
    376 F. 2d 280
    CLIFF C. WILSON ET AL. v. THE UNITED STATES
    [No. 134-64
    Decided April 14, 1967]
    
      
      Oliff 0. Wilson, Osie B. Wilson, Martha E. Robinson^ and Alfred P. Miller, pro se.
    
      Miphael I. Sanders, with whom was Assistant Attorney General Mitchell Rogovin, for defendant. Philif R. Miller, of counsel.
    
      Before Cowen, Chief Judge, Laramoke, DtjRfee, Davis, ColliNS, SueltoN and Nichols, Judges.
    
   PeR Cueiam :

With minor modifications, the court is in agreement with Trial Commissioner Mastín Gr. White’s findings and recommended opinion. Accordingly, the court adopts the findings and opinion, as so modified, as the basis for its judgment in this case.

Commissioner White’s opinion, as modified by the court, is as follows:

The plaintiffs in this case are Cliff C. and Osie B. Wilson (who are husband and wife), Alfred P. Miller (who is a nephew of Cliff C. Wilson), and Martha E. Robinson (who is a niece of Cliff C. Wilson). All the plaintiffs are residents of Texas.

In the present action, the plaintiffs seek to recover refunds of Federal income taxes previously paid for the several years during the period 1958-1961.

During the 4-year period mentioned in the preceding paragraph, the plaintiffs (along with six other relatives of Cliff C. Wilson who are not parties to the present litigation) were partners in Cliff C. Wilson & Partners, a partnership which owned and operated a cattle ranch in Hemphill County, Texas. Cliff C. and Osie B. Wilson owned a one-ninth interest, Alfred P. Miller owned a one-ninth interest, and Martha E. Robinson owned a one-ninth interest in Cliff C. Wilson & Partners. Cliff C. Wilson was the managing partner of Cliff C. Wilson & Partners.

Cliff C. Wilson & Partners, in addition to being engaged in the cattle ranching business itself, owned a one-half interest in Starnes, Wilson & Co., a partnership which operated a cattle ranch in Ellis County, Oklahoma, during part of the period previously mentioned. The other one-half interest in Starnes, Wilson & Co. was owned by Kenneth D. and Mary Verne Starnes, who were husband and wife. Kenneth D. Starnes was the managing partner of Starnes, Wilson & Co. Mary Verne Starnes is a niece of Cliff C. Wilson. During the period 1958-1961, Mrs. Starnes was a partner in Cliff C. Wilson & Partners.

Cliff C. Wilson & Partners owned the land in Oklahoma on which Starnes, Wilson & Co. operated its ranching business.

First Count of Petition

The question presented to the court in the first count of the petition is whether, as contended by the plaintiffs, Section 1018 of the Internal Kevenue Code of 1954 (26 U.S.C. section 1018) “is unconstitutional in application to the sale of capital [i.e., breeding] livestock which had been valued in inventory under the Farm Price accrual method. It is our opinion that the plaintiff’s attack on the constitutionality of Section 1013 of the 1954 Code must fail, and, accordingly, that their claims set out in the first count of the petition must be rejected.

The question concerning the constitutionality of Section 1013 of the 1954 Code is raised by the plaintiffs because some of their claims directly involve the taxability of proceeds received in 1958 and 1959 from a sale of breeding cattle by Starnes, Wilson & Co. in 1958, and other claims indirectly involve the taxability of the proceeds from a sale of breeding cattle by Cliff C. Wilson & Partners in 1957. All the breeding animals with which we are concerned in the present case had been held for 12 months or more from the date of acquisition and, accordingly, they were by statutory definition (26 U.S.C. § 1231(b) (3)) “property used in the trade or business,” so that any gain derived from their sale could constitute capital gain rather than ordinary income.

A rancher is permitted to use either a cash-receipts-and-disbursements method or an accrual method of accounting. If he uses an accrual method, he must also maintain an inventory account and he must value his livestock for the inventory either by the farm-price method or by the unit-livestock-price method.

The two partnerships previously mentioned, Cliff C. Wilson & Partners and Starnes, Wilson & Co., each elected to use an accrual-inventory method of accounting for all its livestock; and each partnership, at all times subsequent to the inception of the partnership’s business, consistently valued its livestock in accordance with the farm-price method of inventorying livestock. The farm-price method provides for a valuation of livestock in the inventory at market price, less direct costs of disposition.

“The general and long-standing rule for all taxpayers, whether they use the cash or accrual method of accounting, is that costs incurred in the acquisition, production, or development of capital assets, inventory, and other property used in the trade or business may not be currently deducted, but must be deferred until the year of sale, when the accumulated costs may be set off against the proceeds of the sale. Under general principles of accounting, therefore, it would be expected that expenses incurred by ranchers in raising breeding livestock should be charged to capital account, even though the ranchers employed the cash method of accounting.” United States v. Catto, 384 U.S. 102, 109-110 (1966). However, ranchers are permitted by the tax laws and regulations to take a current deduction for the expenses incurred in raising their livestock, including their breeding animals, and this is so without regard to the method of accounting employed by a particular rancher.

In the case of a rancher who has a breeding herd and who uses an accrual-inventory method of accounting, the taking of a current deduction for the expenses incurred in raising the breeding animals is substantially counterbalanced by the requirement that the breeding animals which remain in the inventory at the end of a year be revalued, and that any increase in the inventory valuation of such animals at the end of the year over their inventory valuation at the beginning of the year be reported as ordinary income for income tax purposes. This procedure provides a simple means of capitalizing costs. Then, when breeding animals are sold by a rancher who uses an accrual-inventory system of accounting, Section 1013 of the Internal Eevenue Code of 1954 provides that the cost basis to be used in determining capital gain “shall be the last inventory value thereof.” Thus, an accrual-inventory rancher receives capital-gam treatment on the proceeds from the sale of breeding animals only to the extent, if any, that the proceeds exceed the last inventory valuation of the animals sold. In the meantime, such a rancher has been taxed, as for ordinary income, on the annual increments in the inventory valuation of the animals involved in the sale.

On the other hand, in the case of a rancher who has elected to use a cash method of accounting, the current deduction that is taken against ordinary income for the expenses incurred in raising breeding animals is not counterbalanced annually by any increase in the value of the breeding animals. The cash-method rancher is not concerned, from the accounting or income tax standpoint, with the value of breeding animals unless and until there is a sale or other disposition of such animals. At that time, since the expenses involved in raising the animals have not been capitalized in any fashion, the cost basis of the breeding animals for the purpose of determining capital gain is zero, and the rancher who uses a cash method of accounting with respect to his breeding animals receives capital-gain treatment with respect to all the proceeds from the sale of such animals (after the costs of the sale are deducted).

The plaintiffs contend — and seemingly with justification — ■ that, from the overall standpoint, the rancher who uses an accrual-inventory method of accounting with respect to breeding animals which are ultimately sold generally pays a higher income tax in relation to the value of the animals than would be paid with respect to similar animals by a cash-method rancher. The plaintiffs say that this is discriminatory; and they argue that Section 1013 of the Internal Revenue Code of 1954, which limits the accrual-inventory rancher to capital-gain treatment on the portion, if any, of the proceeds from the sale of breeding animals that is in excess of the last inventory valuation of such animals, must be regarded as unconstitutional because of the discriminatory treatment thus accorded accrual-inventory ranchers.

However, it should be borne in mind that at the inception of his business, a rancher has a free choice in deciding whether he will use a cash method or an accrual-inventory method of accounting. Each method of accounting has certain advantages over the other, and the rancher must exercise his judgment in making a determination as to whether, from the long-range standpoint, he prefers a cash method or an accrual-inventory method. In view of this initial freedom of choice, the rule is well established that once a rancher has selected and used a particular system of accounting, he cannot change to a different system of accounting for income tax purposes on his own volition, and if he desires to make such a change, he must first obtain the approval of the Commissioner of Internal Revenue. Niles Bement Pond Co. v. United States, 281 U.S. 357, 360 (1930); Carter v. Commissioner, 257 F. 2d 595, 600 (5th Cir. 1958); United States v. Ekberg, 291 F. 2d 913, 924 (8th Cir. 1961), cert den. 368 U.S. 920 (1961). No request for, or authorization for, such a change has been granted by the Commissioner in the present case.

The plaintiffs assert a supposed right on the part of an accrual-inventory rancher to retroactively change his system of accounting in order to claim capital-gain treatment for income tax purposes on the entire proceeds from the sale of breeding animals, notwithstanding the previous use of an accrual-inventory method of accounting. Since the petition in this case was filed the Supreme Court’s decision in United States v. Catto, supra, has resolved the previous conflict in the cases. The Court held that a taxpayer who elects to use an accrual-inventory system of accounting for his overall ranching operation may not use a cash method of accounting for his breeding livestock. The Court said (at p. 114), “Congress has granted the Commissioner broad discretion in shepherding the accounting methods used by taxpayers, and the uniform application of the unit-livestock-price method to the respondents’ entire livestock operation is a reasonable exercise of the discretion rested by Congress in the Secretary and the Commissioner for the administration of the tax laws.” While we recognize that the taxpayer herein used the “farm-price method,” the Supreme Court’s reasoning is equally applicable to it.

The Court did not see in the ultimate capital-gain advantage enjoyed by a cash basis rancher, otherwise similarly situated, a sufficient cause to hold the regulation involved (26 C.F.R. 1.471-6 (f)) unreasonable, particularly since the taxpayer did not wish to shift completely to the cash method; but only with respect to breeding animals. The same is true of the plaintiff herein. ' His fire is not directed at any Regulation but at Section 1013 of the Internal Revenue Code of 1954, infra, but this difference does not help him. Section 1013 merely says,

If the property should have beén included in the last inventory, the basis shall be the last inventory value thereof.

If this could be unconstitutional it can only be so because in conjunction with other statutes and regulations it achieves the same discriminatory effect that failed to disturb the Court in Catto, supra. Therefore, this court must reject the plaintiff’s contention in the present case that Section 1013 of the Internal Revenue Code of 1954 is unconstitutional in its application to a farm-price, accrual-inventory rancher.

Accordingly, since the sole basis of the alleged cause of action set out in the first count of the petition is the supposed unconstitutionality of Section 1013 of the 1954 Code, the claim set out in the first count of the petition must be rejected.

Second Count of Petition

As indicated earlier in this opinion, the Starnes, Wilson & Co. partnership carried on a ranching business in Oklahoma. The land involved in this operation was owned by Cliff C. Wilson & Partners, which also owned a one-half interest in Starnes, Wilson & Co.

Starnes, Wilson & Co. ceased to function'at the end of 1958, and that partnership was formally dissolved thereafter. At the beginning of 1959, Cliff C. Wilson & Partners, the owner of the land comprising the Oklahoma ranch, took over possession of the ranch, with the intention of leasing it to someone else.

On December 31, 1958, just before Starnes, Wilson & Co. went out of business, Cliff C. Wilson & Partners purchased from Starnes, Wilson & Co. all the livestock and equipment that Starnes, Wilson & Co. still had on hand.

The purchase price paid in connection with the transaction mentioned in the preceding paragraph was $3,867.19. This price was allocated by Cliff C. Wilson & Partners on the basis of $3,042.19 for the equipment and $825 for the livestock.

The actual value of the equipment and livestock purchased on December 31, 1958, by Cliff C. Wilson & Partners from Starnes, Wilson & Co. was only $1,913.19. The inflated price of $3,867.19 was paid by Cliff C. Wilson & Partners in order to avoid a lawsuit with Kenneth D. Starnes, the managing partner of Starnes, Wilson & Co. It was the intention of Cliff C. Wilson & Partners at the time of the purchase to resell the equipment and livestock.

On August 17, 1959, Robert C. Miller entered into a lease with Cliff C. Wilson & Partners for the Oklahoma ranch. The lease was for the term beginning August 17, 1959, and ending May 1,1965.

Robert C. Miller is a nephew of Cliff C. Wilson. He was a partner in Cliff C. Wilson & Partners during 1958-1961.

