United States Supreme Court
ARKANSAS BEST CORPORATION,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE

Docket S.Ct. 86-751
Date of Decision: March 7, 1988
Judge:  Marshall, Justice, opinion

Tax Analysts Citation: 1988 TNT 52-1
Parallel Citations: 61 AFTR2d 88-397
Principal Code Reference: Section 1221

Summary
Provided by Tax Analysts.  Copyright 2000 Tax Analysts.  All rights reserved.
SUPREME COURT AFFIRMS EIGHTH CIRCUIT'S NARROW READING OF CORN PRODUCTS, CAPITAL ASSET TREATMENT DOES NOT DEPEND ON BUSINESS MOTIVE.
The Supreme Court March 7 unanimously ruled that a taxpayer's
motivation in purchasing an asset is irrelevant to the determination of
whether an asset falls within the broad definition of "capital asset" in
section 1221, affirming the Eighth Circuit's opinion in Arkansas Best
Corporation v. Commissioner. Because Arkansas Best's bank stock falls
within section 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, the Court ruled.
Background
     Arkansas Best, a diversified holding company, acquired
approximately 65 percent of a bank's stock, between 1968 and 1974. The bank
was apparently prosperous until 1972, when Federal bank examiners
classified it as a problem bank. After 1971, Arkansas Best made several
purchases of additional stock in the bank at the behest of the Federal
regulators. In 1975, Arkansas Best 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 Service disallowed the deduction, finding 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 section 1221 and therefore gave rise to a
capital loss when it was sold. However, the Tax Court ruled that 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 Arkansas Best's reputation by fending off
the bank's failure. (For a summary of the Tax Court's decision, see Tax
Notes, November 5, 1984, p. 555.)
     The Eighth Circuit reversed the Tax Court decision with respect
to the post 1972 stock, ruling that all of the stock sold in 1975 was
subject to capital loss treatment. (For a summary of the Eighth Circuit's
opinion, see Tax Notes, September 29, 1986, pp. 1261-1262.)
A Unanimous Opinion
     The Supreme Court, in an unanimous opinion delivered by Justice
Marshall, affirmed the Eighth Circuit's decision, holding that Arkansas
Best's loss arising from its sale of the bank stock is a capital loss
because the stock falls within the broad definition of the term "capital
asset" in section 1221 and is outside the classes of property excluded from
capital asset status.
     Arkansas Best had argued that the Corn Products doctrine
authorized noncapital asset treatment for any asset acquired and held for
business rather than investment purposes. The Supreme Court interpreted
Corn Products as standing for the narrow proposition that only "hedging"
transactions that are an integral part of a business' inventory-purchase
system fall within section 1221's first exception to the definition of
capital assets for inventory property.
     Arkansas Best's reading of the Corn Products doctrine as
authorizing noncapital asset treatment for any asset acquired and held for
business rather than investment purposes is too expansive, the Court said.
That reading finds no support in Section 1221's language, which does not
mention a business-motive test, and is in direct conflict with section
1221's broad definition of capital asset, the Court reasoned. Similarly,
the contention that section 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, Justice Marshall continued. 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 section 1221's first exception for "property . . . which
would be included in the [taxpayer's] inventory," the Supreme Court
explained.

US-SUP-CT, [88-1 USTC ¶9210],   Arkansas Best Corp. v. Commissioner of Internal Revenue, Stock: Capital asset status: Capital assets: Mixed business and investment motives for acquisition.--, (Mar. 07, 1988)
[88-1 USTC ¶9210]  Arkansas Best Corp. v. Commissioner of Internal Revenue

Supreme Court of the United States, 86-751, 3/7/88, 108 SCt 971, 485 US 212, Affirming CA-8, 800 F.2d 215, 86-2 ustc ¶9671 

On Writ of Certiorari to the United States Court of Appeals for the Eighth Circuit.

