* * * Since this section is an exception from the normal tax requirements of the Internal Revenue Code, the definition of a capital asset must be narrowly applied and its exclusions interpreted broadly. This is necessary to effectuate the basic congressional purpose. This Court has always construed narrowly the term 'capital assets' in § 117. * * *
'The problem of the appropriate tax treatment of hedging transactions first arose under the 1934 Tax Code revision. Thereafter the Treasury issuedG.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 gains and losses therefrom were ordinary business gains and losses. The interpretation outlined in this memorandum has been consistently followed by the courts as well as by the Commissioner. While it is true that this Court has not passed on its validity, it has been well recognized for 20 years; and Congress has made no change in it though the Code has been re-enacted on three subsequent occasions. This bespeaks congressional approval. * * * Furthermore, Congress has since specifically recognized the hedging exception here under consideration in the short-sale rule of 1233(a) of the 1954 Code.'
The Court held that taxpayer's purchases and sales of corn futures, though not 'true hedges,' were an integral part of its business and were not capital-asset transactions under § 117(a) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 117(a), and that gain and losses therefrom gave rise to ordinary income and ordinary deductions.
Here plaintiff because of the seasonal variation in the production of fresh eggs, had two business risks: (1) the risk of loss during the period of falling prices and (2) the risk of scarcity during the period of rising prices. Plaintiff entered into transactions in the egg futures commodity market as hedging transactions for the purpose of protecting his business against the uninsurable risks of loss and scarcity due to the seasonal variation in production of egg actuals. He also entered into short sales transactions open during the period of the seasonal risk of loss from falling actuals prices, again as hedging transactions for the purpose of protecting plaintiff's business from loss from such falling actuals prices by gains from futures.
It seems to me that this procedure is entirely consonant with Corn Products, where taxpayer admittedly only sought partial insurance.
Defendant's two experts were not, in my judgment, convincing and, indeed, were not in complete accord.
It is my conclusion that plaintiff's losses sustained on commodity egg futures transactions during the year 1950 constitute ordinary losses incurred in a trade or business under Section 23(e) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 23(e).
Conclusions of Law
1. The Court has jurisdiction over the parties and subject matter of this action.
2. The net loss sustained by plaintiff in transactions in egg futures was loss from hedging transactions.
3. The net loss sustained by plaintiff from hedging transactions in egg futures was deductible as ordinary loss.
4. Plaintiff was entitled to deduct in full as ordinary loss the losses sustained by him in 1950 in transactions in egg futures aggregating $ 23,633.60, and therefore is entitled to judgment in the amount of $ 5,835.60 with interest thereon at six per cent. per annum from July 31, 1951.
© 1992-2004 VersusLaw Inc.