Topic #3: Tax Cases
Question #1: Provide an overview of and the ruling for the Corn Products Refining Co. Case. Answer: In the Corn Products Refining Co. case, the company had purchased corn futures in order to ensure that the corn needed for operations could be obtained in times of shortage or raising prices, without the need to worry about storage capacity limitations. The company reported the gain or loss on the futures as ordinary income and losses in 1940 and 1942, however the company later argued that the futures should be classified as a capital asset, subjecting the gain and losses incurred to Section 117 (now referred to as Section 1211). The company attempted to justify this shift in treatment by stating that the purchase …show more content…
and the Steadman case referenced in Contemporary Tax Practice reference the same limitation placed on the applicability of the Corn Products ruling. Specifically, these cases addressed the tax treatment of stock gain and losses incurred by a business. Based upon the Corn Products ruling, taxpayers were trying to argue that their stock sales were subject the favorable ordinary loss treatment. These companies attempted to argue this point on the grounds that the corporation used their investment to achieve a similar end as futures in the Corn Products case, resulting in the stock being a part of "everyday operations of the business", subjecting the losses to ordinary treatment. As more cases such as the two mentioned above began surface, the government began to exam each case to determine if a “substantial investment motive" could be identified, allowing for the courts to limit the applicability of the Corn Products ruling on exchanges dealing with stock for businesses. Such a case where this limitation was applied is Dearborne Co. The result of this case was that the loss had to be treated as a capital loss, subject the company to annual and carry-forward limitations. A case were this treatment was applied to a gain on stock sale was in …show more content…
In order for an asset to qualify as like-kind realty, both the property transferred and received needs to be realty used for investment or business purposes. In is important to note that the term like-kind exchange is not as restrictive as some many initially believe. Specifically, a Forbes article explains the broadness of Section 1031 like-kind property when it states, "most exchanges must merely be of “like-kind”–an enigmatic phrase that doesn’t mean what you think it means. You can exchange an apartment building for raw land, or a ranch for a strip mall. The rules are surprisingly liberal." This statement demonstrates that realty exchanged may still qualify for like-kind realty tax treatment under Section 1031 even if the property exchanged are from different development stages or serve different business uses. This is important to recognize, since many examples in educational resources provide examples were an asset is replaced with something that is almost identical. In contrast, any realty used for personal use is not able to qualify for Section 1031
Question #1: Provide an overview of and the ruling for the Corn Products Refining Co. Case. Answer: In the Corn Products Refining Co. case, the company had purchased corn futures in order to ensure that the corn needed for operations could be obtained in times of shortage or raising prices, without the need to worry about storage capacity limitations. The company reported the gain or loss on the futures as ordinary income and losses in 1940 and 1942, however the company later argued that the futures should be classified as a capital asset, subjecting the gain and losses incurred to Section 117 (now referred to as Section 1211). The company attempted to justify this shift in treatment by stating that the purchase …show more content…
and the Steadman case referenced in Contemporary Tax Practice reference the same limitation placed on the applicability of the Corn Products ruling. Specifically, these cases addressed the tax treatment of stock gain and losses incurred by a business. Based upon the Corn Products ruling, taxpayers were trying to argue that their stock sales were subject the favorable ordinary loss treatment. These companies attempted to argue this point on the grounds that the corporation used their investment to achieve a similar end as futures in the Corn Products case, resulting in the stock being a part of "everyday operations of the business", subjecting the losses to ordinary treatment. As more cases such as the two mentioned above began surface, the government began to exam each case to determine if a “substantial investment motive" could be identified, allowing for the courts to limit the applicability of the Corn Products ruling on exchanges dealing with stock for businesses. Such a case where this limitation was applied is Dearborne Co. The result of this case was that the loss had to be treated as a capital loss, subject the company to annual and carry-forward limitations. A case were this treatment was applied to a gain on stock sale was in …show more content…
In order for an asset to qualify as like-kind realty, both the property transferred and received needs to be realty used for investment or business purposes. In is important to note that the term like-kind exchange is not as restrictive as some many initially believe. Specifically, a Forbes article explains the broadness of Section 1031 like-kind property when it states, "most exchanges must merely be of “like-kind”–an enigmatic phrase that doesn’t mean what you think it means. You can exchange an apartment building for raw land, or a ranch for a strip mall. The rules are surprisingly liberal." This statement demonstrates that realty exchanged may still qualify for like-kind realty tax treatment under Section 1031 even if the property exchanged are from different development stages or serve different business uses. This is important to recognize, since many examples in educational resources provide examples were an asset is replaced with something that is almost identical. In contrast, any realty used for personal use is not able to qualify for Section 1031