Faroll v. Jarecki, 11542.

• Decision Date: 15 March 1956
• Docket Number: No. 11542.,11542.
• Citation: 231 F.2d 281
• Parties: Elsie W. FAROLL, Executor of the Estate of Barnett Faroll, deceased, Plaintiff-Appellee, v. John T. JARECKI, Collector of Internal Revenue, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

231 F.2d 281 (1956)

Elsie W. FAROLL, Executor of the Estate of Barnett Faroll, deceased, Plaintiff-Appellee, v. John T. JARECKI, Collector of Internal Revenue, Defendant-Appellant.

No. 11542.

United States Court of Appeals Seventh Circuit.

March 15, 1956.

H. Brian Holland, Asst. Atty. Gen., Marvin Weinstein, Atty., Tax Division, U. S. Dept. of Justice, Washington, D. C., Robert Tieken, U. S. Atty., Chicago, Ill., Lee A. Jackson, Stanley P. Wagman, Attys., Dept. of Justice, Washington, D. C., for appellant.

Sidney U. Hiken, Joseph H. Taylor, Benjamin M. Brodsky, Bernard Weisberg, Chicago, Ill., Gottlieb & Schwartz, Chicago, Ill., of counsel, for appellee.

Before FINNEGAN, LINDLEY and SCHNACKENBERG, Circuit Judges.

FINNEGAN, Circuit Judge.

A judgment of the District Court, in substance, grounded on a finding that commodity futures sold by the taxpayer, Barnett Faroll,¹ during the year 1943 constituted property held by him primarily for sale (and that sales were made) to customers in the ordinary course of his trade or business, is appealed by the defendant, Collector of Internal Revenue. After that finding, the district judge further concluded that those commodity futures were not "by express statutory definition, `capital assets,'" citing § 117(a) (1), Internal Revenue Code of 1939,² as amended by § 115(b), Internal Revenue Act of 1941, c. 412, 55 Stat. 687, and § 151(a), Internal Revenue Act of 1942, c. 619, 56 Stat. 798. Consequently taxpayer's losses sustained in 1943 on these commodity future sales were not capital losses, according to the court below, and were not subject to the capital loss limitations appearing in § 117(d) (2), Internal Revenue Code of 1939, as amended by § 150 (c), Revenue Act of 1942. The losses, aggregating $136,421.59, were allowed in full as an ordinary deduction from taxpayer's gross income under § 23(e), Internal Revenue Code of 1939. Taxpayer's claim of refund, $43,565.83 plus interest, for federal income taxes erroneously and illegally collected was allowed under the judgment brought here for review.

Stipulated facts underlie the memorandum, findings of fact and conclusions of law made and entered by the district judge. Because of Rule 52(a), Federal Rules of Civil Procedure, 28 U.S.C.A., it is necessary to underscore the prefatory portion of the stipulation:

"* * * it is expressly agreed that by the use herein of words and phrases such as `traded in,\' `dealt in,\' `sold for his own account,\' etc., the defendant does not concede that the commodity futures which the defendant sold in 1943 were, and the plaintiff does not concede that they were not, the decedent\'s stock in trade or property of a kind which should have been included in an inventory at the close of said year, or property held by him primarily for sale to customers in the ordinary course of his trade or business."³

With that caveat in the stipulation of facts, the status, taxwise, of commodity futures and taxpayer's activities were left open for judicial interpretation of the relevant Code provision, and we are not bound to an affirmance. Chandler v. Jarecki, 7 Cir., 1955, 226 F.2d 403.