On December 31, 1959, Cliff C. Wilson & Partners sold to Robert C. Miller the equipment and livestock which Cliff C. Wilson & Partners had purchased from Starnes, Wilson & Co. on December 31,1958. As previously stated, the equipment and livestock had been acquired by Cliff C. Wilson & Partners for a price of $3,867.19. They were sold to Robert C. Miller for a price of $1,913.19. Plence, Cliff C. Wilson & Partners sustained a loss in the amount of $1,954 on the sale of the equipment and livestock to Robert C. Miller.

In its partnership income tax return for 1959, Cliff C. Wilson & Partners treated the loss of $1,954 as an ordinary loss. The Internal Revenue Service, on audit of the income tax return, disallowed this loss as an ordinary deduction, holding that it was a loss within the scope of Section 1231 of the Internal Revenue Code of 1954 (26 TJ.S.C. § 1231). Claims for refund on the basis of such disallowance were subsequently filed by the plaintiffs as partners in Cliff C. Wilson & Partners, and the claims were denied by the Internal Revenue Service.

In the present action, the plaintiffs claim (in the second count of the petition) that the loss of $1,954 on the sale to Robert C. Miller of the equipment and livestock previously purchased from Starnes, Wilson & Co. should be treated as a fully deductible expense under Section 162(a) of the Internal Revenue Code of 1954 (26 U.S.C. § 162(a)). That section provides in part as follows:

There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *.

The defendant contends, on the other hand, that the situation with which we are concerned in this part of the opinion is governed by Section 1231 of the 1954 Code. Subsection (a) of that section provides in part as follows:

If, during the taxable year, the recognized gains on sales or exchanges of property used in the trade or business * * * exceed the recognized losses from such sales [and] exchanges, * * * such gains and losses shall be considered as gains and losses from sales or exchanges of capital assets held for more than 6 months. * * *

In this connection, the record indicates that the gains of Cliff C. Wilson & Partners during the pertinent period on sales or exchanges of property used in the trade or business of the partnership exceeded the partnership’s losses from such sales and exchanges. • Therefore, it is necessary to consider whether the livestock and equipment which Cliff C. Wilson & Partners purchased from Starnes, Wilson & Co. and later sold to Robert C. Miller was “property used in the trade or business” of Cliff C. Wilson & Partners, and thus within the ambit of Section 1231 of the 1954 Code.

Subsection (b) (3) of Section 1231 defines the term “property used in the trade or business” to include (among other things) “livestock, regardless of age, held by the taxpayer for draft, breeding, or dairy purposes, and held by him for 12 months or more from the date of acquisition.” The livestock which Cliff C. Wilson & Partners purchased from Starnes, Wilson & Co. on December 31, 1958, was held by the former until December 31,1959, or for 12 months. The record indicates, however, that such livestock was held by Cliff C. Wilson & Partners for the purpose of resale, rather than for draft, breeding, or dairy purposes. Accordingly, this phase of the transaction with Robert C. Miller on December 31, 1959, would be outside the scope of Section 1231 of the 1954 Code, and the loss sustained on the sale of the livestock would be deductible under Section 162(a) of the 1954 Code.

With respect to the equipment which Cliff C. Wilson & Partners purchased from Starnes, Wilson & Co. and thereafter sold to Robert C. Miller, there is a general definition of “property used in the trade or business” in subsection (b) (1) of Section 1231 to the effect that this term “means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 167, held for more than 6 months * * *.” Section 167 of the 1954 Code, in turn, provides (among other things) that “There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) — (1) of property used in the trade or business * * *.”

The equipment which Cliff C. Wilson & Partners acquired from Starnes, Wilson & Co. included a tractor.. The other equipment is not specifically identified, except that it is referred to in the record as farm equipment. It is reasonable to infer that all this equipment was subject to exhaustion, wear, and tear, and, therefore, that it was of a type for which a depreciation deduction was proper. The equipment was held by Cliff C. Wilson & Partners for longer than 6 months, so the remaining question as to the applicability of Section 1231 of the 1954 Code is whether the equipment was “used in the trade or business” of Cliff C. Wilson & Partners.

From the beginning of 1959 until the Oklahoma ranch was leased to Robert C. Miller, Cliff C. Wilson & Partners was engaged in the “trade or business” of owning a ranch in Oklahoma and preparing it for subsequent leasing to someone else. In this connection, the record indicates that the partnership carried on a program of repairing roads, windmills, and tanks on the ranch in order to enhance the leas-ability of the ranch. The record shows that the tractor which Cliff C. Wilson & Partners purchased from Starnes, Wilson & Co. was used by the former in the road-repair work. The inference seems warranted that the other pieces of equipment were used in connection with the repair of the windmills and tanks, since the record is silent concerning the ownership by Cliff C. Wilson & Partners in 1959 of any equipment that was usable for this purpose, other than the equipment discussed in this part and the next succeeding part of the opinion.

The conclusion seems to be justified, therefore, that the equipment which Cliff C. Wilson & Partners purchased from Starnes, Wilson & Co. was depreciable property which Cliff C. Wilson & Partners used in its “trade or business” of owning a ranch and rehabilitating it for leasing to someone else. Consequently, the defendant is correct in its contention that the loss on the sale of equipment to Robert C. Miller was within the scope of Section 1231 of the 1954 Code.

On the basis of the discussion set out in this part of the opinion, it appears that the plaintiffs are entitled to recover under the second count of the petition with regard to — and only with regard to — the loss that was sustained in connection with the sale of the livestock which had been purchased from Starnes, Wilson & Co. for the purpose of resale.

Third Count of Petition

As indicated in the immediately preceding part of this opinion, Cliff C. Wilson & Partners took over possession of the Oklahoma ranch at the beginning of 1959, after Starnes, Wilson & Co. went out of the ranching business. It was the intention of Cliff C. Wilson & Partners to lease the ranch to someone else, and the partnership determined that it was necessary for certain rehabilitation work on the ranch to be accomplished in order to enhance the leasability of the ranch.

For one thing, the roads on the ranch were in need of repairs. After investigating the matter, Cliff C. Wilson, the managing partner of Cliff C. Wilson & Partners, concluded that it was cheaper for the partnership to purchase the necessary equipment and to employ the necessary workers to make the road repairs than it would be to engage a contractor to make such repairs. Accordingly, Cliff C. Wilson & Partners purchased the following equipment for the accomplishment of the road-repair work:

G.M.C. pickup truck_$2,260. 00
Chevrolet truck_ 1, 500. 00
Ford tractor & equipment_ 3, 900. 79
Ford truck (1947)_ 200.00
Dirt wagon- 150. 00
$8, 010.79

In addition to purchasing and using the equipment listed above in connection with the road-repair work, Cliff C. Wilson & Partners also used for this purpose a tractor that had been purchased from Starnes, Wilson & Co. for $250 on December 31,1958 (see the immediately preceding portion of this opinion).

Cliff C. Wilson & Partners used the road-repair equip-' ment, purchased at a cost of $8,010.79, solely to repair the roads on the Oklahoma ranch one time in 1959.

After this road-repair job was completed, Cliff C. Wilson & Partners leased the Oklahoma ranch on August 17, 1959, to Robert C. Miller for a term of years. On December 31, 1959, the road-repair equipment which the partnership had purchased in 1959 was sold to Robert C. Miller for $4,086.81, the partnership thereby sustaining a loss of $3,923.98 on the sale of the equipment.

In its income tax return for 1959, Cliff C. Wilson & Partners treated the loss on the sale of the road-repair equipment to Robert C. Miller as an ordinary loss. The Internal Revenue Service, however, disallowed the ordinary deduction. The plaintiffs, as partners in Cliff C. Wilson & Partners, subsequently filed claims for refund on the basis of such disallowance, and the claims were rejected by the Internal Revenue Service.

The problem involved in this part of the opinion is similar to the problem discussed in the immediately preceding portion of the opinion, i.e., whether the loss on the sale of road-repair equipment should be regarded as coming within the category of “ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business” (Section 162(a) of the 1954 Code), or as a loss from the sale of “property used in the trade or business” of the partnership (Section 1231 of the 1954 Code).

As stated in the immediately preceding part of this opinion, Cliff C. Wilson & Partners, from the beginning of 1959 until August 17,1959, was engaged “in the trade or business” of owning a ranch and preparing it for leasing to someone else. The necessary preparatory work included repairs to the roads on the ranch in order to enhance the leasability of the ranch, and the equipment with which we are concerned in this part of the opinion was purchased for and used in connection with the road-repair work. Therefore, the road-repair equipment was used “in the trade or business” of Cliff C. Wilson & Partners. Since this equipment was of a character that was subject to an allowance for depreciation, and since it was held by Cliff C. Wilson & Partners for more than 6 months, it seems clear that the loss which Cliff C. Wilson & Partners sustained when it sold the road-repair equipment to Robert C. Miller was within the scope of Section 1231 of the 1954 Code.

As indicated in the immediately preceding part of this opinion, the gains of Cliff C. Wilson & Partners during the pertinent period on sales or exchanges of property used in the trade or business of the partnership exceeded the partnership’s losses from such sales and exchanges. Consequently, Cliff C. Wilson & Partners was not entitled to take an extra deduction on the basis of the loss that was sustained in connection with the sale of the road-repair equipment to Robert C. Miller. In view of this, the plaintiffs are not entitled to recover under the 'third count of the petition.

Fourth Coimt of Petition

The fourth count of the petition involves bad-debt deductions in the amounts of $1,000, $1,000, and $6,228.72 which the plaintiffs Cliff C. and Osie B. Wilson took on their joint income tax returns for the years 1959, 1960, and 1961, respectively, on the ground that the several amounts represented worthless business debts.

The subject of bad-debt deductions for income tax purposes is governed by Section 166 of the Internal Revenue Code of 1954 (26 U.S.C. § 166). That section first states the following general rule: Tbe section, subsequently makes a distinction between the treatment that is to be accorded business bad debts and nonbusiness bad debts.

There shall be allowed as a deduction any debt which becomes worthless within the taxable year.

The several amounts which the Wilsons deducted as business bad debts in 1959, 1960, and 1961 grew out of a series of transactions that occurred in 1958 between Mrs. Osie B. Wilson and her nephew, Everett M. Blackwell, who was then a young man approximately 25 years of age.

Everett M. Blackwell’s father, who was one of Mrs. Osie B. Wilson’s brothers, died when Everett was a boy, and Everett became the ward of an uncle, Fred Blackwell, who was also Mrs. Wilson’s brother. During a period of approximately 8% years, beginning when Everett was about 14 years of age and continuing until he was about 171,4 years old, he lived with his aunt, Mrs. Osie B. Wilson, and her husband. This was pursuant to arrangements made with the Wilsons by Fred Blackwell, Everett’s guardian.

During 1958, Mrs. Osie B. Wilson made a number of financial advances or loans, totaling $8,228.72, to Everett M. Blackwell. The first advance or loan amounted to $114 and was made on or about February 1, 1958. At that time, Everett, who was then married and had not lived with the Wilsons for several years, went to see Mrs. Wilson and told her that he was unemployed and wanted to borrow $114 with which to make a payment on his passenger automobile. Mrs. Wilson let Everett have the $114.

Sometime in March 1958, Everett M. Blackwell went to see Mrs. Wilson again and wanted to borrow from her $600 with which to buy a used truck, so that he could go into the business of trucking for hire. Mrs. Wilson refused to make the loan at the time when she was first approached by Everett. Later, Fred Blackwell went to see Mrs. Wilson and requested that she reconsider her refusal to loan $600 to Everett. Fred Blackwell emphasized the fact that Everett was unemployed at. the time, and expressed the opinion that Everett would repay the loan. On the basis of Fred Blackwell’s representation, Mrs. Wilson let Everett have the $600.

During the remainder of 1958, Mrs. Wilson made numerous advances or loans to Everett M. Blackwell for such purposes as the acquisition of truck registration tags, a further payment on Everett’s passenger automobile, paying off debts incurred as operating expenses in connection with Everett’s trucking business, buying out the interest of Everett’s partner in the trucking business, and purchasing diesel-powered trucks for the trucking business. As previously stated, the advances or loans made by Mrs. Wilson to Everett during 1958 totaled $8,228.72.

