General Livestock

Table of Contents

• Chapter 1, Introduction
  • Purpose of the Guide
  • Keeping in Touch with the Industry
  • Compliance Potential
  • General Livestock Risks
  • Changes in Methods of Accounting
  • Conclusion

• Chapter 2, Examination Techniques
  • Pre-Planning
  • Document Request/Appointment Schedule
  • Initial Interview
  • Site Visit
  • Audit Steps
  • Closing Conference
  • Conclusion

• Chapter 3, Industry Issues
  • Common Issues
  • Breeder Operation
  • Fattening/Feeding Operation

  • Issues
    • IRC section 1231
    • IRC section 162
    • IRC section 61
    • IRC section 168
    • IRC section 179
    • IRC section 183
    • IRC section 195
    • IRC section 451
    • IRC section 465
    • IRC section 469
    • IRC section 471
    • IRC section 1033

  • Conclusion
  • Unique Characteristics

• Chapter 4, Cattle Industry
  • Introduction
  • Industry Facts

  • Issues
    • IRC section 162
    • IRC section 61
    • IRC section 168
    • IRC section 469

• Chapter 5, Dairy Cattle Industry
  • Introduction
  • Industry Facts
  • Issues
    • IRC section 61
    • IRC section 168

• Chapter 6, Horse Industry
  • Introduction
  • Industry Facts
  • Issues
    • IRC section 1231
    • IRC section 61
    • IRC section 168

• Chapter 7, Sheep And Goat Industry
  • Introduction
  • Sheep
  • Goats
  • Industry Facts
  • Issues
    • IRC section 162
    • IRC section 61
    • IRC section 168

• Chapter 8, Swine Industry
  • Introduction
  • Industry Facts

  • Issues
    • IRC section 168

• Chapter 9, Ratites And Alternative Livestock Industry
  • Ratites
    • Introduction
    • Industry Facts
    • End Products

  • Issues
    • IRC section 1231
    • IRC section 61
    • IRC section 168
    • IRC section 179
    • IRC section 195
    • IRC section 469

  • Alternative Livestock
    • Introduction

  • Issues
    • IRC section 1231
    • IRC section 61
    • IRC section 168
    • IRC section 179
    • IRC section 195
    • IRC section 469

• Appendix - A, Glossary-Livestock Terms
  • Quick Facts Related to Livestock Farming
    • Cattle
    • Horses
    • Sheep
    • Swine
    • Mink Farming

  • Glossary

• Appendix - B, Interview Questions - By Type
  • Introduction
  • Farm Initial Interview
  • Beef Interview Questions
  • Dairy Interview Questions
  • Swine Interview Questions
  • Sheep Interview Questions
  • Exotic Animal Interview Questions

• Appendix - C, Other Sources Of Information
  • MSSP Audit Guides
  • Publications
  • Periodicals and Non-IRS Publications

• Appendix - D, Livestock Breed Associations
  • Ass Breed Associations
  • Cattle Breed Associations
  • Goat Breed Associations
  • Horse Breed Association
  • Sheep Breed Associations
  • Swine Breed Associations

• Appendix - E, United States Department Of Agriculture
  • Electronic Sources of Information

Disease presents danger, but improvements in health care and breeding have reduced the potential problems over the years. Improvements continue to be made.

The cattle chosen for use in the dairy process often are "grade cattle" with no pedigree but with predominant characteristics of certain dairy breeds. These farms focus on commercial production seeking maximum returns with minimum investment. The quality of milk will not generally suffer in this herd configuration.

Farms utilizing purebred cattle often are involved in the side line activities of breeding for resale and competing in shows and fairs. Operations of this nature, to be truly successful, will be involved in careful recordkeeping of breeding dates, calving dates, sales, transfers and other information. Tagging and tattooing, sketches and photographs, and proper registration procedures will all be meticulously followed to maximize the results of the processes.

The breed chosen for a particular operation may be tied to the requirements of the principle buyer regarding the makeup of the milk in solids, fats, proteins, etc. Feed components and nutritional additives will also be geared toward these requirements. Proteins, fats, carbohydrates, and minerals and vitamins are all balanced to provide maximum yield.

