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New Mexico Timber Company, a New Mexico Corporation, T. P. Gallagher and Barbara Gallagher, Petitioners v. Commissioner of Internal Revenue, RespondentNew Mexico Timber Co. v. CommissionerDocket No. 24199-82
United States Tax Court June 17, 1985. June 17, 1985, Filed*67Decision will be entered under Rule 155 .Held , "gross receipts," within the meaning ofsec. 1372(e)(5), I.R.C. 1954 , realized by a small business corporation trading in commodity futures contracts, equals the total amount received, unreduced by any fees and commissions, and is not limited to gains from such transactions.John S. Campbell , for the petitioners.James E. Polk , for the respondent.Korner,Judge .KORNER*1290 Respondent determined deficiencies in Federal income tax against petitioners as follows: *1291
Petitioner TYE Deficiency New Mexico Timber Co. Apr. 30, 1979 $ 62.055 Apr. 30, 1980 46,420 Apr. 30, 1981 56,323 Total 164,798 T.P. Gallagher Dec. 31, 1979 18,662 and Barbara Gallagher Dec. 31, 1980 75,017 Total 93,679 The only issue for us to decide is whether the amount of "gross receipts," within the meaning of
section 1372(e)(5) , *68 realized by a small business corporation trading in commodity futures contracts, equals the total amount realized, or whether such receipts are taken into account only to the extent of the gains from such transactions, unreduced by any fees or commissions.In 1959, T.P. purchased 100,000 acres of standing timber in the Valle Grande *69 in Sandoval County, New Mexico (hereinafter the Baca location) and 116,000 acres of standing timber in Sandoval County, New Mexico, in the San Diego Land Grant (hereinafter the San Diego location). T.P. also purchased a saw *1292 mill, logging equipment, a planing mill, dry kilns, and other equipment used in the production of lumber, the inventory and receivables of NEMTICO, Inc., and a tract of real property located in Bernalillo, Sandoval County, New Mexico (hereinafter the Bernalillo land). The timber and the other assets were then transferred to NMT's predecessor, *70 to cease its lumber business and to liquidate the equipment on May 1, 1976. As of May 1, 1976, and at all times until April 30, 1978, NMT was an electing small business corporation. No voluntary revocation of NMT's small business corporation election was filed by its shareholders during the years in issue.
A commodity futures contract is a firm commitment to deliver or to receive a specified quantity and grade of a commodity during a designated month in the future (the delivery month) at a specified price. All the terms and provisions of a futures contract are fixed by the bylaws and rules of the commodity exchange on which the contract is traded, except for the price and the delivery month, which are agreed upon at the time a trade is made on the floor of the exchange. A person entering into a commodity futures contract to sell a commodity, viz, to deliver the commodity, is obligated to deliver the commodity in the delivery month, unless he has disposed of the contract in the meantime; this is known as taking a "short position." A person buying a commodity futures contract *72 to purchase a commodity, viz, to accept delivery of the commodity, is obligated to accept delivery of the commodity in the delivery month and pay for the commodity at the specified contract price, unless he has disposed of the contract in the meantime, although his liability for the payment of such money on any day before the delivery date is limited to the margin call on that particular day;
The holders of both long and short positions can close out their contracts, without making or taking delivery of the commodity, by entering into offsetting purchases or sales of futures contracts on the exchange. *1294 commodity by acquiring from another the promise to purchase and pay for the same commodity on the same exchange *73 for the same delivery month, that is, by entering into an offsetting short contract, and vice versa.
NMT also executed a power of attorney constituting and appointing Hanseatic as NMT's agent for the purpose of buying, selling, and trading in commodities. As a condition for buying, selling, and trading in commodities, Merrill Lynch required that NMT deposit $ 100,000 in cash with it. This was a margin *75 requirement to protect Merrill Lynch and the various commodity exchanges from losses in NMT's commodities account. *1295 in writing, to transfer funds from its Ready Assets account to its commodity account.
