Amicus Curiae Brief — Arkansas Best Corp. v. Commissioner

| FILED.

5) MAY 6 1987

No. 86-751 ai

SPANIOL, JR,

In THE =

Supreme Court of the United States

OCTOBER TERM, 1986

ARKANSAS BEST CORPORATION AND SUBSIDIARIES,

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

ON WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

BRIEF OF THE

NATIONAL COUNCIL OF FARMER COOPERATIVES

AS AMICUS CURIAE

ARTHUR E. BRYAN, JR.

(Counsel of Record)

GEORGE W. BENSON

McDermott, WiLL & EMERY

111 W. Monroe Street

Chicago, Illinois 60603

(312) 372-2000

Attorneys for Amicus Curiae

Of Counsel:

JAMES 8S. KRZYMINSKI

General Counsel

National Council of Farmer Cooperatives

50 F Street, N.W.

Washington, D.C. 20001

(202) 628-6676

CHAS. P. YOUNG COMPANY

TABLE OF CONTENTS

TABLE OF CONTENTS ..... 1.2... cece ccc cnees

TABLE OF AUTHORITIES.....................

INTEREST OF THE NATIONAL COUNCIL OF

FARMER COOPERATIVES..................-.-.

SUMMARY OF ARGUMENT...................

PEE pcdeuicbbedeebicecesesevcccocccces

I. CORN PRODUCTS AND ITS PROGENY ARE

Se ROUEN. ceccecececececccess

A. This Court has consistently held that the

capital asset provisions (including the term

“eapital asset”) should be construed narrow-

B. Taxation statutes are not literally construed

when a literal construction is inconsistent

with the intent of the statute ...........

C. Corn Products was decided as it was at the

urging of the Government, and it confirmed

prior administrative practice and lower

SE occcentectecscencccecees

Il. THE CORN PRODUCTS DECISION IS A SEN-

SIBLE AND PRACTICAL APPROACH TO

CONSTRUING THE INTERNAL REVENUE

CODE AND, UNTIL THE RECENT DECI-

SION OF THE EIGHTH CIRCUIT, HAD

BEEN ACCEPTED BY THE INTERNAL

REVENUE SERVICE, THE COURTS AND

EE a wcccbdedddocodeccccccsvcceces

A. The Internal Revenue Service has, at least

until recently, embraced the Corn Products

decision and confirmed its applicability to

SD Gc bc ccccccccccssccccccecvess

15

19

21

B. Corn Products has been applied by lower

courts in many cases over the past thirty

years and no court, until the Eighth Circuit,

thought it “misbegotten”................

Cc. Congress has accepted the result of the Corn

FUE HED ceccccccocceceancsne

III. MISSISSIPPI CHEMICAL DID NOT REVERSE

CORN PRODUCTS SUB SILENTIO........___.

GOERS «occ cccuccccccesteces UE

PAGE

ili

TABLE OF AUTHORITIES

A. Statutes. PAGE

Revenue Act of 1921 (ch. 136, 42 Stat. 227)..... Ls)

Internal Revenue Code of 1939 (26 U.S.C.)

EEE 15, 29

ee cece cccccces 15

Internal Revenue Code of 1986 (26 U.S.C.)

ee one dé ceccccascccccss 18

Ne is cece cceucecoceccs 26

Sections 1201-1288 (Subchapter P)......... 26-27

a 6, 7, 11, 15, 18, 29

EN IE 14

Section 123l(aX3\XAVii) .................. 10

EEE 1]

Cee ctw ccesceces 1, 6

ccc us esccsccess 15

EE 10

Ce ee ces oc e cease as i)

EEE 14

Sections 1381-1388 (Subchapter T)......... 4

Ne ee occa cccsececss 4

B. Cases.

Arkansas Best Corporation v. Commissioner, 800 F.2d

215 (8th Cir. 1986), rev’g. in part and aff’g. in

part 83 T.C. 640 (1984)... .1, 4, 5, 6, 7, 15, 19, 27, 29, 30

Bazley v. Commissioner, 331 U.S. 737, 91 L.Ed.

BE 17

Bob Jones University v. United States, 461 U.S. 574,

76 L.Ed.2d 157, 103 S.Ct. 2017 (1983). ....... 18

Burnet v. Harmel, 287 U.S. 103, 77 L.Ed. 199, 53

Neen ee eg owes eusccceces 8, 9

iv

PAGE

Campbell Taggart, lnc. v. United States, 744 F.2d 442

Ge GS EE xe dieucuncietaneueueanuncnnan 26

Charles A. Clark, 19 T.C. 46 (1952), aeq. 1958-1 Cum.

Bull. 7, appeal to the 9th Circuit dismissed June

Bb Se Sled. neds inde bh and eRe bae eesi 23

Commissioner v. Bagley & Sewall Co., 221 F.2d 944

Se ek EE Senvne venue dbeseaaneed tunes. 23

Commissioner v. Gillette Motor Transport, 364 U.S. 130,

4 L.Ed.2d 1617, 80 S.Ct. 1497 (1960)........ 13, 23-24

Commissioner v. P. G. Lake, Inc., 356 U.S. 260, 2

L.Ed.2d 743, 78 S.Ct. 691 (1958). ......... 12-13, 22

Corn Products Refining Co. v. Commissioner, 350

U.S. 46, 100 L.Ed. 29, 76 S.Ct. 20 (1955)..... 6,7, 8,

11-12, 15, 19-21, 22, 23, 24, 25, 26, 27, 29, 30

Fairbanks v. United States, 306 U.S. 436, 83 L.Ed.

Sa ee Ges Ge I cc sb sdk Wawdecihscees: 9

Gregory v. Helvering, 293 U.S. 465, 79 L.Ed. 596, 55

rs kas a ode kckantcduateuees es 16

Griffiths v. Commissioner, 308 U.S. 355, 84 L.Ed.

Beek ee es Se WE Sckt cuebuctasdanus ss 18

Helvering v. Alabama Asphaltic Limestone Co., 315

U.S. 179, 86 L.Ed. 775, 62 S.Ct. 540 (1942).... 17

Helvering v. Flaccus Leather Co., 313 U.S. 247, 85

L.Ed. 1310, 61 S.Ct. 878 (1941). ............. 10

Hillsboro National Bank v. Commissioner, 460 U.S.

370, 75 L.Ed.2d 130, 103 S.Ct. 1134 (1983). ... 18

Hort v. Commissioner, 313 U.S. 28, 85 L.Ed. 1168,

Pe es ee EN kv iwc nu codce causes tees 9-10

Kieselbach v. Commissioner, 317 U.S. 399, 87 L.Ed.

es We ls ME, ys oe we vcs ccccaunesast 10-11

LeTulle v. Scofield, 308 U.S. 415, 84 L.Ed. 355, 60

es So scctet aoeaychuoeeesoee as 16

Malat v. Riddell, 383 U.S. 569, 16 L.Ed.2d 102, 86

Sees. INS v bv ahwedceduawtenerekeues 14

C.

