350U.S.

46(1955)

CORNPRODUCTSREFININGCO.
v.
COMMISSIONEROFINTERNALREVENUE.
No.20.
SupremeCourtofUnitedStates.
ArguedOctober18,1955.
DecidedNovember7,1955.
CERTIORARITOTHEUNITEDSTATESCOURTOFAPPEALSFORTHESECONDCIRCUIT.
JayO.KramerandSamuelA.McCainarguedthecauseandfiledabriefforpetitioner.
CharlesK.Ricearguedthecauseforrespondent.WithhimonthebriefwereSolicitorGeneralSobeloff,Assistant
AttorneyGeneralHolland,CharlesF.Barber,EllisN.Slack,HilbertP.ZarkyandHarryMarselli.
47

*47MR.JUSTICECLARKdeliveredtheopinionoftheCourt.
Thiscaseconcernsthetaxtreatmenttobeaccordedcertaintransactionsincommodityfutures.[1]IntheTaxCourt,
petitionerCornProductsRefiningCompanycontendedthatitspurchasesandsalesofcornfuturesin1940and1942
werecapitalassettransactionsunder117(a)oftheInternalRevenueCodeof1939.Itfurthercontendedthatitsfutures
transactionscamewithinthe"washsales"provisionsof118.The1940claimwasdisposedofonthegroundthat118
didnotapply,butfortheyear1942boththeTaxCourtandtheCourtofAppealsfortheSecondCircuit,215F.2d513,
heldthatthefutureswerenotcapitalassetsunder117.Wegrantedcertiorari,348U.S.911,[2]becauseofanasserted
conflictwithholdingsintheCourtsofAppealfortheThird,Fifth,andSixthCircuits.[3]Sinceweholdthatthesefuturesdo
notconstitutecapitalassetsinpetitioner'shands,wedonotreachtheissueofwhetherthetransactionswere"wash
sales."

48

*48Petitionerisanationallyknownmanufacturerofproductsmadefromgraincorn.Itmanufacturesstarch,syrup,sugar,
andtheirbyproducts,feedsandoil.Itsaverageyearlygrindofrawcornduringtheperiod1937through1942variedfrom
thirtyfivetosixtymillionbushels.Mostofitsproductsweresoldundercontractsrequiringshipmentinthirtydaysataset
priceoratmarketpriceonthedateofdelivery,whicheverwaslower.Itpermittedcancellationofsuchcontracts,butfrom
experienceitcouldcalculatewithsomeaccuracyfutureordersthatwouldremainfirm.Whileitalsosoldtoafew
customersonlongtermcontractsinvolvingsubstantialorders,thesehadlittleeffectonthetransactionshereinvolved.[4]

49

In1934andagainin1936droughtsinthecornbeltcausedasharpincreaseinthepriceofspotcorn.Withastorage
capacityofonly2,300,000bushelsofcorn,abarethreeweeks'supply,CornProductsfounditselfunabletobuyata
pricewhichwouldpermititsrefinedcornsugar,cerelose,tocompetesuccessfullywithcaneandbeetsugar.Toavoida
recurrenceofthissituation,petitioner,in1937,begantoestablishalongpositionincornfutures"asapartofitscorn
buyingprogram"and"asthemosteconomicalmethodofobtaininganadequatesupplyofrawcorn"withoutentailingthe
expenditureoflargesumsforadditionalstoragefacilities.Atharvesttimeeachyearitwouldbuyfutureswhentheprice
appearedfavorable.Itwouldtakedeliveryonsuchcontractsasitfoundnecessarytoitsmanufacturingoperationsand
selltheremainderinearlysummerifnoshortagewasimminent.*49Ifshortagesappeared,however,itsoldfuturesonly
asitboughtspotcornforgrinding.[5]Inthismanneritreachedabalancedpositionwithreferencetoanyincreaseinspot
cornprices.Itmadenoefforttoprotectitselfagainstadeclineinprices.
In1940itnettedaprofitof$680,587.39incornfutures,butin1942itsufferedalossof$109,969.38.Incomputingitstax
liabilityCornProductsreportedthesefiguresasordinaryprofitandlossfromitsmanufacturingoperationsforthe

respectiveyears.Itnowcontendsthatitsfutureswere"capitalassets"under117andthatgainsandlossestherefrom
shouldhavebeentreatedasarisingfromthesaleofacapitalasset.[6]Insupportofthispositionitclaimsthatitsfutures