During its taxable year ended April 30, 1979, NMT, acting as a commodities trader, effected a number of futures transactions in commodities that included lumber, gold, hogs, copper, sugar, soybean oil, silver, soybeans, cotton, wheat, foreign currency, and cattle. NMT entered into commodities futures contracts with an aggregate cost price of $ 880,882. In order to close its positions, NMT entered into offsetting commodity futures contracts with respect to the same underlying commodities in the same delivery months with an aggregate selling price of $ 909,471.60. NMT realized total gains, before fees or commissions, of $ 28,590 from its commodity futures transactions. NMT did not engage in any straddle transactions. *76 with its commodity futures transactions.
*78Delivery Date Date date Description purchased sold 8/78 Jan. 1979, Soybeans 8/14/78 8/28/78 8/78 Dec. 1978, SB Meal 8/15/78 8/29/78 8/78 Dec. 1978, Cattle new 8/25/78 9/15/78 8/78 Dec. 1978, Cattle new 8/25/78 9/15/78 8/78 Mar. 1979, Wheat 8/24/78 10/20/78 8/78 Mar. 1979, Wheat 8/24/78 10/20/78 8/78 Dec. 1978, Hogs 8/25/78 9/20/78 8/78 Dec. 1978, Hogs 8/25/78 9/20/78 8/78 Mar. 1979, Sugar II 8/31/78 10/31/78 9/78 Dec. 1978, Copper 9/18/78 10/16/78 9/78 Dec. 1978, Deutsche marks 9/18/78 10/31/78 9/78 Dec. 1978, IMM gold 9/20/78 10/20/78 9/78 Dec. 1978, IMM gold 9/20/78 10/20/78 9/78 Dec. 1978, Swiss francs 9/25/78 9/26/78 9/78 Dec. 1978, Canadian oil 10/04/78 9/28/78 10/78 Mar. 1979, Corn 10/02/78 10/78 Dec. 1978, Cotton 10/03/78 11/01/78 10/78 Jan. 1979, Soybeans 10/04/78 10/20/78 10/78 Dec. 1978, Silver 10/04/78 10/20/78 10/78 Dec. 1978, British pounds 10/12/78 10/31/78 10/78 Dec. 1978, IMM gold 10/25/78 10/31/78 10/78 Mar. 1979, IMM gold 10/27/78 10/31/78 11/78 Jan. 1979, Lumber 11/04/78 11/06/78 11/78 Jan. 1979, Soybean oil 11/21/78 11/08/78 11/78 Mar. 1979, IMM gold 11/21/78 11/10/78 11/78 Feb. 1979, Hogs 11/16/78 11/28/78 11/78 Feb. 1979, Cattle new 11/16/78 11/28/78 11/78 Feb. 1979, Cattle new 11/16/78 11/28/78 11/78 Mar. 1979, Japanese yen 11/21/78 11/16/78 9/78 Dec. 1979, Swiss francs 9/22/78 Total commodity gains before commission
*79Delivery Selling date Description price Cost *80 8/78 Jan. 1979, Soybeans $ 32,050.00 $ 31,525.00 8/78 Dec. 1978, SB Meal 16,850.00 16,650.00 8/78 Dec. 1978, Cattle new 22,750.00 21,760.00 8/78 Dec. 1978, Cattle new 22,750.00 21,830.00 8/78 Mar. 1979, Wheat 16,987.50 16,487.50 8/78 Mar. 1979, Wheat 16,987.50 16,375.00 8/78 Dec. 1978, Hogs 15,000.00 14,257.50 8/78 Dec. 1978, Hogs 15,015.00 14,400.00 8/78 Mar. 1979, Sugar II 10,505.60 9,072.00 9/78 Dec. 1978, Copper 16,750.00 16,650.00 9/78 Dec. 1978, Deutsche marks 72,050.00 64,325.00 9/78 Dec. 1978, IMM gold 22,980.00 21,910.00 9/78 Dec. 1978, IMM gold 22,980.00 21,800.00 9/78 Dec. 1978, Swiss francs 85,850.00 85,000.00 9/78 Dec. 1978, Canadian oil 84,850.00 84,640.00 10/78 Mar. 1979, Corn 47,400.00 47,250.00 10/78 Dec. 1978, Cotton 33,700.00 33,060.00 10/78 Jan. 1979, Soybeans 34,050.00 33,975.00 10/78 Dec. 1978, Silver 29,550.00 29,450.00 10/78 Dec. 1978, British