KENNETH H. VAN RADEN AND SUSAN L. VAN RADEN, FRED F. VAN RADEN AND CORINNE B. VAN RADEN, Docket Nos. 1336-76, 1407-76. Filed March 29, 1979. Petitioners, cash basis taxpayers, invested as limited partners in Cyril David Kasmir, for the petitioners. GOFFE, Judge: The Commissioner determined deficiencies in Federal income tax of petitioners as follows: Upon the joint motion of the parties, these cases were consolidated for purposes of trial, briefs, and opinion. Due to concessions, the only issue remaining for our decision is: Whether Western Trio-VR, a limited partnership, of which petitioners were the limited partners, is entitled to deduct in the year of purchase and payment the cost of a 1-year supply of feed, purchased for its cattle-feeding operations, which was consumed by the cattle in the taxable year following the year of purchase. FINDINGS OF FACT Some of the facts have been stipulated. The stipulations of facts with attached exhibits are found as facts and incorporated herein by reference. Of the stipulated facts only those necessary to an understanding of the opinion will be repeated herein. Petitioner Kenneth H. Van Raden and his wife, Susan L. Van Raden, timely filed their joint Federal income tax return for the taxable year 1972 with the District Director of Internal Revenue at Ogden, Utah. At the time of the filing of their petition they resided at Hillsboro, Ore. Petitioner Fred F. Van Raden and his wife, Corinne B. Van Raden, timely filed their joint Federal income tax return for the taxable year 1972 with the office of the Internal Revenue Service Center at Ogden, Utah. They resided at Hillsboro, Ore., at the time of filing their petition. Prior to July 1972, petitioners owned shares of stock in Peerless Trailer & Truck Services, Inc., as follows: Name of owner Kenneth H. Van Raden Kenneth H. and Susan L. Van Raden as joint tenants with right of survivorship Total shares Fred F. Van Raden Number of shares 1,535 135 1,670 762 1,219 1,981 Fred F. and Corinne B. Van Raden as joint tenants with right of survivorship Total shares .... In July 1972, petitioners sold their shares of stock in Peerless. They realized and reported long-term capital gain in the amounts of $2,154,501 (Kenneth and his wife Susan), and $2,482,458 (Fred and his wife Corinne). Petitioners wanted to invest the proceeds from the sale of their stock and to this end they examined various investment possibilities. One investment opportunity presented to them by a Portland, Ore., brokerage firm was a cattle-feeding operation. In the autumn of 1972 petitioners discussed investing in a cattle-feeding program with Clark S. Willingham who represented Western Trio Cattle Co. (Western Trio). Petitioners considered the potential profit, potential tax benefit, and the cash required to invest in a Western Trio cattle-feeding program. Petitioners as limited partners and Western Trio as the general partner organized a limited partnership, Western Trio-VR (Trio-VR), on December 26, 1972. The investments of petitioners in Trio-VR were made pursuant to a Private Placement Memorandum dated December 13, 1972. The limited partnership interests in Trio-VR and the related Private Placement Memorandum were exempt from registration with the Securities and Exchange Commission under section 4(2) of the Securities Act of 1933. Petitioner Kenneth H. Van Raden and petitioner Fred F. Van Raden each contributed $150,000 to Trio-VR. Under the terms of the partnership agreement all of the losses and all of the profits and gains due the limited partners were allocated to the limited partners in the ratio of their respective capital contributions. Any profits withdrawn prior to 3 years were allocated 85 percent to the redeeming limited partner and 15 percent to the general partner. As to the proportion of the limited partner's capital contribution which remains in the partnership for a minimum of 3 years, the limited partner had allocated to his account, on a year-by-year cumulative basis, an amount which recovers any similarly proportionate charges to such limited partner's account, plus 25 percent of such proportion of the limited partner's contribution, if profits and gains are sufficient to permit such allocation. After such allocation, the remaining profits and gains were allocated 85 percent to the limited partners and 15 percent to the general partner. Western Trio, the general partner in Trio-VR, is a general partnership that was organized under the laws of Oklahoma on June 1, 1972. Its principal place of business is Guymon, Okla. The partners of Western Trio were H. C. Hitch, Jr., Paul H. Hitch, and Clark S. Willingham. It was organized to seek investments in cattle for profit and to act as a general partner in limited partnerships to be offered in private placements and public offerings. The limited partnerships were presented to investors as "programs" and were designed to take advantage of tax benefits which, in its opinion, were available in farming operations. Western Trio was engaged in the business. of purchasing, grazing, feeding, and selling cattle on behalf of the limited partnerships of which it was the general partner. Trio-VR was organized to purchase, graze, feed, and sell cattle, which it did. Petitioners, as limited partners, made no business decisions of Trio-VR. Instead, all of the business decisions, which included the purchase of feed and cattle and the sale of cattle, were made by F. Edward Herron, the general manager of Western Trio, and by H. C. Hitch., Jr. Mr. Hitch has been engaged in the farming business all of his life which has included raising crops and buying, feeding, and selling cattle. In 1965, Mr. Hitch was honored as cattle feeder of the year by "Feed Lot Magazine." On December 26, 1972, Trio-VR purchased and paid for the following amounts of feed to be used in its cattle-feeding operations: (a) 4,716,981 pounds of silage at $0.0053 per pound, or $25,000 from Master Feeders, Inc. (Master Feeders). (b) 10,640,000 pounds of corn at $0.03152 per pound, or $335,400 from Feeders Grain & Fertilizer, Inc. (Feeders Grain). H. C. Hitch, Jr., and his brother, Paul H. Hitch, were officers of both Master Feeders and Feeders Grain in 1972, 1973, and 1974. For the same period they were the sole shareholders of Master Feeders and together owned 71 percent of Feeders Grain. Trio-VR operated its business in Hooker, Okla., which is located in the "Oklahoma Panhandle" near Guymon, Okla. The price of feed in the Guymon area varied directly with grain prices in Kansas City, Mo., and Chicago, Ill. The cash prices per bushel of No. 2 yellow corn on the Kansas City grain market were as shown in Table I on page 1087. The cash prices per bushel of No. 2 yellow corn on the Chicago grain market were as shown in Table II on page 1088. Trio-VR purchased the feed in December 1972 because generally the price is lower at that point in time than in succeeding months until the next grain harvest. Trio-VR calculated the December 1972 purchase to be its needs for 1 year. It has been Mr. Hitch's practice to purchase a year's supply of feed at one time in the autumn months. The amount of feed purchased was based upon projections of the number of head of cattle to be fed over the next year and the anticipated rate of consumption, not the income tax deductions to be generated by the purchase. The estimated needs were 40 to 45 bushels of feed per head of cattle. The operation anticipated purchasing "feeder" cattle which weighed from 650 to 1,150 pounds, feeding them for 150 days and selling them. Also, on December 26, 1972, Trio-VR purchased and paid for 149 head of cattle from Five Flags Cattle Co., Inc. (Five Flags), for $56,672.76. Seventy-five percent of the capital stock of Five |