Feeds acquired may include alfalfa, clover, soybean hay, and certain grass hays. Care is taken to acquire feed which has been properly processed and cured to realize the greatest nutritional benefit. Corn, sorghum, and grass silage may also be purchased, stored in silos or bunkers, and fed as a part of the overall feeding strategy. Some types of cattle may also require grains to supply the requirements of body maintenance and milk production. A wide variety of supplements may be included in feed mixtures to produce the desired result.

Pasturing considerations include the adequacy of grazing material, type of material, and effect of material on the health of the cattle and the milk produced. The use of pasturing will be determined by the style and methodology of the farmer as well as availability of satisfactory fields. Pastured animals will require return to the milking barn twice daily. This travel plus the potential of bloat, poisoning hazard and undesirable flavoring of milk due to certain types of forage tend to weigh against pasture usage. The positive aspects include cleaner and better rested animals, yards and lots requiring less cleaning, a reduced fly problem, and the reduction of mastitis and foot rot.

Regenerating dairy herds through breeding the cows and retention of the heifer calves for future inclusion in the herd is very common. This limits the possibility of introducing disease into the herd through purchased cattle. Calves may be placed with nurse cows which do not fit the herd requirements well, but are still beneficial for this purpose. The heifer calves retained will not be productive milk producers until two years old. Feeding young heifers requires special considerations to properly prepare them for breeding and milk production.

Bull calves are generally sold although they may be kept for use in later breeding. The earliest a bull calf will likely be placed in service is 12 months on a restricted basis. Rather than retaining and maintaining bulls for the herd, dairy farmers may use stud services or, more likely, artificial insemination.

Animals purchased for replacement or expansion of the herd will require special handling and testing to avoid contamination of the herd. These additional cost measures can result in the avoidance of additional expenses later.

Veterinary expenses are common in dairy operations. The following conditions, among others, will usually warrant involvement of a veterinarian: (1) Sickness due to disease-producing organisms such as mastitis, metritis, and pneumonia, (2) problems in calving or retained afterbirth, (3) tests for brucellosis, tuberculosis, leptospirosis, vibrio, and trichomoniasis in bulls, (4) pregnancy and breeding problems, (5) injuries, and (6) cows off feed.

Modern milking equipment and facilities are costly and require certain maintenance and testing to ensure proper functioning and to limit disease potential within the herd as well as the product. Stainless steel is common and the related initial cost is high. Barns may range from conventional types to fully automated high-tech facilities. Equipment will exist for all stages of animal and product handling. Elevators, augers, and conveyers are used in feed movement along with feed carts, silos, mixers and grinders. Milking machines, pumps, and storage or transport tanks handle the milk produced. Barn cleaning equipment, manure spreaders, along with manure dryers and packaging equipment may be used. Many types of equipment are necessary to facilitate dehorning, hoof trimming, bleeding and testing the cattle.

Additional equipment will be used for pasture care and production. Expenses for seed, fertilizer and chemicals, and possibly pasture lease will be reasonable in operations utilizing pasturing.

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Record production figures (measured in pounds) for the various breeds is shown below. These records date to the early 60's as reported by Coletti. The number following the production is the time period for the production in days.

Dairy Breed	Butterfat Produced	Milk Produced
Ayrshire	1,079 / 305	24,630 / 305
Brown Swiss	1,733 / 365	34,850 / 365
Guernsey	1,451 / 365	29,665 / 365
Holstein	1,866 / 365	42,805 / 365
Jersey	1,343 / 365	25,293 / 365
Milking Shorthorn	957 / 365	23,734 / 365

The following narrative related to milk costs and returns was downloaded from the Economic Research Service of USDA at the website, http:/www.ers.usda.gov.

1994-95 Costs of Production from the Farm Costs and Returns Survey

Total 1995 U.S. cash production costs averaged $12.49 per hundredweight (cwt) of milk sold, down from $12.90 in 1994. Lower feed costs were primarily responsible for the decline. With 1994 corn and soybeans yields much improved, concentrates costs in 1995 averaged 5 percent below a year earlier. Both average 1995 hay and silage costs were down 13 percent.