At the times when the several advances or loans were made, there was no understanding between Mrs. Wilson and Everett M. Blackwell concerning the payment of interest by Everett on the various amounts, and the transactions were not evidenced by any written documentation.

On or about August 28,1958, Everett M. Blackwell signed four promissory notes in favor of Mrs. Wilson to cover the advances or loans which Mrs. Wilson had made to Everett during 1958. One of the notes was dated June 4,1958, was in the amount of $1,000, and was payable to Mrs. Wilson on June 1, 1959, together with interest at 6 percent per annum. Another of the promissory notes was dated June 18, 1958, was in the amount of $1,000, and was payable on June 18, 1960, together with interest at 6 percent per annum. A third promissory note was dated July 27, 1958, was in the amount of $1,864.72, and was payable on July 27,1961, together with interest at 6 percent per annum. The fourth promissory note was dated August 28,1958, was in the amount of $4,364, and was payable on August 28, 1962, together with interest at 6 percent per annum.

Although the four promissory notes were prepared and signed on the same date, they were given different purported dates of execution and different due dates on the advice of counsel, so that bad-debt deductions could be claimed in different years if the notes were not paid.

Everett M. Blackwell never made any payment to Mrs. Wilson with respect to the advances or loans which Mrs. Wilson made to him in 1958. On her part, Mrs. Wilson never, demanded any payment from Everett in connection with these transactions. Mrs. Wilson believed that Everett was not financially able to repay the advances or loans, or any part thereof.

Cliff C. and Osie B. Wilson claimed a business bad-debt deduction in the amount of $1,000 for 1959 on the basis of Everett M. Blackwell’s failure to pay off the promissory note in the amount of $1,000 that was due on June 1, 1959; they claimed a business bad-debt deduction in the amount of $1,000 for 1960 on the basis of Everett’s failure to pay off the promissory note in the amount of $1,000 that was due on June 18, 1960; and they claimed a business bad-debt deduction in the amount of $6,228.72 for 1961 because of Everett’s failure to pay off the other two promissory notes (although one of them was not due until August 28, 1962). All these deductions were disallowed by the Internal Bev-enue Service and deficiencies were assessed, which the Wil-sons duly paid.

As indicated earlier in this part of the opinion, Section 166 of the Internal Bevenue Code of 1954 provides in part that:

There shall be allowed as a deduction any debt which becomes worthless within the taxable year.

The plain language of this statutory provision obviously contemplates (1) the existence of a debt, (2) that the debt had value sometime during a taxable year, and (3) that the debt subsequently became worthless during the course of the taxable year.

In the present case, the defendant contends that, under the circumstances shown in the record, the several advances made by Mrs. Osie B. Wilson to her nephew were, in substance if not in form, gifts made without any reasonable expectation of repayment, and that such advances did not create debts in any real sense. I do not believe that it is necessary to decide this particular question, because even if it is assumed for the purpose of discussion that the financial advances which Mrs. Wilson made to her nephew were real loans and created real debts on the part of the nephew— and if it is further assumed that such debts were business rather than nonbusiness debts — the claims set out in the fourth count of the petition must nevertheless be denied due to the failure of Mr. and Mrs. Wilson to prove that the other essential elements prescribed by Section 166 of the 1954 Code were present in this case.

Mr. and Mrs. Wilson, as the taxpayers, have the “burden of persuasion” concerning the issue of the deductibility of the alleged bad-debt items. Russell Box Co. v. Commissioner, 208 F. 2d 452, 455 (1st Cir. 1953). However, the Wilsons have failed to provide the court with any substantial evidence in the record that would support findings to the effect that the $1,000 debt (if it was a debt) which they deducted for 1959 had value sometime in that year and then became worthless during 1959, or that the $1,000 debt which they deducted for 1960 had value sometime in 1960 and then became worthless during that year, or that the $6,228.72 debt which the Wilsons deducted for 1961 had value sometime in 1961 and then became worthless during that year.

Actually, the only inference on this point that can reasonably be drawn from the pertinent evidence in the record is that these several alleged debts were worthless at the beginning of the respective years and remained so continuously until the end of the respective years. Consequently, even if it is assumed for the purpose of discussion that the several amounts were not only debts but business debts, there is no proof in the record that would justify findings to the effect that such debts had value sometime in, and then became worthless during, the respective taxable years for which business bad-debt deductions were claimed by the Wilsons. In the absence of such proof, Mr. and Mrs. Wilson are not entitled to recover on the issue presented in the fourth count of the petition relative to the bad-debt deductions. Russell Box Co. v. Commissioner, supra, at page 455; Bratton v. Commissioner, 217 F. 2d 486, 488 (6th Cir. 1954).

Fifth Coimt of Petition — Investment Expenses

During the period 1958-1961, Cliff C. and Osie B. Wilson were active in purchasing and selling common stocks for their own account. Their objective in such activities was to make a profit; and they did make a profit on some of the transactions, while losses were incurred on other transactions. Gains and losses were reported as capital gains and losses for income tax purposes.

The Wilsons did not buy or sell stocks for other persons on a commission basis.

The portfolio of common stocks owned by the Wilsons averaged about $700,000 (at the then-current market prices) during the period 1958-1981.

In determining from time to time which common stocks they would purchase and which of the common stocks in their portfolio they would sell, the Wilsons devoted a substantial amount of time to the performance of research on stock-market conditions and trends, and on the past history, the then-current status, and the seeming future prospects of particular common stocks that were under active consideration either for purchase or for sale. Mr. Wilson devoted an average of perhaps two hours a day during 1958 and 1959, and an average of perhaps three hours a day in 1960 and 1961, to such research work and other activities involved in the purchase and sale of common stocks. Mrs. Wilson devoted an average of perhaps three or four hours per week to the program.

In performing the research work referred to in the preceding paragraph, Mr. and Mrs. Wilson utilized (among other materials) literature and other aids which they obtained from Moody & Company and from Standard & Poor, and for which they paid. The amounts expended for such materials during the several years involved in this litigation were as follows:

1958. $543
1959. 150
1960. 144
1961. 144

Mr. and Mrs. Wilson purchased some common stocks on margin during the period 1958-1961, although such purchases were relatively small in comparison to the total volume of common stocks purchased by the Wilsons during that period. Interest payments on the Wilson’s margin account during the several years involved in the present case were as follows:

1958. $8.05
1959. 105. 82
1960. 35.38
1961. 89.06

In their joint income tax returns for the several years during the period 1958-1961, the Wilsons claimed as business deductions the respective amounts which they expended for literature and other aids to be used in the performance of research, on common stocks, and also the respective amounts which they expended in the form of interest payments on their margin account. They also took for each of these years the standard deduction of $1,000 in lieu of itemizing permissible nonbusiness deductions.

In auditing the Wilsons’ income tax returns for the several years during the period 1958-1961, the Internal Revenue Service determined that the Wilsons were not entitled to take as business deductions the several amounts previously mentioned in this part of the opinion as investment expenses. The Internal Revenue Service held, in effect, that the Wilsons could either take the standard deduction of $1,000 for each year or itemize allowable nonbusiness deductions, whichever would be larger, and that their investment expenses could be included in any itemization of nonbusiness deductions.

The result of the action by the Internal Revenue Service was that, for the year 1958, the Wilsons elected to claim itemized deductions that exceeded $1,000, including their investment expenses for that year in the amounts of $543 and $8.05. Similarly, for 1959, the Wilsons elected to claim itemized deductions that exceeded $1,000, including their investment expenses of $150 and $105.82. On the other hand, the Wilsons elected to claim the standard deduction of $1,000 for each of the years 1960 and 1961, so their investment expenses in the amounts of $144 and $35.38 for 1960, and in the amounts of $144 and $89.06 for 1961, were ignored for income tax purposes.

The Wilsons subsequently filed claims for refund on the basis of the disallowance of their investment expenses as business deductions for 1958, 1959, 1960, and 1961. The claims were denied by the Internal Revenue Service.

The legal question presented in connection with this phase of the case is whether the investment expenses of Mr. and Mrs. Wilson were within or outside the scope of Section 162(a) of the Internal Revenue Code of 1954 (26 U.S.C. § 162(a)). That section provides in part as follows:

There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *.

It is my opinion that the investment expenses of Mr. and Mrs. Wilson during the period 1958-1961 were not paid or incurred in carrying on a “trade or business.” In this connection, the Supreme Court has said that “investing is not a trade or business.” Whipple v. Commissioner, 373 U.S. 193, 202 (1963). Consequently, managing one’s own investments in securities is not the carrying on of a trade or business, irrespective of the extent of the investments or the amount of time required to perform the managerial functions. Higgins v. Commissioner, 312 U.S. 212, 218 (1941).

It appears, therefore, that the plaintiffs Cliff C. and Osie B. Wilson are not entitled to recover on the phase of the fifth count relating to their investment expenses.

Fifth Cownt of Petition — Literary Expenses

Ever since she was about 9 years old, Mrs. Osie B. Wilson has aspired to be a writer. She has taken many courses of instruction in writing; she has attended many meetings of writers; she has written many stories and articles; and she has received many rejection slips, although some of her material has been published.

During the 1930’s, 1940’s, and 1950’s, while Mrs. Wilson was living in the Panhandle region of Texas with her husband, she submitted numerous feature articles on historical subjects to the Amarillo Daily News. These feature articles related to pioneer times and conditions on the Texas Plains, and to the settlers, peace officers, doctors, ranchers, buffalo hunters, and pioneer women who lived in that region during the early days. Some of these pieces were accepted and published by the Amarillo Daily News, which paid Mrs. Wilson modest fees for the articles accepted.

Mrs. Wilson and her husband moved from the Texas Panhandle to Mustang Island on the Texas Gulf Coast in 1959, and they lived there through 1960. While living on Mustang Island, Mrs. Wilson engaged in news-gathering activities concerning local events, wrote about them, and submitted the items to the Corpus Christi Caller and the Aransas Pass Progress. These newspapers accepted some of the material submitted by Mrs. Wilson, and paid her small amounts for the material accepted.

During tbe period 1958-1960, Mrs. Wilson worked rather regularly at her writing and related activities, devoting approximately half of her time to such efforts.

In 1958, Mrs. Wilson incurred expenses that aggregated $236.20 in connection with her writing activities and the submission of articles to the Amarillo Daily News. In 1959 and 1960, when she was writing articles and submitting them to the Corpus Christi Caller and the Aransas Pass Progress, her expenses in connection with such activities amounted to $440.59 for 1959 and $380.19 for 1960.

Mrs. Wilson did not receive any income in 1958 from her literary activities. In 1959, her gross income from the sale of newspaper articles amounted to $18.50. In 1960, Mrs. Wilson’s gross income from her literary activities increased to $202.25.

In their joint income tax returns for 1958, 1959, and 1960, Cliff C. and Osie B. Wilson claimed as business deductions the respective amounts of $236.20, $440.59, and $380.79 previously mentioned as expenses incurred by Mrs. Wilson in connection with her literary activities. For each of these years, Mr. and Mrs. Wilson also claimed the standard deduction of $1,000 in lieu of itemizing permissible nonbusiness deductions.

In auditing the income tax returns of Mr. and Mrs. Wilson for 1958, 1959, and 1960, the Internal Bevenue Service determined that the Wilsons were not entitled to treat Mrs. Wilson’s literary expenses as business deductions, but that such expenses might be claimed as permissible nonbusiness deductions if the Wilsons wished to itemize their nonbusiness deductions in lieu of taking the standard deduction of $1,000. As a result of the action by the IBS, the Wilsons itemized their deductions for 1958 and included Mrs. Wilson’s literary expenses in the amount of $236.20. The same procedure was followed by the Wilsons for 1959, and they included among their itemized deductions Mrs. Wilson’s literary expenses in the amount of $440.59. On the other hand, the Wilsons elected to take the standard deduction of $1,000 for 1960, with the result that the $380.79 representing Mrs. Wilson’s literary expenses for 1960 was not included in the calculation of their income tax liability for 1960.

