SWARTZ v. C.I.R

Citation Codes

Equivalent Citations

citation codes

Docket Number

No. 88-2757.

Attorney(S)

Floyd Eugene Swartz, appellant pro se. William S. Rose, Jr., Gary R. Allen, Kenneth L. Green, and Curtis C. Pett, Washington, D.C., for appellee.

Judges

Richard Sheppard Arnold
Pasco Middleton Bowman
Frank J. Magill

Acts

Internal Revenue Code — Income Taxes — Normal Taxes And Surtaxes — Computation Of Taxable Income — Itemized Deductions For Individuals And Corporations — Trade Or Business Expenses

See more information ...

Smart Summary

Factual and Procedural Background

Floyd Eugene Swartz, Jr. engaged full-time in trading gold and silver commodity futures contracts from December 1980 to December 1983. He conducted these transactions through brokerage houses without direct dealings with other buyers or sellers and did not trade in the underlying commodities themselves, instead offsetting each contract with another. Swartz incurred significant trading losses over three years and deducted some of these losses as ordinary business losses on his federal income tax returns, which resulted in tax refunds for prior years. The Internal Revenue Service Commissioner determined these losses were capital losses, not deductible against ordinary income, and assessed tax deficiencies for several years. Swartz petitioned the Tax Court for redetermination, which held that the futures contracts were capital assets under section 1221 of the Internal Revenue Code, and affirmed the treatment of losses as capital losses.

Legal Issues Presented

Whether the gold and silver commodity futures contracts traded by Swartz constitute capital assets under section 1221 of the Internal Revenue Code.
Whether losses from these futures contracts can be deducted as ordinary business losses or must be treated as capital losses subject to limitations under sections 1211 and 1212.
Whether Swartz’s activities qualify as a trade or business under section 162(a) and thus affect the characterization of the contracts.

Arguments of the Parties

Appellant's Arguments

Swartz contended that his commodity futures contracts were not capital assets because he was engaged in a trade or business of exchanging futures, relying on the Supreme Court’s decision in Commissioner v. Groetzinger, where full-time, regular gambling was recognized as a trade or business under section 162(a).
He argued that the futures contracts were his "stock in trade" and should be treated as inventory held for sale to customers, thus excluded from capital asset status under section 1221.

Appellee's Arguments

The Commissioner maintained that the futures contracts were capital assets because Swartz had no customers within the meaning of section 1221 and did not hold the contracts as inventory for sale to customers.
The Commissioner argued that losses from these contracts must be treated as capital losses and are subject to the limitations imposed by sections 1211 and 1212.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Commissioner v. Groetzinger, 480 U.S. 23 (1987)	Recognition that gambling activity pursued full-time in good faith and with regularity constitutes a trade or business under 26 U.S.C. § 162(a).	The court acknowledged Swartz’s reliance on this case to argue he was in the trade or business of exchanging futures but found the point immaterial to the capital asset determination under section 1221.
King v. Commissioner, 89 T.C. 445 (1987)	Commodity futures contracts are capital assets for traders.	Supported the court’s conclusion that Swartz’s contracts were capital assets and not inventory or stock in trade.
Van Suetendael v. Commissioner, 152 F.2d 654 (2d Cir. 1945)	Securities held primarily for sale to customers qualify as inventory; otherwise, they are capital assets.	Used to reject Swartz’s inventory argument, as he had no customers.
Mirro-Dynamics Corp. v. United States, 247 F. Supp. 214 (S.D. Cal. 1965), aff'd 374 F.2d 14 (9th Cir. 1967)	Securities bought and sold solely for the taxpayer’s own account are not business inventory.	Reinforced the conclusion that the contracts were capital assets, not inventory.
Arkansas Best Corp. v. Commissioner, 485 U.S. 212 (1988)	Capital asset status depends on statutory definition, not the taxpayer’s motive or business purpose.	Clarified that gains and losses from the contracts must be treated as capital gains and losses regardless of Swartz’s business motive.
Corn Products Refining Co. v. Commissioner, 350 U.S. 46 (1955)	Definition of capital assets and inventory prior to Arkansas Best ruling.	The court held Swartz’s reliance on this precedent was misplaced in light of Arkansas Best.

Court's Reasoning and Analysis

The court focused on the statutory definition of "capital asset" under section 1221 of the Internal Revenue Code, which excludes property held primarily for sale to customers in the ordinary course of business. Swartz’s futures contracts did not qualify for this exclusion because he had no customers; he traded solely for his own account through brokerage houses. The court rejected Swartz’s argument that the contracts were "stock in trade" or inventory, citing established precedent that securities or contracts held solely for the taxpayer’s account are capital assets, not inventory.

Although Swartz argued that his activities constituted a trade or business under section 162(a), the court found this irrelevant to the capital asset issue. The court emphasized the Supreme Court’s ruling in Arkansas Best Corp., which clarified that the characterization of property as a capital asset depends on the statutory definition and not on the taxpayer’s business motive. Consequently, losses from these contracts must be treated as capital losses subject to statutory limitations on deductibility.

