## Facts

- Launce E. Gamble and Joan L. Gamble filed a joint federal income-tax return for 1971.
- Launce Gamble conducted a thoroughbred horse-racing activity treated as a trade or business; over time he owned interests in multiple racehorses and broodmares, but maintained a relatively small stable.
- Gamble purchased a pregnant broodmare, Champagne Woman, for use in his horse-racing business; the foal’s sire was a high-value stallion.
- Gamble insured the in-utero foal separately from the mare for $20,000.
- The colt was sold at auction as a yearling (about 16 months old), before being trained or raced, yielding net proceeds of $125,000 after selling costs.
- On the 1971 return, the Gambles treated the colt as property used in a trade or business under I.R.C. § 1231 and reported the gain as capital gain, claiming a $30,000 basis derived from stud-fee and allocation methods.
- The Commissioner determined a deficiency, asserting (1) the colt was held primarily for sale to customers in the ordinary course of business (ordinary income), and (2) the colt’s basis was zero because the mare’s purchase price could not be allocated to the foal.

## Issues

1. Whether the yearling colt was held “primarily for sale to customers in the ordinary course” of Gamble’s horse business, making the gain ordinary income rather than § 1231 capital gain.
2. Whether the colt had a cost basis greater than zero, and if so, the proper amount of basis to allocate to the colt.

## Decision

- The Tax Court held the colt was not held primarily for sale to customers in the ordinary course of Gamble’s business.
- The court treated the colt as § 1231 property; the resulting gain qualified for capital-gain treatment under I.R.C. § 1231(a).
- The court rejected the Commissioner’s zero-basis position and found a reasonable basis allocation of $20,000 to the colt.
- The deficiency was to be recomputed under the court’s holdings.

## Legal Principles

- For I.R.C. § 1231 purposes, the exclusion for property held “primarily for sale to customers in the ordinary course” applies only when the sales purpose is of first importance; mixed motives do not satisfy the exclusion unless the sales motive predominates.
- In determining whether property is held primarily for sale, the court examines the taxpayer’s intent and the character of the overall activity, including whether the operation resembles a racing enterprise rather than a dealership.
- When a broodmare is purchased while pregnant and evidence shows the unborn foal has recognized economic value (including separate insurance and market indicators such as stud-fee data), a portion of acquisition cost may be allocated to the foal as basis.

## Conclusion

The Tax Court concluded that Gamble’s yearling colt was § 1231 property rather than inventory held primarily for sale, so the sale generated capital gain, and it allowed a $20,000 basis allocated to the colt based on the economic value attributable to the in-utero foal at acquisition.


Gamble v. Commissioner, 68 T.C. 800 (1977)