[Code Sec. 1221 --Result unchanged by the Tax Reform Act of 1986 ]

Stock: Capital asset status: Capital assets: Mixed business and investment motives for acquisition.--The sale of bank stock by a diversified holding company was subject to capital loss treatment because such stock fell within the definition of capital asset under Code Sec. 1221  and was outside of the classes of excluded property. Between 1968 and 1974 the taxpayer had acquired approximately 65% of the bank’s stock. In 1975, three years after federal examiners classified the bank as a problem bank, the taxpayer sold the bulk of its bank stock at a loss and claimed a deduction from such sale as an ordinary loss. The Supreme Court agreed with the Eighth Circuit’s reversal of the Tax Court’s determination that, based on Corn Products Refining Co.  (850 U.S. 46, 55-2 ustc ¶9746 ), 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 purposes of protecting the taxpayer’s reputation by fending off the bank’s failure. The High Court held that the Corn Products doctrine did not authorize ordinary asset treatment for any asset acquired and held for business rather than investment purposes. The Court noted that Code Sec. 1221  does not mention a business-motive test and that such a reading would be in direct conflict with Code Sec. 1221 ’s broad definition of a capital asset. Also, the taxpayer’s contention that the five listed exceptions to Code Sec. 1221  were merely illustrative rather than exhaustive was refuted by the section’s “does not include” phrase, and by the legislative history and Reg. §1.1221-1(a) . Thus, the Corn Products doctrine stood for the narrow proposition that hedging transactions that are an integral part of a business’ inventory purchase system fell within the first exception to Code Sec. 1221  for “property . . . . which would properly be included in the [taxpayer’s] inventory.” Accordingly, Corn Products had no application to the instant case because the taxpayer, which was not a dealer in securities, had never suggested that its bank stock fell within the inventory exclusion.  BACK REFERENCES: 88FED ¶1330.157, 88FED ¶1619.598, 88FED ¶2551.149, 88FED ¶4717.6835, 88FED ¶4717.6865, 88FED ¶4717.6871, and 88FED ¶4717.6936

Vester T. Hughes, Jr., Counsel of Record, David Bryant, Stephen D. Good, Jay H. Gerbert, Hughes & Luce, 1717 Main St., Dallas, Tex. 75201, for petitioner. Alan I. Horowitz, Assistant to the Solicitor General, Department of Justice, Washington, D.C. 20530, for respondent.

 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 [55-2 ustc ¶9746 ], 850 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. 4-11.

[86-2 ustc ¶9671 ] 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.

Justice Marshall

 delivered the opinion of the Court. The issue presented in this case is whether capital stock held by petitioner Arkansas Best Corporation (Arkansas Best) is a “capital asset” as defined in §1221  of the Internal Revenue Code regardless of whether the stock was purchased and held for a business purpose or for an investment purpose.

I

Arkansas Best is a diversified holding company. In 1968 it acquired approximately 65% of the stock of the National Bank of Commerce (Bank) in Dallas, Texas. Between 1969 and 1974, Arkansas Best more than tripled the number of shares it owned in the Bank, although its percentage interest in the Bank remained relatively stable. These acquisitions were prompted principally by the Bank’s need for added capital. Until 1972, the Bank appeared to be prosperous and growing, and the added capital was necessary to accommodate this growth. As the Dallas real estate market declined, however, so too did the financial health of the Bank, which had a heavy concentration of loans in the local real estate industry. In 1972, federal examiners classified the Bank as a problem bank. The infusion of capital after 1972 was prompted by the loan portfolio problems of the bank.

Petitioner sold the bulk of its Bank stock on June 30, 1975, leaving it with only a 14.7% stake in the Bank. On its federal income tax return for 1975, petitioner claimed a deduction for an ordinary loss of $9,995,688 resulting from the sale of the stock. The Commissioner of Internal Revenue disallowed the deduction, finding that the loss from the sale of stock was a capital loss, rather than an ordinary loss, and that it therefore was subject to the capital loss limitations in the Internal Revenue Code. 1

