*251 Decision will be entered for the respondent.
Petitioner requires supplies of newsprint paper in its business and to obtain paper it enters into long-term contracts, in the ordinary operations of its business, for newsprint paper. Petitioner entered into such long-term contract in 1948 with Coosa River. Under the contract petitioner was entitled to receive 1,000 tons of paper per year. In 1951, petitioner entered into three separate agreements with purchasers of paper pursuant to which each acquired paper to which petitioner was entitled under its contract with Coosa River. The purchasers paid the contract price for the paper plus an additional amount per ton to petitioner. Petitioner received the payments in 1951 and 1952. Petitioner realized gain. Held, the transactions with the outside purchasers of paper constituted an integral part of petitioner's business and, therefore, the gain realized is not entitled to capital gains treatment; the gain is ordinary income.
*902 The Commissioner determined deficiencies in income tax for the taxable years 1951 and 1952 in the amounts of $ 41,041.72 and $ 13,930.69, respectively. The question is whether payments received in the taxable years from petitioner's assignees of contract rights to purchase newsprint paper from a paper mill constitute ordinary income or capital gain.
FINDINGS OF FACT.
The petitioner is an Ohio corporation having its principal place of business in Mansfield, Ohio. Petitioner keeps its books and reports income on an accrual basis. It filed its returns for the taxable years with the collector of internal revenue for the*253 eighteenth district of Ohio in Cleveland, Ohio.
Petitioner is engaged in the publication of a daily newspaper, the Mansfield News-Journal. It has published this newspaper since around 1930. During the taxable years all of the stock of petitioner was owned by S. A. Horvitz and I. Horvitz. The only outstanding stock of petitioner is common stock. During 1951 and 1952, I. Horvitz was the president and treasurer of petitioner, and Harry R. Horvitz was vice president. Also, S. A. Horvitz was publisher and his son, Harry R. Horvitz, was assistant publisher.
Lorain Publishing Co. is an Ohio corporation which is engaged in publishing a daily newspaper in Lorain, Ohio. All of the stock of the Lorain Publishing Co. was owned during 1951, 1952, and prior thereto, by S. A. Horvitz and I. Horvitz. The city of Lorain is located about 60 miles from the city of Mansfield. The officers of Mansfield Journal Co. were officers of the Lorain Publishing Co. during 1951 and 1952, and *903 Harry R. Horvitz was vice president and assistant publisher of the newspaper published by the Lorain Publishing Co., the Lorain Journal.
In the operation of the business of publishing a newspaper, it is necessary*254 to be assured of a continuous supply of newsprint (the paper which is used) so that paper will be available for the daily printing of the newspaper. It was the practice, ordinarily, of the Mansfield Journal Company, hereinafter called the petitioner, to contract with a newsprint mill for its supply of newsprint under a long-term contract. Under such contracts, the contractor agreed to deliver a specified amount of newsprint monthly during a specified period of time.
During the war the foreign supply of newsprint was either greatly reduced or entirely cut off, and in 1948 there was a shortage in supply of newsprint. When there is a shortage of newsprint paper, those who use it, if their long-term contracts do not provide enough paper, buy newsprint in the so-called "spot market" where the price per ton is higher than it is under a long-term contract with a papermill. For example, in 1948, petitioner bought paper in the spot market for $ 178 per ton; under a long-term contract it had with a mill at that time, the price for paper was $ 90 per ton.
Coosa River Newsprint Co., an Alabama corporation, hereinafter called Coosa River, was organized March 18, 1946, for the purpose of manufacturing*255 newsprint from southern pine pulp. It had a papermill constructed and in due course produced newsprint paper.
Coosa River obtained some of its capital by offering stock to consumers of newsprint paper, such as newspaper publishers, under a plan whereby its stockholders would be given the opportunity to enter into long-term contracts for paper. Petitioner became a stockholder and obtained a long-term contract under the following circumstances.
On May 7, 1948, petitioner entered into a contract with Coosa River to purchase 2,000 shares of its common stock, having a par value of $ 50 per share, for $ 50 per share, or $ 100,000. Under the agreement no stock was to be issued to petitioner until such stock was fully paid for in cash. Petitioner purchased 2,000 shares of common stock of Coosa River for $ 100,000.