PAGE

Paulsen v. Commissioner, 469 U.S. 131, 83 L.Ed.2d

540, 105 S.Ct. 627 (1985)... 2.6... eee eee eee 17

Pinellas Ice Co. v. Commissioner, 287 U.S. 46, 77

L.Ed. 428, 53 S.Ct. 257 (1933). ............-- 16

Renziehausen v. Lucas, 280 U.S. 387, 74 L.Ed. 501,

te OY). | Sr eee ~

United States v. Midland-Ross Corp., 351 U.S. 54, 14

L.Ed.2d 214, 85 S.Ct. 1308 (1965). ........... 14

United States v. Mississippi Chemical Corporation,

405 U.S. 298, 31 L.Ed.2d 217, 92 S.Ct. 905 (1972),

rev’g. 431 F.2d 1320 (5th Cir. 1970)........ 7, 27-30

Watson v. Commissioner, 345 U.S. 544, 97 L.Ed.

1232, 73 S.Ct. 848 (1953)... ... 6... eee ee eee 1]

Western Wine & Liquor Co., 18 T.C. 1090 (1952),

appeal dismissed, 205 F.2d 420 (Sth Cir. June

17, 1953) aeq. 1958-1 Cum. Bull. 6. .......... 23

Revenue Rulings.

Rev. Rul. 58-40, 1958-1 Cum. Bull. 275. ......... 23

Rev. Rul. 69-216, 1969-1 Cum. Bull. 109. ........ 4

Rev. Rul. 70-64, 1970-1 Cum. Bull. 36.......... 4-5, 24

Rev. Rul. 70-298, 1970-1 Cum. Bull. 52. ......... }

Rev. Rul. 70-407, 1970-2 Cum. Bull. 52. ......... 5

Rev. Rul. 72-238, 1972-1 Cum. Bull. 65. ......... 24

Rev. Rul. 75-13, 1975-1 Cum. Bull. 67, revoked by

ee ee FD goo ccc cacueevctosecuvaeseneds 24-25

Rev. Rul. 78-94, 1975-1 Cum. Bull. 58. ........-. 25

Rev. Rul. 78-396, 1978-2 Cum. Bull. 114. ........ 25

Rev. Rul. 78-402, 1978-2 Cum. Bull. 13s. ........ 3-4

Ltr. 8713055 (December 30, 1986). ............-. }

Other.

Brief for the Pet.tioner, Corn Products Refining Co.

v. Commissioner, supra. (filed 10/3/55)... .. 19-20, 23

vi

PAGE

Petitioner’s Brief for Certiorari, Commissioner v.

P. G. Lake, Inc., supra. (filed 4/17/57). ....... 22

Brief for the Petitioner, Commissioner v. Gillette

Motor Transport, supra. (filed 2/4/60)......... 23-24

CCH 1987 Standard Federal Tax Reports, Citator

DT vdtcnvekduekdeseubacvahwe ath adaeen 26

Farm Credit Act of 1955, 69 Stat. 656........... 28

H.R. Rep. No. 426, 99th Cong., Ist Sess. (1985). 27

S. Rep. No. 313, 99th Cong., 2d Sess. (1986)..... 27

IN THE

Supreme Court of the United States

OCTOBER TERM, 1986

ARKANSAS BEST CORPORATION AND SUBSIDIARIES,

Petitioner,

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

ON WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

BRIEF OF THE

NATIONAL COUNCIL OF FARMER COOPERATIVES

AS AMICUS CURIAE

INTEREST OF THE NATIONAL COUNCIL OF FARMER

COOPERATIVES

The National Council of Farmer Cooperatives (“NCFC’”’),

with the consent of the parties,’ submits this Brief as Amicus

Curiae in support of Appellant’s position that the United

States Court of Appeals for the Eighth Circuit was in error

when it held that capital stock must always be treated as a

capital asset without regard to the reasons the stock was

purchased and held.’

‘Copies of our letters to counsel for the parties to this case

requesting their permission to file an amicus brief and their

favorable responses accompanied this brief when filed.

* Arkansas Best Corporation v. Commissioner, 800 F.2d 215 (Sth

Cir. 1986) rev’g. in part and aff’g. in part 83 T.C. 640 (1984).

(footnote continued on next page

2

The NCFC is a nationwide association of businesses oper-

ated on a cooperative basis which are owned and controlled

by farmers. Its membership includes 90 major marketing

and farm supply cooperatives, the 37 banks of the Farm

Credit System,’ and 33 state councils of farmer cooperatives.

The members of the NCFC handle nearly every type of

agricultural commodity produced in the United States, mar-

ket these commodities domestically and around the world

and furnish production supplies and credit to their farmer

members and patrons. The membership of the members of

NCFC includes approximately 90 percent of the nearly 5,600

local farmer cooperatives in the nation.

Farmer cooperatives were formed, and operate today, to

meet the needs of farmers for reliable and fairly-priced

sources for farm supplies (such as, fertilizer, seed, feed and

pesticides) and farm services and to provide farmers assis-

tance in effectively marketing the commodities that they

produce. These cooperatives are an integral extension of the

farming operations of their members. Their importance to

agriculture is demonstrated by the fact that five out of six

American farmers are affiliated with one or more

cooperatives.

What distinguishes cooperatives from other businesses is

that a cooperative’s earnings inure directly to the benefit of

its patrons, not to its shareholders. Cooperatives distribute

their earnings each year in the form of patronage dividends

based upon the quantity or value of business done with or for

each patron.

(footnote continued trom preceding page)

The only exception recognized by the Eighth Circuit was for

security dealers holding capital stock in inventory who are

subject to the rules of Code section 1236.

*The Farm Credit System consists of the 12 district Federal

Land Banks, the 12 district Federal Intermediate Credit Banks,

the 12 district Banks for Cooperatives and the Central Bank for

Cooperatives all of which are Federally chartered and governed

by the Farm Credit Act and the Farm Credit Administration.

3

Farmer cooperatives are incorporated and issue capital

stock to their members. However, that stock does not repre-

sent an “investment” by their members as that term is

commonly used. Normally, cooperative stock is entitled to

no dividends. As noted, earnings of a cooperative are dis-

tributed on the basis of patronage, not stock ownership.

Usually, cooperative stock has no appreciation potential

since it is sold at par and is entitled upon liquidation to

receive an amount equal to its par value and no more.

Residual assets on liquidation normally are distributed on a

patronage basis. In most cases, cooperative stock is subject to

restrictions on transferability and there is no market for the

stock. Usually, members are required to buy stock in a

cooperative before they can patronize the cooperative. They

may receive additional shares of capital stock as a portion of

their patronage dividends. Given the characteristics of

cooperative stock and the conditions under which members

obtain it, it is clear that members acquire and hold the stock

for business, not investment, purposes.

The Internal Revenue Service has publicly recognized the

unique features of the stock of cooperatives. Rev. Rul. 78-402,

1978-2 Cum. Bull. 138, held that stock purchased by a

retailer in a cooperative wholesaler “was purchased and held

predominantly for purposes related to the conduct of

the ...{retailer’s} business, and not predominantly, for

investment purposes.” The ruling stated:

“... the purchase and holding of the common stock of

the cooperative by X was predominantly related to the

conduct of the . . . |retailer’s) business since it permitted

X to avail itself of the cooperative’s purchasing power,

supply of products, and business services. In addition.

no dividends were payable with respect to the stock, and

because the cooperative stock was purchased at par and

redeemable at the lower of par or book value, the

optimum return X could expect to receive upon its

redemption was the par value purchase price.”

