Question

Cassius Clay operates a bituminous coal home heating and delivery service in Dauphin and Center counties. He must have a supply of bituminous coal on hand so customers may get the coal they need to heat their homes. As a convenience to his customers, and to prevent high bills over the winter and low bills in the summer, he allows them to buy coal in advance at set prices and to pay for the coal ratably over a calendar year. To ensure himself a steady, reliable, and affordable supply of coal and to protect against price fluctuations, Cassius Clay enters into certain futures contracts to buy coal at a future date and at a set price. Clay clearly indicates beforehand that the futures contract in which he enters to buy coal is simply to secure a supply of coal and to protect him from losses on the futures contracts with his customers to sell coal, and that he does not intend to profit from the contract itself.

Assume that Cassius Clay realizes a loss on the futures contract in which he entered to buy coal. That is, the price per his contract to buy coal is higher than the actual spot market price of coal the day he acquires a new supply of coal. How should Cassius Clay classify the loss—as ordinary or as capital?

Be sure to demonstrate your research skills in writing a memo to the file. You must cite the relevant code section(s) (including section 1221) and at least two (2) Supreme Court cases (hint: the two key cases are dated 1955 and 1988). You must also address the general principle of classifying assets—as capital or as operating—and the exceptions thereto.

The memo to the file should contain a brief statement of the facts, a statement of the issue(s), your conclusion(s) and recommendations, and an analysis which will include the sources (eg, Code, Regs, court cases) you used in reaching your conclusion(s).

Answer 1

Answer:

Obviously, the business endured a customary misfortune. Segment 1221 gives a record of what can individually be standard misfortunes and capital misfortunes.

Under IRC 1221 :

1. When all is said in done , the term capital resource implies property held by citizen (regardless of whether incorporated into business or not) but rather does exclude,

a. Stock in exchange of the citizen or property held as stock or which is intended for resale to clients in the conventional course of business or exchange of the citizen.

b. Any benefit for which the citizen claims deterioration or remittances u/s 16.

c. Copyright,literary, melodic or masterful creation or comparative property held by

• The citizen whose individual endeavors made them
• In the event of a letter, reminder, a citizen payer for whom such property was made.
• A citizen in whose hands the additions of such properties are ascertained.

d. Records or notes receivable gained in the common course of exchange through offer of properties specify in section A.

e. A distribution of US government held by

• A citizen who so got such distribution.
• A citizen in whose hands such gains are figured available to be purchased of such distributions.

f. Any product subsidiary monetary negligent held by an items merchant.

g. Any supporting exchange unmistakably in that capacity before the end of the day in which it was procured, private or went into..

h.supplies of a sort utilized in the conventional course of business by the citizen.

The two vital cases identifying with this are :

• Arkansas Best v Commissioner 485 U.S. 212(1988)
• Corn items refining co. Versus official, 350 U.S. 46(1955)

Remembering the expressed focuses it is very clear that the exchange was not.entered into with a speculation rationale rather it was in itself to hedge against the danger of misfortune in the common course of business. In this way the misfortune brought about is a conventional misfortune inside the domain of segment 1221.