delivery to Mr. Sheppard. Then, in sole reliance upon Mr. Sheppard’s fairness and judgment in valuing the Sisters’ interest in Star’s Pride at $50,000, Mother Shepherd formally accepted The Farms’ offer of purchase by executing the bill of sale transferring the Sisters’ interest in Star’s Pride to The Farms and returning it to Mother Loretto for delivery to The Farms.

52. Mr. Sheppard tendered gifts to the University and to the Sisters of fractional interests in Star’s Pride in the belief that those interests could be acquired by The Farms for cash. Without any preliminary solicitation or receipt of a commitment from either of the charities that they would sell their respective interests to The Farms, nevertheless Mr. Sheppard did hold a reasonable expectation that this could be accomplished because of the immediate cash needs of the charities. Without overlooking the possibility that either or both of the charities conceivably might offer their interest to other persons interested in standardbred horses, Mr. Sheppard was willing to assume that risk because he was confident that The Farms would be able to acquire the donated interests in the horse from the donees by raising the cash offers, if that should become necessary.

53. On June 17, 1959, Mr. Sheppard sold his own remaining one-sixth interest in Star’s Pride to The Farms for $50,000.

54. By virtue of the several acquisitions described above, The Farms acquired full ownership of Star’s Pride for a total consideration of $250,000 cash, plus the breeding services granted to Mr. Harriman.

55. On their joint Federal income tax return for 1959, Mr. and Mrs. Sheppard took a charitable contribution deduction of $50,000 for the described gift to the Sisters of St. Joseph and a like deduction of $50,000 for the described gift to The University of Pennsylvania. The Commissioner of Internal Revenue disallowed both deductions in their entirety.

56. The transfers of undivided interests in Star’s Pride to the Sisters of St. Joseph in the City of Philadelphia and to The University of Pennsylvania School of Veterinary Medicine constituted unconditional gifts of appreciated property, which property in each case was one-third of the donor’s right, title, and interest in and to Star’s Pride as co-owner thereof.

The value of each of the gifts when made can be best determined by ascertaining the value of the consideration that passed from The Farms to the New York Chapter of the American Bed Cross and to E. Boland Harriman when The Farms acquired the Harriman one-half interest in Star’s Pride. That consideration comprised $100,000 in cash to the Bed Cross together with limited breeding rights in Star’s Pride reserved for Mr. Harriman’s mares. The fair value of those reserved breeding rights was at least $50,000 so that the total consideration paid by The Farms for the Harriman one-half interest in Star’s Pride amounted to $150,000. Hence, the fair value for each of the gifts involved herein (one-third of the Sheppard one-half interest) was $50,000.

THE DEPRECIATION ISSUE

57. In 1958, Mr. Sheppard sold five horses — Hickory Smoke, Meadow Buckey, Sabrina Hanover, Bheta Hanover, and Valentine Day — at prices exceeding their adjusted bases. On their 1958 return Mr. and Mrs. Sheppard claimed depreciation for the year using the declining balance method, and reported capital gains on the sales of the horses. The Internal Bevenue Service took the position as to each sale that the sale price of the horse represented its salvage value and, as to each horse, disallowed all depreciation deductions for 1958 below the price at which the horse was sold, thus disallowing $4,838.11 of depreciation deductions claimed by plaintiffs with respect to the five horses sold in 1958 and reducing the amount of their capital gains accordingly. In addition, and on the same grounds, the Internal Bevenue Service disallowed $2,015.22 of 1958 depreciation deductions claimed by plaintiffs in their 1958 return with respect to four horses— Golda Hanover, Eyler Hanover, Heath, and Brenna Hanover — sold by Mr. Sheppard in the following year, 1959.