pounds 51,450.00 49,575.00 10/78 Dec. 1978, IMM gold 24,120.00 23,410.00 10/78 Mar. 1979, IMM gold 24,730.00 24,590.00 11/78 Jan. 1979, Lumber 20,400.00 20,000.00 11/78 Jan. 1979, Soybean oil 14,706.00 14,580.00 11/78 Mar. 1979, IMM gold 21,350.00 20,610.00 11/78 Feb. 1979, Hogs 15,705.00 15,480.00 11/78 Feb. 1979, Cattle new 23,140.00 22,940.00 11/78 Feb. 1979, Cattle new 23,220.00 23,030.00 11/78 Mar. 1979, Japanese yen 67,187.50 66,250.00 9/78 Dec. 1979, Swiss francs Total commodity gains before commission 880,882.00 Delivery Gain date Description or (loss) 8/78 Jan. 1979, Soybeans $ 525.00 8/78 Dec. 1978, SB Meal 200.00 8/78 Dec. 1978, Cattle new 990.00 8/78 Dec. 1978, Cattle new 920.00 8/78 Mar. 1979, Wheat 500.00 8/78 Mar. 1979, Wheat 612.50 8/78 Dec. 1978, Hogs 742.50 8/78 Dec. 1978, Hogs 615.00 8/78 Mar. 1979, Sugar II 1,433.60 9/78 Dec. 1978, Copper 100.00 9/78 Dec. 1978, Deutsche marks 7,725.00 9/78 Dec. 1978, IMM gold 1,070.00 9/78 Dec. 1978, IMM gold 1,180.00 9/78 Dec. 1978, Swiss francs 850.00 9/78 Dec. 1978, Canadian oil 210.00 10/78 Mar. 1979, Corn 150.00 10/78 Dec. 1978, Cotton 640.00 10/78 Jan. 1979, Soybeans 75.00 10/78 Dec. 1978, Silver 100.00 10/78 Dec. 1978, British pounds 1,875.00 10/78 Dec. 1978, IMM gold 710.00 10/78 Mar. 1979, IMM gold 140.00 11/78 Jan. 1979, Lumber 400.00 11/78 Jan. 1979, Soybean oil 126.00 11/78 Mar. 1979, IMM gold 740.00 11/78 Feb. 1979, Hogs 225.00 11/78 Feb. 1979, Cattle new 200.00 11/78 Feb. 1979, Cattle new 190.00 11/78 Mar. 1979, Japanese yen 937.50 9/78 Dec. 1979, Swiss francs 4,407.50 Total commodity gains before commission 28,589.60 *1298 *1297 NMT received $ 35,000 in cash payments, attributable to the sale of the Bernalillo land, and $ 125,000, *81
Respondent determined, in his statutory notices of deficiency, that NMT derived "gross receipts," within the meaning of
section 1372(e)(5) , from its commodity futures transactions in the amount of $ 28,590 -- the difference between the contract price of the commodity futures contracts entered into by NMT in order to close or offset its open positions ($ 909,471.60) and the contract price of the commodity futures contracts ($ 880,882), rounded to the nearest dollar -- during its taxable year ended April 30, 1979. Based upon the aforesaid interpretation of "gross receipts," within the meaning ofsection 1372(e)(5) , respondent determined that NMT had gross receipts for its taxable year ended April 30, 1979, more than 20 percent of which was passive investment income. *1299 that NMT's election to be taxed as a tax-option corporation undersection 1372(a) was involuntarily terminated *82 as of May 1, 1978, pursuant to the provisions ofsection 1372(e)(5) , determined the deficiencies here in issue.Respondent determined, in *84 his notices of deficiency, that gross receipts from commodity futures transactions equal the amount of gain resulting from the difference between the total contract prices of the offsetting short positions and the total contract prices of the long positions, unreduced by any fees or commissions.