1978-2 Cum. Bull. 138, at 138-9.

4

Recently in Ltr. 8713055 (December 30, 1986),‘ the Internal

Revenue Service cited Rev. Rul. 78-402 and contrasted the

facts in that ruling with the Eighth Circuit decision in

Arkansas Best.

Many cooperatives pay a portion of their patronage divi-

dends each year in the form of written notices of allocation

that inform each member that earnings have been allocated

to the member on the books of the cooperative. The Internal

Revenue Service has ruled that such notices are the equiv-

alent of equity. Rev. Rul. 69-216, 1969-1 Cum. Bull. 109 and

Rev. Rul. 70-298, 1970-1 Cum. Bull. 82. Provided certain

formalities are followed, pursuant to Subchapter T (26 U.S.C.

§§ 1351-1358) of the Internal Revenue Code of 1986 (hereinaf-

ter referred to as “Code’’) a cooperative is entitled to exclude

from its income patronage dividends paid to members in this

form, and members are required to include the notices in

ordinary income at the face amount (without regard to fair

market value). Usually the notices have no dividend rights

or appreciation potential.

Rev. Rul. 70-64, 1970-1 Cum. Bull. 36, held that a chicken

farmer recognized an ordinary loss when a cooperative

redeemed notices of allocation at less than face which had

been distributed to the farmer as part of his patronage

dividend from the cooperative. The ruling stated:

“In the instant situation the taxpayer joined the

cooperative to facilitate his business and to make it more

profitable. The transaction that gave rise to the issuance

of the notice of allocation arose in the ordinary course of

taxpayer's trade or business. Accordingly, the loss

incurred by the taxpayer upon redemption of the quali-

fied written notice of allocation is an ordinary loss

‘Pursuant to section 6110Q)3) of the Internal Revenue Code

of 1956 (26 U.S.C. § 6110G)(3)), private letter rulings may not be

used or cited as precedent. This private letter ruling is cited

solely as evidence of administrative acceptance of the special

status of cooperative stock.

5

deductible for 1968 under the provisions of section 165

of the Code. See Corn Products Refining Company v.

Commissioner, 350 U.S. 46 (1955), Ct. D. 1787, C.B.

1955-2, 511; Burnet v. Harmel, 287 U.S. 103 (1932), Ct. D.

611, C.B. X1-2, 210; and Western Wine and Liquor Com-

pany v. Commissioner, 18 T.C. 1090 (1952), aequiescence,

C.B. 1958-1, 6. The loss is measured by the difference

between the stated amount included in income in 1963

and the amount received upon redemption.”

1970-1 Cum. Bull. 36, at 36.

Rev. Rul. 70-407, 1970-2 Cum. Bull. 52, held that a cotton

farmer incurred an ordinary loss when, in order to recoup a

loss which it had incurred, a cooperative cancelled marketing

eredits that had been issued to the cotton farmer in prior

years.

Because of the severely depressed state of American agri-

culture, many farmer cooperatives have incurred losses in

recent years. The decision of the United States Court of

Appeals for the Eighth Circuit in Arkansas Best is of great

concern to the farmer cooperatives and their members

represented by the NCFC because it is directly contrary to

the present accepted treatment of capital stock issued by

cooperatives. The NCFC’s members are most concerned with

the Eighth Cireuit’s conclusion that Arkansas Best was not

entitled to ordinary loss treatment on the disposition of its

stock “regardless of when or why the stock was acquired”

(800 F.2d 215, at 220) and, with its statement that “we do not

read Corn Products as either requiring or permitting the

courts to decide that capital stock can be anything other than

a capital asset under section 1221.” at 221. These conclusions

suggest that losses of cooperatives and their members on

capital stock (and perhaps written notices of allocation) con-

stitute capital losses whether the stock was purchased to

obtain, through the cooperative, a source of supply or a

market for products or whether the stock (or notices of

allocation) was received as a patronage refund on which the

patron was taxed as ordinary income upon receipt. For

reasons set forth herein, the NCFC strongly believes that the

conclusions of the Eighth Circuit are erroneous.

SUMMARY OF ARGUMENT

In its opinion in this case, the Eighth Circuit indicated

that it believed the decisions of this Court in Corn Products

Refining Co. v. Commissioner, 350 U.S. 46, 100 L.Ed. 29, 76

S.Ct. 20 (1955), and of the courts that have since followed

Corn Products to be “misbegotten.” Declining to follow the

lead of other courts, the Eighth Circuit announced that Code

section 1221 should be read literally and that capital stock is

always a capital asset.’

It is respectfully submitted that these views are in error.

The Corn Products decision was not “misbegotten.” It has its

roots in a long line of decisions of this Court which hold that

the capital gains and losses provisions of the tax laws are to

be strictly construed. This Court has so held because these

provisions are exceptions to the general rule thai income and

loss is ordinary. The Corn Products decision has roots as well

in another long line of decisions of this Court that hold

statutes (and in particular the Code) should be construed to

achieve the purpose of Congress. Moreover, this Court

decided Corn Products upon the urging of the Government

and in so doing confirmed the correctness of prior adminis-

trative practice and a number of lower court decisions.

The Corn Products decision is a sensible and practical

approach to construing the Internal Revenue Code and, until

the recent decision of the Eighth Circuit, had been accepted

by the Internal Revenue Service, the courts and Congress.

Decisions such as Corn Products, which are grounded on

construing statutes based on their purpose, are essential to

the proper functioning of the Federal tax system.

’ As noted above, the only exception recognized by the Eighth

Circuit was for securities dealers holding capital stock in inven-

tory who are subject to the rules of Code section 1236.

7

There is no support for the position taken by the Eighth

Cireuit that this Court overuled Corn Products by its decision

in United States v. Mississippi Chemical Corporation, 405 US.

298, 31 L.Ed.2d 217, 92 S.Ct. 908 (1972). The Eighth Circuit

attributes considerably more weight than it deserves to a

reference to Code section 1221 in Mississippi Chemical. The

authorities cited in that reference dealt only with the ques-

tion of whether the amounts in issue were currently deduct-

ible or should be capitalized. The question of whether the

expenditure produced a Code section 1221 “capital asset” was

not at issue.

I. Corn Products and its Progeny Are Not “Misbegotten.”

The Eighth Circuit's opinion asserts that “Corn Products

and its progeny” are “mishegotten” and calls for a literal

construction of Code section 1221:

“ We do not read Corn Products as either requiring or

permitting the courts to decide that capital stock can be

anything other than a capital asset under section 1221.

It seems to us that one of the last places where the legal

system deliberately should foster subjectivity and uncer-

tainty is in the tax code. Corn Products and its progeny,

which we respectfully view as misbegotten, have done

precisely that, leading to increased recourse to the

administrative and judicial processes to resolve conflict-

ing contentions about taxpayers’ motivations in pur-

chasing capital stock. Congress could have written

section 1221 to incorporate some sort of exception

regarding capital stock, just as it recognized the unique

position of securities dealers in 26 U.S.C. § 1236, but it

did not do so. We believe that the judiciary lacks author-

ity to create exceptions to section 1221] that Congress did

not choose to make.”