At the same time that petitioner entered into the above contract with Coosa River to purchase its common stock, it entered into a separate contract with Coosa River, dated May 7, 1948, which provided, in general, as follows:
The petitioner, the purchaser, agreed to purchase from Coosa River, the seller, out of the output of the seller's mill, standard white newsprint paper for*256 use exclusively in the publication of the Mansfield News-Journal and the Lorain Journal, newspapers published in the *904 cities of Mansfield and Lorain, Ohio, respectively, such paper to be of a specified weight and size. The initial term of the contract is the period beginning January 1, 1950, and ending December 31, 1959, a period of 10 years, such initial term being renewable for a further term of 10 years ending December 31, 1969, provided the seller gives the purchaser written notice of its desire to extend the contract for a further term of 10 years, and provided the purchaser does not notify the seller of his refusal to extend the term. It was agreed that the quantity covered by the contract would be 1,000 tons annually, to be ordered and delivered in carload lots in approximately equal monthly installments, noncumulative, during the term of the agreement. Payment for each shipment was to be made in cash on or before the 15th day of the month following shipment. With respect to the price to be paid, the material provision is that the seller's contract market price for standard newsprint paper in effect from time to time shall be the price applicable to all shipments*257 of paper under the contract, but such price at no time shall be more than $ 4 per ton in excess of the generally accepted contract market price then in effect for standard newsprint paper manufactured in North America, delivered in New York City. The contract provided further that the contract could not be assigned without the prior written consent of the seller, but such consent could not be arbitrarily withheld. The contract includes provisions relating to any default upon the part of the purchaser to pay any amount when due or to fulfill any other provision of the contract. In particular, if the purchaser should be in default, the seller could refuse to furnish any more paper, declare the purchaser to be in default, and the purchaser would be and remain liable to the seller for all loss and damage sustained by reason of the default. Because of the difficulty in ascertaining the loss or damage which the seller might sustain by reason of any failure or default by the purchaser, it was agreed that the sum of $ 10 per ton for all paper covered by the contract and undelivered would constitute liquidated damages which the purchaser agreed to pay to the seller in addition to all amounts, *258 including interest, for paper and cores delivered and not paid for and returned.
At the time petitioner entered into the contract to purchase newsprint from Coosa River, the petitioner had a contract with Great Northern Paper Company for the purchase of newsprint paper. The term of the contract with Great Northern was from February 1, 1948, to December 31, 1952. Under this contract petitioner agreed to purchase 1,200 tons per year. Lorain Journal Company had a contract with Abitibi Sales Co. for the purchase of newsprint which ran from January 1, 1948, to December 31, 1955, under which Lorain could purchase 840 tons per year.
*905 Petitioner and Lorain Journal Company, having the same stockholders, were in a position to and did exchange newsprint. Petitioner obtained newsprint from Abitibi Sales Co.
During the years 1949-1952, inclusive, petitioner purchased tons of newsprint under the long-term contracts from Great Northern, Abitibi, and Coosa River, as follows:
| Vendor | Vendee | 1949 | 1950 | 1951 | 1952 |
| Tons | Tons | Tons | Tons | ||
| Great Northern | Petitioner | 1,175 | 1,257 | 1,178 | 796 |
| Abitibi | Lorain Journal Co | 459 | 206 | 95 | 439 |
| Coosa River | Petitioner | 0 | 478 | 477 | 858 |
| Total | 1,634 | 1,941 | 1,750 | 2,093 |
*259 During the years 1950 and 1951, petitioner elected to make assignments of parts of its annual tonnage of newsprint which it had agreed to purchase from Coosa River under the contract of May 7, 1948, and in each instance Coosa River gave its consent to the assignment without, however, relieving petitioner of its obligations under its contract with Coosa River. In general, the assignee agreed to purchase a stated number of tons of newsprint paper which was available to petitioner under its contract with Coosa River, dated May 7, 1948. The provisions of the assignment agreements are referred to hereinafter. The four assignment agreements were executed with the following assignees: On June 5, 1950, petitioner entered into an assignment agreement with the Kansas City Star Company. On May 21, 1951, an assignment agreement was entered into with the Brush-Moore Newspapers, Inc. Another assignment contract was entered into on October 8, 1951, with the Beacon Publishing Company, and on November 23, 1951, another assignment agreement was entered into with the Lorain County Printing and Publishing Company (which is a different corporation and is not connected with the Lorain Journal Company). *260 Coosa River was not a party to any of the assignment agreements apart from the fact that it gave its consent to them.
