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 'futures contracts.'
    • In a futures contract, Corn Products bought the right to buy loads of corn later at a price set today.
    • This is known as a hedging transaction.
  • 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 U.S.C. 1221).
    • 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 IRS.
    • 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 U.S.C. 1221(a)(7).
      • 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 business.