Acct 613

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Internet Based Tax Briefing 1 – Haig Simmons

Aqeel A Sahibzada,
University of Maryland University College

ACCT 613/9040 – Professor Bruce McClain
October 14, 2012

Subject: Haig Simmons – Loss recognition on anthracite coal future contracts, capital or ordinary loss

Facts
Taxpayer Haig Simmons operates an in home coal heating and delivery service for consumer uses in Baltimore and Anne Arundel counties. Due to the instability of coal resources and prices, Haig Simmons enters into certain futures contract purchases in order to ensure a steady supply of coal for customers at a fixed rate. Simmons sole purpose of entering into futures contracts is to protect against price fluctuations with no profitable intentions. As a result of this business decision, she is able to offer customers the option to buy coal for future use at a set price with installment payments over the period of a calendar year. When Haig Simmons takes receipt of the purchased coal, the price she pays per the contract is higher than the current market price of the coal resulting in a loss on the futures contract.

Issues
1. May taxpayer recognize losses on future contracts as capital or ordinary loss? 2. Is the purchase of futures contracts part of the anthracite coal business? 3. Is the purchase of futures contracts considered as hedging transactions? 4. Is the anthracite coal purchased through futures contracts classified as a capital asset?

Conclusion
In this situation, Haig Simmons may recognize losses on the future contracts as ordinary loss on her tax return under section 65. The purchase of futures contracts is considered a hedging transaction under section 1221(b)(2). As a hedging transaction and as property held in the ordinary course of her business, the futures contracts for anthracite coal are not considered capital assets as defined under 1221(a)(1) and 1221(a)(6). Future contracts are entered in to support anthracite coal business practices as exampled in...
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