Cash production costs varied by region. The Southeast continued to see the highest costs, averaging $14.23 per cwt of milk sold, while the Pacific again saw the lowest costs, averaging $10.89 per cwt of milk sold. However, only the Northeast region failed to see a decline in total cash costs from 1994 to 1995, as variable cash expenses stayed unchanged and fixed cash costs rose 8 percent.

The average 3-percent decline in total cash expenses from 1994 to 1995 was enough to improve the position of U.S. dairy producers' gross value of production less cash expenses. On a regional basis, however, unchanged variable cash expenses brought the gross value of production less cash expenses down by 50 cents per cwt of milk sold.

Residual returns to management and risk improved in 4 out of the 6 regions in 1995, as total economic costs declined. However, only the Pacific region's returns climbed out of the negative column.

Farm Business Economics Branch-Economic Research Service/USDA Updated: September 30, 1996

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Rev. Rul. 77-168 (1977-1 C.B. 248) deals with the method of computing basis for their milk base when additional milk base is purchased following the receipt of the initial allocation. In computing the gain on the sale, the "first-in, first-out" method described in Treas. Reg. section 1.1012-1(c)(1) must be used in computing basis. The full text of the revenue ruling provides further details.

Income reporting may be required on receipt of payments made under the Dairy Refund Payment Program. The Dairy Refund Payment Program (DRPP), administered by the CCC, refunds the reductions in price received by eligible producers during a calendar year. Milk processors, milk handlers, and others responsible for the marketing of milk withhold the reductions in price from their payments to the producers and send the withheld amounts to the CCC. If the producer can prove that milk marketing for the current year did not exceed milk marketing for the prior year, the producer is eligible for a refund of the reductions in price. Typically, an eligible producer receives a refund of the reductions in price in a year after the reductions occurred. Proper reporting of the refund depends on whether the producer claimed the reductions in price as an expense in the year they occurred. See Publication 225, chapter 4, for examples of proper reporting of refunds of reductions in price.

By-product sales include manure either packaged or in bulk for fertilizer. Calves may be sold if not necessary for expansion of the dairy herd. Breeders with quality bulls may provide stud services or sell semen. Milk, and milk products, may be prepared for direct sale from the dairy.

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According to the U.S. Department of Commerce, International Trade Administration, most U.S. horse meat is exported to Europe where it is especially popular in Belgium and France. Horses are covered under the Federal Meat Inspection Act and thus must be slaughtered under federal or state inspection. Any carcasses slaughtered for sale must be inspected. There are no quality or yield grades for horse meat. Horse meat is also used in some pet foods.

Although many Americans have an aversion to eating horse meat, the horse meat industry is now rivaling the beef and pork industries in the amounts of fresh meat shipped abroad. In 1994, meat from 109,353 horses was shipped overseas. In Sweden horse meat outsells lamb and mutton combined. It is also commonly consumed in Spain, Italy, Switzerland, Germany, Austria, and the Netherlands, but it is most popular in Belgium and France.

See the write-up for beef cattle for the general concepts of this type of operation.

Horses (equines) federally inspected:

1984: 130,825
1989: 342,877
1993: 184,320
1994: 109,353

Most horse operations will be breeding race, show, work or special purpose horses. Ancillary operations for training and boarding will also be included in this MSSP segment.

Training operations will take in horses and provide feed, boarding, and training appropriate to the purpose of the horse. Race horses, whether thoroughbreds, quarterhorses, walkers, trotters, or other types, will be provided appropriate training over a period of time. Show horses, likewise, receive extensive training and grooming. The trainers will charge fees for feed and board on a daily rate and charge out the training at flat rates, hourly rates, or may accept an interest in the horse as a fee. This type of fee requires determination of value for inclusion as income in the current year. The amount determined as income would become the basis of the interest. The horse owner would recognize the transfer of the interest as a sale and realize a gain or loss on the transfer as it relates to the basis of the horse. See F.C. McDougal et al. (1974) 62 TC 720 for this court decision.