50

tradingwasseparateandapartfromitsmanufacturingoperationsandthatinitsfuturestransactionsitwasactingasa
"legitimatecapitalist."UnitedStatesv.NewYorkCoffee&SugarExchange,263U.S.611,619.Itdeniesthatitsfutures
transactionswere"hedges"or"speculative"dealingsas*50coveredbytherulingofGeneralCounsel'sMemorandum
17322,XV2Cum.Bull.151,andclaimsthatitisintruth"theforgottenman"ofthatadministrativeinterpretation.
BoththeTaxCourtandtheCourtofAppealsfoundpetitioner'sfuturestransactionstobeanintegralpartofitsbusiness
designedtoprotectitsmanufacturingoperationsagainstapriceincreaseinitsprincipalrawmaterialandtoassurea
readysupplyforfuturemanufacturingrequirements.CornProductsdoesnotleveladirectattackonthesetwocourt
findingsbutinsiststhatitsfutureswere"property"entitledtocapitalassettreatmentunder117andassuchwere
distinctfromitsmanufacturingbusiness.Wecannotagree.
WefindnothinginthisrecordtosupportthecontentionthatCornProducts'futuresactivitywasseparateandapartfrom
itsmanufacturingoperation.Onthecontrary,itappearsthatthetransactionswerevitallyimportanttothecompany's
businessasaformofinsuranceagainstincreasesinthepriceofrawcorn.Notonlywerethepurchasesinitiatedforjust
thisreason,butthepetitioner'ssalespolicy,sellinginthefutureatafixedpriceorless,continuedtoleaveitexceedingly
vulnerabletorisesinthepriceofcorn.Further,thepurchaseofcornfuturesassuredthecompanyasourceofsupply
whichwasadmittedlycheaperthanconstructingadditionalstoragefacilitiesforrawcorn.Underthesefactsitisdifficultto
imagineaprogrammorecloselygearedtoacompany'smanufacturingenterpriseormoreimportanttoitssuccessful
operation.
LikewisetheclaimofCornProductsthatitwasdealinginthemarketasa"legitimatecapitalist"lackssupportinthe
record.Therecanbenoquarrelwithamanufacturer'sdesiretoprotectitselfagainstincreasingcostsofrawmaterials.
Transactionswhichprovidesuchprotectionareconsideredalegitimateformofinsurance.UnitedStatesv.NewYork

51

Coffee&SugarExchange,263*51U.S.,at619Brownev.Thorn,260U.S.137,139140.However,inlabelingits
activityasthatofa"legitimatecapitalist"exercising"goodjudgment"inthefuturesmarket,petitionerignoresthe
testimonyofitsownofficersthatinenteringthatmarketthecompanywas"tryingtoprotectapartof[its]manufacturing
costs"thatitsentrywasnotforthepurposeof"speculatingandbuyingandsellingcornfutures"buttofillanactual"need
forthequantityofcorn[bought]...inordertocover...what[products]weexpectedtomarketoveraperiodoffifteenor
eighteenmonths."Itmattersnotwhetherthelabelbethatof"legitimatecapitalist"or"speculator"thisisnotthetalkofthe
capitalinvestorbutofthefarsightedmanufacturer.Fortaxpurposespetitioner'spurchaseshavebeenfoundto
"constituteanintegralpartofitsmanufacturingbusiness"byboththeTaxCourtandtheCourtofAppeals,andon
essentiallyfactualquestionsthefindingsoftwocourtsshouldnotordinarilybedisturbed.Comstockv.Groupof
Investors,335U.S.211,214.
PetitioneralsomakesmuchoftheconclusionbyboththeTaxCourtandtheCourtofAppealsthatitstransactionsdidnot
constitute"truehedging."ItistruethatCornProductsdidnotsecurecompleteprotectionfromitsmarketoperations.
Underitssalespolicypetitionercouldnotguardagainstafallinprices.Itisclear,however,thatpetitionerfearedthe
possibilityofapricerisemorethanthatofapricedecline.Itthereforepurchasedpartialinsuranceagainstitsprincipal
risk,andhopedtoretainsufficientflexibilitytoavoidseriouslossesonadecliningmarket.
Norcanwefindsupportforpetitioner'scontentionthathedgingisnotwithintheexclusionsof117(a).Admittedly,
petitioner'scornfuturesdonotcomewithintheliterallanguageoftheexclusionssetoutinthatsection.Theywerenot

