*273 Decision will be entered under Rule 50.
Wash Sales -- Securities -- Substantially Identical -- Commodity Futures -- Section 118. -- Contracts for the delivery of corn for a stated price at a stated future time are not securities within the meaning of section 118 and one such contract is not substantially identical with another where the date for delivery is different and the contract price and the other contracting party may be different.
*395 The Commissioner determined a deficiency of $ 163,804.78 in the income tax of the petitioner and an affiliate for 1940. The issues in dispute are whether profits and losses of the petitioner resulting from purchases and sales of corn futures are capital gains and losses within the meaning of section 117 and, second, whether the wash sales provisions of section 118 apply to those transactions.
FINDINGS OF FACT.
The petitioner filed a consolidated corporate income tax return for 1940 with the collector of internal revenue for the second district of New York.
*396 The petitioner is a nationally known corporation engaged in the manufacture and sale of corn products, including starches, sugars, syrups, oils, and feeds.
The maximum amount of raw corn which the petitioner could store in its own plants during 1940 was 2,303,000 bushels. That quantity would keep it supplied for less than three*275 weeks. The daily grind capacity of the plants of the petitioner during 1940 was 147,700 bushels. Similar conditions existed in prior years.
The principal product obtained by the petitioner from raw corn is starch. Cerelose is a refined sugar derived from starch. It competes with cane and beet sugars, but at a lower price, and constituted 15.93 per cent of the total sales of the petitioner in 1940.
A corn future consists of a contract to buy 5,000 bushels of corn, or some multiple thereof, of a stated quality, at a stated price, during a stated month in the future. The contracts involved were for delivery at a stated time within eleven months or less of the date of the contract. The party contracting to furnish the corn has the option of delivering the corn on any day during the month in which the contract matures and has the option of furnishing a different grade of corn at an appropriate adjustment in price. The transactions are made through a broker on a commodity exchange. The buyer furnishes his broker with a percentage, or margin, of the contract price of the corn until delivery is taken or the contract is sold, at which time final settlement is made. The contracts are*276 freely dealt in on the commodity exchange.
The petitioner began to buy and sell corn futures in 1932 and continued that practice through 1940. It engaged in those futures transactions as a part of its corn buying program and as the most economical method of obtaining an adequate supply of raw corn in view of its limited storage facilities and the expense of increasing those facilities sufficiently to take care of its needs. Purchases of futures were made when the price of corn was advantageously low.
High corn costs following droughts in 1934 and 1936 resulted in losses on cerelose sales made by the petitioner in 1937. The petitioner, in order to avoid or minimize similar losses, increased its buying of corn futures so that it would have corn available at prices which permitted it to sell cerelose in competition with beet and cane sugar. It never reached its goal of a long position of 12,000,000 bushels.
The petitioner took delivery of corn on some of its future contracts, but usually sold most of its corn futures in early summer if it then appeared that there would be no shortage of corn and no great danger of increased prices, but if the crop was poor, or there was danger of*277 an increase in price, it sold its futures gradually as it bought corn *397 for grinding. The petitioner would begin to acquire additional futures contracts at harvest time each year.
The outbreak of World War II in 1939 raised the price of cane and beet sugars to such an extent that the petitioner no longer needed the futures to assist it in selling cerelose successfully in competition with those sugars. It owned futures at the beginning of 1940 for the purchase of over 8,000,000 bushels of corn. That long position was reduced, beginning in about June, so that, at the end of the year, it had futures covering only about 1,400,000 bushels.
It was the petitioner's practice to account for its profits or losses on corn futures in an account entitled "Corn Miscellaneous." The balance in that account, at the end of each year prior to 1940, was debited or credited to cost of sales and in 1940, the profit balance of $ 680,587.39 was used to reduce "Cost of Goods Sold."
The Commissioner, in determining the deficiency for 1940, made no change in "Cost of Goods Sold" as reported by the petitioner on its return.
The transactions in futures resulted in losses of $ 816,164.03 for 1938 and*278 of $ 424,437.54 for 1939, and a net profit of $ 680,587.39 for 1940.
