Harry H. Kem, Jr., and Diane C. Kem, Charles E. Miller and Mary J. Miller v. Commissioner of Internal Revenue

At issue in this case is whether a depreciation deduction is available to an owner of breeding cattle who leases them to another under conditions so strict as to protect the lessor against any real economic loss. We hold it is not and affirm the ruling of the Tax Court.

Cattle breeding, the business involved here, presents a classical example of how to derive income from capital within the meaning of Eisner v. Macomber, 252 U.S. 189 , 40 S.Ct. 189 , 64 L.Ed. 521 (1920). The breeder’s capital is his herd, and the annual calf crop his income. According to the record, a healthy cow begins to breed at around age two, and produces one calf a year until her breeding life ends at age seven or eight whereupon she is sold to a slaughterhouse. New heifers to replaced aged or diseased animals are either purchased from other ranchers, or diverted from the calves that would normally be sold for cash.

The variant engaged in by the taxpayers consisted of leasing the breeding herd rather than managing it themselves. In January of 1963, their partnership, the Circle Bar Ranch, leased a breeding herd of about 9,600 head to the group of persons from whom Circle Bar had purchased the cattle only a…