, affd. on this issueCovington v. Commissioner , 42 B.T.A. 601">42 B.T.A. 601 (1940)120 F.2d 768">120 F.2d 768 (5th Cir. 1941), cert. denied 315 U.S. 822">315 U.S. 822 (1942). A commodity futures contract does not represent the commodity itself, but rather *85 the right to acquire the specific commodity. (1950). The person initiating a commodity futures contract acquires either the right and obligation to purchase the underlying commodity in the future (a long position) or the right and obligation to sell the underlying commodity in the future (a short position), in each case, at a fixed price. A long or short commodity futures position is acquired when a long or short position is traded by a broker over a recognized commodity exchange and recorded on the exchange's books.Modesto Dry Yard, Inc. v. Commissioner , 14 T.C. 374">14 T.C. 374 (1982); seeSmith v. Commissioner , 78 T.C. 350">78 T.C. 350 (5th Cir. 1940), cert. deniedValley Waste Mills v. Page , 115 F.2d 466">115 F.2d 466312 U.S. 681">312 U.S. 681 (1941); (1956). In order for a party to a commodity futures contract to terminate the contractual rights and obligations prior to delivery, a closing or setoff transaction is required.Maloney v. Commissioner , 25 T.C. 1219">25 T.C. 1219 ;Vickers v. Commissioner , 80 T.C. 394">80 T.C. 394 (1983) ; see *1301Covington v. Commissioner, supra (1979);Hoover Co. v. Commissioner , 72 T.C. 206">72 T.C. 206 (1942). *86 Accordingly, gain or loss is sustained at the time of settlement of a commodity futures contract by offset.Battelle v. Commissioner , 47 B.T.A. 117">47 B.T.A. 117Smith v. Commissioner, supra .The amount realized from the sale or other disposition of property is the sum of any money received plus the fair market value of the property (other than money) received. Sec. 1001(b);
sec. 1.1001-1(a), Income Tax Regs. The amount of gain or loss realized from the settlement of a commodity futures contract by offset is the difference between the contract price of the offsetting short (if a long position was originally entered into), or long (if a short position was originally entered into) position and the contract price of the original commodity futures contract. *87Section 1372(a) provides for an election, available to eligible small business corporations, not to be subject to the taxes imposed by chapter 1, *89 but to have all its income taxed directly to its shareholders. Once validly made, such election is effective for the taxable year of the corporation for which it is made and for all succeeding taxable years of the corporation unless it is terminated or revoked undersection 1372(e) .Sec. 1372(d) .Section 1372(e)(5) provides, in pertinent *88 part, as follows:(5) Passive investment income. --
Section 1372(e)(5) was enacted as part of section 64, Technical Amendments Act of 1958, Pub. L. 85-866, 72 Stat. 1606, 1652 (1958), which amended chapter 1 by adding subchapter S, composed of sections 1371 through 1377. *92 As originally enacted in 1958,section 1372(e)(5) provided as follows:Subsection (a) of section 3 of the Act of April 14, 1966, Pub. L. 89-389, 80 Stat. 114-115, amended
section 1372(e)(5) by changing the heading of paragraph (5) from "Personal holding company income" to "Passive investment income," and by dividing the paragraph into subparagraphs (A), (B), and (C).section 1372(e)(5) . *93 *95 Rather, respondent's contention *1304 is thatsection 1372(e)(5) requires that only the gains realized by a small business corporation from its commodity futures transactions be included in determining whether the corporation had gross receipts more than 20 percent of which constitute passive investment income. Respondent argues, in support of his contention, that: (1) The legislative history ofsection 1372(e)(5) and the Federal statutory scheme in subchapter S indicate that only gains from commodity futures transactions were intended by Congress to be used in computing gross receipts; *96 *97 (2) the intent that only gains from these transactions be included is evidenced by the parenthetical "(gross receipts from such sales or exchanges being taken into account for purposes of this paragraph only to the extent of gains)" insection 1372(e)(5)(C) ; (3) NMT's primary purpose in trading in commodity futures was to avoid the automatic termination provision insection 1372(e)(5) ; (4) NMT's monetary obligation and risk and loss with respect to its commodity futures transaction was limited to the amount of the margin deposits, and not to the full amount of the contract price of the commodity futures *94 contract, thus the amount realized is only the gain ($ 28,589.60) excluding the "debt relief" (total contract prices of original commodity futures contracts, $ 880,882).Respondent's arguments are not supported by the scant legislative history of the subchapter S provisions.