This case is the converse of those familiar instances when taxpayers insist upon capital gain treatment for their transactions. Here, the defendant government seeks the capital asset status under the Code, and taxpayer resists. In this respect, as well as others, the appeal before us is unlike the taxpayer's claim for capital-asset treatment under § 117(a) of the Internal Revenue Code of 1939, in Corn Products Refining Co. v. Commissioner, 1955, 350 U.S. 46, 76 S.Ct. 20, 24, on which the plaintiff, before us, places her chief reliance. But a more significant element of Faroll's case in contrast with Corn Products, can be shortly stated. "None of the taxpayer's (Faroll's) futures transactions referred to in this stipulation were hedges or entered into by him for the purpose of hedging; nor was the taxpayer a farmer, producer, miller, operator of a grain elevator, operator of a grain warehouse, or processor in any other manner in grains."⁴ But this phase of the parties stipulation, before us, quickly cuts ground from under the Corn Products opinion as a closely analogous precedent. For there, Corn Products, futilely contended that its transactions "did not constitute `true hedging.'" Such argument being necessary to implement the capital asset position asserted, by Corn Products, and, no doubt, because GCM 17322 draws a line of demarcation between speculative transactions in commodity futures and hedging transactions. Rejecting the assertions of Corn Products, Mr. Justice Clark, delivering the Court's opinion said,⁵inter alia: "The interpretation outlined in this memorandum has been consistently followed by the courts as well as 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. Helvering v. Winmill, 305 U.S. 79, 83, 59 S.Ct. 45, 46, 83 L.Ed. 52. Furthermore, Congress has since specifically recognized the hedging exception here under consideration in the short sale rule of § 1233(a) of the 1954 Code, 26 U.S. C.A. § 1233(a). We believe that the statute clearly refutes the contention of Corn Products * * *. To hold otherwise would permit those engaged in hedging transactions to transmute ordinary income into capital gain at will. * * *" 1955, 350 U.S. 46, 53-54, 76 S.Ct. 20, 24. Consistent with the recitation already quoted from Faroll's stipulation, the district judge, in Faroll's case, repeated that non-hedging element in his memorandum and third finding of fact.

After close examination of the factual situation reported in the Corn Products⁶ opinion supra, we think that case is not decisive of the one before us. Both the Tax Court and Court of Appeals found Corn Products' futures transactions "to be an integral part of its business designed to protect its manufacturing operations against a price increase in its principal raw material and to assure a ready supply for future manufacturing requirements." (Our emphasis.) The Supreme Court refused to disturb those findings and rejected, as being without merit, the theory sponsored by Corn Products that its futures were property entitled to § 117 treatment because as such, those futures activities of Corn Products were separate and apart from its manufacturing operation.

As we read that opinion, Corn Products was a manufacturer of products made from grain corn (it manufactures starch, syrup, sugar, and their by-products, feeds and oil) who purchased and acquired its raw materials (indispensable for its manufacturing operations) through commodity futures. The short of it is cogently stated by Mr. Justice Clark: "* * * it is difficult to imagine a program more closely geared to a company's manufacturing enterprise or more important to its successful operation." 350 U.S. 46, 50, 76 S.Ct. 20, 23. Moreover, the Justice referred to specific evidence elicited from officers of Corn Products who testified that in entering the market the company was "`trying to protect a part of (its) manufacturing costs' * * * to fill an actual `need for the quantity of corn (bought) * * * in order to cover * * * what (products) we expected to market over a period of fifteen or eighteen months.'" 350 U.S. 46, 51, 76 S.Ct. 20, 23. Justice Clark characterized that testimony as "not the talk of the capital investor but of the far-sighted manufacturer." Ibid. It was, accordingly, held that the futures did not constitute capital assets in Corn Products' hands. We think this is important because the Corn Products case must be read as applicable to the core business of manufacturing in which that taxpayer engaged. That and the hedging aspect, we think, is what controlled the classification of the futures there involved. The Supreme Court declined to separate out the element of commodity futures. But there is no such indistinguishable fusion of activities present in the appeal we are considering.

After making some particular findings of fact, the district judge added this one: "5 incorporated herein by specific reference thereto are all of those facts not hereinabove set forth which are contained in the written stipulation of facts and in the exhibits attached thereto." For that reason we will first report the salient findings of fact, made below, then implement them with pertinent passages from the stipulation:

Findings:

"Throughout 1943 and for many years both prior and subsequent thereto the Taxpayer was engaged in two distinct and separate businesses, as follows: (a) He was a general partner in a brokerage firm and (b) he bought and sold commodity futures, chiefly wheat, corn, oats, barley, rye and soybeans, on the floor of the Board of Trade of the City of Chicago, of which he was in 1943 and thereafter, and since 1907 had been, a member. His futures transactions were on his own behalf and not for the account of the partnership of which he was a member or for any of the customers of said partnership. Each week-day during 1943 the Chicago Board of Trade (hereinafter sometimes called the `Exchange\') opened at 9:30 A. M. and closed at 2 P. M. On Saturdays it was open from 9:30 A. M. to noon. Except for vacations, illnesses and trips out of the city, the Taxpayer was personally present on the floor of the Exchange on each day the Exchange was open, during all of the hours it was open, for the sole purpose of buying and selling commodity futures on his own behalf. When not on the floor of the Exchange, he devoted his remaining working time to research and other activities related to his tradings or dealings on the Exchange except for occasional and brief consultations with the partners and employees of his partnership concerning the brokerage business of that firm. Such consultations were

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