Arkansas Best Corp. v. Commissioner

Arkansas Best Corp. v. Commissioner
Arkansas Best Corp. v. Commissioner
	Supreme Court of the United States
Argued December 9, 1987; Decided March 7, 1988
Full case name	Arkansas Best Corporation v. Commissioner of Internal Revenue
Citations	485 U.S. 212 ( more ) 108 S. Ct. 971; 99 L. Ed. 2d 183
Case history
Prior	83 T.C. 640 (1984); 800 F.2d 215 (8th Cir. 1986); cert. granted, 480 U.S. 930(1987).
Holding
	Loss arising from sale of stock is capital loss, regardless of taxpayer's motive in purchasing the stock.
Court membership
	Chief Justice William Rehnquist Associate Justices William J. Brennan Jr. · Byron White ; Thurgood Marshall · Harry Blackmun ; John P. Stevens · Sandra Day O'Connor ; Antonin Scalia · Anthony Kennedy
Case opinion
Majority	Marshall, joined by unanimous
	Kennedy took no part in the consideration or decision of the case.
Laws applied
	Internal Revenue Code § 1221

Last updated October 26, 2019

Arkansas Best Corporation v. Commissioner, 485 U.S. 212 (1988), is a United States Supreme Court decision that helps taxpayers classify whether or not the sale of an asset is an ordinary or capital gain or loss for income tax purposes.^[1]

The Supreme Court of the United States (SCOTUS) is the highest court in the federal judiciary of the United States. It has ultimate appellate jurisdiction over all federal and state court cases that involve a point of federal law, and original jurisdiction over a narrow range of cases, including suits between two or more states and those involving ambassadors. The Court holds the power of judicial review, the ability to invalidate a statute for violating a provision of the U.S. Constitution. It is also able to strike down presidential directives for violating either the Constitution or statutory law. However, it may act only within the context of a case in an area of law over which it has jurisdiction. The Court may decide cases having political overtones, but it has ruled that it does not have power to decide non-justiciable political questions.

A capital gain refers to profit that results from a sale of a capital asset, such as stock, bond or real estate, where the sale price exceeds the purchase price. The gain is the difference between a higher selling price and a lower purchase price. Conversely, a capital loss arises if the proceeds from the sale of a capital asset are less than the purchase price.

Facts

Arkansas Best, a diversified holding company acquired a large percentage of the stock of the National Bank of Commerce in Dallas, Texas. When the real estate market in Dallas faltered, Arkansas Best sold a large portion of its stake in the Bank at a loss. Arkansas Best claimed a deduction for an ordinary loss of nearly $10 million from the sale. The Commissioner of the Internal Revenue Service disallowed the deduction, finding that it was a capital, not ordinary loss.

A holding company is a company that owns other companies' outstanding stock. A holding company usually does not produce goods or services itself ; rather, its purpose is to own shares of other companies to form a corporate group. Holding companies allow the reduction of risk for the owners and can allow the ownership and control of a number of different companies.

Dallas is a city in the U.S. state of Texas and the seat of Dallas County, with portions extending into Collin, Denton, Kaufman and Rockwall counties. With an estimated 2018 population of 1,345,047, it is the ninth most-populous city in the U.S. and third in Texas after Houston and San Antonio. Located in North Texas, the city of Dallas is the main core of the largest metropolitan area in the Southern United States and the largest inland metropolitan area in the U.S. that lacks any navigable link to the sea. It is the most populous city in the Dallas–Fort Worth metroplex, the fourth-largest metropolitan area in the country at 7.5 million people as of 2018. The city's combined statistical area is the seventh-largest in the U.S. as of 2017, with 7,846,293 residents.

The Internal Revenue Service (IRS) is the revenue service of the United States federal government. The government agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue, who is appointed to a five-year term by the President of the United States. The IRS is responsible for collecting taxes and administering the Internal Revenue Code, the main body of federal statutory tax law of the United States. The duties of the IRS include providing tax assistance to taxpayers and pursuing and resolving instances of erroneous or fraudulent tax filings. The IRS has also overseen various benefits programs, and enforces portions of the Affordable Care Act.

Issue

Was the stock properly a capital asset as defined by I.R.C. § 1221?^[2] Should the Court read § 1221 broadly as it had in Corn Products Refining Co. v. Commissioner , 350 U.S. 46 (1955)?