Section 1372(e)(5) was amended in 1966 by section 3(a) of Pub. L. 89-389, 80 Stat. 111, 114, which changed the title of the aforesaid section from "Personal holding company income" to *1305 "Passive investment income." Thus, even if respondent is correct that the original version ofsection 1372(e)(5) intended to incorporate by reference the provisions of the Code referring to the personal holding companies, the amendment ofsection 1372(e)(5) by section 3(a) of Pub. L. 89-389, 80 Stat. 111, 114, changing the heading of paragraph (5), constitutes a calculated effort by Congress to erase utterly any implication that a small business corporation must be a personal holding company before it can be excluded from subchapter S treatment bysection 1372(e)(5) . See 510 F.2d 259">510 F.2d 259 (10th Cir. 1975), *98 affg.Marshall v. Commissioner ,60 T.C. 242">60 T.C. 242 (1973). Section 543 was also amended by section 225(d) of the Revenue Act of 1964, Pub. L. 88-272, 78 Stat. 19, 81, which deleted the provisions of paragraph (3) of subsection (a), including gains from commodity futures transactions within the definition of personal holding company income, from the definition of personal holding company income.Respondent's contention that the parenthetical in
section 1372(e)(5)(C) requires that only gains from commodity futures transactions be included as "gross receipts," is also meritless. The aforesaid parenthetical, by its terms, refers exclusively to sales or exchanges of stock or securities. *99 to maintain its subchapter S status until the final installment payments from the sale of its assets were received. NMT's transactions in commodity futures contracts provided a source of nonpassive investment income necessary to avoid termination of its subchapter S corporation status undersection 1372(e)(5) .The spell of the "active" trade of business requirement has been invoked, in the context of the subchapter S provisions, on innumerable occasions. *101 See, e.g.
*1306 (1980);Buono v. Commissioner , 74 T.C. 187">74 T.C. 187Marshall v. Commissioner, supra ; (1972);Howell v. Commissioner , 57 T.C. 546">57 T.C. 546 (1969), affd. per curiamBuhler Mortgage Co. v. Commissioner , 51 T.C. 971">51 T.C. 971443 F.2d 1362">443 F.2d 1362 (9th Cir. 1971).Section 1372(e)(5) requires the application of an objective test in determining whether a small business corporation's election undersection 1372(a) has been terminated. *100 normal characterization of a corporation's receipts in order to classify them as active or passive. SeeBuhler Mortgage Co. v. Commissioner, supra .Section 1372(e)(5) clearly specifies the types of potentially disqualifying passive investment income; gross receipts from transactions in commodity futures contracts are not among them. Furthermore, this Court has previously held that there is nothing unique or improper about a corporation engaging in exclusively investment activity, including under this rubric a subchapter S corporation.Buono v. Commissioner, supra ; "[It] has been black letter law ever sinceHowell v. Commissioner, supra . 319 U.S. 436">319 U.S. 436 (1943), that a corporation is, almost by definition, an entity engaged in 'business activity.'"Moline Properties, Inc. v. Commissioner , .Buono v. Commissioner , 74 T.C. at 197Finally, respondent argues that Merrill Lynch, not NMT, was primarily obligated for any losses sustained in NMT's commodity account; that liability or debt potential as a trader was limited on any day before the delivery month with respect to each commodity contract to the margin call on that particular day, and not to the purchase price of the futures contract. Thus, when NMT closed out a futures contract by entering into an offsetting position, it was not relieved of any real and present debt includable in its amount realized.