The disallowance of Mrs. Wilson’s literary expenses as business deductions for 1958, 1959, and 1960 formed a basis for refund claims, which the Internal Revenue Service denied.

Here, again, the question presented to the court is whether Mrs. Wilson’s literary expenses during the years 1958, 1959, and 1960 were paid or incurred in carrying on a “trade or business,” within the meaning of the quoted phrase as used in Section 162(a) of the 1954 Code.

In view of the fact that Mrs. Wilson did not receive any income at all from her writing activities in 1958, that her income from this source for 1959 amounted only to $18.50 (in contrast to literary expenses that aggregated $440.59 in 1959), and that Mrs. Wilson’s income from her writing activities in 1960 did not go beyond $202.25 (whereas her literary expenses for that year amounted to $380.79), it would be incongruous to say that her writing was a “trade or business” during the 3-year period. On the contrary, the impression to be gained from the record as a whole is that Mrs. Wilson, for many years prior to 1958, wrote as a hobby, and that her writing activities during the period 1958-1960 were those of a literary hobbyist, rather than the efforts of a person engaged in writing as a “trade or business.”

It is my opinion, therefore, that the plaintiffs Cliff C. and Osie B. Wilson could not properly utilize Mrs. Wilson’s literary expenses in 1958,1959, and 1960 as business deductions for those respective years.

Fifth Count of Petition — Litigation Expenses

Prior to the institution of the present litigation, the plaintiffs Cliff C. and Osie B. Wilson successfully prosecuted against the United States an action for the recovery of Federal income tax paid for the year 1951. The points at issue in the former litigation were the nature and extent of the taxable gains realized by the Wilsons on sales of livestock in 1951.

In prosecuting the litigation mentioned in the preceding paragraph, Mr. and Mrs. Wilson incurred legal expenses that amounted to $849.51 in 1958 and $1,663.43 in 1959.

The amount recovered by Mr. and Mrs. Wilson in the j>rior litigation exceeded by a considerable margin the total amount of the expenses incurred by them in successfully prosecuting the litigation.

Tn their joint income tax returns for the years 1958 and 1959, Mr. and Mrs. Wilson claimed as business deductions the respective amounts of $849.51 and $1,663.43 previously mentioned as expenses incurred in the prosecution of the prior litigation. The Wilsons also took for each of these years the standard deduction of $1,000 in lieu of itemizing their nonbusiness deductions.

Upon auditing the Wilsons’ income tax returns for 1958 and 1959, the Internal Revenue Service held that the respective items of $849.51 and $1,663.43 were not properly deductible as business expenses, but that they were deductible as nonbusiness expenses if the Wilsons elected to itemize their nonbusiness deductions in lieu of taking the standard deduction of $1,000 for each year.

As a result of the action by the Internal Revenue Service, the Wilsons elected to take for 1958 and 1959 itemized deductions that exceeded $1,000 for each year, and they included among such itemized deductions the litigation expenses amounting to $849.51 for 1958 and $1,663.43 for 1959.

Claims for refund were later filed by the Wilsons on the basis of the disallowance of the $849.51 and the $1,663.43 items as business deductions for 1958 and 1959, respectively. The claims were rejected by the Internal Revenue Service.

Mr. and Mrs. Wilson contend in the present case that their litigation expenses in 1958 and 1959 were paid or incurred in carrying on Mr. Wilson’s “trade or business” of cattle ranching and, accordingly, that the respective amounts of $849.51 and $1,663.43 were properly deductible as business expenses under Section 162(a) of the Internal Revenue Code of 1954.

In this connection, the evidence shows that in 1951, and also in 1958 and 1959, Mr. Wilson was engaged in the business of raising and selling livestock. He did not have any other business in those years. Since the prior litigation related to the nature and extent of the taxable gains realized on sales of livestock, it would appear that the expenses incurred in successfully prosecuting the litigation were incurred in carrying on Mr. Wilson’s “trade Or business” and, therefore, were properly deductible as business expenses.

In its brief, the defendant does not interpose any objection to a recovery by Mr. and Mrs. Wilson on this phase of the present litigation.

Sixth Count of Petition

As mentioned earlier in this opinion, Cliff C. Wilson & Partners owned a ranch in Ellis County, Oklahoma, and took over possession of the ranch at the beginning of 1959, after a former lessee, Starnes, Wilson & Co., went out of the ranching business. Cliff C. Wilson & Partners retained possession of the Oklahoma ranch until about the middle of August 1959, and conducted during the intervening period a program of rehabilitation designed to enhance the leasa-bility of the ranch.

There were two dwelling houses and a bunkhouse on the Oklahoma ranch. During the period from the beginning of 1959 until about the middle of August 1959, one dwelling house was occupied by Cliff C. and Osie B. Wilson, the other dwelling house was occupied by a married employee of Cliff C. Wilson & Partners and his family, and the bunkhouse was occupied by four single employees of Cliff C. Wilson & Partners.

Mr. and Mrs. Wilson lived on the Oklahoma ranch during the period previously mentioned, so that Mr. Wilson, the managing partner of Cliff C. Wilson & Partners, might look after the property and protect it from theft, and might effectively supervise the activities of the workmen employed on the ranch by Cliff C. Wilson & Partners to perform the repair work that was involved in the improvement program.

While, the rehabilitation work on the Oklahoma ranch was in progress, Cliff C. Wilson & Partners provided food and housing for the married employee and the four single employees, as part Qf their compensation. The partnership defrayed the cost of purchasing the necessary groceries and paid the wife of the married employee wages to prepare meals for the five employees. The partnership also defrayed the cost of purchasing the fuel that was needed to heat the bunkliouse and tbe dwelling bouse that was occupied by tbe married employee and his family, and to cook the meals for the five employees.

During the period in 1959 while Mr. and Mrs. Wilson were living on the Oklahoma ranch and Mr. Wilson was supervising the program of repair work, the cost of the groceries consumed by Mr. and Mrs. Wilson amounted to $200, and the cost of the fuel that was used in heating the dwelling house occupied by the Wilsons and in preparing their meals amounted to $191.14. Mr. Wilson paid these amounts out of the partnership funds of Cliff C. Wilson & Partners.

In reporting their 1959 gross income for income tax purposes, the Wilsons did not include the amounts of $200 and $191.14 mentioned in the preceding paragraph.

When the Internal Eevenue Service audited the Wilsons’ income tax return for 1959, the IES included in the Wilsons’ gross income the items of $200 and $191.14 previously mentioned. This resulted in a deficiency assessment against the Wilsons, which they duly paid.

With respect to the point now under consideration, the plaintiffs Cliff C. and Osie B. Wilson rely on Section 119 of the Internal Eevenue Code of 1954 (26 U.S.C. §119). That section provides in part as follows:

There shall be excluded from gross income of an employee the value of any meals or lodging furnished to him by his employer for the convenience of the employer, but only if — •
(1) in the case of meals, the meals are furnished on the business premises of the employer, or
(2) in the case of lodging, the employee is required to accept such lodging on the business premises of his employer as a condition of his employment.

In this connection, the Wilsons assert — and with justification, on the basis of the evidence in the record — that they lived on the Oklahoma ranch from the beginning of 1959 until about the middle of August 1959 for the convenience of Cliff C. Wilson & Partners, the owner of the ranch, and that this was a matter of practical necessity, in order that the ranch property might be looked after and the program of repair work on the ranch might be properly supervised.

The trouble is, however, that the “convenience of the employer” rule that is embodied in Section 119 of the 1954 Code does not have any application to the facts of this case. The owner of the Oklahoma ranch was a partnership, Cliff C. Wilson & Partners, and Mr. Wilson was the managing partner of the partnership. A partnership is not a legal entity separate and apart from the partners, and, accordingly, a partnership cannot be regarded as the employer of a partner for the purposes of Section 119 of the 1954 Code. Commissioner v. Doak, 234 F. 2d 704, 708 (4th Cir. 1956); Commissioner v. Moran, 236 F. 2d 595, 598 (8th Cir. 1956); Commissioner v. Robinson, 273 F. 2d 503, 504—505 (3rd Cir. 1959), cert. den. 363 U.S. 810 (1960).

The expenses of Mr. and Mrs. Wilson for groceries and for heating and cooking fuel while living on the Oklahoma ranch in 1959 were, therefore, outside the scope of Section 119 of the 1954 Code. Eather, these expenses were within the scope of Section 262 of the 1954 Code (26 U.S.C. § 262), which provides that:

Except as otherwise expressly provided in this chapter, no deduction shall be allowed for personal, living, or family expenses.

Expenses for food and for fuel with which to cook the food and heat a home are essentially personal in nature. Everyone must have these necessities of life, and expenditures to obtain them do not lose their personal characteristics because they may contribute indirectly to a taxpayer’s business activities. Commissioner v. Moran, supra, 236 F. 2d at page 597. Eather, in such a situation, they are by their nature predominantly personal with a tinge of business, and not business expenses with a personal tinge. Commissioner v. Doak, supra, 234 F. 2d at page 709.

For the reasons set out in this part of the opinion, it appears that the Internal Eevenue Service acted correctly in adding to the gross income of Mr. and Mrs. Wilson for 1959 the amounts of $200 and $191.14 which they received out of the partnership funds of Cliff C. Wilson & Partners as reimbursement for their food and fuel expenses while living on the Oklahoma ranch.

Seventh Count of Petition

In 1960, while the Oklahoma ranch owned by Cliff C. Wilson & Partners was under lease to Bobert C. Miller, a severe wash occurred in a road on the ranch. The wash came to the attention of Cliff C. Wilson, although he was no longer living on the ranch. Mr. Wilson was of the opinion that the wash could be repaired for a relatively small amount if prompt action was taken, but that it would grow much worse in the absence of prompt action.

Mr. Wilson employed a man with a tractor to go on the ranch and repair the wash mentioned in the preceding paragraph. The cost of the road-repair job was $38.62. Mr. Wilson defrayed this cost personally, instead of paying it out of the partnership funds of Cliff C. Wilson & Partners.

In their joint income tax return for 1960, Cliff C. and Osie B. Wilson claimed a business deduction in the amount of $38.62 with respect to the cost of the road-repair job mentioned in this part of the opinion. The Wilsons also took for 1960 the standard deduction of $1,000 in lieu of itemizing their nonbusiness deductions.

On auditing the Wilsons’ income tax return for 1960, the Internal Bevenue Service held that the Wilsons were not entitled to take as a business deduction the cost of the road-repair job in the amount of $38.62, although this amount could be included as a nonbusiness deduction if the Wilsons elected to itemize such deductions instead of taking the standard deduction of $1,000 for 1960.

The Wilsons elected to stand on their previous action in taking the standard deduction of $1,000 for 1960, rather than itemize their nonbusiness deductions and include a deduction in the amount of $38.62 with respect to the cost of the road-repair job on the Oklahoma ranch.

This was involved in a subsequent claim for refund, which the Internal Bevenue Service disallowed.

The cost of repairing the wash in the road on the Oklahoma ranch owned by Cliff C. Wilson & Partners was obviously a partnership expense. The general rule is that such an expense should be deducted on the partnership income tax return in computing the net income of the partnership for the particular year, and, accordingly, tliat sucli an expense is not allowable as a deduction on the personal income tax return of a partner. Western Construction Co. v. Commissioner, 14 T.C. 453, 471 (1950); Klein v. Commissioner, 25 T.C. 1045, 1051 (1956).

An. exception to the general rule mentioned in the preceding paragraph is recognized in a situation where, under a partnership agreement, a partner has been required to pay a partnership expense out of his own funds. Under those circumstances, the partner is entitled to deduct the amount of such expense from his individual gross income. See Klein v. United States, supra, at pages 1051-1052; Graham v. Commissioner, 35 T.C. 273, 278 (1960). In the present case, however, there is no evidence in the record tending to show that Cliff C. Wilson was required by the partnership agreement under which Cliff C. Wilson & Partners operated to. defray the cost of the road-repair job on the Oklahoma ranch in 1960 out of his personal funds.

