Arkansas Best Corporation v. Commissioner

Arkansas Best Corporation v. Commissioner, 485 U.S. 212 (1988), is a United States Supreme Court

Supreme Court of the United States

The Supreme Court of the United States is the highest court in the United States. It has ultimate appellate jurisdiction over all state and federal courts, and original jurisdiction over a small range of cases...

decision that helps taxpayers classify whether or not the sale of an asset is an ordinary or capital gain

Capital gain

A capital gain is a profit that results from investments into a capital asset, such as stocks, bonds or real estate, which exceeds the purchase price. It is the difference between a higher selling price and a lower purchase price, resulting in a financial gain for the investor...

or loss for income tax purposes.

Facts

Arkansas Best, a diversified holding company

Holding company

A holding company is a company or firm that owns other companies' outstanding stock. It usually refers to a company which does not produce goods or services itself; rather, its purpose is to own shares of other companies. Holding companies allow the reduction of risk for the owners and can allow...

acquired a large percentage of the stock of the National Bank of Commerce in Dallas, Texas. When the real estate market in Dallas faltered, Arkansas Best sold a large portion of its stake in the Bank at a loss. Arkansas Best claimed a deduction for an ordinary loss of nearly $10 million from the sale. The Commissioner of the Internal Revenue Service

Internal Revenue Service

The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...

disallowed the deduction, finding that it was a capital, not ordinary loss.

Issue

Was the stock properly a capital asset as defined by I.R.C. § 1221? Should the Court read § 1221 broadly as it had in Corn Products Refining Co. v. Commissioner, 350 U.S. 46 (1955)?

Holding

The Eighth Circuit reversed the Tax Court’s determination that the loss was an ordinary loss since the Bank stock fell within the general definition of “capital asset” in I.R.C. § 1221 and did not fall within any of the statutory exceptions in the section. A taxpayer’s motivation in purchasing an asset is irrelevant to its classification.

Reasoning

The broad definition of the term “capital asset” explicitly makes irrelevant any consideration of the property’s connection with the taxpayer’s business. The motive behind the purchase of the asset is not mentioned as a factor in § 1221.

Congress
United States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....

does not direct the Court to read § 1221 liberally. Congress intended the specific exceptions explicitly contained in § 1221.

The holding in Corn Products is that hedging transactions that are an integral part of a business’ inventory-purchase system fall within the inventory exclusion of § 1221. This ruling does not apply to the facts of this case.

The capital stock held by Arkansas Best falls within the broad definition of a “capital asset” in § 1221 and is outside the classes of property excluded from capital-asset status.

Corn Products Refining Co. v. Commissioner, 350 U.S. 46 (1955)

The Corn Products case involved discussion of whether income arising from the sale of corn futures by a company that refined corn

Maize

Maize known in many English-speaking countries as corn or mielie/mealie, is a grain domesticated by indigenous peoples in Mesoamerica in prehistoric times. The leafy stalk produces ears which contain seeds called kernels. Though technically a grain, maize kernels are used in cooking as a vegetable...

into other forms and food products were entitled to capital gains treatment. The company bought corn futures

Futures contract

In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange...

to protect their future corn supply and pricing and would sell the futures if it had excess inventory corn for its processes. As the corn futures were essentially inventory, they were classified as such property which would “properly be included in the inventory of the taxpayer … in the ordinary course of his trade or business.” I.R.C. § 1221(a)(1).

IRC § 1221(a)(7)

Since the time of Corn Products, IRC §1221(a)(7) was added which specifically excludes from the definition of capital asset "any hedging transaction which is clearly identified as such before the close of the day on which it was acquired, originated, or entered into (or other such time as the Secretary may by regulations prescribe)."

This is essentially a codification of the result in Corn Products and removes the necessity of classifying hedging transactions as "inventory" under IRC § 1221(a)(1).

Importance

This case signals that the Court will closely read the exclusions in I.R.C. § 1221 in classifying capital versus ordinary losses. By sticking with the explicit language of the section the Court clarifies this section for other courts and practitioners interpreting and implementing the Code.