Corn Products Refining Company v. Commissioner, 350 U.S. 46 (1955), is a United States Supreme Court decision that helps taxpayers classify whether or not the disposition of a commodity futures contract by a business of raw materials as part of its hedging of business risk is an ordinary or capital gain or loss for income tax purposes.

Holding

The Eighth Circuit reversed the Tax Court's determination that the loss was an ordinary loss since the Bank stock fell within the general definition of “capital asset” in I.R.C. § 1221 and did not fall within any of the statutory exceptions in the section.^[3] A taxpayer's motivation in purchasing an asset is irrelevant to its classification.

Reasoning

The broad definition of the term “capital asset” explicitly makes irrelevant any consideration of the property's connection with the taxpayer's business. The motive behind the purchase of the asset is not mentioned as a factor in § 1221.
Congress does not direct the Court to read § 1221 liberally. Congress intended the specific exceptions explicitly contained in § 1221.
The holding in Corn Products is that hedging transactions that are an integral part of a business’ inventory-purchase system fall within the inventory exclusion of § 1221. This ruling does not apply to the facts of this case.
The capital stock held by Arkansas Best falls within the broad definition of a “capital asset” in § 1221 and is outside the classes of property excluded from capital-asset status.

The United States Congress is the bicameral legislature of the federal government of the United States, and consists of two chambers: the House of Representatives and the Senate. The Congress meets in the United States Capitol in Washington, D.C. Both senators and representatives are chosen through direct election, though vacancies in the Senate may be filled by a gubernatorial appointment. Congress has 535 voting members: 435 representatives and 100 senators. The House of Representatives has six non-voting members representing Puerto Rico, American Samoa, Guam, the Northern Mariana Islands, the U.S. Virgin Islands, and the District of Columbia in addition to its 435 voting members. Although they cannot vote in the full house, these members can address the house, sit and vote in congressional committees, and introduce legislation.

Notes

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

The Corn Products case involved discussion of whether income arising from the sale of corn futures by a company that refined corn into other forms and food products were entitled to capital gains treatment. The company bought corn futures to protect their future corn supply and pricing and would sell the futures if it had excess inventory corn for its processes. As the corn futures were essentially inventory, they were classified as such property which would “properly be included in the inventory of the taxpayer … in the ordinary course of his trade or business.” I.R.C. § 1221(a)(1).

Maize, also known as corn, is a cereal grain first domesticated by indigenous peoples in southern Mexico about 10,000 years ago. The leafy stalk of the plant produces pollen inflorescences and separate ovuliferous inflorescences called ears that yield kernels or seeds, which are fruits.

Futures contract standardized legal agreement to buy or sell something (usually a commodity or financial instrument) at a predetermined price (“forward price”) at a specified time (“delivery date”) in the future

In finance, a futures contract is a standardized forward contract, a legal agreement to buy or sell something at a predetermined price at a specified time in the future, between parties not known to each other. The asset transacted is usually a commodity or financial instrument. The predetermined price the parties agree to buy and sell the asset for is known as the forward price. The specified time in the future—which is when delivery and payment occur—is known as the delivery date. Because it is a function of an underlying asset, a futures contract is a derivative product.

IRC § 1221(a)(7)

Since the time of Corn Products, IRC §1221(a)(7) was added which specifically excludes from the definition of capital asset "any hedging transaction which is clearly identified as such before the close of the day on which it was acquired, originated, or entered into (or other such time as the Secretary may by regulations prescribe)."^[2]

This is essentially a codification of the result in Corn Products and removes the necessity of classifying hedging transactions as "inventory" under IRC § 1221(a)(1).

Importance

This case signals that the Court will closely read the exclusions in I.R.C. § 1221 in classifying capital versus ordinary losses. By sticking with the explicit language of the section the Court clarifies this section for other courts and practitioners interpreting and implementing the Code.

Related Research Articles

Tax deduction is a reduction of income that is able to be taxed and is commonly a result of expenses, particularly those incurred to produce additional income. Tax deductions are a form of tax incentives, along with exemptions and credits. The difference between deductions, exemptions and credits is that deductions and exemptions both reduce taxable income, while credits reduce tax.

Thor Power Tool Company v. Commissioner, 439 U.S. 522 (1979), was a United States Supreme Court case in which the Court upheld IRS regulations limiting how taxpayers could write down inventory.