800 F.2d 215, at 221.

»

Corn Products is not “misbegotten.” It is rooted in two long

lines of cases decided by this Court, one holding that the

capital gains provisions should be construed narrowly and

the other holding that literal compliance with the tax stat-

utes is not sufficient if the purpose is not met.

A. This Court has consistently held that the capital

asset provisions (including the term “capital asset’’)

should be construed narrowly.

Capital gains have been accorded special treatment for

Federal income tax purposes since the Revenue Act of 1921,

ch. 136, 42 Stat. 227. Since Renziehausen v. Lucas, 280 US.

387, 74 L.Ed. 501, 50 S.Ct. 156 (1930), this Court has con-

strued the capital gains provisions narrowly. This Court has

done so by narrowly construing the term “capital asset” and

also by narrowly construing the term “sale or exchange”.

In Renziehausen, this Court held that a distiller realized

ordinary income upon the sale of whiskey which had been

segregated from the raw whiskey sold in the normal course

of the distiller’s trade or business to mature over a period of

years. The whiskey was carried in a separate account

entitled “Old Whiskey” in the distiller’s records. This Court

affirmed the holding of the lower courts that “the whiskey

was clearly part of the stock in trade.” 280 U.S. 387, at 389.

In Burnet v. Harmel, 287 U.S. 103, 77 L.Ed. 199, 53 S.Ct. 74

(1932), this Court held that bonus payments and royalties

received by the owner of Texas oil lands for oil and gas leases

constituted ordinary income. Although under Texas law the

lease passed title to the oil and gas in place to the lessee and

there was no specific statutory exception to capital gains

treatment for oil and gas leases, this Court did not believe it

would be consistent with the purpose of Congress in provid-

ing special tax treatment for sales of capital assets to treat

the payments as capital:

“Before the Act of 1921, gains realized from the sale

of property were taxed at the same rates as other

income, with the result that capital gains, often accru-

ing over long periods of time, were taxed in the year of

realization at the high rates resulting from their inclu-

sion in the higher surtax brackets. The provisions of the

1921 revenue act for taxing capital gains at a lower rate,

retnacted in 1924 without material change, were

adopted to relieve the taxpayer from these excessive tax

burdens on gains resulting from a conversion of capital

investments, and to remove the deterrent effect of those

burdens on such conversions.”

287 U.S. 103, at 106.

This Court concluded that treating gain as capital “would

have tended to defeat rather than further the purpose of the

et.” 287 U.S. 103, at 10s.

In Fairbanks v. United States, 306 US. 436, 83 L.Ed. 855, 59

S.Ct. 607 (1939), this Court affirmed administrative practice

and the lower courts when it held that gain realized upon the

redemption of bonds did not result in a “capital gain”

because “payment and discharge of a bond is neither sale nor

exchange within the commonly accepted meaning of the

words.” 306 U.S. 436, at 437. By the time this Court

rendered its decision, the statute had been amended for 1934

and later years by adding what is now Code section

1271(a\1) to provide capital gains treatment for redemptions.

This and other examples of the interplay between court

decisions and Congressional! actions listed below illustrate

how Congress has monitored court decisions in this area.

Where Congress has felt that changes are required, it has

acted.

In Hort v. Commissioner, 313 U.S. 28, 85 L.Ed. 116s, 61

S.Ct. 757 (1941), this Court held that a lump sum payment

for cancellation of a lease that had nine years to run was

ordinary income to the lessor. This Court accepted Hort's

characterization of the lease as “property” but did not feel

compelled to treat the cancellation payment as capital sim-

ply because there was no explicit statutory exception for

lease cancellation payments:

“Simply because the lease was ‘property’ the amount

received for its cancellation was not a return of capita!,

quite apart from the fact that ‘property’ and ‘capital’ are

not necessarily synonymous in the Revenue Act of 1952

immaterial that for some purposes the contract

creating

the right to such payments may be treated as ‘property’

or ‘eapital’.”

313 US. 2s, at 31.

In 1954, Congress added what is now Code section 1241 to

treat payments made to a lessee for cancellation of a

favorable lease as capital gain, but left the result in Mort

unchanged.

In Helvering v. Placeus Leather Co., 313 US. 247, 8 L.Ed.

1310, 61 S.Ct. 875 (1941), this Court held that insurance

proceeds received by a corporation as compensation for the

loss by fire of buildings, machinery and equipment were

ordinary income because there was no “sale or exchange.”

This result was changed by Congress in 1942 with the addi-

tion of what is now Code section 1231(aX3 AXii).

In Avwselback v. Commissioner, 317 U.S. 399, 87 L.Ed. 358,

63 S.Ct. 303 (1943), this Court held that a portion of the

proceeds received from the condemnation by the City of New

York of land was ordinary income since the portion was

“paid to the taxpayers in lieu of what they might have

earned on the sum found to be the value of the property on

11

the day the property was taken.” 317 U.S. 399, at 403. This

Court then stated:

“ .. petitioner contends that as just compensation

requires the payment of these sums for delay in settle-

ment, they are a part of the damages awarded for the

property. But these payments are indemnification for

delay, not a part of the sale price. While without their

payment just compensation would not be received by the

vendor, it does not follow that the additional payments

are a part of the sale price under § 117(a) [the predeces-

sor to Code section 1221}. The just compensation consti-

tutionally required is not the same thing as the sale

price of a capital asset.”

317 US. 399, at 404.

In Watson v. Commissioner, 345 U.S. 544, 97 L.Ed. 1232, 73

S.Ct. 848 (1953), this Court held that a portion of the proceeds

received from the sale of an orange grove should be allocated

to the growing crop and treated as ordinary income.

Responding to decisions of lower courts on this issue, in 195]

Congress amended the statute by adding what is now Code

section 1231(b)\(4) to make it clear that gain attributable to

unharvested crops in circumstances similar to those in Wat

son was capital.

The next decision in this line is Corn Products Refining Co.

v. Commissioner, supra. In Corn Products, this Court sum-

marized the holdings of some of its prior decisions regarding

the definition of capital assets as follows:

“But the capital-asset provision of § 117 must not be

so broadly applied as to defeat rather than further the

purpose of Congress. Burnet v. Harmel, 287 U.S. 103,

108. Congress intended that profits and losses arising

from the everyday operation of a business be considered

as ordinary income or loss rather than capital gain or

loss. The preferential treatment provided by §117

applies to transactions in property which are not the

normal source of business income. It was intended ‘to

12

relieve the taxpayer from ... excessive tax burdens on

gains resulting from a conversion of capital invest-

ments, and to remove the deterrent effect of those

burdens on such conversions.’ Burnet v. Harmel, 287

U.S., at 106. Since this section is an exception from the

normal tax requirements of the Internal Revenue Code,

the definition of a capital asset must be narrowly

applied and its exclusions interpreted broadly. This is

necessary to effectuate the basic congressional purpose.

This Court has always construed narrowly the term

‘capital assets’ in § 117. See Hort v. Commissioner, 313

U.S. 28, 31; Kieselbach v. Commissioner, 317 U.S. 399,

403.”