Arkansas Best challenged the Commissioner’s determination in the United States Tax Court. The Tax Court, relying on cases interpreting  Corn Products Refining Co. v. Commissioner [55-2 ustc ¶9746 ], 350 U.S. 46 (1955), held that stock purchased with a substantial investment purpose is a capital asset which, when sold, gives rise to a capital gain or loss, whereas stock purchased and held for a business purpose, without any substantial investment motive, is an ordinary asset whose sale gives rise to ordinary gains or losses. See [CCH Dec. 41,581 ] 83 T.C. 640, 653-654 (1984). The court characterized Arkansas Best’s acquisitions through 1972 as occurring during the Bank’s “ ‘growth’ phase,” and found that these acquisitions “were motivated primarily by investment purpose and only incidentally by some business purpose.” Id., at 654. The stock acquired during this period therefore constituted a capital asset, which gave rise to a capital loss when sold in 1975. The court determined, however, that the acquisitions after 1972 occurred during the Bank’s “ ‘problem’ phase,” ibid., and, except for certain minor exceptions, “were made exclusively for business purposes and subsequently held for the same reasons.” Id., at 656. These acquisitions, the court found, were designed to preserve petitioner’s business reputation, because without the added capital the Bank probably would have failed. Id., at 656-657. The loss realized on the sale of this stock was thus held to be an ordinary loss.

The Court of Appeals for the Eighth Circuit reversed the Tax Court’s determination that the loss realized on stock purchased after 1972 was subject to ordinary-loss treatment, holding that all of the Bank stock sold in 1975 was subject to capital-loss treatment. 800 F.2d 215 (1986). The court reasoned that the Bank stock clearly fell within the general definition of “capital asset” in Internal Revenue Code §1221 , and that the stock did not fall within any of the specific statutory exceptions to this definition. The court concluded that Arkansas Best’s purpose in acquiring and holding the stock was irrelevant to the determination whether the stock was a capital asset. We granted certiorari, 480 U.S.--, and now affirm.

II

Section 1221  of the Internal Revenue Code defines “capital asset” broadly, as “property held by the taxpayer (whether or not connected with his trade or business),” and then excludes five specific classes of property from capital-asset status. In the statute’s present form, 2 the classes of property exempted from the broad definition are (1) “property of a kind which would properly be included in the inventory of the taxpayer”; (2) real property or other depreciable property used in the taxpayer’s trade or business; (3) “a copyright, a literary, musical, or artistic composition,” or similar property; (4) “accounts or notes receivable acquired in the ordinary course of trade or business for services rendered” or from the sale of inventory; and (5) publications of the Federal Government. Arkansas Best acknowledges that the Bank stock falls within the literal definition of capital asset in §1221 , and is outside of the statutory exclusions. It asserts, however, that this determination does not end the inquiry. Petitioner argues that in Corn Products Refining Co. v. Commissioner, supra, this Court rejected a literal reading of §1221 , and concluded that assets acquired and sold for ordinary business purposes rather than for investment purposes should be given ordinary-asset treatment. Petitioner’s reading of Corn Products finds much support in the academic literature 3 and in the courts. 4 Unfortunately for petitioner, this broad reading finds no support in the language of §1221 .

In essence, petitioner argues that “property held by the taxpayer (whether or not connected with his trade or business)” does not include property that is acquired and held for a business purpose. In petitioner’s view an asset’s status as “property” thus turns on the motivation behind its acquisition. This motive test, however, is not only nowhere mentioned in §1221 , but it is also in direct conflict with the parenthetical phrase “whether or not connected with his trade or business.” The broad definition of the term “capital asset” explicitly makes irrelevant any consideration of the property’s connection with the taxpayer’s business, whereas petitioner’s rule would make this factor dispositive. 5

 In a related argument, petitioner contends that the five exceptions listed in §1221  for certain kinds of property are illustrative, rather than exhaustive, and that courts are therefore free to fashion additional exceptions in order to further the general purposes of the capital-asset provisions. The language of the statute refutes petitioner’s construction. Section 1221  provides that “capital asset” means “property held by the taxpayer[,] . . . but does not include” the five classes of property listed as exceptions. We believe this locution signifies that the listed exceptions are exclusive. The body of §1221  establishes a general definition of the term “capital asset,” and the phrase “does not include” takes out of that broad definition only the classes of property that are specifically mentioned. The legislative history of the capital asset definition supports this interpretation, see H.R. Rep. 704, 73d Cong., 2d Sess., 31 (1934) (“[T]he definition includes all property, except as specifically excluded”); H.R. Rep. 1887, 83d Cong., 2d Sess., A273 (1954) (“[A] capital asset is property held by the taxpayer with certain exceptions”), as does the applicable Treasury regulation, see 26 CFR §1.1221-1(a)  (1987) (“The term ‘capital assets’ includes all classes of property not specifically excluded by section 1221 ”).