*1307 The parties stipulated, and we found as a fact, that when a commodity futures contract is entered into, the parties commit themselves to deliver, and accept delivery of, or to accept delivery of, and deliver, a specified commodity during a designated *102 delivery month, and at a specified price. In order to acquire the contractual rights and incur the obligations in a futures transaction, an initial margin deposit is generally required. Should the trader's equity drop,
section 1372(e)(5) , means thetotal amount received or accrued by the corporation under its method of accounting in computing its taxable income without reduction for fees or commissions, and not simply *103 gains, as contended by respondent. *104Footnotes
3. See note 5
infra↩ .4. Holders of commodity futures contracts can only close out their positions by delivery or offset; they cannot transfer them to third parties.↩
5. Margin is the amount of money or collateral deposited by a client with the broker for the purpose of insuring the broker against loss on open futures contracts; it is not a part payment on a purchase, and does not represent a loan. If a customer's "equity" in any futures contract drops to or under a specified percentage of the original margin (the equity percentage) the broker must issue a margin call (variation margin) to restore the equity percentage. Equity is the residual dollar value of a customer's total futures trading account assuming it were liquidated at current market prices.
6. Pursuant to the rules of the various commodity exchanges, the broker effecting orders is primarily responsible to the various commodity exchanges for the trading losses of its customers.↩
7. A commodity straddle is defined as the simultaneous holding of a long position in one delivery month and a short position in another delivery month. The long position and the short position are commonly referred to as the "legs" of the straddle. A straddle may be achieved in one or two ways: (1) By trading each leg separately, or (2) by taking both positions in one simultaneous transaction. Outright long or short positions in commodity futures are much more risky than straddle positions. The risk in an outright position is that the price of the underlying commodity will rise or fall. In a straddle position, the risk (potential for profit or loss) is that the spread or difference between the prices of the two legs of the straddle will widen or narrow; the general trend of the price of the underlying commodity is of no serious economic importance.↩
8. "Selling price" means the market price of the underlying commodity that is the subject of a commodity futures contract, on the date of the sale of the commodity futures contract.↩
9. "Cost" means the market price of the underlying commodity that is the subject of a commodity futures contract, on the date that the commodity futures contract is entered into.
11. The missing selling price and cost figures are not in evidence.↩
12. This figure was stipulated by the parties, although the addition is not arithmetically correct. See note 11.↩
10. "Gain" or "loss" is the difference between the selling price and the cost, before fees and commissions.↩
13. Payment of principal with respect to the sale of the Baca location amounted to $ 104,500; $ 20,500 was interest.↩
14. Computed as follows:
Interest on U.S. obligations $ 953 Other interest 90,012 Oil royalties 1,761 Total 92,726 The $ 90,012 of "other interest" includes the portion of the installment payment on the sale of the Baca location attributable to interest ($ 20,500).
15. The computation is as follows:
Gross receipts: Principal collections -- installment sale (Baca location) $ 104,500 Principal collections -- installment sale (Bernalillo land) 35,000 Sale of D7 cat tractor 9,600 Sale of office furniture 40 Commodity futures transactions -- gains before commissions 28,590 Interest on U.S. obligations 953 Other interest 90,012 Oil royalties 1,761 Total gross receipts 270,456 Passive investment income: Interest on U.S. obligations $ 953 Other interest 90,012 Oil royalties 1,761 Total passive investment income 92,726 Passive investment income ($ 92,726) is more than 20 percent of gross receipts ($ 270,456), or $ 54,091.20.↩
16. Based upon the aforesaid interpretation of "gross receipts," within the meaning of
sec. 1372(e)(5) , respondent determined that NMT's election undersec. 1372(a) was involuntarily terminated as of May 1, 1978, pursuant tosec. 1372(e)(5) , because NMT had gross receipts for its taxable year ended Apr. 30, 1979, more than 20 percent of which was passive investment income. SeeRev. Rul. 79-294, 2 C.B. 305">1979-2 C.B. 305↩ , which states respondent's position on this issue.17. A closing or offsetting transaction involves the acquisition of either a long position (if the trader wishes to liquidate a short position) or a short position (if the trader wishes to liquidate a long position) covering the same amount of a specified commodity and the same delivery month.↩
18. NMT did not sustain any losses as a result of its trading in commodity futures contracts, only gains.↩
19. For example, on Sept. 20, 1978, NMT entered into a contract to accept delivery of IMM gold in December 1978 (long position). The price per ounce of gold as of this date was $ 218; the contract involved 100 ounces. The price per ounce of gold on Oct. 20, 1978, was $ 229.80, and NMT on that date entered into a contract to deliver IMM gold in December 1978 at $ 229.80 per ounce (short position). The acquisition of a short position in the same commodity for the same delivery month, viz, the entering into an offsetting short contract, constitutes a sale or exchange in which a gain of $ 1,180 was realized, as follows: amount realized is the contract price of the short contract ($ 22,980) less the contract price of the long contract ($ 21,800), equals gain of $ 1,180 before fees or commissions.
