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Stock Acquired to Secure Inventory Source Is Capital Asset

APR. 17, 1997

FSA 1997-22

DATED APR. 17, 1997
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Citations: FSA 1997-22

Editor's Note: The Tax Court declined to adopt the IRS's proposed "per se" rule for determining nonpatronage income in Farmland Industries.

 

Date: April 17, 1997

 

 

Refer Reply to: CC:TL-N-9627-96

 

DOM:FS:FI&P:EAHandler

 

 

INTERNAL REVENUE SERVICE MEMORANDUM

 

 

TO:

 

District Counsel, South Florida CC:SER:SFL:MIA

 

Attn: James Dawson

 

 

FROM:

 

Assistant Chief Counsel (Field Service) CC:DOM:FS

 

 

SUBJECT:

 

* * * - Field Service Advice

 

 

[1] This responds to your request for field service advice in connection with the above-referenced case.

 

DISCLOSURE LIMITATIONS

 

 

[2] Field Service Advice constitutes return information subject to I.R.C. section 6103. Field Service Advice contains confidential information subject to attorney-client and deliberative process privileges and if prepared in contemplation of litigation, subject to the attorney work product privilege. Accordingly, the Examination, Appeals, or Counsel recipient of this document may provide it only to those persons whose official tax administration duties with respect to this case require such disclosure. in no event may this document be provided to Examination, Appeals, Counsel, or other persons beyond those specifically indicated in this statement. Field Service Advice may not be disclosed to taxpayers or their representatives.

[3] Field Service Advice is not binding on Examination or Appeals and is not a final case determination. Such advice is advisory and does not resolve Service position on an issue or provide the basis for closing a case. The determination of the Service in the case is to be made through the exercise of the independent judgment of the Field office with jurisdiction over the case.

 

ISSUE

 

 

[4] Whether stock acquired to secure a source of supply of inventory is excepted from capital asset treatment?

 

CONCLUSION

 

 

[5] Stock acquired to secure a source of supply of inventory is a capital asset, unless the taxpayer can show that the stock is property described in I.R.C. section 1221(1)-(5), or is a hedging transaction as defined in Treas. Reg. section 1.1221-2(b) .

 

FACTS

 

 

[6] In * * *, the taxpayer purchased * * * shares of common stock in * * * for the purpose of securing a supply of "50-micron Wafers." These wafers were to be used as components in products that were manufactured and sold by the taxpayer. The arrangement was unsuccessful, and in * * *, the taxpayer claimed an ordinary deduction for the * * * stock that it deemed worthless.

 

DISCUSSION

 

 

[7] The taxpayer cites The Circle K Corp. v. United States, 23 Cl. Ct. 665 (1991), and its Orders at 23 Cl. Ct. 161, and at 23 Cl. Ct. 659 (1991), for the proposition that the * * * stock is an ordinary asset. As you indicated in your request for field service advice, taxpayer's reliance on Circle K is misplaced because it is contrary to the law. In a telephone conversation on April 16, 1997, between * * * of your office and Elizabeth Handler of our office, Ms. Handler indicated that taxpayer's reliance on Circle K is also misplaced because the orders published at 23 Cl. Ct. 665, and at 23 Cl. Ct. 161, and at 23 Cl. Ct. 659, represent the court's opinion in the case. The case was dismissed subsequently and no decision was entered in the case.

[8] The issue of whether stock acquired to secure a source of supply of inventory is a capital asset is-currently being litigated in the Tax Court in Farmland Industries v. Commissioner, Tax. Ct. Dkt. No. 11881-93. This case was tried before Judge Whalen in June, 1995, and opening and reply briefs were filed in September and November, 1995, respectively. The court has not issued an opinion in this case. The enclosed briefs filed by the Service in Farmland fully explain the Service's position with respect to this issue. In short, the Service contends that stock acquired to secure a source of supply of inventory is a capital asset, unless the stock is excepted from capital asset treatment pursuant to sections 1221(1)-(5), or is a hedging transaction as defined in Treas. Reg. section 1.1221-2(b). As Ms. Handler indicated in her telephone conversation with * * *, Treas. Reg. section 1.1221-2 is effective retroactively to all open years, and thus, would apply in this case.

[9] In addition, the briefs set forth the Service's disagreement with the Court of Federal Claims' opinion in Circle K. For the reasons discussed more fully in the briefs, the Service concludes that the opinion in Circle K is erroneous as a matter of law.

[10] If you have any further questions, please contact Elizabeth Handler at (202) 622-7870.

DEBORAH A. BUTLER

 

 

By: JOEL E. HELKE

 

Acting Branch Chief

 

Financial Institutions

 

& Products Branch

 

(Field Service)

 

 

Attachment:

 

Opening and Reply Briefs filed by respondent in Farmland Industries

 

v. Commissioner, Tax. Ct. Dkt. No. 11881-93
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