-48-
5. Self-Insurance for Replacement of Herd
Petitioner has the burden of proof on this issue.
Gustafson's Dairy, Inc. v. Commissioner, supra.
Petitioner contends that it accumulated $3,300,000 in fiscal
year 1987, $3,900,000 in fiscal year 1988, and $3,900,000 in
fiscal year 1989 to self-insure against loss of the dairy herd
due to diseases or other natural disasters. This reserve was
based on an assumed herd size of 6,000 cows and a replacement
cost (net of the estimated slaughter price it would receive) of
$550 per cow in fiscal year 1987 and $650 per cow in fiscal years
1988 and 1989.
Petitioner did not have commercial insurance for the risk of
loss of the dairy herd. Few Florida dairies insure their herds
because herd insurance is expensive, not because there is no risk
of loss. The fact that most dairies do not buy insurance
suggests that it was reasonable for petitioner to not buy
insurance. See sec. 1.537-1(a), Income Tax Regs. (prudent
businessperson standard).
Respondent argues that the risks to the herd were too remote
to justify maintaining self-insurance. Respondent points out
that, except for the brucellosis outbreak in the 1970's,
petitioner's herd has not had significant losses. Respondent
points out that hoof-and-mouth disease was eradicated in the
United States in the 1920's, that none of petitioner's cows have
had tuberculosis, that petitioner has lost no cattle from natural
disasters, and that petitioner's barns built in 1982 can
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