20. These taxes include the regular corporate income tax, the accumulated earnings tax, and the personal holding company tax. However, pursuant to
sec. 1372(b) , an electing small business corporation which realizes capital gains may be subject to the special capital gains tax imposed by sec. 1378 and the minimum tax of secs. 56 and 58(d)(2).21. In 1954, President Eisenhower recommended the passage of legislation which would eliminate the influence of Federal tax laws on the selection of the form of organization adopted by small businesses. President's Budget Message of Jan. 21, 1954, 100 Cong. Rec. 567, 571 (1954). In the same year, the Senate acted upon the President's proposal; sec. 1351 of the bill passed by the Senate would have allowed certain corporations to be taxed as partnerships and certain proprietorships and partnerships to be taxed as corporations. The companion bill reported by the House Ways and Means Committee did not contain any such provision and the Conference Committee approved only the provision allowing proprietorships and partnerships to elect to be taxed as corporations. Conf. Rept. 2543, 83d Cong., 2d Sess. 72 (1954). In 1958, President Eisenhower again recommended that Congress adopt certain tax provisions to help small businesses. President's Budget Message of Jan. 13, 1958, 104 Cong. Rec. 388, 389 (1958). In the same year, the Treasury Department drafted provisions for the consideration of the House Ways and Means Committee. The House Committee did not adopt the Treasury's draft in any form. H. Rept. 775, 85th Cong., 1st Sess. (1957),
3 C.B. 811">1958-3 C.B. 811 . However, the Senate developed subch. S, which Congress adopted in the Technical Amendments Act of 1958. S. Rept. 1983, to accompany H.R. 8381 (Pub. L. 85-866), 85th Cong., 2d Sess. (1958),3 C.B. 922">1958-3 C.B. 922↩ , 1008.22. Subsec. (b) of sec. 3 of the Act of Apr. 14, 1966, Pub. L. 89-389, 80 Stat. 111, 114, made the amendment in subsec. (a) generally applicable to taxable years of electing small business corporations ending after the date of enactment of the act.↩
23.
Sec. 1372(e)(5)(C) provides that the term "passive investment income" means six types of gross receipts. The term "means" indicates an exclusive list. The sole type of income which can reasonably be considered to include commodity futures transactions is gross receipts derived from sales or exchange of stock or securities.Sec. 1.543-1(b)(5)(i), Income Tax Regs. , defines stock or securities.Sec. 1.543-1(b)(5)(i), Income Tax Regs. , is applied to subch. S bysec. 1.1372-4(b)(5)(x), Income Tax Regs. Sec. 1.543-1(b)(5)(i), Income Tax Regs. , provides in pertinent part, as follows:"The term 'stock or securities' as used in section 543(a)(2) and this subparagraph includes shares or certificates of stock, stock rights or warrants, or interest in any corporation (including any joint stock company, insurance company, association, or other organization classified as a corporation by the Code, certificates of interest or participation in any profit sharing agreement, or in any oil, gas, or other mineral property, or lease, collateral trust certificates, voting trust certificates, bonds, debentures, certificates of indebtedness, notes, car trust certificates, bills of exchange, obligations issued by or on behalf of a State, Territory, or political subdivision thereof."
Thus, commodity futures contracts are not stock or securities.