350 U.S. 46, at 52.

Subsequent cases have reaffirmed the approach taken by

this Court to the construction of the capital asset definitions

contained in the tax laws. In Commissioner v. P. G. Lake, Inc.,

356 U.S. 260, 2 L.Ed.2d 743, 78 S.Ct. 691 (1958), this Court

held that payments for oil and gas rights and sulphur rights

were ordinary income even though under Texas law oil

payments are interests in land. This Court held:

“The purpose of § 117 was ‘to relieve the taxpayer

from ... excessive tax burdens on gains resulting from a

conversion of capital investments, and to remove the

deterrent effect of those burdens on such conversions.’

See Burnet v. Harmel, 287 U.S. 103, 106. And this excep-

tion has always been narrowly construed so as to protect

the revenue against artful devices. See Corn Products

Refining Co. v. Commissioner, 350 U.S. 46, 52.

We do not see here any conversion of a capital

investment...

These arrangements seem to us transparent devices.

Their forms do not control. Their essence is determined

13

not by subtleties of draftsmanship but by their total

effect.”

356 U.S. 260, at 265 and 266-267.

In Commissioner v. Gillette Motor Transport, 364 U.S. 130, 4

L.Ed.2d 1617, 80 S.Ct. 1497 (1960), this Court held that

compensation received by the taxpayer for a temporary tak-

ing of its facilities during World War II was ordinary

income. This Court stated:

“While a capital asset is defined in §117(a)(1) as

‘property held by the taxpayer,’ it is evident that not

everything which can be called property in the ordinary

sense and which is outside the statutory exclusions

qualifies as a capital asset. This Court has long held

that the term ‘capital asset’ is to be construed narrowly

in accordance with the purpose of Congress to afford

capital-gains treatment only in situations typically

involving the realization of appreciation in value

accrued over a substantial period of time, and thus to

ameliorate the hardship of taxation of the entire gain in

one year. Burnet v. Harmel, 287 U.S. 103, 106. Thus the

Court has held that an unexpired lease, Hort v. Commis-

sioner, 313 U.S. 28, corn futures, Corn Products Co. v.

Commissioner, 350 U.S. 46, and oil payment rights, Com-

missioner v. P. G. Lake, Inc., 356 U.S. 260, are not capital

assets even though they are concededly ‘property’ inter-

ests in the ordinary sense. And see, Surrey, Definitional

Problems in Capital Gains Taxation, 69 Harv. L. Rev.

985, 987-959 and Note 7.

In the present case, respondent’s right to use its trans-

portation facilities was held to be a valuable property

right compensable under the requirements of the Fifth

Amendment. However, that right was not a capital

asset within the meaning of §§ 117(a)(1) and 117(j).”

364 U.S. 130, at 134-135.

14

In United States v. Midland-Ross Corp., 381 U.S. 54, 14

L.Ed.2d 214, 85 S.Ct. 1308 (1965), this Court held that origi-

nal issue discount was ordinary income even though “origi-

nal issue discount becomes property when the obligation falls

due or is liquidated prior to maturity and § 117(a)(1) defined

a capital asset as ‘property held by the taxpayer,’ . . .” 381

U.S. 54, at 56. This Court quoted from the passage in Gillette

Motor set forth above and then stated:

“In applying this principle, this Court has consist-

ently construed ‘capital asset’ to exclude property repre-

senting income items or accretions to the value of a

capital asset themselves properly attributable to

income.”

381 U.S. 54, at 57.

Congress has since essentially codified the holding of Mid-

land-Ross in sections 1271 to 1288 of the Code.

Finally, in Malat v. Riddell, 383 U.S. 569, 16 L.Ed.2d 102,

86 S.Ct. 1030 (1966), this Court provided guidance in an area

that has resulted in much litigation, namely, when does real

estate become “property held by the taxpayer primarily for

sale to customers in the ordinary course of his trade or

business” within the meaning of Code section 1221(1). This

Court held:

“The purpose of the statutory provision with which

we deal is to differentiate between the ‘profits and losses

arising from the everyday operation of a business’ on

the one hand (Corn Products Co. v. Commissioner, 350 U.S.

46, 52) and ‘the realization of appreciation in value

accrued over a substantial period of time’ on the other.

(Commissioner v. Gillette Motor Co., 364 U.S. 130, 134.) A

literal reading of the statute is consistent with this

legislative purpose. We hold that, as used in § 1221(1),

‘primarily’ means ‘of first importance’ or ‘principally’.”

383 U.S. 569, at 572.

15

Congress has made efforts over the years to clarify the law in

this area commencing in 1954 with the addition of Code

section 1237.

These cases taken together show that this Court has con-

sistently construed the capital asset provisions narrowly

because they represent an exception to the usual tax rules

treating income and losses as ordinary. The Corn Products

ease is one case in this line. The Eighth Circuit’s approach to

construing Code section 1221 in Arkansas Best is inconsistent

with these cases and should be reversed.

B. Taxation statutes are not literally construed when

a literal construction is inconsistent with the intent

of the statute.

When this Court put what the Eighth Circuit describes as

a “judicial gloss”, 800 F.2d 215, at 219, on Code section 1221

in Corn Products, it was not only construing the capital asset

provisions narrowly but it was also acting in a manner

consistent with many prior cases interpreting the revenue

laws. In Corn Products this Court started from the assump-

tion that “petitioner’s corn futures do not come within the

literal language of the exclusions set out in that section

(117(a)).” 350 U.S. 46, at 51. However this Court then

observed that:

“Since this section [117] is an exception from the

normal tax requirements of the Internal Revenue Code,

the definition of a capital asset must be narrowly

applied and its exclusions interpreted broadly. This is

necessary to effectuate the basic congressional purpose.”

(emphasis added).

350 U.S. 46, at 52.

This Court has always sought to interpret the revenue laws

as it did in Corn Products in a manner that ensures their

purpose will be achieved.

16

For instance, it has long been established that literal

compliance with the reorganization provisions is not suff-

cient to ensure tax-free treatment of a transaction. In Pinel-

las Ice Co. v. Commissioner, 287 US. 46, 77 L.Ed. 428, 53 S.Ct.

257 (1933), although the statute did not so require, this Court

held that to qualify as a tax free reorganization:

“ .. the seller must acquire an interest in the affairs

of the purchasing company more cefinite than that

incident to ownership of its short-term purchase-money

notes.”

257 U.S. 462, at 470.

In Gregory v. Helvering, 293 U.S. 465, 79 L.Ed. 596, 55 S.Ct.

266 (1935), this Court held that a transaction which was in

form a reorganization was in fact a dividend. In so holding,

this Court determined that:

“ .. the transaction upon its face lies outside the

plain intent of the statute. To hold otherwise would be

to exalt artifice above reality and to deprive the statu-

tory provision in question of all serious purpose.”

293 U.S. 465, at 470.

In LeTulle v. Scofield, 308 U.S. 415, 84 L.Ed. 355, 60 S.Ct.

313 (1940), this Court held that a reorganization was not tax-

free where the consideration received was cash and long-term

bonds. This Court prefaced its discussion of the reorganiza-

tion provisions with the following observation:

“As the court below properly stated, the section is not

to be read literally, as denominating the transfer of all

the assets of one company for what amounts to a cash

consideration given by the other a reorganization.”

308 US. 415, at 420.

17

In Helvering v. Alabama Asphaltic Limestone Co., 315 US.

