Source: http://www.chanrobles.com/usa/us_supremecourt/350/46/case.php
Timestamp: 2019-08-20 11:26:30
Document Index: 98065169

Matched Legal Cases: ['§ 117', '§ 118', '§ 118', '§ 117', '§ 117', '§ 117']

This case concerns the tax treatment to be accorded certain transactions in commodity futures. [Footnote 1] In the Tax Court, petitioner Corn Products Refining Company contended that its purchases and sales of corn futures in 1940 and 1942 were capital asset transactions under § 117(a) of the Internal Revenue Code of 1939. It further contended that its futures transactions came within the "wash sales" provisions of § 118. The 1940 claim was disposed of on the ground that § 118 did not apply, but, for the year 1942, both the Tax Court and the Court of Appeals for the Second Circuit, 215 F.2d 513, held that the futures were not capital assets under § 117. We granted certiorari, 348 U.S. 911, [Footnote 2] because of an asserted conflict with holdings in the Courts of Appeals for the Third, Fifth, and Sixth Circuits. [Footnote 3] Since we hold that these futures do not constitute capital assets in petitioner's hands, we do not reach the issue of whether the transactions were "wash sales." chanroblesvirtualawlibrary
In 1934 and again in 1936, droughts in the corn belt caused a sharp increase in the price of spot corn. With a storage capacity of only 2,300,000 bushels of corn, a bare three weeks' supply, Corn Products found itself unable to buy at a price which would permit its refined corn sugar, cerealose, to compete successfully with cane and beet sugar. To avoid a recurrence of this situation, petitioner, in 1937, began to establish a long position in corn futures "as a part of its corn buying program" and "as the most economical method of obtaining an adequate supply of raw corn" without entailing the expenditure of large sums for additional storage facilities. At harvest time each year, it would buy futures when the price appeared favorable. It would take delivery on such contracts as it found necessary to its manufacturing operations, and sell the remainder in early summer if no shortage was imminent. chanroblesvirtualawlibrary
In 1940, it netted a profit of $680,587.39 in corn futures, but, in 1942, it suffered a loss of $109,969.38. In computing its tax liability, Corn Products reported these figures as ordinary profit and loss from its manufacturing operations for the respective years. It now contends that its futures were "capital assets" under § 117, and that gains and losses therefrom should have been treated as arising from the sale of a capital asset. [Footnote 6] In support of this position, it claims that its futures trading was separate and apart from its manufacturing operations, and that, in its futures transactions, it was acting as a "legitimate capitalist." United States v. New York Coffee & Sugar Exchange, 263 U. S. 611, 263 U. S. 619. It denies that its futures transactions were "hedges" or "speculative" dealings as chanroblesvirtualawlibrary
Likewise, the claim of Corn Products that it was dealing in the market as a "legitimate capitalist" lacks support in the record. There can be no quarrel with a manufacturer's desire to protect itself against increasing costs of raw materials. Transactions which provide such protection are considered a legitimate form of insurance. United States v. New York Coffee & Sugar Exchange, 263 chanroblesvirtualawlibrary
Nor can we find support for petitioner's contention that hedging is not within the exclusions of § 117(a). Admittedly, petitioner's corn futures do not come within the literal language of the exclusions set out in that section. They were not stock in trade, actual inventory, chanroblesvirtualawlibrary
The problem of the appropriate tax treatment of hedging transactions first arose under the 1934 Tax Code revision. [Footnote 7] Thereafter, the Treasury issued G.C.M. 17322, supra, distinguishing speculative transactions in commodity futures from hedging transactions. It held that hedging transactions were essentially to be regarded as insurance, rather than a dealing in capital assets, and that chanroblesvirtualawlibrary
We believe that the statute clearly refutes the contention of Corn Products. Moreover, it is significant to note that practical considerations lead to the same conclusion. To hold otherwise would permit those engaged in hedging transactions to transmute ordinary income into capital chanroblesvirtualawlibrary