Tennessee Egg Co. v. Commissioner

*558 This proceeding involves deficiencies in income and excess profits taxes for the fiscal year ended February 28, 1939, in the respective amounts of $776.68 and $427.47. The sole question presented for our consideration is whether losses sustained*678 by virtue of certain transactions in egg futures are allowable in full as deductions or are subject to the capital loss limitations of section 117 of the Revenue Act of 1938.

FINDINGS OF FACT.

Petitioner, the Tennessee Egg Co., is a corporation, with its principal place of business located at Chattanooga, Tennessee. Its income *559 and excess profits tax returns for the period here involved were filed with the collector of internal revenue for the district of Tennessee. Its books are kept and its tax returns filed on a fiscal year basis, the fiscal year commencing March 1. Petitioner's business is the purchase and sale for profit of poultry, eggs, butter, and cheese. Petitioner purchases from farmers, truckers, small and large dealers, and brokers and sells to jobbers, hotels, restaurants, grocery stores, and institutions.

During the taxable year ended February 28, 1939, petitioner entered into contracts with E. A. Pearce & Co. and Courts & Co., brokerage firms on the Chicago Mercantile Exchange, for the future delivery of approximately 24 carloads of eggs. Delivery was accepted on only 5 of these carloads, the remaining contracts being closed out without delivery. *679 This resulted in certain losses being sustained by the petitioner, which losses are the center of this controversy. The total volume of petitioner's egg business in the taxable year was approximately 150 carloads.

The transactions during the taxable year involving egg futures contracts purchased and sold by petitioner through the two brokers mentioned above, and upon which no delivery of eggs was accepted, are as follows:

Petitioner generally entered into these transactions on a marginal basis.

The peasons for the making of these futures contracts were as follows: In entering*680 into such contracts it was unnecessary to pay the full purchase price in cash, since the brokers allowed dealings on margin and frequently petitioner was able to sell the contracts quickly, at a moment's notice, especially on a down market, thus *560 avoiding losses which might occur if the eggs were themselves held and marketed; in addition, the petitioner might sell eggs from inventory and buy futures contracts at a better advantage; and, also, by dealing in futures contracts in the season of scarcity, the pulse of the market could be better ascertained.

OPINION.

KERN: The question presented in this proceeding is whether losses sustained by petitioner as a result of the purchase and sale of futures contracts covering eggs are capital losses and, therefore, subject to the limitation of section 117:d):1) of the Revenue Act of 1938, as respondent has determined, or are losses resulting from hedging transactions or losses from the sale of properly be included in the inventory of the taxpayer if on hand at the close of the taxable year not subject to any capital loss limitation.

Upon the general subject of hedging attention is called to our recent opinion in *681 . The evidence with regard to the transactions here in question and the reasons given for them by petitioner's witness do not warrant us in characterizing them as hedges. There is no evidence that petitioner was ever obligated to sell eggs at a future date to any of its customers at any contract price, and, therefore, no risk is shown of loss through price changes to which a counter-balancing of operations could constitute a hedge. Inasmuch as the petitioner has failed to prove that its futures transactions were entered into for the purpose of hedging, the losses sustained therefrom can not, on that account, be considered as other than capital losses. Commissioner v. Covington, 120 Fed.:2d) 768.

Nor do we agree with petitioner that these futures contracts were property of a kind which would properly be included in its inventory. See A.R.M. 100, 3 C.B. (1920), p. 66; A.R.M. 135, 4 C.B. (1921), p. 67; Staerker v.United States :Dist. Ct., N. Dist. Tex., Sept. 23, 1938). We can not say that the eggs covered in the futures contracts were property held primarily for sale to customers, since*682 the record shows that in only a few instances petitioner ever took delivery of those eggs. For the same reason we can not say that they constituted stock in trade or property of a kind which would properly be included in its inventory.

We conclude, therefore, that the losses in question were from the sale of capital assets and, therefore, subject to the limitation on capital losses. Accordingly,

Decision will be entered for respondent.