Under the assignment to Kansas City Star Company, it did no more than take delivery of paper from Coosa River for the price which petitioner would have paid under the agreement with Coosa River. Kansas City Star Company did not pay any amount to petitioner under its agreement with petitioner. However, in its arrangements with Brush-Moore Newspapers, Inc., Beacon Publishing Company, and the Lorain County Printing and Publishing Company, in each instance petitioner and the assignee entered into a memorandum agreement under which the assignee agreed to pay petitioner a stated consideration in addition to what the assignee would pay *906 Coosa River for paper. An example of such memorandum agreement, all of which were the same in form, is as follows:
Mansfield Journal Company has contemporaneously herewith executed and delivered to The Brush-Moore Newspapers, Inc., an assignment of the right to purchase 400 tons of newsprint from Coosa River Newsprint Company by virtue of a certain contract dated May 7, 1948. In consideration of such assignment, The Brush-Moore*261 Newspapers, Inc., agree to pay Mansfield Journal Company a sum equal to the net difference between $ 250.00 (Two Hundred Fifty Dollars) per ton of newsprint paper received by The Brush-Moore Newspapers, Inc., pursuant to said assignment and the net price payable by The Brush-Moore Newspapers, Inc. to Coosa River Newsprint Company, in respect of the receipt of said newsprint paper, such difference to be payable at the due date of invoices submitted by Coosa River Newsprint Company in respect to such deliveries.
Under the memorandum agreement with Brush-Moore, the sum which it paid petitioner under the formula contained in the agreement amounted to $ 53,478.08. The sum paid to petitioner by Beacon was $ 20,139.35; and the amount paid to petitioner by Lorain County Printing and Publishing Company was $ 22,237.83. The other memorandum agreements are incorporated herein by this reference. Petitioner received in full in 1951 the above-stated amounts from Brush-Moore and Beacon, and in 1952 it received $ 22,237.83 from Lorain County Printing and Publishing Company.
The formula under which the above-named assignees made payments to petitioner, in addition to the amounts which they paid*262 Coosa River for paper, involved the use of the then price per ton of paper in the spot market, and the price to be paid, per ton, to Coosa River under petitioner's long-term contract. For example, in the memorandum agreement with Brush-Moore, $ 250 per ton was the then spot-market price for newsprint paper, which was more than the price per ton under petitioner's long-term contract with Coosa River. In substance, the assignees under petitioner's long-term contract with Coosa River paid the current spot-market price per ton for paper; Coosa River supplied the paper; Coosa River received the price per ton from the assignee for which petitioner could have obtained the paper, and petitioner received the difference between Coosa River's contract price per ton and the spot-market price.
The total tonnage purchased under the Coosa River contract by the petitioner, and the total amounts assigned by the petitioner to others in 1950, 1951, and 1952 were as follows:
| Tons | |||
| 1950 | 1951 | 1952 | |
| Purchased | 478 | 477 | 850 |
| Assigned | 250 | 730 | |
| Total amount of the Coosa River contract | 728 | 1,207 | 850 |
*907 A newspaper publisher ordinarily makes long-term contracts with a papermill*263 for the purchase of newsprint paper. Petitioner's purpose in entering into the newsprint contract with Coosa River was to have an assured supply of paper over a long period at reasonable cost which would be lower than the cost of paper purchased in the spot market. The execution of the newsprint contract with Coosa River was done in the ordinary course of petitioner's business and the contract constituted an integral part of petitioner's business.