58. In 1959, Mr. Sheppard sold five horses — Golda Hanover, Eyler Hanover, Heath, Audey Hanover, and Brenna Hanover — at prices exceeding their adjusted bases after allowing for 1959 depreciation. On their 1959 return, plaintiffs claimed depreciation allowances for the year using the declining balance and straight line methods. On the same grounds as for 1958, the Internal Revenue Service disallowed $1,766.51 of the 1959 depreciation deductions claimed with respect to the five horses sold in 1959, correspondingly reduced the amount of capital gains reported by plaintiffs in 1959 and, in addition, reduced the amount of plaintiffs’ 1959 capital gains by the amount of the 1958 depreciation deductions on four of the five horses sold in 1959 which had been disallowed as described in the preceding finding.

59. The estimated useful lives used by plaintiffs in computing 1958 and 1959 depreciation allowances on the horses named in the two preceding findings were determined in accordance with the recommendations contained in Internal Revenue Service Bulletin F, and salvage values were estimated at zero. Plaintiffs customarily held their horses to the end of the usefulness of the horses in plaintiffs’ business of standardbred horseracing and breeding after which, when they became too weak to rise, the practice was to destroy them. Occasionally, however, they sold horses as culls, e.g., upon a determination that such horses did not meet the performance standards and requirements of plaintiffs’ business. Also, when a particular horse showed promise, it was occasionally sold to The Farms for development purposes. With one exception, all of the ten horses sold in 1958 and 1959 were culls which had not measured up to plaintiffs’ standards. The exception was a young stallion named Hickory Smoke, who was sold because The Farms wanted him as a stallion. All ten of these horses were sold considerably before the end of their useful lives. On an average, each had a remaining useful life of approximately five years at the time of sale.

CONCLUSION OF Law

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiffs are entitled to recover. Judgment will be entered for plaintiffs with the amount of recovery to be determined pursuant to Eule 47 (c).

In accordance with the opinion of the court, a memorandum report of the commissioner and a stipulation of the parties, it was ordered on September 30, 1966, that judgment be entered for the plaintiffs for $93,538.57, with interest from December 15,1960, 'as provided by law. 
      
       See for example, Stubbs v. United States, 86 Ct. Cl. 152 (1937) (silver foxes) ; Pedersen v. United States, 115 Ct. Cl. 335 (1950) (dogs and cats) ; Krueger v. United States, 161 Ct. Cl. 599 (1963) (mink) ; Causby v. United States, 104 Ct. Cl. 342, rev’d 328 U.S. 256 (1946) (chickens).
     
      
       In equine parlance, this word refers to a family, or breed, of horses which have been bred and trained for trotting and pacing, usually under harness. The “standardbred” family is distinct from the “thoroughbred” family. The latter term refers to a family of horses bred and trained for running.
     
      
       There are two issues herein, and for convenience they will be discussed under separate headings, namely, (a) The Charitable Contributions Issue, and (b) The Depreciation Issue.
     
      
      
         Plaintiff’s wife, Charlotte N. Sheppard, is a party hereto solely by reason of her having filed a joint tax return with her husband. Accordingly, in this opinion Lawrence B. Sheppard is referred to either as “plaintiff” or “taxpayer.”
     
      
       Unfortunately for Ms owners, Star’s Pride’s service fee for the 1959 breeding season bad been set at $750 prior to Emily’s Pride’s victories and could not be changed. No time was lost, however, in raising his fee to $2,000 for the 1960 breeding season.
     
      
       Erozn prior telephone conversations, plaintiff had been alerted to the probability that Harriman -would assign his interest to the Red Cross as a charitable contribution.
     
      
       From the timing involved, it is at least a permissible inference that this idea may have occurred to him as a result of his negotiations with Mr. Harri-man who, as we have seen, had informed plaintiff of his intention to give his interest in Star’s Pride to the Red Cross.
     
      
       Based on the arm’s-length Harriman sale, plaintiff had estimated Star’s Pride’s total value at $300,000, or $50,000 for a one-sixth interest in the horse. Commissioner Fletcher held that plaintiff bore his burden of proving that this value was reasonable. In fact, he said the record proved it to be conservative. In its brief to the court, the government has conceded the point.
     
      
       The statement has been attributed to the late Roscoe Pound that all such “maxims” should ratlier be called “minims” since they convey a minimum of information with a maximum of pretense.
     
