Court Opinion

ID: 2964247
Source: CourtListenerOpinion
Date Created: 2015-09-21 21:22:42.523971+00
Date Added: 2024-06-11T11:42:52.948807
License: Public Domain

USCA1 Opinion

	

                            UNITED STATES COURT OF APPEALS
                            UNITED STATES COURT OF APPEALS
                                FOR THE FIRST CIRCUIT
                                FOR THE FIRST CIRCUIT

                                 ____________________

        No. 95-2358

                           MILO L. PIKE and PENNY P. PIKE,

                               Plaintiffs, Appellants,

                                          v.

                              UNITED STATES OF AMERICA,

                                 Defendant, Appellee.

                                 ____________________

                     APPEAL FROM THE UNITED STATES DISTRICT COURT

                          FOR THE DISTRICT OF NEW HAMPSHIRE

                 [Hon. Joseph A. DiClerico, Jr., U.S. District Judge]
                                                 ___________________

                                 ____________________

                                        Before

                                  Cyr, Circuit Judge,
                                       _____________

                            Aldrich, Senior Circuit Judge,
                                     ____________________

                            and Gertner,* District Judge.
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                                 ____________________

            Eugene M.  Van Loan, III with  whom Richard  Thorner and Wadleigh,
            ________________________            ________________     _________
        Starr, Peters, Dunn & Chiesa were on brief for appellants.
        ____________________________
            Thomas V.M. Linguanti with whom Gary  R. Allen, Jonathan S. Cohen,
            _____________________           ______________  _________________
        Attorneys, Tax  Division, Department  of Justice, Loretta  C. Argrett,
                                                          ___________________
        Assistant  Attorney  General,  and   Paul  M.  Gagnon,  United  States
                                             ________________
        Attorney, were on brief for appellee.

                                 ____________________

                                    July 12, 1996
                                 ____________________

                            
        ____________________

        *Of the District of Massachusetts, sitting by designation.

                      ALDRICH, Senior Circuit Judge.   This case involves
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            the government's  familiar  income tax  principle  of  taxing

            gains  in  the  sale  or   exchange  of  capital  assets  but

            disallowing  deduction of  losses, except  against comparable

            taxable gains.  See 26 U.S.C.   1211.  During the 1980s, Milo
                            ___

            Pike ("Taxpayer")  made substantial  purchases of stock  in a

            number of New  England banks  with the intent  of creating  a

            regional bank holding company, whose stock he could sell at a

            profit.   Before  realizing  this goal,  however, the  shares

            universally declined in value and, in 1989, he sold them at a

            substantial loss.  He classified the loss as "capital" on his

            1989 federal  tax return, which precluded  deduction in full.

            See id.  In  this action to recover taxes  overpaid, Taxpayer
            ___ __

            claims  his  special  scheme   and  purpose  for  making  the

            purchases   requires   that  the   stock  be   classified  as

            "inventory,"  a non-capital asset  under 26 U.S.C.   1221(1),

            entitling  him to full  deduction.  The  Commissioner did not

            agree.  Nor did  the district court.   Taxpayer appeals.   We

            affirm.

                      Under    1221  of  the Revenue  Code  all  taxpayer

            property not qualifying for  a specific exception, whether or

            not held in connection with the taxpayer's trade or business,

            is deemed capital.  Five "exclusive" categories are excepted,

            Arkansas  Best Corp.  v. Commissioner,  485 U.S.  212, 217-18
            ____________________     ____________

            (1988), including

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                      (1)   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.

            26 U.S.C.   1221(1).  Taxpayer does not contend that the bank

            shares  were "stock in trade,"  nor that he  was holding them

            for sale to customers in the ordinary course of his business,

            nor that  they can be  exempted under  any of the  other four

            provisions of   1221.  He does not even claim that  the stock

            was "inventory"  in the usual  sense.  He  nonetheless claims

            that  summary  judgment  was  improper because  there  remain

            unresolved  issues of material  fact as to  whether the stock

            was  sufficiently "inventory-like"  to qualify  for exemption

            from capital asset  status under the  above-quoted exception,

            based on his intent in acquiring it.  We disagree.

                      In  determining  whether  property   qualifies  for

            exclusion from capital asset treatment, the Supreme Court has

            indicated that a taxpayer's business purpose is relevant only
                                                                     ____

            in  the very  narrow circumstance  wherein an  otherwise non-

            inventory asset may be regarded as a substitute for inventory
                                                 __________

            -- i.e., property acquired  in a "hedging  transaction[] that

            [was]  an  integral  part of  a  business' inventory-purchase

            system."    Arkansas Best,  485  U.S.  at 221-22  (explicitly
                        _____________

            narrowing  Corn Products  Refining Co.  v. Commissioner,  350
                       ___________________________     ____________

            U.S.  46,  52-53  (1955)).   Even  then  there  must be  some

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            objectively  demonstrable  nexus  to  an  "inventory-purchase

            system,"  beyond the  taxpayer's subjective  intent.   Id. at
                                                                   ___

            221, 222.  In Arkansas Best,  the Court ruled that stock in a
                          _____________

            local bank  acquired  for  the  business-related  purpose  of

            preserving the taxpayer's financial  reputation, id. at  215,
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            fell "outside the classes  of property excluded from capital-

            asset status" under    1221, thus the  loss arising from  its

            sale was "a  capital loss."   Id. at  223.  Here,  Taxpayer's
                                          ___

            project  was to  purchase enough  shares of stock  in certain

            banks sufficient to obtain the ability to persuade management

            to join in his  plan of forming the overall  holding company,

            whose stock he would then sell.  He claims the bank stock was

            the "raw material"  in his business  of building the  holding

            company and, as such, qualifies for the inventory exception.

                      Overall, Taxpayer was  simply seeking capital gains

            by   an  intermediate  step   --  acquiring   enough  capital

            investments,  that,  jointly,  might  be  converted  into new

            assets.   His scheme was manifestly not a "hedge" integral to

            protecting inventory or an  inventory-purchase system.   That

            it involved work on his part and was necessary to his overall

            business  plan does not change the basic picture.  His theory

            that  the  building  blocks  of his  would-be  empire  should

            qualify as  "inventory"  would allow  aspiring  entrepreneurs

            significant influence over whether losses receive capital  or

            ordinary treatment.   Id. at  222.  An  ordinary investor  in
                                  ___

                                         -4-

            capital stock,  objectively not  entitled to take  losses not

            offset  by gains,  could do so  if he could  show a business-

            related  motive  to  realize  gains  through  conversion  and

            disposition  of  those assets.    Such an  alluring  door for

            escaping taxpayers was firmly locked in Arkansas Best.
                                                    _____________

                      Affirmed.
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