It is my opinion, therefore, that the Internal Eevenue Service acted correctly in disallowing the business deduction in the amount of $38.62 which the plaintiffs Cliff C. and Osie B. Wilson took on their income tax return for 1960 with respect to the cost of the road-repair job on the Oklahoma ranch owned by Cliff C. Wilson & Partners.

Eighth Cou/nt of Petition

In each of the years 1959, 1960, and 1961, Cliff C. Wilson drew disability retirement pay from the United States Navy on the basis of 100 percent disability as a retired lieutenant commander.

In their joint income tax returns for the three years mentioned in the preceding paragraph, Cliff C. and Osie B. Wilson did not claim any retirement income credit by virtue of the disability retirement pay received by Cliff C. Wilson for the respective years.

In March 1963, Cliff C. and Osie B. Wilson submitted to the Internal Eevenue Service claims for refund with respect to the years 1959, 1960, and 1961, contending that Cliff C. Wilson was entitled to retirement income credit for each of these years by virtue of the disability retirement pay received by Mm. The claims for refund were disallowed by the Internal Revenue Service.

The defendant concedes in the present action that the plaintiffs Cliff C. and Osie B. Wilson are entitled to recover on the claim stated in the eighth count of the petition.

Ninth Oov/nt of Petition

During the year 1960, Cliff C. Wilson & Partners received $900 as rental under the lease of the Oklahoma ranch to Robert C. Miller. The sum of $100 out of the $900 rental figure was distributed to Cliff C. Wilson as the owner of a one-ninth interest in Cliff C. Wilson & Partners.

In its 1960 partnership income tax return, Cliff C. Wilson & Partners reported as income the $900 referred to in the preceding paragraph.

On their joint income tax return for 1960, Cliff C. and Osie B. Wilson reported as income a partnership distribution wlfich included the $100 wMch Mr. Wilson had received from Cliff C. Wilson & Partners in connection with the distribution of the $900 rental among the partners, and the Wilsons also reported the $100 a second time.

Cliff C. and Osie B. Wilson filed a timely claim for refund of income tax for 1960, asserting that there was double taxation on the $100 previously mentioned. The Wilsons’ claim was disallowed by the Internal Revenue Service.

The defendant concedes in the present action that the plaintiffs Cliff C. and Osie B. Wilson are entitled to recover on the claim set out in the ninth count of the petition.

Tenth Oov/nt of Petition

In the tenth count of the petition, the plaintiffs assert that they are entitled to interest on any income tax refunds that they may recover in the present action.

TMs is authorized by 26 U.S.C. § 6611.

Affirmative Defense

The defendant asserts as an affirmative defense that the plaintiff Martha E. Robinson is not entitled to recover any income tax for the year 1958 because her claim for 1958 that is involved in the present action was not timely filed with the Internal Revenue Service.

As Mrs. Robinson’s claim for 1958 is presented in the first count of the petition, the previous discussion of that count renders unnecessary any discussion of the defendant’s affirmative defense.

FINDINGS of Fact

The Plaintiffs

1. (a) The plaintiffs are Cliff C. and Osie B. Wilson, Alfred P. Miller, and Martha E. Robinson.

(b) Cliff C. and Osie B. Wilson are husband and wife. Their residential address is 5409 Sunshine Drive, Austin, Texas. They filed joint Federal income tax returns for the calendar years 1958 through 1961.

(c) Alfred P. Miller’s residential address is Box 3, Combes, Texas. He filed individual Federal income tax returns for the calendar years 1958 through 1961.

(d) Martha E. Robinson’s residential address is 405 West King, Kingsville, Texas. She filed individual Federal income tax returns for the calendar years 1958 through 1961.

(e) Alfred P. Miller is a nephew, and Martha E. Robinson is a niece, of Cliff C. Wilson.

(f) For Federal income tax purposes, the plaintiffs were on the cash basis of accounting during, the years involved in this litigation.

The Partnerships

2. (a) During the calendar years 1958 through 1961, the plaintiffs were partners in Cliff C. Wilson & Partners, a partnership that was engaged in farming and cattle ranching.

(b) For Federal income tax purposes, Cliff C. Wilson & Partners was on the accrual basis of accounting during the years involved in the present litigation.

3. (a) Cliff C. Wilson & Partners was formed on May 18, 1951, when Cliff C. Wilson deeded an undivided one-tenth interest in certain properties to each of nine relatives, including two of the present plaintiffs, Martha É. Robinson and Alfred P. Miller.

(b) The properties mentioned in paragraph (a) of this finding consisted of:

(1) a ranch located in Hemphill County, Texas (which will usually be referred to hereafter in the findings as “the Texas ranch”);

(2) 216 cows, 30 bulls, 75 heifers, 3 steers, 178 little calves, and 7 horses located in Hemphill County, Texas ;

(3) a ranch located in Ellis County, Oklahoma (which will usually be referred to hereafter in the findings as “the Oklahoma ranch”); and

(4) 327 cows, 11 bulls, 104 heifers, 107 steers, 180 little calves, and 7 horses in Ellis County, Oklahoma.

(c) Cliff C. Wilson, at or about the time of the formation of Cliff C. Wilson & Partners, prepared a memorandum regarding his deed of an undivided one-tenth interest in certain properties to each of nine relatives, as follows:

To each of the above nine relatives, I made a combination sale and gift of an undivided ten percent interest in all the land and livestock that I own. Date of sale and gift May 18, 1951. I sold them the ten percent interest in the several items at which I figured that I yet had to recover from those items, the maximum price at which I could sell them and still have no income tax to pay. Then I made each a gift of the remaining value that I had in the ten percent sold to him or her. For the land and some of the livestock that turned out to be part sale and part gift. For some of the cattle it turned out to be all sale, and for some it turned out to be all gift. That all is best shown on an enclosure I herewith make entitled “Calculation On Sale And Gift To Relatives.” It shows that sale to the entire nine people totals $204,461.55, and the gift totals $120,127.95.

(d) The operations of Cliff C. Wilson & Partners were not profitable during the early years of the partnership’s existence.

4. (a) The names and addresses of the nine relatives of Cliff C. Wilson mentioned in finding 3(a) were as follows:

Mrs. Martha L. Wilson Roberts, Cleburne, Texas
Mrs. Billie K. Roberts Turner, Cleburne, Teaxs
Mrs. Margaret E. Roberts Anderson, Cleburne, Texas
Alfred Peyton Miller, Raymondville, Texas
Robert Cicero Miller, Raymondville, Texas
Mrs. Martha E. Miller Robinson, Raymondville, Texas
Mrs. Bess Wilson Moorman, McCamey, Texas
Mrs. Mary Verne Moorman Starnes, Arnett, Oklahoma
Mrs. Bess Lee Moorman Walcher, Midland, Texas

(b) The nine relatives of Cliff C. Wilson named in paragraph (a) of this finding filed United States gift tax returns for the calendar year 1951, which returns were prepared for them by Mr. Wilson. The following statement was also prepared by Mr. Wilson for use by each donee as a memorandum accompanying the gift tax return:

* * * It was a purchase to the extent that I [each donee] am to pay for the cattle just that amount which he figures will cause him [Cliff C. Wilson] to need pay no income tax on them, that maximum amount, and he gives me the remainder of the value where there is a remainder. And an exactly similar arrangement for the land. _ In the land and some of the cattle I get a 10% undivided interest. In some of the cattle I get 10% of the donor’s half (he owns only half) of the cattle, making me a 5% undivided interest in those cattle. In the Hemp-hill County, Texas, cattle I get a 10% interest: — 216 cows, 80 bulls, 75 heifers, 8 steers, 178 little calves and 7 horses. For that interest I am to pay my % of $42,255.00 and to receive as gift my % of $9,144.00. In the Ellis County, Oklahoma, cattle, I get a 5% interest: — 327 cows, 11 bulls, 104 heifers, 107 steers, 180 little calves and 7 horses. For that 5% interest I am to pay my % of $32,778.00, and to receive as gift my % of $6,457.50. For an undivided 10% interest in 14,400 acres of land I am to pay a ninth of $129,428.55 and receive as gift a ninth of $104,546.45. When totals and divisions are made it will work out that for land and cattle I individually am to pay $22,717.95 for the interest received in all the land and cattle, and to receive as gift the remainder of value in land and cattle totaling $13,347.55.

(c) (1) A note in the principal amount of $6,625.95, dated May 18, 1951, was executed 'by each of the nine relatives, payable to the order of Cliff C. Wilson and showing on its face that it was given in part payment for the Texas ranch.

(2) A note in the principal amount of $7,755, dated May 18,1951, was executed by each of the nine relatives, payable to the order of Cliff C. Wilson and showing on its face that it was given in part payment for certain lots or parcels of land situated in Ellis County, Oklahoma.

(3) A note in the principal amount of $5,223.02, dated May 18, 1951, was executed by each- of the nine relatives, payable to the order of Cliff C. Wilson and showing on its face that it was given as part payment for livestock located in Ellis County, Oklahoma, and Hemphill County, Texas.

(d) Cliff C. Wilson had never made any gifts to the nine relatives prior to the donation of interests in Cliff C. Wilson & Partners.

(e) Cliff C. Wilson did not inquire as to whether the nine relatives were financially able to make payments on the notes referred to in paragraph (c) of this finding, although he assumed that they were.

(f) The notes mentioned in paragraph (c) of this finding were paid to a great extent by future gifts from Cliff C. Wilson in the form of credits upon such notes.

5. Mrs. Bess Lee Moorman Walcher, a niece of Cliff C. Wilson, died in 1956. Upon her death, Cliff C. Wilson & Partners purchased her interest, thereby increasing each surviving partner’s share in the partnership properties to a one-ninth interest.

6. During the years 1958-1961, Cliff C. and Osie B. Wilson owned a one-ninth interest, Alfred P. Miller owned a one-ninth interest, and Martha E. Bobinson owned a one-ninth interest in Cliff C. Wilson & Partners.

,7» During the years 1958-1961, Cliff C. Wilson was the managing partner of Cliff C. Wilson & Partners.

8. (a) In 1958, Cliff C. Wilson & Partners owned a one-half interest in Starnes, Wilson & Co., a partnership of Arnett, Oklahoma, which was engaged in cattle ranching. The remaining one-half interest in Starnes, Wilson & Co. was owned by Kenneth D. and Mary Verne Starnes, husband and wife, 3628 Villanova Drive, Dallas, Texas.

(b) Kenneth D. Starnes was the managing partner of Starnes, Wilson & Co.

(c) Mary Verne Starnes is a niece of Cliff C. Wilson. During the period 1958-1961, she was a partner in Cliff C. Wilson & Partners.

9. (a) The Texas ranch was used in the ranching operations of Cliff C. Wilson & Partners.

(b)The Oklahoma ranch was used in the ranching operations of Starnes, Wilson & Co.

10. (a) Cliff C. Wilson learned in 1944 that the sale of breeding livestock would be allowed capital gains treatment by the Internal Revenue Service.

(b) Cliff C. Wilson & Partners and Starnes, Wilson & Co. each elected to use the accrual-inventory method of accounting for all its livestock, and each partnership, at all times subsequent to the inception of the partnership’s business, consistently valued its livestock in accordance with the “farm price” method of inventorying livestock. The “farm price” method provides for a valuation of livestock in the inventory at market price, less direct costs of disposition.

(c) There is no evidence in the record that either Cliff C. Wilson & Partners or Starnes, Wilson & Co. ever requested or obtained permission from the Commissioner of Internal Revenue to change to the cash basis of accounting.

(d) The capital gains on livestock involved in this litigation were realized from the sale or other disposition of breeding and draft animals which had been held for more than 12 months.