179, 86 L.Ed. 775, 62 S.Ct. 540 (1942), this Court stated:

“From the Pinellas case (287 U.S. 462) to the LeTulle

ease (308 U.S. 415) it has been recognized that a transac-

tion may not qualify as a ‘reorganization’ under the

various revenue acts though the literal language of the

statute is satisfied.”

315 US. 179, at 182.

In Bazley v. Commissioner, 331 US. 737, 91 L.Ed. 1782, 67

S.Ct. 1489 (1947), this Court held a purported recapitalization

to be taxable after making the following observations:

“Application of the language of such a revenue provi-

sion is not an exercise in framing abstract definitions.

In a series of cases this Court has withheld the benefits

of the reorganization provision in situations which

might have satisfied provisions of the section treated as

inert language, because they were not reorganizations of

the kind with which § 112, in its purpose and particu-

lars, concerns itself. See Pinellas Ice & Cold Storage Co. v.

Commissioner, 287 U.S. 462; Gregory v. Helvering, 293

U.S. 465; LeTulle v. Scofield, 308 U.S. 415.”

331 U.S. 737, at 741.

Most recently, in Paulsen v. Commissioner, 469 US. 131, 53

L.Ed.2d 540, 105 S.Ct. 627 (1985), this Court reiterated these

views.

“Satisfying the literal terms of the reorganization

provisions, however, is not sufficient to qualify for

nonrecognition of gain or loss. The purpose of these

provisions is “to free from the imposition of an income

tax purely ‘paper profits or losses’ wherein there is no

realization of gain or loss in the business sense but

merely the recasting of the same interests in a different

form.” (citations omitted |.”

469 U.S. 131, at 136.

l*

In Grifiths v. Commissioner, 305 US. 355, 54 L.Ed. 319. 60

S.Ct. 277 (1939), this Court looked through an arrangement

which was cast in form as an installment sale, but was in

reality not an instaiiment sale, with the following

observation:

“Legislative words are not inert, and derive vitality

from the obvious purposes at which they are obtained,

particulariy in the provisions of a tax law like those

governing installment sales in § 44 of the Revenue Act

f 1932.”

30 US. 355, at 35s

More recent examples of this Court construing the lan-

guage of the tax laws are found in Bob Jones University v

United States, 461 U.S. 574, 76 L.Ed.2d 157, 103 S.Ct. 2017

1953) and in Hillsboro National Bank v. Commissioner, 460

US. 370, 75 L.Ed.2d 130, 103 S.Ct. 1134 (1983). In Bob Jones,

this Court held that

to warrant exemption under § 501(c\3), an insti-

tution must fall within a category specified in that

section and must demonstrably serve and be in harmony

with the public interest ,

461 US. 574, at 592

In reaching this conclusion, this Couré started from the

premise that

“It is a well-established canon of statut ry construc

tion that a court should go beyond the literal language

[ a Statute if reliance on that language would defeat

the plain purpose of the statute

161 US. 574. at 556

In Hillsboro, this Court held that the tax benefit rule

which was described by this Court as a “judicially developed

principle that ailays some of the infleximilities of the annual

accounting system”, 460 US. 370, at 377), overrides the clear

language ©. section 3.36 of the Code

19

The Corn Products decision is consistent with these and

other decisions of this Court that construe the specific lan-

guage of the tax laws in a manner designed to ensure that

the Congressional purpose is achieved. The Eighth Circuit

decision in Arkansas Best does not construe the language of

Code section 1221 in such a manner and thus should be

reversed.

C. Corn Products was decided as it was at the urging

of the Government, and it confirmed prior

administrative practice and lower court decisions.

In considering Corn Products’ roots, it should be

remembered that it was decided as it was at the urging of the

Government, and it confirmed prior administrative practice

as well as lower court decisions.

The Government's Brief in Corn Products* argued strongly

for the approach this Court ultimately took in its opinion:

“A. In general, under the Code the annual profits

derived from the ordinary carrying on of a trade or

business are taxed as ordinary income. Preferential

treatment is, however, accorded by Section 117 to the

results of dealings in property, called capital assets, that

are not the normal, direct source of business profits. The

definition of a capital asset in Section 117 embodies an

unusual draftsman’s technique—the definition is spe-

cific only in stating what is nol a capital asset. Tax-

payer argues that because futures contracts do not fall

strictly within the exclusions from Section 117 they

must be held to be capital assets notwithstanding that

they were employed, as held by both lower courts, as an

integral part of the day-to-day operations of taxpayers

manufacturing business

Taxpayer's approach ignores the settled rule that the

scope of the preferential capital gains provisions of the

"Brief for the Petitioner, Corn Products Re fining Co. % (ium

misswoner, supra, at 11-12 and 37

Code is to be strictly construed. Thus in Burnet v.

Harmel, 287 U.S. 103, 106, one of the first cases to reach

this Court following the inclusion of capital gains provi-

sions in the income tax law, the Court indicated that the

new provisions were to be strictly construed to effect the

congressional purpose of relieving the taxpayer from

the ‘excessive tax burdens on gains resulting from a

conversion of capital investments’ which it noted would

often have accrued ‘over long periods of time.’ A neces-

sary corollary of the rule that the capital asset defini-

tion of Section 117 is to be narrowly applied is that the

exclusions from the capital asset definition shall be

broadly applied so as not to frustrate the congressional

purpose of limiting the preferential treatment to prop-

erty in the nature of investments, not employed as an

integral part of the day-to-day income producing activ-

ity of the taxpayer.”

at 11-12.

“As this Court has indicated, the capital gains provi-

sions must be read in the light of their purpose and in

the context of the pattern of the income tax law which .

taxes ordinary income at full rates and grants excep-

tional treatment to capital gains and losses. So read, it

becomes evident that Congress has made it as clear as

the limitations of language permit (short of a detailed

enumeration of every conceivable kind of transaction

which might be found in every conceivable type of

business) that profits and losses derived from the normal

operation of a business are not to receive the special tax

considerations reserved for what, generally, may be

described as investments.”

at 27.

21

In its opinion in Corn Products, this Court accepted these

arguments. This Court also rested its decision on prior

administrative practice as well as lower court decisions:

“The problem of the appropriate tax treatment of

hedging transactions first arose under the 1934 Tax Code

revision. Thereafter the Treasury issued G.C.M. 17322,

supra, distinguishing speculative transactions in com-

modity futures from hedging transactions. It held that

hedging transactions were essentially to be regarded as

insurance rather than a dealing in capital assets and

that gains and losses therefrom were ordinary business

gains and losses. The interpretation outlined in this

memorandum has been consistently followed by the

courts as well as by the Commissioner. While it is true

that this Court has not passed on its validity, it has been

well recognized for 20 years; and Congress has made no

change in it though the Code has been re-enacted on

three subsequent occasions. This bespeaks congressional

approval.”

350 US. 46, at 52-53.

Thus, the Corn Products decision was well-grounded on

prior decisions of this Court, administrative practice and

lower court decisions. The Eighth Circuit's suggestion that

the decision was “misbeyotten” is clearly erroneous.

Il. THE CORN PRODUCTS DECISION IS A SENSIBLE

The Corn Products decision has achieved broad acceptance

since it was rendered in 1955 because it represents a sensible

and practical approach to construing the Internal Revenue

Code. Because the distinction between the treatment of gain

or loss as ordinary or capital has made such a difference

22

under the tax laws and because the economic world is so

varied and complex, it has been inevitable that a number of

disputes have arisen as to where to draw the line between

capital and ordinary. Decisions like Corn Products, which are

grounded on construing statutes based upon their purpose,

are essential to the proper functioning of the Federal tax

system.

