Charles. L. Murphy appeals the district court’s summary judgment in his action challenging the constitutionality of 26 U.S.C. § 1256. Murphy contends that Congress exceeded its authority by taxing “unrealized” gains. We have jurisdiction under 28 U.S.C. § 1291 and affirm.
BACKGROUND
During 1987, Murphy was an investor in commodity futures contracts. The parties stipulated and the district court found that all of his contracts “had been purchased on, and were regularly traded on, a national securities exchange registered with the Securities Exchange Commission or a board of trade designated as a contract market by the Commodity Futures Trading Commission.” Ml were held in marked-to-market accounts.
At the end of the 1987 tax year, the fair market value of Murphy’s futures contracts had increased by $20,645. Pursuant to 26 U.S.C. § 1256, Murphy reported that amount on his 1987 tax return as taxable gain! The corresponding -tax owed was $4,372, which Murphy paid under protest. Murphy then filed a claim for refund, which was denied. Ultimately, he filed this refund action in the district court in which he claimed that section 1256 was unconstitutional because it taxed unrealized gain.
The government and Murphy filed cross-motions for summary judgment based upon a joint stipulation of facts. The district court granted the government’s motion for- summary judgment and concluded that section 1256 was constitutional. The district court then denied Murphy’s motion for reconsideration, and Murphy timely appealed.
STANDARD OF REVIEW
“The constitutionality of a statute is a question of law. We therefore review the district courts’ rulings de novo.”
Seattle Audubon Soc’y v. Robertson,
DISCUSSION
The Sixteenth Amendment provides:
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
“The power of Congress in levying taxes is very wide, and where a classification is made of taxpayers that is reasonable, and not merely arbitrary and capricious, the Fifth Amendment can not apply.”
Barclay & Co. v. Edwards,
“Commodity futures contracts are executo-ry contracts representing a commitment to deliver or receive a specified quantity and grade of a commodity during a specified future month at a designated price.”
Dial v. Commissioner,
Because of the timing aspect of futures contracts, traders were able to defer tax on short-term capital gain and to convert short-term capital gain realized in the first year into preferentially taxed long-term capital gain in a later year. Id. at 155-56, 1981 U.S.C.C.A.N. at 254-255. In addition, traders holding futures contracts were entitled to withdraw their gains at the close of every day under the marked-to-market system. Id. at 157, 1981 U.S.C.C.A.N. at 256. Thus, Congress enacted 26 U.S.C. § 1256, which provides, in part:
(a)(1) [E]aeh section 1256 contract held by the taxpayer at the close of the taxable year shall be treated as sold for its fair market value on the last business day of .such taxable year (and any gain or loss shall be taken into account for the taxable year) ...
* * * * * *
(b) For purposes of this section, the term “section 1256 contract” means—
(1) any regulated futures contract.
The section does, as the Senate Report indicates, have the effect of ending the “use of futures for tax-avoidance purposes.” S.Rep. No. 144, 97th Cong., 1st Sess. 156 (1981), 1981 U.S.C.C.A.N. 255. The section also tends to “establish an accurate method of determining a taxpayer’s futures income (or loss), and ease tax administration and paperwork.” Id. Murphy argues, .however, that section 1256 is unconstitutional because it taxes unrealized gains. We disagree.
Section 1256 is premised on the doctrine of constructive receipt because the taxpayer who trades futures contracts receives profits as matter of right daily.
Id.
at 157, 1981 U.S.C.C.A.N. at 256. Under this doctrine, “[i]ncome although not actually reduced to a taxpayer’s possession is constructively received by him in the taxable year during which it is . •.. made available so that he may draw upon it at any time____” Treas.Reg. § 1.451-2(a) (as amended in 1979). For example, “[dividends on corporate stock are constructively received when unqualifiedly made subject to the demand of the shareholder.” Treas.Reg. § 1.451-2(b). Similarly, “[t]he power to dispose of income is the equivalent of ownership of it. The exercise of that power to procure, the payment of income to another is the enjoyment, and hence the realization, of the income by him who exercises it.”
Helvering v. Horst,
Although Murphy did not sell his futures contracts, his gains could be treated as realized because he was entitled to withdraw those gains daily. There were no restrictions, and his failure to receive cash was entirely due to his own volition.
See id.; cf. Baxter v. Commissioner,
CONCLUSION
Because of the unique accounting method governing futures contracts, the gains inherent in them are properly treated as constructively received. Congress acted well within its authority when it decided to treat them differently from other capital assets. Thus, section 1256 is neither arbitrary, capricious, nor confiscatory and is a proper exercise of Congress’ constitutional power to tax.
See Chiles,
AFFIRMED.