52

stockintrade,actualinventory,*52propertyheldforsaletocustomersordepreciablepropertyusedinatradeor
business.Butthecapitalassetprovisionof117mustnotbesobroadlyappliedastodefeatratherthanfurtherthe
purposeofCongress.Burnetv.Harmel,287U.S.103,108.Congressintendedthatprofitsandlossesarisingfromthe
everydayoperationofabusinessbeconsideredasordinaryincomeorlossratherthancapitalgainorloss.The
preferentialtreatmentprovidedby117appliestotransactionsinpropertywhicharenotthenormalsourceofbusiness
income.Itwasintended"torelievethetaxpayerfrom...excessivetaxburdensongainsresultingfromaconversionof
capitalinvestments,andtoremovethedeterrenteffectofthoseburdensonsuchconversions."Burnetv.Harmel,287U.
S.,at106.SincethissectionisanexceptionfromthenormaltaxrequirementsoftheInternalRevenueCode,the

definitionofacapitalassetmustbenarrowlyappliedanditsexclusionsinterpretedbroadly.Thisisnecessaryto
effectuatethebasiccongressionalpurpose.ThisCourthasalwaysconstruednarrowlytheterm"capitalassets"in117.
SeeHortv.Commissioner,313U.S.28,31Kieselbachv.Commissioner,317U.S.399,403.
Theproblemoftheappropriatetaxtreatmentofhedgingtransactionsfirstaroseunderthe1934TaxCoderevision.[7]
ThereaftertheTreasuryissuedG.C.M.17322,supra,distinguishingspeculativetransactionsincommodityfuturesfrom
hedgingtransactions.Itheldthathedgingtransactionswereessentiallytoberegardedasinsuranceratherthana
53

dealingincapitalassetsandthat*53gainsandlossestherefromwereordinarybusinessgainsandlosses.The
interpretationoutlinedinthismemorandumhasbeenconsistentlyfollowedbythecourtsaswellasbythe
Commissioner.[8]WhileitistruethatthisCourthasnotpassedonitsvalidity,ithasbeenwellrecognizedfor20years
andCongresshasmadenochangeinitthoughtheCodehasbeenreenactedonthreesubsequentoccasions.This
bespeakscongressionalapproval.Helveringv.Winmill,305U.S.79,83.Furthermore,Congresshassincespecifically
recognizedthehedgingexceptionhereunderconsiderationintheshortsaleruleof1233(a)ofthe1954Code.[9]
WebelievethatthestatuteclearlyrefutesthecontentionofCornProducts.Moreover,itissignificanttonotethatpractical

