UNITED STATES COURT OF APPEALS
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
FOR THE FIRST CIRCUIT
No. 95-2358
MILO L. PIKE and PENNY P. PIKE,
Plaintiffs, Appellants,
v.
UNITED STATES OF AMERICA,
Defendant, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE
[Hon. Joseph A. DiClerico, Jr., U.S. District Judge]
Before
Cyr, Circuit Judge,
Aldrich, Senior Circuit Judge,
and Gertner,* District Judge.
Eugene M. Van Loan, III with whom Richard Thorner and Wadleigh,
Starr, Peters, Dunn & Chiesa were on brief for appellants.
Thomas V.M. Linguanti with whom Gary R. Allen, Jonathan S. Cohen,
Attorneys, Tax Division, Department of Justice, Loretta C. Argrett,
Assistant Attorney General, and Paul M. Gagnon, United States
Attorney, were on brief for appellee.
July 12, 1996
*Of the District of Massachusetts, sitting by designation.
ALDRICH, Senior Circuit Judge. This case involves
the government's familiar income tax principle of taxing
gains in the sale or exchange of capital assets but
disallowing deduction of losses, except against comparable
taxable gains. See 26 U.S.C. 1211. During the 1980s, Milo
Pike ("Taxpayer") made substantial purchases of stock in a
number of New England banks with the intent of creating a
regional bank holding company, whose stock he could sell at a
profit. Before realizing this goal, however, the shares
universally declined in value and, in 1989, he sold them at a
substantial loss. He classified the loss as "capital" on his
1989 federal tax return, which precluded deduction in full.
See id. In this action to recover taxes overpaid, Taxpayer
claims his special scheme and purpose for making the
purchases requires that the stock be classified as
"inventory," a non-capital asset under 26 U.S.C. 1221(1),
entitling him to full deduction. The Commissioner did not
agree. Nor did the district court. Taxpayer appeals. We
affirm.
Under 1221 of the Revenue Code all taxpayer
property not qualifying for a specific exception, whether or
not held in connection with the taxpayer's trade or business,
is deemed capital. Five "exclusive" categories are excepted,
Arkansas Best Corp. v. Commissioner, 485 U.S. 212, 217-18
(1988), including
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(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.
26 U.S.C. 1221(1). Taxpayer does not contend that the bank
shares were "stock in trade," nor that he was holding them
for sale to customers in the ordinary course of his business,
nor that they can be exempted under any of the other four
provisions of 1221. He does not even claim that the stock
was "inventory" in the usual sense. He nonetheless claims
that summary judgment was improper because there remain
unresolved issues of material fact as to whether the stock
was sufficiently "inventory-like" to qualify for exemption
from capital asset status under the above-quoted exception,
based on his intent in acquiring it. We disagree.
In determining whether property qualifies for
exclusion from capital asset treatment, the Supreme Court has
indicated that a taxpayer's business purpose is relevant only
in the very narrow circumstance wherein an otherwise non-
inventory asset may be regarded as a substitute for inventory
-- i.e., property acquired in a "hedging transaction[] that
[was] an integral part of a business' inventory-purchase
system." Arkansas Best, 485 U.S. at 221-22 (explicitly
narrowing Corn Products Refining Co. v. Commissioner, 350
U.S. 46, 52-53 (1955)). Even then there must be some
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objectively demonstrable nexus to an "inventory-purchase
system," beyond the taxpayer's subjective intent. Id. at
221, 222. In Arkansas Best, the Court ruled that stock in a
local bank acquired for the business-related purpose of
preserving the taxpayer's financial reputation, id. at 215,
fell "outside the classes of property excluded from capital-
asset status" under 1221, thus the loss arising from its
sale was "a capital loss." Id. at 223. Here, Taxpayer's
project was to purchase enough shares of stock in certain
banks sufficient to obtain the ability to persuade management
to join in his plan of forming the overall holding company,
whose stock he would then sell. He claims the bank stock was
the "raw material" in his business of building the holding
company and, as such, qualifies for the inventory exception.
Overall, Taxpayer was simply seeking capital gains
by an intermediate step -- acquiring enough capital
investments, that, jointly, might be converted into new
assets. His scheme was manifestly not a "hedge" integral to
protecting inventory or an inventory-purchase system. That
it involved work on his part and was necessary to his overall
business plan does not change the basic picture. His theory
that the building blocks of his would-be empire should
qualify as "inventory" would allow aspiring entrepreneurs
significant influence over whether losses receive capital or
ordinary treatment. Id. at 222. An ordinary investor in
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capital stock, objectively not entitled to take losses not
offset by gains, could do so if he could show a business-
related motive to realize gains through conversion and
disposition of those assets. Such an alluring door for
escaping taxpayers was firmly locked in Arkansas Best.
Affirmed.
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