Petitioner at no time acquired possession or took delivery of the newsprint acquired from Coosa River by petitioner's assignees.
Each transaction in 1951 of petitioner with Brush-Moore, Beacon, and Lorain County Printing and Publishing Company constituted a sale by petitioner of newsprint which petitioner was obligated, otherwise, to purchase from Coosa River.
In its 1951 return, petitioner reported $ 73,617.43, as long-term capital gain from the sale of "contract rights," which amount represented the total of the sums received from Brush-Moore and Beacon, namely, $ 53,478.08 and $ 20,139.35, respectively. Such contract rights were reported as having a zero basis. In its 1952 return, petitioner reported long-term capital gain of $ 22,237.83, *264 the amount received from Lorain County Printing and Publishing Company, and the basis of the contract right allegedly sold was stated to be zero.
The Commissioner determined that the sums received by petitioner from its assignees in 1951 and 1952 constituted ordinary income, under section 22(a), rather than capital gain.
The payments received by petitioner in 1951 and 1952 from those who purchased paper under petitioner's contract with Coosa River constituted ordinary income.
The stipulated facts are found as stipulated. The stipulation of facts is incorporated herein by this reference.
OPINION.
The question is whether payments received by petitioner in 1951 and 1952 from publishers, who were allowed to purchase paper from Coosa River under petitioner's newsprint contract with Coosa River, constitute ordinary income or capital gain. The payments in dispute amounted to $ 73,617.43, in 1951, and $ 22,237.83, in 1952.
Petitioner contends that the newsprint contract with Coosa River was a capital asset within the definition of section 117(a)(1), 1939 Code, that the assignments under that contract constituted sales of parts of the capital asset, and that the receipts from the assignees*265 were long-term capital gain under section 117(a)(4). Petitioner contends, further, that such gain is excludible from its excess profits tax net income under section 433(a)(1)(C). Petitioner makes the *908 additional contention that the gain represented "abnormal income" so as to be excludible from excess profits net income under section 456.
It is the respondent's position that the petitioner entered into the 10-year newsprint contract with Coosa River for the purpose of assuring itself an adequate supply of newsprint at a stable price; that such contract was made in the course of and was an integral part of the operation of petitioner's business; and that in entering into the contract, petitioner was protecting its inventory of newsprint paper. Respondent argues that the issue is controlled by the rationale of Corn Products Refining Co. v. Commissioner, 350 U.S. 46">350 U.S. 46.
Our conclusion is that the respondent's determination is correct.
In the operation of petitioner's business it is essential that it maintain an inventory of newsprint paper. To do so, at the most reasonable cost to itself, it is highly desirable to have long-term contracts with*266 papermills for the purpose of obtaining an assured supply of paper. Obtaining and having such contracts is an integral part of the conduct of petitioner's ordinary trade and business. Such contracts not only provide a continuous inventory of paper but they also serve to establish a stable basis for arriving at the price to be paid for paper. Otherwise, it is necessary to go into the open market to purchase paper, if inventories run short, at prices which generally are considerably higher and subject to more fluctuation than are the prices provided by long-term contracts. The record shows that in the publishing business it is customary to operate under long-term contracts for newsprint paper, and that petitioner's purpose in entering into the newsprint contract with Coosa River was to assure for itself and a related corporation, which also published a newspaper, a continuous supply of paper over a long period.
In the 3 transactions entered into in 1951 which give rise to the issue to be decided, petitioner arranged for Brush-Moore to take, in 1951, 400 tons of the newsprint which petitioner had a right to purchase under its contract with Coosa River; for Beacon, in 1951, to take*267 180 tons; and for Lorain County Printing Company to take 150 tons. Thus, the 3 concerns agreed to take 730 tons out of the tonnage which was available to petitioner under petitioner's contract with Coosa River. The form of the transactions involved the execution of two documents, one an "Agreement of Partial Assignment of Newsprint Contract," and the other, a "Memorandum of Agreement." The latter agreement contained the terms under which the so-called assignee agreed to pay consideration to petitioner, which consideration petitioner received. The two instruments, in our opinion, must be considered together. They constituted a sale in each instance by petitioner of part of the newsprint petitioner was obligated to purchase. *909 In considering the question to be decided, and all of the evidence before us, we are concerned with the substance of the transactions, rather than the form, and the caption of one of the documents used, namely, "Partial Assignment of Newsprint Contract," is not controlling. The so-called assignment of part of the newsprint contract was no more than an assignment of part of the quota of newsprint which petitioner was obligated to purchase, and it *268 served to effectuate delivery thereof by Coosa River to each assignee rather than to petitioner.