The 1957Sale by Oliff O. Wilson & Partners

11. (a) On or about April 29,1957, Cliff C. Wilson & Partners sold the Texas ranch, with its livestock and equipment, to Wallace L. Locke, of Miami, Texas. The amount realized from the sale was $422,693.75, which was allocated by the partnership as follows:

Land and improvements_ $365, 760. 00
Sale of equipment, fuUy depreciated- 4,500. 00
Sale of livestock — breeding cattle- $37,880.18
commercial cattle_ 14, 553. 57 52, 433. 75
$422, 693. 75

(b) Cash proceeds from this sale were received by Cliff C. Wilson & Partners in 1957, 1958,1959,1960, and 1961.

(c) In connection with the sale referred to in paragraph (a) of this finding, Cliff C. Wilson & Partners sold the partnership interest in the several specific items of property mentioned in paragraph (a).

12. Cliff C. Wilson & Partners used the “farm price” method of inventorying the cattle that were sold to Wallace L. Locke in April 1957, as indicated in finding 11.

13. The adjusted basis, as of April 29,1957, of the properties sold on that date by Cliff C. Wilson & Partners to Wallace L. Locke, as reported by Cliff C. Wilson & Partners on its partnership income tax return for the calendar year 1957, was as follows:

(A) Land and Building:
4896 acres at $8- $39,168. 00
576 acres at $12.50_ 7, 200.00
609.6 acres at a total price of- 12, 988.17
Legal expense on purchase of 609.6 acres- 20. 65
$59, 376. 82
Depreciable items added after land purchase_ $13,425. 30
Less:
Depreciation allowable- 9, 527. 32 3, 897. 98
Adjusted basis of land and building- $63,274. 80
(B) The adjusted basis of the equipment sold was zero.
(O) The adjusted basis (last inventory value) of livestock sold was $34,582.38.
(D) The legal expenses applicable to the sale amounted to $701.50, which amount was attributed to the land and livestock.

14.(a) The proceeds from the April 1957 sale, referred to in finding 11, were reported by Cliff C. Wilson & Partners to the Internal Eevenue Service on the accrual basis and under the “farm price” method of inventorying the cattle that were involved in that sale.

(b) Cliff C. Wilson & Partners reported the income from the sale on its partnership income tax return for the calendar year 1957 as follows:

Gross sales price_$422,693.75
Cost of sale_ 98,558.68
Gross profit_$324,135. 07
Gross profit percentage—
$324,135.07-í-$422,693.75=76.683%

15.The Internal Eevenue Service, in determining the long-term capital gain on the April 1957 sale of cattle by Cliff C. Wilson & Partners to Wallace L. Locke, applied Section 1013 of the Internal Eevenue Code of 1954. This resulted in deficiency assessments, which were duly paid by the plaintiffs.

2,6. The amounts received by Cliff C. Wilson & Partners pursuant to the April 1952 sale to Wallace L. Locke, with the corresponding realization of gain thereon, after adjustment by the Internal Revenue Service, were as follows, according to the position of the Internal Revenue Service as to the gain realized:

17. (a) The plaintiffs timely filed claims for refund of income taxes paid during the period 1958-1961.

(b) The plaintiffs’ claims for refund relative to the 1957 sale of livestock by Cliff C. Wilson & Partners allege that Section 1018 of the Internal Revenue Code of 1954 is unconstitutional in its application to the sale of breeding livestock which had been valued in inventory under the “farm price” accrual method. The plaintiffs’ recomputation of the 1957 sale is as follows:

Total sales price_$422, 693. 75
Minus cost_ 63,976.30
Long-term capital gain_$358,717.45
Minus double the inventory of cattle raised_ 69,164. 76
Balance to be rendered_$289,552.69
Gross profit percentage — 289,552.69-1-422,693.75=68.5105%

The 1958 Sales by Starnes, Wilson <& Oo.

18. On or about December 12,1958, Starnes, Wilson & Co. sold the following breeding livestock:

19.Starnes, Wilson & Co. reported the December 1958 sale under the installment method on its partnership income tax return for the calendar year 1958, as follows:

Gross sales price-$180, 305
Cost or other basis of livestock- 52, 960
Gross profit-$127, 345
Gross profit percentage 127,345-h180,305=70.6275%

20.With respect to the December 1958 sale, Starnes, Wilson & Co. reported as follows on their income tax return for 1958:

21. For 1958 and previous years, Starnes, Wilson & Co. used the “farm price” method in inventorying livestock involved in sales, including the livestock referred to in finding 18.

22. In addition to the December 1958 sale mentioned in finding 18, Starnes, Wilson & Co. reported two side sales of livestock in 1958, as follows:

Sale A — (96 cows and 5 bulls)
Gross sales price_ _ $15, 618.40
Less: expense of sale_ $565.19
cost or other basis__ 8,430. 00 8,995.19
Net gain_ $6, 623.21
Sale B— (12 horses)
Gross sales price- $1,360.00
Cost or basis_ 480.00
Net gain_ $880.00

23. The expenses of the sale of the livestock referred to in finding 22 totaled $565.19.

24. The proceeds from the livestock sales mentioned in findings 18 and 22 were reported to the Internal Eevenue Service on the accrual basis and under the “farm price” method of inventorying such livestock.

25. The Internal Eevenue Service, in determining the long-term capital gains on the livestock sales by Starnes, Wilson & Co. referred to in findings 18 and 22, applied Section 1013 of the Internal Kevenue Code of 1954. This resulted in deficiency assessments being made by the Internal Eevenue Service against the plaintiffs as partners in Cliff C. Wilson & Partners, which assessments were duly paid by the plaintiffs.

26. The rendition assessment by the Internal Revenue Service against Cliff C. Wilson & Partners on the livestock sales by Starnes, Wilson & Co., referred to in findings 18 and 22, was $22,575.97.

27. The amount received in 1959 by Cliff C. Wilson & Partners on the livestock sales by Starnes, Wilson & Co., referred to in findings 18 and 22, was $64,008.13.

28. The gains realized from the installment sale (finding 18) applicable to calendar year 1958 collections, on the side sales (finding 22), and on the sale of equipment of $718.66, totalling $45,151.89, reported on the Starnes, Wilson & Co. 1958 partnership income tax return, were distributed to the partners in accordance with their interests therein. Therefore, since Cliff C. Wilson & Partners owned a one-half interest in Starnes, Wilson & Co., $22,525.95 was distributed to the former as “Net Gain Under Section 1231,” computed as follows:

Summary of Schedule “D” Capital Cains
Breeding cattle sold (not on installment sale)_ $6,623.21
Horse sales_ 880.00
Installment sale of breeding cattle_ 36,930.02
Sale of equipment_ 718.66
$45,151.89
Schedule “D” long-term gain ($45,151.94X Cliff C. Wilson & Partners’ fifty percent interest (50%) =distributable share ($22,575.95)

29. The gain of $90,414.98 realized from the installment sale (finding 18) applicable to 1959 collections of $128,016.55 was distributed to Cliff C. Wilson & Partners as follows:

Schedule “D” long-term gain ($90,414.98) X Cliff C. Wilson & Partners’ fifty percent interest (50%) = distributable share ($45,207.49)

30. (a) The plaintiffs timely filed claims for refund of income taxes that involved (among other things) the deficiency assessments made by the Internal Revenue Service with, respect to the long-term capital gain on the December 1958 sale of livestock by Starnes, Wilson & Co. referred to in finding 18.

(b) The plaintiffs’ claims for refund relative to the December 1958 livestock sale by Starnes, Wilson & Co. allege that Section 1013 of the Internal Revenue Code of 1954 is unconstitutional in its application to the sale of breeding livestock which had been valued in inventory under the farm price accrual method. The plaintiffs’ recomputation of the December 1958 sale is as follows:

Total sales price, installment sale_$180, 305. 00
Minns cost_ 4,235. 00
Long term capital gain-$176,070. 00
Minns double tbe inventory of raised cattle, plus inventory increase on a few bought cattle- 97,450. 00
Balance on which to pay tax, installment part- $78, 620. 00
Gross profit percentage 78,620-4-180,305.00= 43.603%

The Dissolution of Starnes, Wilson dk Oo.

31.Subsequent to the sales by Starnes, Wilson & Co. described in findings 18 and 22, its remaining livestock and equipment were sold to Cliff C. Wilson & Partners on December 31,1958 for $3,867.19. (This transaction will sometimes be referred to hereafter in the findings as “purchase A.”) The sales price was allocated by Cliff C. Wilson & Partners as follows:

Farm equipment_$3, 042.19
Livestock_ 825.00
$3, 867.19

32. The actual value of the equipment and livestock purchased on December 31, 1958 by Cliff C. Wilson & Partners from Starnes, Wilson & Co. was $1,913.19.

33. The items involved in the December 31, 1958 transaction between Cliff C. Wilson & Partners and Starnes, Wilson & Co., referred to in finding 31, consisted of livestock, a tractor which Cliff C. Wilson & Partners subsequently used as road repair equipment, and other equipment which Cliff C. Wilson & Partners purchased with the purpose of reselling it. The inflated price was paid by Cliff C. Wilson & Partners in order to avoid a lawsuit with Kenneth D. Starnes.

34. (a) Starnes, Wilson & Co. ceased to function at the end of 1958, and it was formally dissolved thereafter.

(b) At the beginning of 1959, Cliff C. Wilson & Partners, the owner of the Oklahoma ranch, took over the possession of that ranch. Roads, windmills, and tanks were in need of repairs, and Cliff C. Wilson & Partners proceeded to make the necessary repairs, with the idea of leasing the ranch to someone else.

The Meals and Lodging Issue

85. Cliff C. Wilson & Partners retained possession of the Oklahoma ranch from the beginning of 1959 until about the middle of August 1959. During that period, there were two dwelling houses and a bunkhouse on the property. One dwelling house was occupied by Cliff C. Wilson and Osie B. Wilson; the other dwelling house was occupied by a married employee of Cliff C. Wilson & Partners and his family; and the bunkhouse was occupied by four single employees of Cliff C. Wilson & Partners.

36. Cliff C. and Osie B. Wilson lived on the Oklahoma ranch during the period mentioned in finding 35 so that Mr. Wilson might look after the property and protect it from theft, and might effectively supervise the activities of the workmen employed on the ranch by Cliff C. Wilson & Partners.

37. During the period mentioned in finding 35, Cliff C. Wilson & Partners provided room and board for the five employees on the Oklahoma ranch as part of their compensation. The partnership defrayed the cost of purchasing the necessary groceries and paid the wife of the married employee wages to prepare meals for the five employees. The partnership also defrayed the cost of purchasing the fuel that was needed to heat the bunkhouse and the dwelling house that was occupied by the married employee and his family, and to cook the meals for the five employees.

38. (a) During the period mentioned in finding 35, the cost of the groceries consumed by Cliff C. and Osie B. Wilson amounted to $200, and the cost of the fuel that was used in heating the dwelling house occupied by Mr. and Mrs. Wilson and in preparing their meals amounted to $191.14. Mr. Wilson paid these amounts out of the partnership funds of Cliff C. Wilson & Partners.

(b) Cliff C. Wilson did not discuss with the other partners in Cliff C. Wilson & Partners the question of whether it was necessary for him to live on the Oklahoma ranch, or whether it was agreeable with the other partners for partnership funds to be used in paying for the groceries and fuel consumed by Mr. and Mrs. Wilson while they lived on the Oklahoma ranch.

39. In reporting their gross income for the calendar year 1959 to the Internal Kevenue Service for income tax purposes, Cliff C. and Osie B. Wilson did not include the amounts of $200 and $191.14 mentioned in finding 38.

40. In auditing the joint income tax return of Cliff C. and Osie B. Wilson for 1959, the Internal Bevenue Service included in the Wilsons’ gross income the items of $200 and $191.14 referred to in finding 38. This resulted in the making of a deficiency assessment by the Internal Bevenue Service against Cliff C. and Osie B. Wilson for 1959, which assessment was duly paid by the Wilsons.

41. Cliff C. and Osie B. Wilson timely filed a claim for the refund of income tax with respect to the year 1959, contending (among other things) that the Internal Bevenue Service acted improperly in including the items of $200 and $191.14 in the Wilsons’ gross income for 1959.

