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Keywords

contracttax lawcorporation

contractcorporationsustained

Related Cases

Corn Products Refining Co. v. C.I.R., 16 T.C. 395

Facts

The petitioner, a corporation engaged in the manufacture and sale of corn products, faced a tax deficiency due to its treatment of profits and losses from corn futures transactions. The petitioner had been buying and selling corn futures since 1932 as a means to secure an adequate supply of corn, given its limited storage capacity. In 1940, the petitioner reported a profit from these transactions, which the Commissioner contested, leading to the current dispute over the classification of these transactions under tax law.

The petitioner is a nationally known corporation engaged in the manufacture and sale of corn products, including starches, sugars, syrups, oils and feeds.

Issue

Whether profits and losses from the petitioner's purchases and sales of corn futures are capital gains and losses under section 117, and whether the wash sales provisions of section 118 apply to those transactions.

The parties have argued two points. One is whether contracts for the future delivery of corn are to be treated as capital assets in the hands of the petitioner so that gains or losses thereon are capital gains or losses, and the other is whether the wash sales provisions of section 118 apply to those transactions.

Rule

Contracts for the delivery of corn are not considered securities under section 118, and a new future contract is not substantially identical to a prior contract if the delivery date, price, or contracting party differs.

Section 118 of the Internal Revenue Code was enacted to prevent a deduction for losses sustained in wash sales of securities; that is, where the taxpayer at or about the time of a sale acquires identical or substantially identical securities.

Analysis

The court analyzed the nature of corn futures contracts and determined that they do not meet the definition of securities as intended by section 118. It reasoned that the characteristics of corn futures, including their short duration and the manner in which they are traded, do not lend themselves to the issues that section 118 was designed to address. Therefore, the court concluded that the wash sale provisions do not apply to the petitioner's transactions.

The Appellate Court reasoned that the futures contracts were securities because they were pledged with the broker ‘who advanced the necessary funds to purchase the oil.’ Any pledged property is a security in that sense, but obviously not all pledged property is a security within the meaning of section 118.

Conclusion

The court held that the wash sales provisions of section 118 do not apply to the petitioner's corn futures transactions, allowing the petitioner to treat its gains and losses as reductions in the cost of goods sold rather than capital gains and losses.

Section 118 has no application in this case.

Who won?

The petitioner prevailed in the case because the court found that corn futures are not securities under section 118, and thus the wash sales provisions do not apply.

The Commissioner, in determining the deficiency for 1940, made no change in ‘Cost of Goods Sold‘ as reported by the petitioner on its return.

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