Eisner v. Macomber, 252 U.S. 189 (1920), was a tax case before the United States Supreme Court that is notable for the following holdings:

Nonrecourse debt or a nonrecourse loan is a secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable. If the borrower defaults, the lender can seize and sell the collateral, but if the collateral sells for less than the debt, the lender cannot seek that deficiency balance from the borrower—its recovery is limited only to the value of the collateral. Thus, nonrecourse debt is typically limited to 50% or 60% loan-to-value ratios, so that the property itself provides "overcollateralization" of the loan.

Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955), was an important income tax case before the United States Supreme Court. The Court held as follows:

In civil and property law, hotchpot is the blending, combining or offsetting of property to ensure equality of a later division of property.

In finance, a stock market index future is a cash-settled futures contract on the value of a particular stock market index, such as the S&P 500. The turnover for the global market in exchange-traded equity index futures is notionally valued, for 2008, by the Bank for International Settlements at USD 130 trillion.

Taxpayers in the United States may have tax consequences when debt is cancelled. This is commonly known as COD Income. According to the Internal Revenue Code, the discharge of indebtedness must be included in a taxpayer's gross income. There are exceptions to this rule, however, so a careful examination of one's COD income is important to determine any potential tax consequences.

INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992), was a United States Supreme Court case in which the Court held that expenditures incurred by a target corporation in the course of a friendly takeover are nondeductible capital expenditures.

Commissioner v. Idaho Power Co., 418 U.S. 1 (1974), was a United States Supreme Court case.

Davis v. Commissioner, 119 T.C. 1 (2002), was a United States Tax Court decision which closed the door on a potential loophole with regard to annuities and capital gains tax. The case affirmed that annual lottery annuities cannot be assigned and sold as capital assets.

Arrowsmith v. Commissioner, 344 U.S. 6 (1952), is a United States Supreme Court case regarding taxation. The case involves taxpayers who liquidated a corporation in 1937. The taxpayers (properly) reported the income from the liquidation as long-term capital gains, thus obtaining a preferential tax rate. Subsequent to the liquidation in 1944, the taxpayers were required to pay a judgment arising from the affairs of the liquidated corporation. The taxpayers classified this payment as an ordinary business loss, which would allow them to take a greater deduction for the loss than would be permitted for a capital loss.

Commissioner v. Tufts, 461 U.S. 300 (1983), was a unanimous decision by the United States Supreme Court, which held that when a taxpayer sells or disposes of property encumbered by a nonrecourse obligation exceeding the fair market value of the property sold, the Commissioner of Internal Revenue may require him to include in the “amount realized” the outstanding amount of the obligation; the fair market value of the property is irrelevant to this calculation.

UNICAP is an abbreviation for "Uniform Capitalization," a tax concept governed by United States Internal Revenue Code § 263A.

Surrogatum is a thing put in the place of another or a substitute. The Surrogatum Principle pertains to a Canadian income tax principle involving a person who suffers harm caused by another and may seek compensation for (a) loss of income, (b) expenses incurred, (c) property destroyed, or (d) personal injury, as well as punitive damages, under the surrogatum principle, the tax consequences of a damage or settlement payment depend on the tax treatment of the item for which the payment is intended to substitute.

Tax protesters in the United States advance a number of constitutional arguments asserting that the imposition, assessment and collection of the federal income tax violates the United States Constitution. These kinds of arguments, though related to, are distinguished from statutory and administrative arguments, which presuppose the constitutionality of the income tax, as well as from general conspiracy arguments, which are based upon the proposition that the three branches of the federal government are involved together in a deliberate, on-going campaign of deception for the purpose of defrauding individuals or entities of their wealth or profits. Although constitutional challenges to U.S. tax laws are frequently directed towards the validity and effect of the Sixteenth Amendment, assertions that the income tax violates various other provisions of the Constitution have been made as well.

Dobson v. Commissioner, 320 U.S. 489 (1943), was a United States Supreme Court case related to income tax.

References

↑ Arkansas Best Corp. v. Commissioner, 485 U.S. 212 (1988).
1 2 26 U.S.C. § 1221
↑ Arkansas Best Corp. v. Commissioner, 800F.2d215 (8th Cir.1986).

External links

Text of Arkansas Best Corp. v. Commissioner, 485 U.S. 212(1988) is available from: CourtListener Findlaw Google Scholar Justia Library of Congress Oyez (oral argument audio)

This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.

[1] Arkansas Best Corp. v. Commissioner, 485 U.S. 212 (1988).

[IRC1221-2] 1 2 26 U.S.C. § 1221

[3] Arkansas Best Corp. v. Commissioner, 800F.2d215 (8th Cir.1986).