The following table shows for three years the futures purchased, those sold, and those under which delivery was taken, together with the amount of corn purchased and received at the plants:
| Futures purchased | Futures sold | |||
| Year | Contracts | Bushels | Contracts | Bushels |
| 1938 | 824 | 19,675,000 | 755 | 17,400,000 |
| 1939 | 593 | 14,470,000 | 535 | 14,180,000 |
| 1940 | 437 | 8,125,000 | 728 | 14,595,000 |
| Bushels of | |||
| corn purchased | |||
| Futures purchased | Futures under which | and | |
| delivery was taken | received at | ||
| the plants | |||
| Year | Contracts | Bushels | Bushels |
| 1938 | 192 | 4,975,000 | 35,650,773 |
| 1939 | 114 | 2,865,000 | 36,806,869 |
| 1940 | 24 | 250,000 | 37,222,409 |
The general sales policy of the petitioner, at all times material hereto, was to enter into contracts providing for shipment of the goods within 30 days and stating a definite price, but providing that the price should be that stated in the contract or the price in effect at date of delivery, whichever was lower. There were exceptions and variations to this general policy. One was that the petitioner, on January 15, 1940, invited all buyers*279 to submit on or prior to January 20, orders for cerelose to be delivered as late as June 30, 1940. The buyer was guaranteed the lower of the January 15 price or the price in effect at date of delivery. The buyers were allowed to cancel all or parts of the amounts of the goods ordered. The petitioner received a great many orders in response to that invitation. Another exception *398 was that the canning trade on the Pacific Coast was allowed to call on the petitioner for cerelose for delivery in more than thirty days. Cancellations were allowed in this situation also and the buyers were allowed the lower of the contract price or the price in effect at the date of delivery. The petitioner also agreed to furnish starch to two companies on what was, in effect, a cost plus basis.
The stipulation of facts is incorporated herein by this reference.
OPINION.
The parties have argued two points. One is whether contracts for the future delivery of corn are to be treated as capital assets in the hands of the petitioner so that gains or losses thereon are capital gains or losses, and the other is whether the wash sales provisions of section 118 apply to those transactions. The petitioner*280 has not accounted for or reported its gains and losses from futures transactions as capital gains and losses but, on the contrary, treated the 1940 gains as a reduction in the cost of raw materials and the losses in prior years as an addition to the cost of goods sold. It thus reduced its income for prior years by the full amount of large losses sustained in those years on futures transactions and, being consistent, in 1940 reduced the cost of goods sold by the full amount of the 1940 gain. The Commissioner, in determining the deficiency, made no change in the taxpayer's treatment of the futures transactions and now insists that no change is necessary or proper. Nevertheless, the petitioner now seeks to have the transactions regarded as resulting in capital gains and losses within section 117.
Success on that point would have no effect on the tax liability in this case unless the second contention of the petitioner is also sustained. The petitioner sustained a short term capital loss of $ 5,718.27 on bonds and it did not show any short term capital gains on its return against which to offset that loss. However, the Commissioner, in determining the deficiency, held that there *281 were short term capital gains of $ 28,260.71 on foreign exchange and allowed the short term capital losses to be deducted in full. His action in this respect is not challenged in this proceeding. The tax is the same whether the $ 680,587.39 reduces cost of goods sold or is taxed as a short term capital gain. Thus, it is not necessary to decide in this case whether or not section 117 applies to the futures transactions unless it is held that section 118 also applies. The question of whether transactions in commodity futures are within section 117 is a difficult one as is shown by prior decisions cited by the parties. While there would seem to be logic and common sense in the position which the Commissioner now takes and which the petitioner has always taken in accounting for these transactions, *399 nevertheless, the Court expresses no opinion on that subject at the present time.
