Acct 613 Essay

1403 Words Dec 2nd, 2012 6 Pages
Internet Based Tax Briefing 1 – Haig Simmons Aqeel A Sahibzada,
University of Maryland University College

ACCT 613/9040 – Professor Bruce McClain
October 14, 2012

Subject: Haig Simmons – Loss recognition on anthracite coal future contracts, capital or ordinary loss

Facts
Taxpayer Haig Simmons operates an in home coal heating and delivery service for consumer uses in Baltimore and Anne Arundel counties. Due to the instability of coal resources and prices, Haig Simmons enters into certain futures contract purchases in order to ensure a steady supply of coal for customers at a fixed rate. Simmons sole purpose of entering into futures contracts is to protect against price fluctuations with no profitable intentions. As a
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29.

Analysis
Internal Revenue Code section 1221 defines “capital asset” as “property held by the taxpayer (whether or not connected with his trade or business), but does not include (1) Stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.” As defined, Haig Simmons’ anthracite coal home heating and delivery service business holds anthracite coal in the ordinary course of business and therefore, is not considered a capital asset. Section 64 defines ordinary income as income earned from providing services or the sale of goods (inventory) “which is not a capital asset.” Based on this definition, any asset that does not classify as a capital asset is an ordinary asset. Since Haig Simmons was providing home coal heating services for consumers, any inventory kept was for the purpose of maintaining a steady, stable, and regular supply of coal and not held as a long term asset for future sale gains.
Based on the 1988 Supreme Court case of Corn Product Refining Co. v. Commissioner (350 U.S. 46; 76 S.Ct. 20; 100 L.Ed. 29), hedging transactions were determined to be used to support business practices of certain commodities. Such hedging transactions are normal for businesses engaged in commodity sales such as coal or corn to protect against market

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