Campbell Taggart Inc. Case Summary

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 (Section 1211). The company looked to justify this shift in treatment by stating that the purchase and sale of these futures was a separate and distinct activity from the manufacturing operations of the firm, rather than hedges for the business. The
courts ultimately ruled in favor of the government, stating that the gains or losses incurred on Corn Product's futures were to be taxed at ordinary rates. The basis of this decision was on the grounds that the futures were used to "protect a part of the manufacturing costs", which intern served as an integral part of the company’s operations, giving it the characteristic of a hedging activity (Everett, Hennig, & Nichols, 2015). The "'integral part' of the taxpayer business" test, which arose from the findings in the Corn Products Refining Co.
case has been utilized in number of court cases. In some instances this narrow application of capital asset status has assisted the defendant in achieving their desired results and in other cases the courts have found the ruling to be inapplicable, contradictory to the defendant’s argument, or in need of further refinement. One such case where the Corn Product case was noted is Campbell Taggart, Inc. v. U.S. In this case, Campbell Targgart Inc. (CTI) was attempting to claim ordinary losses on the sale of stock in a Spanish corporation known as Superdescuento Uno, Dos, Tres, S.A. (Supermarkets) (American Federal Tax Reports , 1984). The Commissioner of Internal Revenue disallowed the deduction on the grounds that the loss should have been classified as a capital loss. As discussed in the reading, stock is typically classified as a capital asset. Specifically, even when the stock ownership is utilized as a means to facilitate everyday operations of the business, since it still holds a “substantial investment motive”, it needs to be classified as a capital asset (escaping the span of the Corn Products Refining Co.
ruling). Having said this, the CTI case presents a unique situation. In between the time the stock sale was agreed upon and the formal agreement and purchase was made, CTI became aware that the Supermarket was in poor financial condition and that the stock was going to be unprofitable. Knowing this, CTI completed the sale on the grounds that backing out would be bad for their reputation and hurt their goodwill. Utilizing the fact that the stock was not purchased for any “investment means” (since a loss was inevitable) and that the completion of the sale was based solely on preserving the reputation of the business, the courts ultimately concluded that the Corn Products ruling should be applied in full, allowing CTI to maintain the beneficial ordinary loss deduction for the tax years in question (American Federal Tax Reports , 1984).