A boarding facility will normally provide only feed, board, and general care. These services will be priced out on a daily basis with special charges for unusual care situations as they arise. The necessity of veterinary services would be an example of unusual situations.

Breeding work horses will entail many of the same aspects of other breeding operations without the high level of appearance. Emphasis on the work characteristics of the horses is common with purebreed considerations downplayed. Working horses would be those used in other operations for draft purposes or herding and rounding up other animals. Riding fences in rugged terrain to determine and execute repairs would be another function of work horses.

Special purpose horses would include those trained for rodeo, riding, hackney, or other such uses. Some overlap of other areas may be possible. The market for these horses is not extensive but lack of recordkeeping might result in tracking difficulties.

Race and show horses will likely be 100-percent registered purebreds with detailed tracking information available in the taxpayer's records and through the breed associations. The larger, more serious operations will limit activity to animals with known breeding lineage of successful animals to attempt to maximize potential. Seldom will a horse with an unproven lineage rise to the top of the sport. When this does occur, these animals will be highly documented to ensure profitability from future breeding activities.

Expenses related to horse breeder operations will include purchases of animals, veterinary fees to keep the animals in the best health condition, facilities for boarding, feeding, and training, fees for breeding services (either stud or artificial insemination,) insurance coverage of the animals to compensate for losses due to injury or accident, advertising and promotion, and specialized feed materials.

Events, shows and races, involving the animals will require entry fees which are deducted as current expenses. A certain type of race, known as a "futurity", involves periodic payments of entry fees toward a future event. These payments are also deducted currently even though the animal may be unable to participate for any number of reasons.

Race horses have been subject to "syndication," the partitioning of ownership among, typically, up to 40 shareholders. The syndicated shares often contain breeding rights for the owners in addition to rights to profits. See IRC section 464 for the technical definition and application of rules for farming "syndicates."

Stud services are a common source of income for owners of recognized successful animals. The services may carry guarantees related to conception. A private treaty is a one-on-one breeding agreement which may have any type of special arrangement imaginable. No foal free return (NFFR) allows subsequent year attempt if no foal is conceived in current year. No foal no fee (NFNF) guarantees foal or no liability is incurred. Neither NFFR nor NFNF are common in the United States. The live foal guarantee likely carries a higher stud fee due to the additional financial risk to the stallion owner. If no live foal is produced, the mare may return for service or, possibly, another mare may be substituted. These guarantees may affect income.

Weaning foals takes place from 4 to 6 months of age. Colts, as young as 12-months, can impregnate mares. However, normal usage as a stallion will not take place until 2 years. The decision to castrate, geld, colts will often be made between 1 and 2 years of age, depending on the ability to keep the colt separate from mares. Training will begin early with temperament being the primary goal. Eventual addition of saddle and bridle will prepare the foal for being mounted by the age of two years when it has achieved the majority of its growth. A 3-year old should be in its prime and require only fine tuning training for further improvement.

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Treas. Reg. section 1.1231-2(c)(1) provides that

"* * *Whether a horse is held for racing purposes shall be determined in accordance with the following rules:

1. A horse which has actually been raced at a public race track shall, except in rare and unusual circumstances, be considered as held for racing purposes.

2. A horse which has not been raced at a public track shall be considered as held for racing purposes if it has been trained to race and other facts and circumstances in the particular case also indicate that the horse was held for this purpose. [accompanying clarification included]

3. A horse which has neither been raced at a public track nor trained for racing shall not, except in rare and unusual circumstances, be considered as held for racing purposes." [Examples follow in the regulations.]

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Syndication sales will normally involve significant amounts to be recognized. Stud services will be a recurring source of income in many instances.

IRC Section 168

1. any race horse which is more than 2 years old at the time it is placed in service,
2. any horse other than a race horse which is more than 12 years old at the time it is place in service.

Any other horse which qualifies for depreciation will be 7-year property.

Within the horse industry, a horse is considered to have been born on January 1 of the year of birth for designation as a 1-year old, 2-year old, etc.

Geldings cannot be placed in service in a breeding operation except in working or "teasing applications.

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