Section 118 of the Internal Revenue Code was enacted to prevent a deduction for losses sustained in wash sales of securities; that is, where the taxpayer at or about the time of a sale acquires identical or substantially identical securities. The deduction is postponed until the securities are disposed*282 of and not replaced within 30 days. It provides that no deduction for loss shall be allowed under section 23 (f), with exceptions not here material, if the loss is claimed to have been sustained from any sale "of shares of stock or securities" where within 30 days before or after the sale the taxpayer has acquired "substantially identical stock or securities." Other provisions are to the effect that the basis and the holding period of the securities sold attach to the securities purchased where the wash sale provision has applied. The petitioner, by tracing its loss transactions of prior years and assuming that a number of those transactions were wash sales within the meaning of section 118, arrives at bases for the futures sold in 1940 which would show capital gains of $ 62,328.10 and capital losses of $ 202,662.60 instead of the gain of $ 680,587.39 which it reported in accordance with its consistent method of accounting. It relies on Trenton Cotton Oil Co. v. Commissioner, 147 Fed. (2d) 33, rehearing denied, 140 Fed. (2d) 208, reversing on this point a memorandum opinion of this Court.
We are unable to agree with *283 the opinion in the cited case holding that the words "stocks and securities," as used in section 118, include commodity futures and that a new future contract is "substantially identical" with a prior contract. The Appellate Court reasoned that the futures contracts were securities because they were pledged with the broker "who advanced the necessary funds to purchase the oil." Any pledged property is a security in that sense, but obviously not all pledged property is a security within the meaning of section 118. Furthermore, the reasoning is unsound since the broker does not advance the funds necessary to purchase the commodity. The buyer of a commodity futures contract puts up a margin with his broker which is a percentage of the purchase price called for in the contract. That margin is held as security until the contract is closed out. If the purchaser of the contract takes delivery of the corn, he then pays the additional amount called for under the contract, but if he sells the contract he gets credit for the margin which he put up with his broker, plus the price at which the broker sold the contract, and neither he nor the broker makes any further payment on account of the*284 purchase price which that particular purchaser owed under the contract. The Appellate Court also reasoned that the futures contract was "a security" because "the petitioner had no more than a document giving *400 it the right to demand and receive property not in its possession." The owner of a commodity future has no right to demand the property except at maturity upon payment of the contract price. All executory contracts giving a person the right to demand and receive property upon the payment of a contract price are not to be regarded as securities within the meaning of section 118.
Furthermore, a new future commodity contract is not "substantially identical" with any prior contract even though the quantity involved in each is identical. It would be purely accidental if the new contract was with the same party as the one who had agreed to sell the commodity in the earlier contract. The price would probably be different and the delivery date would certainly be different. The United States District Court, Middle District of Georgia, on April 11, 1940, in the case of Valley Waste Mills v. Page, 27 A. F. T. R. 957, held, in regard to cotton*285 futures, that the new contract was not "substantially identical" with the old one under such circumstances and, with that, we agree. Cf. section 117 (1) (3) (B) as added by section 211, Revenue Act of 1950. Cotton futures were considered by the Circuit Court of Appeals for the Fifth Circuit in Valley Waste Mills v. Page, 115 Fed. (2d) 466, certiorari denied, 312 U.S. 681">312 U.S. 681, and it is apparent from the opinion there that such a future is not a security in any generally recognized sense but simply a contract between two parties in which one agrees to supply at a designated time in the future a stated quantity and quality of goods, upon payment of a stated price and on which a part of the contract price, called a margin, has been paid by the buyer to his broker to bind him until the sale is consummated or the contract is sold. See also Rosenthal v. Brown, 247 N.Y. 479">247 N. Y. 479, 160 N.E. 921">160 N. E. 921. Cf. Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U.S. 462">287 U.S. 462; Commissioner v. Segall, 114 Fed. (2d) 706; Commissioner v. Sisto Financial Corporation, 139 Fed. (2d) 253.*286 Corn futures are not different in this respect from cotton futures. Furthermore, corn futures, such as are here involved, are for such short periods and are of such a peculiar character that they do not lend themselves to the evil which section 118 was intended to prevent. Sales of such contracts are completed transactions when made, the gain or loss is recognized at that time, and there is no postponement of the gain or loss for tax purposes. Valley Waste Mills v. Page, supra; Robert M. Harriss, 44 B. T. A. 999, affd., 143 Fed. (2d) 279. Section 118 has no application in this case.
The parties have stipulated that certain adjustments are to be made in computing the tax liability of the petitioner.
Decision will be entered under Rule 50.