The Road Repair Equipment Issue

42. (a) In the early part of 1959, Cliff C. Wilson & Partners determined that it was necessary for certain repairs to be made in the roads on the Oklahoma ranch, in order to enhance the leasability of the ranch. Pursuant to this determination, the partnership purchased the following equipment (hereinafter referred to as “purchase B”) :

Jan. 1959_G.M.C. pickup truck_$2,260. 00
Feb. 1959_Chevrolet truck_ 1,500. 00
Feb. 1959_Ford tractor & equipment_ 3, 900.79
Mar. 1959_Ford truck (1947)_ 200.00
June 1959_Dirt wagon_ 150.00
?8,010. 79

(b) Included among the equipment used in the road-repair work was an Allis-Chalmers tractor which was purchased from Starnes, Wilson & Co. for $250 on December 31, 1958, but this does not affect the taxability or amount of tax. The cost of the tractor was included in the “farm equipment” category of $3,042.19 in finding 31.

43. It was cheaper for Cliff C. Wilson & Partners to purchase the necessary equipment and to employ the necessary workers to make the road repairs referred to in finding 42, than to engage a contractor to make such repairs.

44. (a) Cliff C. Wilson & Partners purchased the road repair equipment for the sole purpose of repairing the roads on the Oklahoma ranch.

(b) Cliff C. Wilson & Partners used the road-repair equipment solely to repair the roads on the ranch one time in 1959. (As indicated in finding 45, Cliff C. Wilson & Partners leased out the Oklahoma ranch in August 1959.)

45. On August 17, 1959, Eobert C. Miller entered into a lease with Cliff C. Wilson '& Partners for the Oklahoma ranch. The lease was for the term beginning August 17, 1959, and ending May 1,1965.

46. Eobert C. Miller is a nephew of Cliff C. Wilson and was a partner in Cliff C. Wilson & Partners during 1958-1961.

47.On December 31,1959, the remaining farm equipment, road repair equipment, and certain livestock were sold by Cliff C. Wilson & Partners to Eobert C. Miller for $6,000. The items sold to Eobert C. Miller were the same items referred to in findings 31 and 42 as having been purchased by Cliff C. Wilson & Partners.

48.(a) Cliff C. Wilson & Partners allocated the $6,000 sales price mentioned in finding 47 to the adjusted basis in the following proportion:

(b) This method resulted in an allocation of the sales price of $1,913.19 to Purchase A, and $4,086.81 to Purchase B:

(c) The cost figures of $3,867.19 and $8,260.79 appearing in paragraph (b) of this finding both include the sum of $250 representing the cost of the tractor which Cliff C. Wilson & Partners purchased from Starnes, Wilson & Co. on December 31,1958, and subsequently used in the road-repair work on the Oklahoma ranch.

(d) During the taxable years in issue, the recognized gains on sales and exchanges of property used by Cliff C. Wilson & Partners in their trade or business, subject to Section 1231 of the Internal Eevenue Code of 1954, exceeded the recognized losses from such sales and exchanges.

49. (a) Cliff C. Wilson & Partners treated the $6,127.98 loss (actually $5,877.98) as an ordinary loss. The District Director, however, disallowed the ordinary deduction on the ground that the properties were Section 1231 equipment, and since the Section 1231 gains exceeded the recognized losses from such sales and exchanges, the losses were to be offset against such gains.

(b) The plaintiffs filed claims for refund of income tax with the District Director based upon the following assertions :

(1) The loss of $1,954 on the sale of equipment and livestock, which were originally purchased from Starnes, Wilson & Co. in order to avoid a lawsuit, is a fully deductible expense under Section 162(a) of the Internal Eevenue Code of 1954.

(2) The loss of $4,173.98 (actually $3,923.98) on the sale of equipment, purchased and used strictly to perform a repair job for the purchaser Cliff C. Wilson & Partners, is a fully deductible expense under Section 162 (a) of the Internal Eev-enue Code of 1954.

(c) These claims were officially rejected by the District Director on August 12,1963.

The Bad Debt Issue

,5.0. On numerous occasions during the year 1958, Mrs. Osie B. Wilson made directly to her nephew, Everett M. Blackwell, advances or loans that totaled $8,228.72.

51. Everett M. Blackwell was approximately 25 years of age at the time when the advances or loans referred to in finding 50 were made to him by Mrs. Osie B. Wilson in 1958. Some years prior to 1958, during a period of approximately 3% years beginning when Everett M. Blackwell was about 14 years of age and continuing until he was about 17% years old, Everett M. Blackwell had lived with Mrs. Osie B. Wilson and her husband. This was pursuant to arrangements made with the Wilsons by Everett M. Blackwell’s guardian, Fred Blackwell, who was Mrs. Wilson’s brother and Everett M. Blackwell’s uncle. Everett Blackwell’s father (a brother of Mrs. Wilson and of Fred Blackwell) was dead.

52. (a) The first advance or loan from Mrs. Osie B. Wilson to Everett M. Blackwell in 1958 was made on or about February 1, 1958, and was in the amount of $114. At that time, Everett M. Blackwell, who was then married and had not lived with the Wilsons for several years, went to see Mrs. Wilson and told her that he was unemployed and wanted to borrow $114 with which to make a payment on his passenger automobile. Mrs. Wilson let Everett have the $114.

(b) Sometime in March 1958, Everett M. Blackwell went to see Mrs. Osie B. Wilson again and wanted to borrow from her $600 with which to buy a used truck, so that he could go into the business of trucking for hire. Mrs. Wilson refused to make this loan at the time when she was first approached by Everett M. Blackwell. Later, Fred Blackwell (previously mentioned in finding 51) went to see Mrs. Wilson and requested that she reconsider her refusal to loan $600 to Everett M. Blackwell. Fred Blackwell emphasized the fact that Everett was unemployed at the time, and expressed the opinion that Everett would repay the loan. On the basis of Fred Blackwell’s representations, Mrs. Wilson let Everett have the $600.

(c) During the remainder of 1958, Mrs. Osie B. Wilson made numerous advances or loans to Everett M. Blackwell for such purposes as the acquisition of truck registration tags, a further payment on Everett M. Blackwell’s passenger automobile, paying off debts incurred as operating expenses in connection with Everett M. Blackwell’s trucking business, buying out the interest of Everett M. Blackwell’s partner in the trucking business, and purchasing diesel-powered trucks for the trucking business.

(d)As indicated in finding 50, the advances or loans made by Mrs. Osie B. Wilson to Everett M. Blackwell during 1958 totaled $8,228.72. At the times when the several advances or loans were made, there was no understanding between Mrs. Wilson and Everett M. Blackwell concerning the payment of interest by Everett M. Blackwell on the various amounts, and the transactions were not evidenced by any written documentation.

53. (a) On or about August 28, 1958, Everett M. Blackwell signed four promissory notes in favor of Mrs. Osie B. Wilson to cover the advances or loans which Mrs. Wilson had made to Everett M. Blackwell during 1958.

(b) One of the promissory notes referred to in paragraph (a) of this finding was dated June 4,1958, was in the amount of $1,000, and was payable to Mrs. Osie B. Wilson on June 1, 1959, with interest at 6 percent per annum from June 1,1958, until paid.

(c) Another of the promissory notes previously mentioned was dated June 18,1958, was in the amount of $1,000, and was payable to Mrs. Osie B. Wilson on June 18,1960, with interest at 6 percent per annum from June 18, 1958, until paid.

(d) A third promissory note was dated July 27,1958, was in the amount of $1,864.72, and was payable to Mrs. Osie B. Wilson on July 27,1961, with interest at the rate of 6 percent per annum from July 27,1958, until paid.

(e) The fourth promissory note was dated August 28, 1958, was in the amount of $4,364, and was payable to Mrs. Osie B. Wilson on August 28, 1962, with interest at the rate of 6 percent per annum from August 28,1958, until paid.

(f) Although the four promissory notes referred to in this finding were prepared and signed on the same date, they were given different purported dates of execution and different due dates on the advice of counsel, so that bad-debt deductions could be claimed in different years if the notes were not paid.

54. (a) Everett M. Blackwell has never made any payment to Mrs. Osie B. Wilson with respect to the advances or loans which Mrs. Wilson made to him in 1958, as indicated in previous findings.

(b) Mrs. Osie B. Wilson has never demanded any payment from Everett M. Blackwell with respect to the advances or loans previously mentioned. Mrs. Wilson believed that Everett M. Blackwell was not financially able to repay the advances or loans, or any part thereof.

55.Cliff C. and Osie B. Wilson claimed the following amounts as bad-debt deductions for the calendar years 1959-1961 on the basis of the failure of Everett M. Blackwell to pay off the several promissory notes mentioned in finding 58:

1959_$1,000. 00
1960_ 1, 000. 00
1961_ 6,228.72
$8,228. 72

56. The Internal Revenue Service disallowed the claimed bad-debt deductions of $1,000, $1,000, and $6,228.72 for the calendar years 1959, 1960, and 1961, respectively, referred to in finding 55. This resulted in deficiencies being assessed against Cliff C. and Osie B. Wilson for the years 1959,1960, and 1961, respectively, which deficiencies were duly paid by the Wilsons.

57. (a) Cliff C.and Osie B. Wilson timely filed claims for refunds of income taxes with respect to the years 1959,1960, and 1961, asserting (among other things) that the Internal Revenue Service acted improperly in disallowing the bad-debt deductions claimed for the respective years, as indicated in findings 55 and 56.

(b) The evidence in the record does not show that the claimed debts of $1,000, $1,000, and $6,228.72 became worthless within the taxable years 1959, 1960, and 1961, respectively.

The Business Deductions Issue

5,8. In 1960, while the Oklahoma ranch was under lease to Robert C. Miller, a severe wash occurred in a road on the ranch. The wash came to the attention of Cliff C. Wilson, although he was no longer living on the Oklahoma ranch. Mr. Wilson was of the opinion that the wash could be repaired for a relatively small amount if prompt action was taken, but that it would grow much worse in the absence of prompt action.

5.9. Cliff C. Wilson employed a man with a tractor to go on the Oklahoma ranch and repair the wash referred to in finding 58. The cost of the repair job was $38.62, and Cliff C. Wilson defrayed this cost personally, instead of paying it out of the partnership funds of Cliff C. Wilson & Partners, the owner of the Oklahoma ranch.

60. At the time referred to in findings 58 and 59, no one other than Robert C. Miller and his employees made use of the road referred to in finding 58, except for people in the neighborhood who used the road in order to go to a fishing place on the ranch.

61. The lease arrangements between Cliff C. Wilson & Partners and Robert C. Miller relative to the Oklahoma ranch did not impose on Cliff C. Wilson & Partners any legal obligation to keep in repair the road referred to in finding 58.

62. In their joint income tax return for 1960, Cliff C. and Osie B. Wilson claimed a business deduction in the amount of $38.62 with respect to the cost of the road repair job mentioned in finding 59. The Wilsons also claimed the standard deduction of $1,000 for 1960.

63. During the period 1958-1961, Cliff C. and Osie B. Wilson were active in purchasing and selling common stocks for their own account. Their objective in such activities was to make a profit; and they did make a profit on some of the transactions, while losses were incurred on other transactions.

64. The portfolio of common stocks owned by Cliff C. and Osie B. Wilson averaged about $100,000 (at the then-current market prices) during the period 1958-1961.

65. In determining from time to time which common stocks they would purchase and which of the common stocks in their portfolio they would sell, Cliff C. and Osie B. Wilson devoted a substantial amount of time to the performance of research on stock-market conditions and trends, and on the past history, the then-current status, and the seeming future prospects of particular common stocks that were under active consideration either for purchase or for sale. Cliff C. Wilson devoted an average of perhaps two hours per day during' 1958 and 1959, and an average of perhaps three hours per day in 1960 and 1961, to such research work and to other activities involved in the purchase and sale of common stocks. Mrs. Osie B. Wilson devoted an average of perhaps three or four hours per week to such research work and other activities involved in the purchase and sale of common stocks.

