7913 / How is gain taxed when breeding cattle are sold?

Gain from a sale or disposition of cattle depreciated under the ACRS method is generally recaptured as ordinary income to the extent of all depreciation deductions previously allowed. Amounts expensed under the provisions of IRC Section 179 (discussed in Q 7911 and Q 716) and the adjustments to basis that resulted from claiming the investment tax credit (see Q 7894) are treated as depreciation deductions.¹ If there is a loss on sale of the property, no recapture is necessary.²

Gain (in excess of amounts recaptured as ordinary income) from sale or disposition of cattle held for breeding purposes (including cattle inventoried by certain accrual basis taxpayers), and which are held for 24 months or more from the date of acquisition, is “IRC Section 1231” gain, eligible for long-term capital gain treatment.³ For this purpose, the holding period of an animal born into the herd begins at birth.⁴ For a discussion of “IRC Section 1231” gain, see Q 7834. For the treatment of long-term capital gain, see Q 702.

Gain from the sale of cattle held for sale in the ordinary course of business is ordinary income. Uncertainty often arises as to the treatment of cattle periodically culled from the herd because of their unsuitability for breeding. (However, annual disposition of steer calves and of animals clearly unsuitable for breeding from birth results in ordinary income since these animals are destined for sale.) Whether an animal is held for breeding is determined from all the facts and circumstances. Although the purpose for which an animal is held is ordinarily shown by its actual use, a breeding purpose may be present if an animal is disposed of within a reasonable time after its intended use is prevented or made undesirable by reason of accident, disease, drought, unfitness of the animal for breeding, or similar reasons. An animal is not deemed to be held for breeding merely because it is suitable or merely because it is held for sale to others as a breeding animal. Even if an animal has been bred, it may not be considered to be held for breeding if use of the animal for breeding is negligible or if the animal is bred in order to provide desirable characteristics.⁵