Petitioner’s reading of the statute is also in tension with the exceptions listed in §1221 . These exclusions would be largely superfluous if assets acquired primarily or exclusively for business purposes were not capital assets. Inventory, real or depreciable property used in the taxpayer’s trade or business, and accounts or notes receivable acquired in the ordinary course of business, would undoubtedly satisfy such a business-motive test. Yet these exceptions were created by Congress in separate enactments spanning 30 years. 6 Without any express direction from Congress, we are unwilling to read §1221  in a manner that makes surplusage of these statutory exclusions.

In the end, petitioner places all reliance on its reading of Corn Products Refining Co. v. Commissioner [55-2 ustc ¶9746 ], 350 U.S. 46 (1955)--a reading we believe is too expansive. In Corn Products, the Court considered whether income arising from a taxpayer’s dealings in corn futures was entitled to capital-gains treatment. The taxpayer was a company that converted corn into starches, sugars, and other products. After droughts in the 1930’s caused sharp increases in corn prices, the company began a program of buying corn futures to assure itself an adequate supply of corn and protect against price increases. See id., at 48. The company “would take delivery on such contracts as it found necessary to its manufacturing operations and sell the remainder in early summer if no shortage was imminent. If shortages appeared, however, it sold futures only as it bought spot corn for grinding.” Id., at 48-49. The Court characterized the company’s dealing in corn futures as “hedging.” Id., at 51. As explained by the Court of Appeals in Corn Products, “[h]edging is a method of dealing in commodity futures whereby a person or business protects itself against price fluctuations at the time of delivery of the product which it sells or buys.” [54-2 ustc ¶66,082 ] 215 F.2d 513, 515 (CA-2 1954). In evaluating the company’s claim that the sales of corn futures resulted in capital gains and losses, this Court stated:

“Nor can we find support for petitioner’s contention that hedging is not within the exclusions of [§1221 ]. Admittedly, petitioner’s corn futures do not come within the literal language of the exclusions set out in that section. They were not stock in trade, actual inventory, property held for sale to customers or depreciable property used in a trade or business. But the capital-asset provision of [§1221 ] must not be so broadly applied as to defeat rather than further the purpose of Congress. Congress intended that profits and losses arising from the everyday operation of a business be considered as ordinary income or loss rather than capital gain or loss. . . . Since this section is an exception from the normal tax requirements of the Internal Revenue Code, the definition of a capital asset must be narrowly applied and its exclusions interpreted broadly.” 350 U.S., at 51-52 (citations omitted).

The Court went on to note that hedging transactions consistently had been considered to give rise to ordinary gains and losses, and then concluded that the corn futures were subject to ordinary-asset treatment. Id., at 52-53.

The Court in Corn Products proffered the oft-quoted rule of construction that the definition of capital asset must be narrowly applied and its exclusions interpreted broadly, but it did not state explicitly whether the holding was based on a narrow reading of the phrase “property held by the taxpayer,” or on a broad reading of the inventory exclusion of §1221 . In light of the stark language of §1221 , however, we believe that Corn Products is properly interpreted as involving an application of §1221 ’s inventory exception. Such a reading is consistent both with the Court’s reasoning in that case and with §1221 . The Court stated in Corn Products that the company’s futures transactions were “an integral part of its business designed to protect its manufacturing operations against a price increase in its principal raw material and to assure a ready supply for future manufacturing requirements.” 350 U.S., at 50. The company bought, sold, and took delivery under the futures contracts as required by the company’s manufacturing needs. As Professor Bittker notes, under these circumstances, the futures can “easily be viewed as surrogates for the raw material itself” 2 B. Bittker, Federal Taxation of Income, Estates and Gifts ¶51.10.3, p. 51-62 (1981). The Court of Appeals for the Second Circuit in Corn Products clearly took this approach. That court stated that when commodity futures are “utilized solely for the purpose of stabilizing inventory cost[,] . . . [they] cannot reasonably be separated from the inventory items,” and concluded that “property used in hedging transactions properly comes within the exclusions of [§1221 ].” 215 F.2d at 516. This Court indicated its acceptance of the Second Circuit’s reasoning when it began the central paragraph of its opinion, “Nor can we find support for petitioner’s contention that hedging is not within the exclusions of [§1221 ].” 350 U.S., at 51. In the following paragraph, the Court argued that the Treasury had consistently viewed such hedging transactions as a form of insurance to stabilize the cost of inventory, and cited a Treasury ruling which concluded that the value of a manufacturer’s raw-material inventory should be adjusted to take into account hedging transactions in futures contracts. See id., at 52-53 (citing G.C.M. 17322, XV-2 Cum. Bull. 151 (1936)). This discussion, read in light of the Second Circuit’s holding and the plain language of §1221 , convinces us that although the corn futures were not “actual inventory,” their use as an integral part of the taxpayer’s inventory-purchase system led the Court to treat them as substitutes for the corn inventory such that they came within a broad reading of “property of a kind which would properly be included in the inventory of the taxpayer” in §1221 .

