1940 BTA LEXIS 1205 | B.T.A. | 1940
Lead Opinion
The petitioner contends that the losses it sustained in its dealings in refined oil futures were normal business losses. This
The respondent concedes petitioner’s loss but contends that its investments in refined oil futures were capital assets within the definition set out in paragraph (b) of section 11T, Revenue Act of 1934, as follows:
(b) Definition of Capital Assets. — Por the liurposes of this title, “capital assets” means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.
If the respondent is correct in his classification of these assets, his holding must be sustained since the law limits deductions for losses from sales or exchanges of capital assets to $2,000, plus gains from such transactions. Sec. 117 (d), Revenue Act 1934; Joseph R. Seeds, 37 B. T. A. 705. In this proceeding the burden is upon petitioner to show that respondent’s classification is incorrect. Lightsey v. Commissioner, 63 Fed. (2d) 254.
The definition quoted identifies as “capital assets” property held by a taxpayer “whether or not connected with his trade or business”, except stock in trade, property includable in the inventory of the taxpayer if on hand at the close of the taxable year, or property held “primarily for sale to customers in the ordinary course of his trade or business.” The petitioner claims that the assets here involved were held under these excepted categories, and that its loss resulted from their “sale in the regular course of its business.”
On the first point petitioner sets forth its contention in its brief as follows:
It is the primary contention of tbe taxpayer that its transactions in refined oil futures were essentially a part of a process of production or other acquisition of property for sale to customers in the ordinary course of its trade or business. Correspondingly, we urge that we are not dealing with capital assets, and that losses sustained are not subject to those provisions of the Revenue Act of 1934 relating to capital losses. * * *
On brief the petitioner argues two grounds to justify its claims as a manufacturer of and/or dealer in refined cottonseed oil. The
Whatever justification the entering into of these transactions may have had from the standpoint of business necessity or custom, it is clear from the record that petitioner acquired through them no property which it held for sale to customers. It contends that the contracts amounted to purchase of refined oil, but we think otherwise. Such transactions were mere executory contracts to purchase, which it acquired with a positive intent not to close into completed purchases and not to acquire any specific commodity through them. Such conclusion as to petitioner’s intent in the premises is inescapable from explanations made by its manager while testifying at the hearing. Typical is the answer made by the witness to a question asking him to explain the oft-repeated statement to the effect that through these transactions in futures crude oil sold was replaced by refined oil. The question and answer are as follows:
Member : You talked about replacing it with refined oil. Do you take delivery, actual delivery, of the refined oil that you bought on futures?
Witness: No, sir, we did not. That would put us back in about the same position as if we would have the refined. We would have the actual oil on hand, which we would have to buy, and it is cheaper to carry it in the crude than in the refined oil.
That in such transactions the petitioner was speculating on the ultimate liquidation of its contracts, and not on commodities “in kind”, is shown from these further answers of the witness to questions as follows:
Member: You made a settlement of these futures purchases on the basis of the difference in the market price at the effective date of the futures purchased, and the price you paid for it?
Witness: Of course, you have the right to demand delivery, and if you do not want delivery, if at that time there was a satisfactory market on which to sell that contract, we would sell it, but otherwise if it was not, we might transfer it into a forward position which we do at times, still further. At the final date you do take your loss or your profit, whichever it is.
Member: And your losses involved in this proceeding are losses that were sustained by reason of your transactions in these futures?
Witness: That is right.
In such cases it is “intent” which determines the character of transactions. United States v. Amalgamated Sugar Co., 72 Fed. (2d) 755; Marengo Abstract Co. v. Hooper & Co., 174 Ala. 497; 56 So. 580; Shannon v. McClung, 210 Ala. 273; 97 So. 840; Smith et al. v. Odell, 21 Ala. App. 358; 108 So. 400; Willard Pope, 28 B. T. A. 1255. Petitioner cites the latter case and also United States v. Amalgamated Sugar Co., supra, in support of its contention, but in
The petitioner advances another ground for claiming these losses as related to its mill business. It claims that transactions in refined oil futures, as here carried out, supply a needful protection to such business to the same end and purpose that a business “hedge” serves manufacturers and dealers in like situations. The petitioner, in its briefs, disclaims any contention that its transactions in controversy are within all requirements of a technical business hedge, but argues in effect that they fulfill all substantial requirements of hedges, subserve the same purpose, and are as legally applicable to its business, and, therefore, should be treated under the same rule in case of losses. Seduced to its essence petitioner’s contention here is that necessity and custom made transactions in refined oil futures a regular part of its ordinary business. In our opinion the record does not support such claim. True, the evidence shows that in marketing its crude oil the petitioner’s business was in need of protection against fluctuating prices, but it is obvious that transactions entered into after its raw stocks were bought, processed, the crude extracted and sold, and profits or losses attributable to it made determinable, could.serve no such purpose. While the purpose of the transactions in refined, oil futures contracts was to counterbalance the market hazards in relation to crude oil, such transactions were independent of the petitioner’s crude oil marketing operations and involved their own hazard of losses and chance of gain. Petitioner’s “forward” purchases were not made when its raw stocks were acquired and its investment therein put at risk in its business. They were made after such stocks were liquidated and the turn-over in capital invested therein was complete. The transactions in futures contracts were entered into for profit, subject to the risk of loss instead of gain, but the gain or loss realized thereon in no way resulted from or was attributable to petitioner’s operations in buying its raw materials, processing same, and marketing its products. The amount of gain or loss realized by petitioner on the sale of crude oil did not affect and was not affected by the amount of gain or loss realized by it on its transactions in refined oil futures.
We hold that petitioner’s transactions in refined oil futures contracts were not a part of its business as operator of its cottonseed oil mill.
It is readily apparent from the facts here that the futures contracts were neither stock in trade of petitioner nor held by it for sale to customers in the ordinary course of business. This being true, they would not properly be includable in petitioner’s inventory if on hand at the close of the taxable year.
Regardless of whether petitioner’s transactions in such futures contracts constituted a trade or business, such contracts were nevertheless capital assets within the definition of section 117 (b), supra. Such contracts were choses in action bought and sold only on a produce exchange through brokers. Petitioner bought and sold such futures contracts on its own account only and not for customers. It held no oil futures in stock for sale to customers and, therefore, had no right to include them in an inventory. Cf. Francis M. Weld, 31 B. T. A. 600; Adirondack Securities Corporation, 23 B. T. A. 61; Oil Shares, Inc., 29 B. T. A. 664. We sustain respondent’s determination herein.
Decision will he entered for the respondent.