54

considerationsleadtothesameconclusion.Toholdotherwisewouldpermitthoseengagedinhedgingtransactionsto
transmuteordinaryincomeintocapital*54gainatwill.Thehedgermayeithersellthefutureandpurchaseinthespot
marketortakedeliveryunderthefuturecontractitself.Butifasaleofthefuturecreatedacapitaltransactionwhile
deliveryofthecommodityunderthesamefuturedidnot,aloopholeinthestatutewouldbecreatedandthepurposeof
Congressfrustrated.
Thejudgmentis
Affirmed.
MR.JUSTICEHARLANtooknopartintheconsiderationordecisionofthiscase.
[1]Acommodityfutureisacontracttopurchasesomefixedamountofacommodityatafuturedateforafixedprice.Cornfutures,
involvedinthepresentcase,areintermsofsomemultipleoffivethousandbushelstobedeliveredelevenmonthsorlessafterthe
contract.Cf.Hoffman,FutureTrading(1932),118.
[2]Thegrantwaslimitedtothefollowingtwoquestions:
"1.Aretransactionsincommodityfutureswhicharenot`truehedges'capitalassettransactionsandthussubjecttothelimitationsof
Section117oftheInternalRevenueCodeof1939,ordotheresultinggainsandlossesfromsuchtransactionsgiverisetoordinary
incomeandordinarydeductions?
"2.Arecommodityfuturescontracts`securities'andthussubjecttothe`washsales'provisionsofSection118oftheInternalRevenue
Codeof1939?"
[3]Makransky'sEstatev.Commissioner,154F.2d59(C.A.3dCir.)Commissionerv.Farmers&GinnersCottonOilCo.,120F.2d772
(C.A.5thCir.)TrentonCottonOilCo.v.Commissioner,147F.2d33(C.A.6thCir.).
[4]Petitionerhadcontractswiththreeconsumerstofurnish,foraperiodoftenyearsormore,largequantitiesofstarchorfeed.In
January1940,petitionerhadsold2,000,000bagsofcornsugar,deliverytobemadeseveralmonthsinthefuture.Also,membersofthe
canningindustryonthePacificCoasthadcontractstopurchasecornsugarfordeliveryinmorethanthirtydays.
[5]Thedispositionsofthecornfuturesduringtheperiodindisputewereasfollows:
SalesofDeliveryunder
futuresthousandfuturesthousand
bushelsbushels
1938.........................17,4004,975
1939.........................14,1802,865
1940.........................14,595250
1941.........................2,5452,175

1942.........................5,6954,460
[6]"(1)CAPITALASSETS.Theterm`capitalassets'meanspropertyheldbythetaxpayer(whetherornotconnectedwithhistradeor
business),butdoesnotincludestockintradeofthetaxpayerorotherpropertyofakindwhichwouldproperlybeincludedintheinventory
ofthetaxpayerifonhandatthecloseofthetaxableyear,orpropertyheldbythetaxpayerprimarilyforsaletocustomersintheordinary
courseofhistradeorbusiness,orproperty,usedinthetradeorbusiness,ofacharacterwhichissubjecttotheallowancefor
depreciationprovidedinsection23(1)...."
[7]Section208(8)oftheRevenueActof1924limited"capitalassets"topropertyheldmorethantwoyears.Thisdefinitionwasretained
untiltheActof1934.Sincetherulesofthevariouscommodityexchangesrequiredthatfuturescontractsbeclosedoutinperiodsshorter
thantwoyears,thesecontractscouldnotqualifyascapitalassets.
[8]StewartSilkCorp.v.Commissioner,9T.C.174Battellev.Commissioner,47B.T.A.117Grotev.Commissioner,41B.T.A.247.
SeeEstateofMakranskyv.Commissioner,5T.C.397,412,aff'dpercuriam,154F.2d59TrentonCottonOilCo.v.Commissioner,147
F.2d33,35Commissionerv.Farmers&GinnersCottonOilCo.,120F.2d772,774TennesseeEggCo.v.Commissioner,47B.T.A.
558,560G.C.M.18383,19372Cum.Bull.244,245I.T.3137,19372Cum.Bull.164,166.Cf.Commissionerv.Banfield,122F.2d
1017,10191020G.C.M.18658,19372Cum.Bull.77.
[9]Section1233(a)providesthatgainorlossfrom"theshortsaleofproperty,otherthanahedgingtransactionincommodityfutures,"
shallbetreatedasgainorlossfromthesaleofacapitalassettotheextent"thattheproperty,includingacommodityfuture,usedtoclose
theshortsaleconstitutesacapitalassetinthehandsofataxpayer."Thelegislativehistoryrecognizesexplicitlythehedgingexception.H.
R.Rep.No.1337,83dCong.,2dSess.,p.A278S.Rep.No.1622,83dCong.,2dSess.,p.437:"Underexistinglawbonafidehedging
transactionsdonotresultincapitalgainsorlosses.Thisresultisbaseduponcaselawandregulations.Tocontinuethisresulthedging
transactionsincommodityfutureshavebeenspecificallyexceptedfromtheoperationofthissubsection."

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