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

Arkansas Best Corp. v. Commissioner of Internal Revenue

No. 86-751

Argued December 9, 1987
Decided March 7, 1988
485 U.S. 212

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR

THE EIGHTH CIRCUIT

Syllabus

Under § 1221 of the Internal Revenue Code, the term "capital asset" means "property held by the taxpayer (whether or not connected with his trade or business), but does not include" five specified classes of property. Between 1968 and 1974, petitioner, a diversified holding company, acquired approximately 65% of a bank’s stock. The bank was apparently prosperous until 1972, when federal examiners classified it as a problem bank. In 1975, petitioner sold the bulk of the stock at a loss, which it claimed as an ordinary loss deduction on its federal income tax return for that year. The Commissioner of Internal Revenue disallowed the deduction, finding that the loss was a capital loss rather than an ordinary loss. The Tax Court, relying on cases interpreting Corn Products Refining Co. v. Commissioner, 350 U.S. 46, held that, since the stock acquired through 1972 was purchased with a substantial investment purpose, it was a capital asset under § 1221 and therefore gave rise to a capital loss when it was sold; however, the loss realized on the stock acquired after 1972 was subject to ordinary loss treatment, since that stock had been bought and held exclusively for the business purpose of protecting petitioner’s reputation by fending off the bank’s failure. The Court of Appeals reversed the latter determination, ruling that all of the stock sold in 1975 was subject to capital loss treatment.

Held: A taxpayer’s motivation in purchasing an asset is irrelevant to the question whether it falls within the broad definition of "capital asset" in § 1221. Petitioner’s reading of Corn Products as authorizing ordinary asset treatment for any asset acquired and held for business, rather than investment, purposes is too expansive. That reading finds no support in § 1221’s language, which does not mention a business motive test, and is in direct conflict with § 1221’s broad definition of capital asset. Similarly, the contention that § 1221’s five listed exceptions are merely illustrative, rather than exhaustive, is refuted by the statute’s "does not include" phrase, and by the legislative history and the applicable Treasury regulation. Moreover, petitioner’s reading would make surplusage of three of the statutory exceptions, whose excluded classes of property would undoubtedly satisfy a business motive test. Corn Products must instead be interpreted as standing for the narrow proposition that "hedging" transactions that are an integral part of a business’ inventory purchase system fall within § 1221’s first exception for "property . . . which would properly be included in the [taxpayer’s] inventory." Since petitioner, which is not a dealer in securities, has never suggested that its bank stock falls within the inventory exclusion, Corn Products has no application in the present context. Because petitioner’s bank stock falls within §1221’s broad definition of "capital asset" and is outside the classes of excluded property, the loss arising from its sale is a capital loss. Pp. 216-223.

800 F.2d 215, affirmed.

MARSHALL, J., delivered the opinion of the Court, in which all other Members joined, except KENNEDY, J., who took no part in the consideration or decision of the case.