Pike v. United States ( 1996 )

USCA1 Opinion

                            UNITED STATES COURT OF APPEALS
UNITED STATES COURT OF APPEALS

                                FOR THE FIRST CIRCUIT
FOR THE FIRST CIRCUIT



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        No. 95-2358



                           MILO L. PIKE and PENNY P. PIKE,



                               Plaintiffs, Appellants,



                                          v.



                              UNITED STATES OF AMERICA,



                                 Defendant, Appellee.



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                     APPEAL FROM THE UNITED STATES DISTRICT COURT



                          FOR THE DISTRICT OF NEW HAMPSHIRE



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



                                  Cyr, Circuit Judge,
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                            Aldrich, Senior Circuit Judge,
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                            and Gertner,* District Judge.
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            Eugene M.  Van Loan, III with  whom Richard  Thorner and Wadleigh,
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        Starr, Peters, Dunn & Chiesa were on brief for appellants.
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            Thomas V.M. Linguanti with whom Gary  R. Allen, Jonathan S. Cohen,
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        Attorneys, Tax  Division, Department  of Justice, Loretta  C. Argrett,
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        Assistant  Attorney  General,  and   Paul  M.  Gagnon,  United  States
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        Attorney, were on brief for appellee.



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                                    July 12, 1996

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        *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
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            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
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            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
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            (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
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            in  the very  narrow circumstance  wherein an  otherwise non-



            inventory asset may be regarded as a substitute for inventory
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            -- 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
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            narrowing  Corn Products  Refining Co.  v. Commissioner,  350
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            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
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            221, 222.  In Arkansas Best,  the Court ruled that stock in a
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            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
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            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
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            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.
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                      Affirmed.
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