66. In performing the research work referred to in finding 65, Cliff C. and Osie B. Wilson utilized (among other materials) literature and other aids which they obtained from Moody & Company and from Standard & Poor, and for which they paid. The amounts expended for such literature and other aids during the period 1958-1961 were as follows:

1958_ $543
1959_ 150
1960_ 144
1961_ 144

67. Cliff C. and Osie B. Wilson purchased some common stocks on margin during the years 1958-1961, although such purchases were relatively small in comparison to the total volume of common stocks purchased by Mr. and Mrs. Wilson during the respective years. Interest payments on the Wil-sons’ margin account during the several years involved in this litigation were as follows:

$8.05 CD <yi CO
105.82 CO C71 CO
35.38 Qi O
89.06 M

,68. In their joint income tax returns for the several years during the period 1958-1961, Cliff C. and Osie B. Wilson reported their profits or losses on sales of common stocks as capital gains or capital losses.

,69|. Neither Cliff C. Wilson nor Osie B. Wilson was a stockbroker during the period 1958-1961. They did not buy or sell common stocks for other persons on a commission basis.

■70. On their joint income tax returns for the several years during the period 1958-1961, Cliff C. and Osie B. Wilson claimed as business deductions the respective amounts which they expended in the form of interest payments on their margin account (as indicated in finding 67), and the respective amounts which they expended for literature and other aids to be used in the performance of research (as indicated in finding 66).

71. Prior to the institution of the present litigation, Cliff C. and Osie B. Wilson successfully prosecuted against the United States an action for the recovery of Federal income taxes paid for the year 1951. The points at issue in the former litigation were the nature and extent of the taxable gains realized by Cliff C. and Osie B. Wilson on sales of livestock in 1951.

.72. Cliff C. Wilson was engaged in the business of raising and selling livestock in 1951, and also in 1958 and 1959.

73. In prosecuting the litigation referred to in finding 71, Cliff C. and Osie B. Wilson incurred expenses amounting to $849.51 in 1958 and $1,663.48 in 1959.

74. The amount recovered by Cliff C. and Osie B. Wilson in the litigation referred to in findings 71-73 exceeded by a considerable margin the total amount of the expense incurred by them in successfully prosecuting the litigation.

75. In their joint income tax returns for the years 1958 and 1959, Cliff C. and Osie B. Wilson claimed as business deductions the amounts of $849.51 and $1,663.43, respedtively, referred to in finding 73.

>7.6. Ever since she was about 9 years old, Mrs. Osie B. Wilson has aspired to be a writer. She has taken many courses of instruction in writing; she has attended many meetings of writers; she 'has written many stories and articles; and she has received many rejection slips, although some of her material has been published.

77. During the 1930’s, 1940’s, and 1950’s, while Mrs. Osie B. Wilson was living in the Panhandle region of Texas with her husband, she submitted numerous feature articles on historical subjects to the Amarillo Daily News. These feature articles related to pioneer times and conditions on the Texas Plains, and to the settlers, peace officers, doctors, ranchers, buffalo hunters, and pioneer women who lived in that region during the early days. Some of these pieces were accepted and published by the Amarillo Daily News, which paid Mrs. Wilson modest fees for the articles accepted.

78. Mrs. Osie B. Wilson and her husband moved from the Texas Panhandle to Mustang Island on the Texas Gulf Coast in 1959, and they lived there through 1960. While living on Mustang Island, Mrs. Wilson engaged in news-gathering activities concerning local events, wrote about them, and submitted the items to the Corpus Christi Caller and the Aransas Pass Progress. These newspapers accepted and published some of the material submitted by Mrs. Wilson, and paid her small amounts for the material accepted.

79. During the period 1958-1960, Mrs. Osie B. Wilson worked rather regularly at her writing and related activities, devoting approximately half of her time to such efforts.

80. (a) Mrs. Osie B. Wilson incurred the following expenses in connection with her writing activities and the submission of articles to the Amarillo Daily News, the Corpus Christi Caller, and the Aransas Pass Progress during the period 1958-1960:

(b) In their joint income tax returns for the several years during the period 1958-1960, Cliff C. and Osie B. Wilson claimed as business deductions the expense items- referred to in paragraph (a) of this finding.-

81. Mrs. Osie B. Wilson received the following gross income from the sale of newspaper articles during the period 1958-1960:

1958_ None
1959_ $18.50
1960_ 202.25

82. (a) In their joint income tax returns for the respective years during the period 1958-1961, Cliff C. and Osie B. Wilson claimed the standard deduction of $1,000 from gross income each year and, in addition, they claimed as business deductions the several amounts referred to in findings 59, 66, 67, 73, and 80 with respect to the various years.

(b) In auditing the income tax returns of Cliff C. and Osie B. Wilson for the several years during the period 1958-1961, the Internal Revenue Service determined that the Wil-sons were not entitled to take the standard deduction of $1,000 from gross income each year and also take as business deductions the various amounts mentioned in findings 59, 66, 67, 73, and 80. The Internal Revenue Service held, in effect, that the Wilsons could elect either to take the standard deduction of $1,000 for each year or to itemize allowable nonbusiness deductions, including among such itemized deductions the various amounts referred to in findings 59, 66, 67, 73, and 80 with respect to the several years.

(c) The result of the action by the Internal Revenue Service, as indicated in paragraph (b) of this finding, was that:

(1) Cliff C. Wilson and Osie B. Wilson elected to claim for 1958 itemized deductions that exceeded $1,000, and were not permitted to claim the standard deduction of $1,000 for that year. The allowable itemized deduction for 1958 included the amounts of $849.51, $543, $8.05, and $236.20 referred to in findings 73, 66, 67, and 80, respectively.

(2) Cliff C. and Osie B. Wilson elected to claim itemized deductions for 1959 that exceeded $1,000, and were not permitted to claim the standard deduction of $1,000 for that year. The allowable itemized deductions for 1959 included the amounts of $1,663.43, $150, $105.82, and $440.59 referred to in findings 73, 66, 67, and 80, respectively.

(3) Cliff C. and Osie B. Wilson elected to claim the standard deduction of $1,000 for 1960, and were not permitted to claim as deductions for 1960 the amounts of $38.62, $144, $35.38, and $380.79 referred to in findings 59, 66, 67, and 80, respectively.

(4) Cliff C. and Osie B. Wilson elected to claim the standard deduction of $1,000 for 1961, and were not permitted to claim as deductions for 1961 the amounts of $144 and $89.06 referred to in findings 66 and 67, respectively.

83. The Internal Revenue Service assessed deficiencies against Cliff C. and Osie B. Wilson on the basis of the actions referred to in finding 82. Such deficiency assessments were duly paid by the Wilsons.

84. Cliff C. and Osie B. Wilson timely filed claims for refunds of income taxes with respect to the several years during the period 1958-1961, contending (among other things) that the Internal Revenue Service acted improperly in refusing to permit the Wilsons to claim both the standard deduction of $1,000 each year and also the several alleged business deductions referred to in findings 59, 66, 67, 73, and 80.

The Double Taxation Issue

85» (a) During the year 1960, Cliff C. Wilson & Partners received $900 as rental under the lease of the Oklahoma ranch to Robert C. Miller.

(b) The sum of $100 out of the $900 referred to in paragraph (a) of this finding was distributed to Cliff C. Wilson as the owner of a one-ninth interest in Cliff C. Wilson & Partners.

.86. On its 1960 partnership income tax return, Cliff C. Wilson & Partners reported as income the $900 referred to in finding 85 (a).

87i. On their joint 1960 income tax return, Cliff C. and Osie B. Wilson reported as income a partnership distribution which included the $100 referred to in finding 85(b), and they also reported the $100 a second time.

88. Cliff C. and Osie B. Wilson filed a timely claim for refund of income tax for the year 1960, on the ground (among others) that there was double taxation on the $100 mentioned in finding 87.

The Retirement Income Credit Issue

89. In each of the years 1959,1960, and 1961, Cliff C. Wilson drew disability retirement pay from the United States Navy on the basis of 100 percent disability as a retired lieutenant commander.

90. In their joint income tax returns for the several years during the period 1959-61, Cliff C. and Osie B. Wilson did not claim any retirement income credit by virtue of the disability retirement pay received by Cliff C. Wilson for the respective years, as indicated in finding 89.

91. In March 1963, Cliff C. and Osie B. Wilson submitted to the Internal Revenue Service claims for refunds with respect to the years 1959, 1960, and 1961, based upon the contention (among others) that Cliff C. Wilson was entitled to retirement income credit for each of these years by virtue of the disability retirement pay received by him, as indicated in finding 89.

The Disallowance of the Claims

92. The claims for refunds of income taxes with respect to the years 1958,1959, 1960, and 1961, referred to in previous findings, were disallowed by the Internal Revenue Service.

The Amounts Claimed

93. (a) The amounts claimed by the plaintiffs Cliff C. and Osie B. Wilson in the present litigation are $750.31 for 1958; $1,676.34 for 1959, $1,086.41 for 1960, and $3,071.73 for 1961, or a total of $6,564.79.

(b) The amounts claimed by the plaintiff Alfred P. Miller in the present litigation are $280.48 for 1958, $233.77 for 1959, and $137.64 for 1960, or a total of $651.89.

(c) The amounts claimed by the plaintiff Martha E. Robinson in the present action are $230.41 for 1958, $366.62 for 1959, $123.84 for 1960, and $30.68 for 1961, or a total of $751.55.

The Ownership <of the Claims

94. The plaintiffs are, and have always been, the sole owners of the claims herein referred to, and have not assigned or transferred the whole or any part thereof, or any interest therein.

The Affirmative Defense

95. On February 6,1959, the plaintiff Martha E. Robinson timely filed a 1958 individual Federal income tax return. On July 7,1959, she filed an amended return for 1958, which made a claim for refund in the amount of $1,908.76. On March 23,1961, she filed an amended claim for refund (Form 843) of $1,718.33. The period of limitation with respect to the assessment of additional tax for 1958, etc., was, by agreement of the parties on Form 872, extended to July 31,1962. The original and amended claims for refund of 1958 tax were fully considered and partially allowed and partially rejected by the District Director in September 1962. In response thereto, Martha E. Robinson executed on October 8, 1962, a Form 870, Waiver of Restriction on Assessment and Collection of Deficiency in Tax and Acceptance of Over-assessment. The overassessment in the amount of $1,390.34, plus interest of. $110.84, was credited to her 1958, 1959, and 1960 tax liability. Subsequently, on March 19,1963, Martha E. Robinson filed what purported to be a further amended claim for refund of $230.41 with respect to 1958; aiid this claim was disallowed on August 29,1963.

CONCLUSIONS OP Law

Upon the foregoing findings of fact and opinion, which are adopted by the court and made a part of the judgment herein, the court concludes as a matter of law that all the plaintiffs are entitled to recover, together with interest as provided by law, under the second count of the petition with respect to the loss that was sustained in connection with the sale of the livestock which had been purchased by Cliff C. Wilson & Partners from Starnes, Wilson & Co., that the plaintiffs Cliff C. and Osie B. Wilson are entitled to recover, together with interest as provided by law, under the fifth count of the petition with respect to the litigation expenses, that the plaintiffs Cliff C. and Osie B. Wilson are entitled to recover, together with interest as provided by law, under the eighth count of the petition, and that the plaintiffs Cliff C. and Osie B. Wilson are entitled to recover, together with interest as provided by law, under the ninth count of the petition, and judgment is entered to that effect. The amounts of the several recoveries will be determined in accordance with Rule 47(c). It is further concluded as a matter of law that the plaintiffs are not entitled to recover on the other claims asserted in the petition, and, accordingly, the petition is dismissed as to such claims. 
      
       The opinion, findings of fact, and. recommended conclusions of laws are submitted under the order of reference and Rule 57(a).
     
      
       The amount of the loss was erroneously calculated to be $4,173.98 by Cliff C. Wilson & Partners, as the partnership included in the cost basis the price of the tractor which had been purchased from Starnes, Wilson & Co. for $250.
     