      
       The underlying purpose of the title shuffling in General Geophysical was to afford the stockholders the position of secured creditors with respect to the unpaid balance due on the redemption of their stock.
     
      
       Apparently, the Government would agree that plaintiff divested himself of ownership. It opts only for a different transferee, i.e., The Farms instead of the charities.
     
      
       Although plaintiff owns 76.8% of The Farms’ outstanding stock, the record discloses no reason for the court to disregard the corporate entity and to treat plaintiff and The Farms as one. Obviously, defendant does not contend for alter ego treatment, since it is essential to its contention for recognition of capital gains to plaintiff that The Farms be recognized as a separate entity. Neither does defendant contend that section 1239 of the Internal Revenue Code of 1954 should be used to subject plaintiff to ordinary income treatment as the price for stepping-up the horse’s basis to the Farms; plaintiff does not own more than 80% of The Farms outright and by attribution from his spouse or minor children and grandchildren (his two daughters own 9.1% but they are adults).
     
      
       Common to the step transaction cases is the factor of an integrated plan or “critical” interrelationship of all the steps. See e.g., American Bantam Car Co. v. Commissioner, 11 T.C. 397, 406 (1948), aff’d per curiam, 177 F. 2d 513 (3d Cir. 1949), cert. denied, 339 U.S. 920 (1950). On the facts of the present case, the court is persuaded that the “steps” in plaintiff’s plan were not so critically interrelated that one could not have taken place without the other. The gifts to the charities were absolute and unconditional; the subsequent purchase by The Farms was entirely separate and not prearranged; the transactions were independent of one another. Cf. United States v. Cumberland Public Service Co., 338 U.S. 451 (1950). No doubt plaintiff made a very shrewd assessment of the disposition of the charities to accept The Farms’ offer without attempting to get competitive bids, but the realities were such that his assessment could have been proved wrong and his plans knocked into a cocked hat.
      For a ease involving a charitable contribution which applied the step transaction doctrine to cause the realization of capital gains income, see Magnolia Development Corp., T.C. Memo. 1960-177, CCH Tax Ct. Mem. 934 (1960).
     
      
       At tie heart of the government’s argument In Humacid was the Idea that the taxpayer had made an anticipatory assignment of income, under the doctrine established by Helvering v. Horst, 311 U.S. 112 (1940), such income is realized by the transferor. In the present case, this seems to be the thread running through the government’s argument. However, as in Humacid, the transfer was of property and not of a bare right to income as in Horst, and the government has not been able to show either how the court can or why it should break the property down into its “property” and “income” components.
      For a recent review of the problems in this area, see Lewis, Income Realization and Charitable Contributions: The Economics of Altruism, 54 Geo. L.J. 482, 500-505 (1966).
     
      
       “* * * i do not understand that a taxpayer must sit by idly twirling his thumbs until a tax liability alights upon him. If he is warned of its approach, if he sees it coming, he may seek such shelter as the law offers in an effort to escape it or diminish its blow. Of course, by examination, it must be determined whether the shelter he reaches is really constructed of statutory material, and by close scrutiny of the facts it must be determined whether the taxpayer really got himself and his transactions within it. But he should not be counted out merely because the shelter lies off his beaten path and he scurries for it.” Member Goodrich, dissenting, in George H. Chisholm, 29 B.T.A. 1334, 1346, rev’d 79 F. 2d 14 (2d Cir. 1935), cert. denied 296 U.S. 641 (1935).
     
      
       See footnote 4, supra.
      
     
      
       When, by reason of age or disease, a horse became too weak to rise to its feet, it was the general practice to destroy the animal.
     
      
       On an average, each of the horses sold during the two years had a remaining useful life of approximately five years.
     
      
       It long has been a common practice for standardbred horses, as well as thoroughbred racehorses, to be owned by groups or syndicates of two or more people.
     
      
       At this time Star’s Pride’s life expectancy -was roughly ten years. Impotency in a properly cared for stallion is a rare occurrence.
     