Petitioner argues that by focusing attention on whether the asset was acquired and sold as an integral part of the taxpayer’s everyday business operations, the Court in Corn Products intended to create a general exemption from capital-asset status for assets acquired for business purposes. We believe petitioner misunderstands the relevance of the Court’s inquiry. A business connection, although irrelevant to the initial determination of whether an item is a capital asset, is relevant in determining the applicability of certain of the statutory exceptions, including the inventory exception. The close connection between the futures transactions and the taxpayer’s business in Corn Products was crucial to whether the corn futures could be considered surrogates for the stored inventory of raw corn. For if the futures dealings were not part of the company’s inventory-purchase system, and instead amounted simply to speculation in corn futures, they could not be considered substitutes for the company’s corn inventory, and would fall outside even a broad reading of the inventory exclusion. We conclude that Corn Products is properly interpreted as standing for the narrow proposition that hedging transactions that are an integral part of a business’ inventory-purchase system fall within the inventory exclusion of §1221 . 7 Arkansas Best, which is not a dealer in securities, has never suggested that the Bank stock falls within the inventory exclusion. Corn Products thus has no application to this case.

It is also important to note that the business-motive test advocated by petitioner is subject to the same kind of abuse that the Court condemned in Corn Products. The Court explained in Corn Products that unless hedging transactions were subject to ordinary gain and loss treatment, taxpayers engaged in such transactions could “transmute ordinary income into capital gain at will.” 350 U.S., at 53-54. The hedger could garner capital-asset treatment by selling the future and purchasing the commodity on the spot market, or ordinary-asset treatment by taking delivery under the future contract. In a similar vein, if capital stock purchased and held for a business purpose is an ordinary asset, whereas the same stock purchased and held with an investment motive is a capital asset, a taxpayer such as Arkansas Best could have significant influence over whether the asset would receive capital or ordinary treatment. Because stock is most naturally viewed as a capital asset, the Internal Revenue Service would be hard pressed to challenge a taxpayer’s claim that stock was acquired as an investment, and that a gain arising from the sale of such stock was therefore a capital gain. Indeed, we are unaware of a single decision that has applied the business-motive test so as to require a taxpayer to report a gain from the sale of stock as an ordinary gain. If the same stock is sold at a loss, however, the taxpayer may be able to garner ordinary-loss treatment by emphasizing the business purpose behind the stock’s acquisition. The potential for such abuse was evidenced in this case by the fact that as late as 1974, when Arkansas Best still hoped to sell the Bank stock at a profit, Arkansas Best apparently expected to report the gain as a capital gain. See 83 T.C. at 647-648.

III

We conclude that a taxpayer’s motivation in purchasing an asset is irrelevant to the question whether the asset is “property held by a taxpayer (whether or not connected with his business)” and is thus within §1221 ’s general definition of “capital asset.” Because the capital stock held by petitioner falls within the broad definition of the term “capital asset” in §1221  and is outside the classes of property excluded from capital-asset status, the loss arising from the sale of the stock is a capital loss. Corn Products Refining Co. v. Commissioner, supra, which we interpret as involving a broad reading of the inventory exclusion of §1221 , has no application in the present context. Accordingly, the judgment of the Court of Appeals is affirmed.

It is so ordered.

Justice Kennedy took no part in the consideration or decision of this case.