Corn Products Refining Company v. Commissioner
350 U.S. 46 (1955)
Corn Products was in the
business of manufacturing corn oil. In order to guarantee a source of
corn for raw materials at a stable price, they entered into a number of
In a futures contract, Corn
Products bought the right to buy loads of corn later at a price set
This is known as a hedging
Sometimes, Corn Products would
exercise their futures contracts, but when they had more corn than they
needed, they would simply sell the futures contract.
When the price of corn was on
the rise, those futures contracts could be sold at a profit.
When they filed their taxes,
they claimed the profits from the sale of the futures contracts as a capital
gain. The IRS disagreed.
Corn Products argued that
they were not in the trade or business of buying and selling futures
contracts. Therefore, as far a Corn Products was concerned, they were capital
assets under the tax code (now 26
The IRS argued that one
couldn't look at the particular asset, but instead look at the functional
relationship of the property and the trade or business of the taxpayer.
Acquiring corn is part of
the process of manufacturing corn oil, and the buying and selling of
futures is integral to the process. Therefore, the sale should be
treated as ordinary income.
26 U.S.C. §1231(a)(2) says that if losses form property used in a
trade or business exceed gains, then those losses should be ordinary
income, not a capital loss.
The US Supreme Court found for
The US Supreme Court found
that where the property interests in question are an integral part of the
trade or business in question, these transactions should not be regarded
as capital transactions and should
be taxed as ordinary income
and not capital gains.
Corn Products probably
could not stay in business without buying and selling futures.
Therefore, as far as §1221 was
concerned, they were in the business of buying and selling futures.
This ruling eventually
backfired on the IRS, since a number of companies started using the
doctrine to get losses counted as ordinary losses and not capital losses. The IRS started arguing against the use of
the Corn Products Doctrine
in future cases.
Eventually, the US Supreme
Court limited the Corn Products Doctrine in the case of Arkansas Best Corporation v. Commissioner
(485 U.S. 212 (1988)), and Congress codified the limitation in 26
The Court held that the
relationship between the taxpayer's business and the asset is irrelevant
and Corn Products should be
interpreted narrowly to mean that inventory includes only 'inventory
substitutes,' and not just any asset connected with the taxpayer's