Commissioner of Internal Rev. v. Farmers & G C. Oil Co.

• Decision Date: 17 July 1941
• Docket Number: No. 9802.,9802.
• Citation: 120 F.2d 772
• Parties: COMMISSIONER OF INTERNAL REVENUE v. FARMERS & GINNERS COTTON OIL CO.
• Court: U.S. Court of Appeals — Fifth Circuit

120 F.2d 772 (1941)

COMMISSIONER OF INTERNAL REVENUE v. FARMERS & GINNERS COTTON OIL CO.

No. 9802.

Circuit Court of Appeals, Fifth Circuit.

June 9, 1941.

Rehearing Denied July 17, 1941.

Edward H. Hammond and Sewall Key, Sp. Assts. to Atty. Gen., Samuel O. Clark, Jr., Asst. Atty. Gen., and J. P. Wenchel, Chief Counsel, Bureau of Internal Revenue, and C. R. Marshall, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., for petitioner.

Lee C. Bradley, Jr., and A. J. Bowron, Jr., both of Birmingham, Ala., for respondent.

Before FOSTER, HUTCHESON, and HOLMES, Circuit Judges.

HOLMES, Circuit Judge.

The question for our decision is whether losses which the taxpayer sustained on contracts for future deliveries of refined cottonseed oil were capital losses under Sec. 117(d) of the Revenue Act of 1934, 26 U.S. C.A. Int.Rev.Acts, page 708, or ordinary and necessary business expenses under Sec. 23(a) of said act, 26 U.S.C.A. Int.Rev.Acts, page 671.

The respondent taxpayer is a corporation. It buys cottonseed, crushes it, and sells the products derived therefrom. One of such products is crude cottonseed oil, which deteriorates rapidly, especially in warm weather. The respondent's storage facilities for crude oil are not more than one-sixth of its annual production, and larger storage facilities would be uneconomical. Because of these circumstances, respondent does not retain its crude oil until it can obtain what it regards as a favorable price, but sells during the operating season at the market price whenever its storage tanks are full. When forced to sell its crude oil at prices which it deems unsatisfactory, it is respondent's practice to buy, on margins, refined oil for future delivery, which later it sells before the delivery date.

There is no futures market for crude oil, but there is a direct relationship in the market price between the crude and the refined oil. The market price of the former is determined in large part by the market price of the latter plus freight to the refinery, the cost of refining, the loss in refining, and such other expenses, if any, as are incident to the operation of converting crude into refined oil. The customary practice followed by respondent during the tax year was first to sell the crude oil at the prevailing market price, and then to place orders with brokers to purchase futures on a produce exchange. If orders could not be filled readily at the price designated by respondent, the orders were carried until purchases could be made at such prices. Such purchases were sometimes made weeks later than the corresponding sales of crude.

Crude oil loses about nine per cent in weight in the process of being refined. In the fiscal year ending June 30, 1936, petitioner sold 2,940,000 pounds of crude oil at prices unsatisfactory to it, and made purchases of 2,760,000 pounds of refined-oil futures. 2,760,000 pounds of refined oil is the approximate equivalent in pounds of 3,033,000 pounds of crude oil. The quantity unit, both in the transactions in crude and refined oil, is a tank of 60,000 pounds. During the taxable year the market price of crude oil averaged approximately nine cents a pound, or $5,400 per tank. Refined-oil futures were bought on margins of about $300 per tank. Petitioner could have demanded delivery of refined oil under any futures contract, but made no such demand, and the contracts were entered into by it with the intention not to demand or receive such delivery. Its transactions in this respect consisted entirely of purchases and sales of refined oil for future delivery, the contracts for which were terminated before the date agreed upon for delivery. Futures contracts for refined oil require no investment for storage, transportation, or insurance. Accordingly, about $300 per tank plus brokerage commissions constituted petitioner's initial investment under the futures contracts.

The Board found that transactions in such commodity for future delivery were entered into by respondent solely as a protective measure against sales of crude oil which it was compelled to make at prices deemed unsatisfactory, since it was able to maintain a position in respect of future market conditions of refined oil which it was powerless to maintain in respect of crude oil; that such futures contracts were bought and sold only on produce exchanges through brokers, and that petitioner had no customers of its own in respect thereof; that such contracts were not stock in trade, and were not property held by respondent primarily for sale to customers in the ordinary...