In substance, therefore, petitioner was dealing in its newsprint, for which it had contracted. The assignees, or purchasers thereof, were purchasing newsprint. The total consideration which each paid consisted of the sum of two payments; one, the amount per ton called for under petitioner's contract with Coosa River, which the purchaser paid to Coosa River, and the second, the amount per ton which the purchaser agreed to pay and paid to petitioner. Petitioner was not released in any respect from any of its obligations under its contract with Coosa River.
We are unable to conclude that the transactions, in substance, involved sales or exchanges of capital assets of petitioner. The transactions related to petitioner's inventories of paper and were anticipatory arrangements under which petitioner had deliveries made to others. Such transactions come within the rationale of Corn Products Refining Co., supra, where it was held that transactions relating to inventories which are an integral part of the taxpayer's business do not result in the realization of*269 capital gains and losses, even though the commodity involved appears to come within the literal wording of the definition of capital assets. See also America-Southeast Asia Co., 26 T.C. 198">26 T.C. 198; and Church's English Shoes, Ltd., 24 T.C. 56">24 T.C. 56, affd. 229 F.2d 957">229 F. 2d 957.
We agree with the respondent's contention that the transactions in question were an integral part of the conduct of petitioner's business, which included the purchase of paper, and were in the nature of a hedge. In petitioner's long-term contract with Coosa River, the provisions controlling the calculation of prices to be paid per ton of paper during the term of the contract tended to provide for a comparatively stable price for paper and to give petitioner some protection against market fluctuations. The existence of such price provisions in the Coosa River contract enabled petitioner to make a profit in the transactions in dispute. Thus, there is a close resemblance to a hedge. Furthermore, at the same time that petitioner was disposing of its Coosa River newsprint, it was purchasing paper from Abitibi Sales Co., to whom it was under*270 no obligation. Hence, the purchases from Abitibi offset the sales of the Coosa River newsprint.
*910 Such arrangements are typical of a hedging transaction. See Stewart Silk Corporation, 9 T.C. 174">9 T.C. 174. Furthermore, it cannot be said that the three transactions in question constituted speculation on petitioner's part. See G.C.M. 17322, XV-2 C.B. 151.
Petitioner relies on Commissioner v. Covington, 120 F. 2d 768, and Jones v. Corbyn, 186 F. 2d 450. The doctrine of these cases has been overruled by Corn Products Refining Co., supra. Consideration has been given to other cases cited by petitioner, namely, Louis W. Ray, 18 T.C. 438">18 T.C. 438, affd. 210 F. 2d 390; McCue Bros. & Drummond, Inc., 19 T.C. 667">19 T.C. 667, affd. 210 F.2d 752">210 F. 2d 752; and Isadore Golonsky, 16 T.C. 1450">16 T.C. 1450, affd. 200 F.2d 72">200 F. 2d 72. These cases, on their respective facts, are distinguishable from the instant case.
It is held that the gains realized*271 by petitioner in 1951 and 1952 from the transactions in question were not capital gains, and that they represent ordinary income.
We consider, next, the alternative contentions of petitioner, whether the gains realized in 1951 and 1952 are excludible in determining excess profits net income under either section 433(a)(1)(C), or section 456, 1939 Code.
Since we have concluded that the gains were not capital gains, it follows that the provisions of section 433(a)(1)(C) do not apply.
Section 456(a)(2) defines the classes of income which come within the definition of abnormal income. See also sec. 40.456-2, Regs. 130. Our conclusion is that the income which petitioner realized from the transactions involved here does not qualify as abnormal income.
The respondent's determination is sustained.
Decision will be entered for the respondent.