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, 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 § 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"
Page 485 U. S. 213
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.
485 U. S.
216-223.
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
Page 485 U. S. 214
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.
[
Footnote 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,
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 83 T.C. 640,
Page 485 U. S. 215
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. 930, 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
Page 485 U. S. 216
status. In the statute's present form, [
Footnote 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
[
Footnote 3] and in the courts.
[
Footnote 4] Unfortunately for
petitioner, this broad reading finds no support in the language of
§ 1221.
Page 485 U. S. 217
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. [
Footnote 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
Page 485 U. S. 218
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. No. 704, 73d
Cong., 2d Sess., 31 (1934) ("[T]he definition includes all
property, except as specifically excluded"); H.R.Rep. No. 1337, 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. [
Footnote 6]
Without any express direction from Congress, we are unwilling to
read § 1221 in a manner that makes surplusage of these statutory
exclusions.
Page 485 U. S. 219
In the end, petitioner places all reliance on its reading of
Corn Products Refining Co. v. Commissioner, 350 U. S.
46 (1965) -- 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
350 U. S. 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
350 U. S. 48-49.
The Court characterized the company's dealing in corn futures as
"hedging."
Id. at
350 U. S. 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."
215 F.2d 513, 515 (CA2 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. . . . "
Page 485 U. S. 220
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
350 U. S. 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
350 U. S.
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
350 U. S. 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
Page 485 U. S. 221
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
350 U. S. 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
350 U. S. 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
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,
Page 485 U. S. 222
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. [
Footnote 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
350 U. S. 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
Page 485 U. S. 223
v..iewed 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.
[
Footnote 1]
Title 26 U.S.C. § 1211(a) states that
"[i]n the case of a corporation, losses from sales or exchanges
of capital assets shall be allowed only to the extent of gains from
such sales or exchanges."
Section 1212(a) establishes rules governing carrybacks and
carryovers of capital losses, permitting such losses to offset
capital gains in certain earlier or later years.
[
Footnote 2]
In 1975, when petitioner sold its Bank stock, § 1221 contained a
different exception (5), which excluded certain federal and state
debt obligations.
See 26 U.S.C. § 1221(5) (1970 ed.). That
exception was repealed by the Economic Recovery Tax Act of 1981,
Pub.L. 97-34, § 505(a), 95 Stat. 331. The present exception (5) was
added by the Tax Reform Act of 1976, Pub.L. 94-455, § 2132(a), 90
Stat.1925. These changes have no bearing on this case.
[
Footnote 3]
See, e.g., 2 B. Bittker, Federal Taxation of Income,
Estates and Gifts § 151.10.3, p. 51-62 (1981); Chirelstein, Capital
Gain and the Sale of a Business Opportunity: The Income Tax
Treatment of Contract Termination Payments, 49 Minn.L.Rev. 1, 41
(1964); Troxell & Noall, Judicial Erosion of the Concept of
Securities as Capital Assets, 19 Tax L.Rev. 185, 187 (1964); Note,
The
Corn Products Doctrine and Its Application to
Partnership Interests, 79 Colum.L.Rev. 341, and n. 3 (1979).
[
Footnote 4]
See, e.g., Campbell Taggart, Inc. v. United States, 744
F.2d 442, 456-458 (CA5 1984);
Steadman v. Commissioner,
424 F.2d 1, 5 (CA6),
cert. denied, 400 U.S. 869 (1970);
Booth Newspapers, Inc. v. United States, 157 Ct.Cl. 886,
893-896, 303 F.2d 916, 920-921 (1962);
W. W. Windle Co. v.
Commissioner, 65 T.C. 694, 707-713 (1976).
[
Footnote 5]
Petitioner mistakenly relies on cases in which this Court, in
narrowly applying the general definition of "capital asset,"
has
"construed 'capital asset' to exclude property representing
income items or accretions to the value of a capital asset
themselves properly attributable to income,"
even though these items are property in the broad sense of the
word.
United States v. Midland-Ross Corp., 381 U. S.
54,
381 U. S. 57
(1965).
See, e.g., Commissioner v. Gillette Motor Co.,
364 U. S. 130
(1960) ("capital asset" does not include compensation awarded
taxpayer that represented fair rental value of its facilities);
Commissioner v. P.G. Lake, Inc., 356 U.
S. 260 (1958) ("capital asset" does not include proceeds
from sale of oil payment rights);
Hort v. Commissioner,
313 U. S. 28 (1941)
("capital asset" does not include payment to lessor for
cancellation of unexpired portion of a lease). This line of cases,
based on the premise that § 1221 "property" does not include claims
or rights to ordinary income, has no application in the present
context. Petitioner sold capital stock, not a claim to ordinary
income.
[
Footnote 6]
The inventory exception was part of the original enactment of
the capital asset provision in 1924.
See Revenue Act of
1924, ch. 234, § 208(a)(8), 43 Stat. 263. Depreciable property used
in a trade or business was excluded in 1938,
see Revenue
Act of 1938, ch. 289, § 117(a)(1), 52 Stat. 500, and real property
used in a trade or business was excluded in 1942,
see
Revenue Act of 1942, ch. 619, § 151(a), 56 Stat. 846. The exception
for accounts and notes receivable acquired in the ordinary course
of trade or business was added in 1954. Internal Revenue Code of
1954, § 1221(4), 68A Stat. 322.
[
Footnote 7]
Although congressional inaction is generally a poor measure of
congressional intent, we are given some pause by the fact that over
25 years have passed since
Corn Products Refining Co. v.
Commissioner was initially interpreted as excluding assets
acquired for business purposes from the definition of "capital
asset,"
see Booth Newspapers, Inc. v. United States, 157
Ct.Cl. 886, 303 F.2d 916 (1962), without any sign of disfavor from
Congress. We cannot ignore the unambiguous language of § 1221,
however, no matter how reticent Congress has been. If a broad
exclusion from capital asset status is to be created for assets
acquired for business purposes, it must come from congressional
action, not silence.