A. The Internal Revenue Service has, at least until

recently, embraced the Corn Products decision and

confirmed its applicability to capital stock.

As noted above the Corn Products decision represented an

Internal Revenue Service victory. In numerous subsequent

cases and in published rulings, the Internal Revenue Service

embraced the rationale of Corn Products and aggressively

argued that gains on the disposition of property acquired and

held for business rather than investment purposes resulted

in ordinary income.

For instance, in 1957, in its petition to this Court for a writ

of certiorari in the P. G. Lake case,’ the Government argued:

“This Court has held that the capital gains provisions

are to be ‘narrowly applied’ so as to effectuate the con-

gressional policy of taxing at ordinary income rates the

profits ‘arising from the everyday operation of a busi-

ness’ while, at the same time, limiting preferential capi-

tal gain treatment ‘to transactions in property which are

not the normal source of business income.’ Corn Products

Co. v. Commissioner, 350 US. 46, 52. And, as the Corn

Products case demonstrates, a transaction may fit the

literal language of the statute and yet not qualify for

capital gain treatment where it does not fall within the

obvious purpose of Congress and where a taxpayer

would otherwise be able (pp. 53-54) ‘to transmute ordi-

nary income into capital gain at will.” Such is the

situation here.”

Petitioner's Brief for Certiorari, Commissioner v. PG. Lake,

dnc. supra, at 17.

at 17.

In 1958, in Rev. Rul. 58-40, 1958-1 Cum. Bull. 275, relying

principally upon Corn Products, the Internal Revenue Service

ruled that stock, government bonds and debentures could

give rise to ordinary income and loss in appropriate circum-

stances. In the examples in the ruling, the stock and deben-

tures were purchased to obtain a source of supply of

inventory. The government bonds were purchased in accor-

dance with the terms of a contract and placed in escrow to

guarantee performance under the contract. In Rev. Rul.

58-40, the Internal Revenue Service announced its acquies-

cence in two Tax Court cases which treated capital stock as

an ordinary asset. Western Wine & Liquor Co, 18 T.C_ 1090

(1952), aeq. 1958-1 Cum. Bull. 6 and Charles A. Clark, 19 T.C.

48 (1952), acq. 1958-1 Cum. Bull. 7. In its brief in the Corn

Products case,” the Government had cited these cases (as well

as Commissioner v. Bagley & Sewall Co., 221 F.2d 944 (2nd Cir.

1955), a case involving escrowed government bonds, and

several other cases) for the following proposition:

“Significant, too, are decisions refusing capital gain or

loss treatment to property which served a purpose

directly related to the earning of normal business prof-

its, even though the property did not come within the

literal language of the stntuyery exceptions to the capt-

tal asset definition.”

In 1959, in its brief to this Court in Gillette Motor Trans-

port,*the Government argued (citing among other cases Corn

Products):

“Section 117(aXl) defines the term ‘capital assets

generally as ‘property’ held by the taxpayer. However,

*Brief for the Petitioner, Corn Products Refining Co. v. Com

misstoner, supra, at 22.

* Brief for the Petitioner, Commussoner v Gillette Motor Trans.

port, supra, at 17-15.

PS |

‘property’ as used in that section is not all-inclusive.

The Congressional purpose in allowing a lower rate of

taxation on the gain resulting from the conversion of

capital assets is to ameliorate the burden which would

be incurred by a taxpayer should that gain be classified

as ordinary income in the year of a sale or exchange

when the gain is due to appreciation in value over the

penod of investment, and to remove the deterrent effect

of that burden on such conversions. citations omitted)

This Court, in order to conform the statutory definition

of ‘capital assets’ to that Congressional purpose, has

always narrowly construed the definition. citations

omitted .~

at 17-145

In Rev. Rul. 70-64, supra, (discussed in detail above), Cora

Products and other cases were cited as the basis for conclud-

ing that the loss incurred by a chicken farmer on qualified

written notices of allocation received from a farmers’ cooper-

ative was ordinary

In Rew. Rul. 72.238, 1972-1 Cum. Bull. 65, Gorn veduets and

(rllette Motor Transport were cited as the bases fo: concluding

that gain realized by a bank in a foreclosure pr. ceding was

ordinary income. Comparing the situation with sat in Cora

Products, the Internal Revenue Service stated:

“Likewise, the gain involwed here arises from the

ordinary operation of the banking business.”

1972-1 Cum. Bull. 65, at 66

In Rew Rul 75-13, 1975-1 Cum. Bull. 67, the Internal

Revenue Service again ruled, citing Corn Predwets, that the

sale of stock could give rise to ordinary gain or less. The

ruling reviewed the holding of this Court in Cora Praducts

and then stated

“In the light of the Corn Products case, subsequent

courts have indicated that whether the sale or exchange

of shares of stock gives rise to ordinary, as oppesed to

25

capital, gain or loss depends upon whether the taxpayer

purchased and held the stock with a predominant busi-

ness motive as distinguished from a predominant invest-

ment motive. Motive is determined by analyzing all the

surrounding facts and circumstances.”

1975-1 Cum. Bull. 67, at 65.

This ruling was revoked by Rev. Rul. 78-94, 1975-1 Cum. Bull.

58. In Rev. Rul. 78-94, the Internal Revenue Service continued

to adhere to the view that the sale of stock can give rise to

ordinary gain or loss, but it shifted the emphasis of the test

which it believed proper to apply:

“Revenue Ruling 75-13 is revoked since it is now the

Service’s position that even a predominant business

motive cannot preclude the stock from capital gain or

loss treatment, as long as there was a substantial invest-

ment motive for acquiring or holding the stock.”

1978-1 Cum. Bull. 55, at 54.

While it might be questioned whether this shift of emphasis

is proper given this Court’s clear direction over the years

that the capital provisions are to be narrowly construed, even

in Rev. Rul. 78-94 the Internal Revenue Service continued to

recognize that there were circumstances » here stock could be

an ordinary asset.

In Rev. Rul. 78-396, 1975-2 Cum. Bull. 114, the Interna!

Revenue Service held that a foreign exchange loss incurred

by a bank was under the circumstances ordinary “because

the currency transaction did not have any substantial invest-

ment purpose, but was directly related to the taxpayer's

business.” 1978-2 Cum. Bull. 114, at 115. The ruling cites

Corn Products.

26

B. Corn Products has been applied by lower courts in

many cases over the past thirty years and no

court, until the Eighth Circuit, thought it

“misbegotten ’”’.

There have been literally hundreds” of decisions over the

past 30 years that have applied the standards set forth in

this Court’s decision in Corn Products to a broad range of

factual situations. Many of the cases have involved stock

and have confirmed that, in appropriate circumstances, sales

of stock may give rise to ordinary income or loss. See, eg.,

Campbell Taggart, Inc. v. United States, 744 F.2d 442 (5th Cir.

1984). The lower courts have found the concept set forth in

‘orn Products to be reasonable and workable. The focus of

these courts on the purpose for aequiring and holding an

asset is the proper focus. This Court should not depart from

that approach at this late date.