Rev. Rul. 71-568, 2 C.B. 312">1971-2 C.B. 312 , so holds. See alsoRev. Rul. 72-457, 2 C.B. 510">1972-2 C.B. 510 (income derived by an electing small business corporation from the buying and selling of commodity futures is not passive investment income within the meaning ofsec. 1372(e)(5) ); , affg. on this issueCorn Products Refining Co. v. Commissioner , 215 F.2d 513 (2d Cir. 1954)16 T.C. 395">16 T.C. 395 (1951), affd. on another ground350 U.S. 46">350 U.S. 46↩ (1955) (commodity futures do not constitute stock or securities within the meaning of the wash sale provisions of the Code -- currently sec. 1091).24. Respondent's reasoning is as follows: (1) Sec. 351 of the Revenue Act of 1934, 48 Stat. 680, 751, imposed a special tax on undistributed profit of personal holding corporations, defined as corporations 80 percent of whose gross income for the taxable year consisted of royalties, dividends, interest, annuities, and (except in the case of regular dealers in stock or securities) gain from the sale or exchange of stock or securities, and whose stock to the extent of more than 50 percent in value was owned by not more than five individuals at any time during the last half of the taxable year; (2) in order that individuals could not take advantage of the personal holding company provisions so as to reduce their taxes, sec. 1 of the Revenue Act of 1937, 50 Stat. 813, was enacted, adding new sec. 353 (the predecessor of sec. 543), which included as personal holding company income the gains from commodity futures transactions on or subject to the rules of boards of trade and exchanges (an exception was made in the case of gains on bona fide hedging transactions derived by corporations engaged in producing, processing, merchandising, or handling such commodities). This provision was included as sec. 502(c) of the 1939 Code; it was further enacted as sec. 543(a)(3) of the 1954 Code; and (3) at the time
sec. 1372(e)(5) was enacted in 1958, the aforesaid version of sec. 543(a)(3) (including commodity gains within the definition of "personal holding company income") was in effect. Thus respondent concludes, in entitling 1372(e)(5) "Personal holding company income" in 1958, Congress expected and anticipated that only the gains from commodity futures transactions would be included for purposes of computing gross receipts from the closing or setoff of commodity futures contracts.25. Commodity futures contracts are not stock or securities. See note 22
supra↩ .26. In support of this argument, the legislative history of the subch. S provisions, specifically S. Rept. 1007, 89th Cong., 2d Sess. (1966),
1 C.B. 532">1966-1 C.B. 532 , which states that the subch. S provisions were passed to allow only small businesses actively engaged in a trade or business to make the election, is usually relied upon. Those businesses with large amounts of passive income were not to have the option of electing subch. S treatment. Consequently, Congress denied the election to those corporations which had large amounts of investment type income such as royalties, rents, dividends, annuities, and profits from the sales or exchanges of stock and securities.27. Respondent stipulated that NMT decided to attempt to make profits by trading in commodity futures contracts.↩
28. For example, where the trader acquires a long position and the price of the underlying commodity falls.↩
29. Both parties discuss the rationale of our decision in
(1982), in extenso. InSmith v. Commissioner , 78 T.C. 350">78 T.C. 350 , we dealt with the deductibility of losses incurred in silver tax straddle transactions. Thus, the facts ofSmith v. Commissioner, supra , are distinguishable and merit, no further discussion here.Smith v. Commissioner, supra↩ 30. In their petition herein, petitioners alleged that they paid in full the deficiencies determined by respondent after the issuance of the statutory notices herein, but prior to the filing of the petition, and accordingly prayed for the entry of a decision finding an overpayment of taxes in such amounts. In his answer, respondent denied petitioners' allegations "for lack of knowledge." The record is otherwise silent. The parties should be able to agree on this matter as part of an agreed recomputation to be presented to the Court under Rule 155. If not, further proceedings under Rule 155 may be necessary.
Document Info
Docket Number: Docket No. 24199-82
Citation Numbers: 1985 U.S. Tax Ct. LEXIS 67, 84 T.C. No. 70, 84 T.C. 1290
Judges: Korner
Filed Date: 6/17/1985
Precedential Status: Precedential
Modified Date: 11/14/2024