Holding and Implications

The court AFFIRMED the decision of the Tax Court that the gold and silver commodity futures contracts traded by Swartz were capital assets under section 1221 of the Internal Revenue Code.

The direct effect of this ruling is that Swartz’s losses on these contracts are capital losses and cannot be deducted as ordinary business losses to offset ordinary income. The court did not establish new precedent but applied existing statutory definitions and case law to confirm the proper tax treatment of commodity futures contracts held by a trader without customers.

Show full summary ...

FLOYD EUGENE SWARTZ, JR., APPELLANT, v. COMMISSIONER OF INTERNAL REVENUE, APPELLEE.

PER CURIAM.

The dispositive issue in this case is whether certain gold and silver commodity futures contracts bought and sold by taxpayer Floyd E. Swartz, Jr. constituted capital assets under section 1221 of the Internal Revenue Code. The Tax Court held that losses stemming from these contracts were capital losses, which could not be deducted from ordinary income to eliminate tax liability. We affirm.

All references to statutory provisions are to the Internal Revenue Code of 1954, as amended and in effect at the time of these transactions.

The Honorable William M. Fay, presiding.

From December 1980 to December 1983, Swartz worked full-time trading commodity futures contracts. He made his transactions through brokerage houses, and had no direct contacts with other buyers and sellers. Swartz did not deal in any commodities; rather, he traded each contract for an offsetting contract. To profit in this undertaking, Swartz needed to predict fluctuations in the price of gold and silver and trade accordingly.

Swartz incurred trading losses of $45,917 in 1981, $25,843 in 1982, and $19,400 in 1983. Deducting his 1983 and 1982 trading losses as ordinary business losses on his federal income tax returns, Swartz carried the resulting net operating losses back to reduce his taxes for the 1979 and 1980 tax years. He received refunds of his taxes paid during those years.

The Commissioner of the Internal Revenue Service determined that the losses Swartz had incurred were capital losses (which could not be used to offset ordinary income), and assessed deficiencies for 1979, 1980, and 1982. Swartz petitioned the Tax Court for a redetermination of his taxes.

Section 1221 excepts from the definition of capital assets "property held by the tax-payer for sale to customers in the ordinary course of his trade or business." Swartz relied on the section, arguing that futures contracts are not capital assets. The Tax Court rejected this argument, holding that even if Swartz were in the business of trading in commodities, he had no "customers" within the meaning of section 1221. Therefore, the court reasoned, Swartz' contracts were capital assets.

In this appeal, Swartz contends that, under Commissioner v. Groetzinger, 480 U.S. 23, 35-36, 107 S.Ct. 980, 987-988, 94 L.Ed.2d 25 (1987) (gambling activity pursued full-time in good faith and with regularity is a trade or business within the meaning of 26 U.S.C. § 162(a)), he was in the trade or business of exchanging commodity futures. We agree with the Tax Court that this point is not material. Under section 165(f), losses from the sale or exchange of capital assets are allowed only to the limited extent provided in sections 1211 and 1212. Swartz did not apply his 1982 and 1983 losses in accordance with these sections. Therefore, the important question is whether the commodity futures contracts were capital assets.

Section 1221(1) provides:

For the purposes of this subtitle, the term "capital asset" means 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[.]

Although he had no customers, Swartz argues that commodity futures contracts were his stock in trade, property that he included in inventory at the end of each taxable year. Swartz' argument based on this characterization is without merit. Commodity futures contracts are capital assets in the hands of a trader. King v. Commissioner, 89 T.C. 445, 457-58 (1987); see also Van Suetendael v. Commissioner, 152 F.2d 654 (2d Cir. 1945) (per curiam) (securities "could not be classified as stock in trade or property subject to inventory unless they were held by the taxpayer primarily for sale to customers"); Mirro-Dynamics Corp. v. United States, 247 F. Supp. 214, 217 (S.D.Cal. 1965) (securities bought and sold solely for taxpayer's account may not be considered business inventory), aff'd, 374 F.2d 14, 16 (9th Cir.), cert. denied, 389 U.S. 896, 88 S.Ct. 215, 19 L.Ed.2d 214 (1967).

In light of the Supreme Court's decision in Arkansas Best Corp. v. Commissioner, 485 U.S. 212, 108 S.Ct. 971, 99 L.Ed.2d 183 (1988), Swartz' reliance on Corn Products Refining Co. v. Commissioner, 350 U.S. 46, 76 S.Ct. 20, 100 L.Ed. 29 (1955), is misplaced. Because the commodity futures contracts fall within the section 1221 definition of capital assets, the gains and losses flowing from the contracts must be treated as capital gains and losses, regardless of Swartz' asserted "business" motive in acquiring them. See Arkansas Best Corp., 485 U.S. 212, 108 S.Ct. at 974, 978, 99 L.Ed.2d 183 (1988).

Accordingly, the judgment of the Tax Court is affirmed.