C. Congress has accepted the result of the Corn

Products case.

Since the Corn Products case was decided in 1955, Congress

has revised the Internal Revenue Code on many occasions.

Significant changes were made in 195s, 1962, 1964, 1969,

1971, 1974, 1976, 1975, 1951, 1952, 1954, and most recently in

1986. The changes in 1986 were so significant that Congress

decided to rename the the Internal Revenue Code the Inter-

nal Revenue Code of 1986.

Congress has not amended the Internal Revenue Code to

change the result of Corn Products and the numerous cases

interpreting Corn Products. This is evidence of Congressional

approval. See, Corn Products, 350 U.S. 46, at 52-53. Even a

cursory review of Subchapter P (Capital Gains and Losses) of

the Code (sections 1201-1255) reveals the time and effort that

Congress has devoted over the years to distinguishing

hetween capital gains and losses. Many of the special provi-

sions contained in Subchapter P were Congressional

“CCH current citator (through 4/8/87) lists 263 decisions

that cite this Court's decision in Corn Products. CCH 1987 Stan

dard Federal Tax Reports, Citator (A-L).

27

responses to decisions of this and other courts (a few were

noted above). Under the circumstances, the absence of a

provision in the Code aimed at reversing Corn Products, and

the cases that have followed it, is even stronger evidence of

Congressional approval of the decision than might normally

be the case where there is Congressional silence.

Congress is clearly aware of Corn Products and its implica-

tions. For instance, in 1986 Congress added Code section 955

to the Code to provide greater certainty as to the treatment of

exchange gains and losses. Both the House Ways and Means

and Senate Finance Committee Reports discussed the appli-

eation of Corn Products to foreign currency transactions:

“The term ‘capital asset’ includes all classes of prop-

erty not specifically excluded by Section 1221 of the

Code. Foreign currency generally falls within the defi-

nition of a capital asset; however, under Corn Products

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

that satisfies the literal language of section 1221 of the

Code is not considered a capital asset if the property is

used by the taxpayer as an integral part of a trade or

business.”

H.R. Rep. No. 426, 99th Cong., Ist Sess., 450 (note 19) (1955)

and 8S. Rep. No. 313, 99th Cong., 2d Sess., 434 (note 5) (1986).

III. MISSISSIPPI CHEMICAL DID NOT REVERSE

CORN PRODUCTS SUB SILENTIO.

The Eighth Circuit sought to rely on this Court’s decision

in Mississippi Chemical for support of its mistaken view that

capital stock is always a capital asset. The Eighth Circuit's

reliance is misplagd

In Mississipp Chemical this Court was faced with the

question as to whether certain amounts paid by Mississippi

Chemical Corporation and Coastal Chemical Corporation,

two fertilizer manufacturing cooperatives located in Missis-

sippi, to purchase Class C stock of the New Orleans Bank for

Cooperatives, which is also 4 cooperative, constituted addi-

tional interest costs of loans they had outstanding with the

Bank.

28

The Farm Credit Act of 1955 provided for three classes of

stock for the banks for cooperatives such as the New Orleans

Bank for Cooperatives—Classes A, B and C. Mississippi

Chemical, 405 U.S. 298, at 305. The class of stock which was

the subject of the controversy in Mississippi Chemical was the

Class C stock. Class C stock could only be issued to farmers

cooperative associations. The stock could be acquired under

only four circumstances:

(1) One share was required to be purchased to ini-

tially qualify any association as a borrower from a

district bank.

(2) Each borrower was required to make quarterly

stock purchases.

(3) Class C stock could be issued as patronage refunds.

(4) Borrowers received at the end of each fiscal year

an “allocated surplus” credit payable out of the bank's

net savings. When the surplus amount reaches 25% of

the total outstanding capital stock of the bank, the

excess could be distributed as Class C stock.

405 U.S. 298, at 306 and 307.

Only the tax treatment of the quarterly purchases of Class

C stock was in dispute. 405 U.S. 298, at 307. The character-

ization of the Class C stock purchased by taxpayer as a

capital asset was fixed as a capital asset on taxpayer's tax

return. 405 U.S. 298, at 300."' The only issue before this

Court was whether any portion of the purchase price of the

quarterly stock purchase was in fact deductible as a “hid-

den” interest charge. 405 U.S. 298, at 300, 307 and 310. This

Court discussed the various characteristics of the purchased

Class C stock which affected its value and concluded that the

stock was part of an overall scheme of financing for coopera-

tives which had a value over the long run. 405 U.S, 295, at

310 and 311. Even though the Government conceded that

the stock was not worth the face amount of $100, this Court

'! Also see Mississippi Chemical Corporation v. United States, 431

F.2d 1320 (5th Cir. 1970), at 1321,

29

found that the stock had long-term value of $100 per share.

405 U.S. 298, at 311-312.

In its discussion of the character and value of the

purchased stock this Court stated:

“Since the security is of value in more than one

taxable year, it is a capital asset within the meaning of

§ 1221 of the Internal Revenue Code, and its cost is

nondeductible. Cf. Commissioner v. Lincoln Savings &

Loan Association, 403 U.S. 345 (1971); Old Colony R. Co. v.

United States, 284 U.S. 552 (1932); 26 CFR § 1.461-1.”

405 U.S. 295, at 310.

It is respectfully submitted that the Eighth Circuit has

accorded this reference to Code section 1221 significantly

more weight than it deserves:

1) The three cited authorities all deal with whether

an expenditure was deductible as an expense or had to

be capitalized. No reference was made in these authori-

ties to Code section 1221] or its predecessor, section 117 of

the 1939 Code.

2) The reference to Code section 122] was dicta as

Code section 1221 was not at issue. The taxpayers in

Mississippi Chemical had treated the purchased stock as a

Code section 1221 asset on their respective returns. The

only issue before the court in Mississippi Chemical was

what portion of the payments made had to be capital-

ized as part of the purchase price.

3) The authorities cited in the above quotation deal

with the timing of deductions, not whether the assets

were capital assets.

4) Neither Corn Products nor the character of the asset

to which payments were being allocated was at issue in

Mississippt Chemical.

In summary, we find no support in this Court’s opinion in

Mississippi Chemical for the proposition that the holding of

Corn Products does not apply to capital stock. The Eighth

Cireuit’s reliance on Mississippi Chemical as support for its

30

attempt to overrule this Court’s decision in Corn Products, is,

to use the Eighth Circuit’s terminology, “misbegotten”.

CONCLUSION

The National Council of Farmer Cooperatives respectfully

urges this Court to determine that the United States Court of

Appeals for the Eighth Circuit was in error when it held

that capital stock (other than that held in inventory by a

securities dealer) must always be treated as a capital asset

without regard to the reasons the stock was purchased and

held.

May 5, 1987

Respectfully submitted,

ArtTuur E. Bryan, JR.

(Counsel of Record)

Grorak W. BENSON

McDermorr, Wit. & Emery

111 W. Monroe Street

Chicago, Illinois 60608

(312) 372-2000

Attorneys for Amicus Curiae

Of Counsel:

JAMES S. KRZYMINSK!

General Counse!

Nationa! Council of Farmer Cooperatives

50 F Street, N.W.

Washington, D.C. 20001

(202) 625-6676