*1210 The purchases and sales of wheat futures by a wheat farmer, made entirely for protection against price fluctuations, held, related to his business of production and sale of wheat, and losses sustained in such transactions, held, not capital losses subject to the deduction limitations of section 117, Revenue Act of 1934.
*247 The Commissioner determined a deficiency for 1935 of $2,197.82 as to each petitioner. He determined that losses sustained in trading in grain futures were capital losses limited to $2,000.
FINDINGS OF FACT.
The petitioners, husband and wife, are residents of Walla Walla, Washington. They had income from community property and filed separate returns for 1935.
For 35 years petitioners have been engaged in growing wheat, and in 1935 they farmed approximately 15,000 acres, 13,000 of which they owned. $750,000 is invested in land and equipment devoted to the production of wheat. They have a storage elevator of 170,000 bushels capacity. Each year half of the lands lie fallow, *1211 so that production takes two years. In 1935 between 150,000 and 200,000 bushels of wheat was produced which was immediately sold. $106,097.47 was received for wheat sold; and of this, $10,108.14 was paid for wheat purchased from other growers.
For the purpose of protecting themselves against price fluctuations petitioners have for approximately twenty-one years been engaged in the purchase and sale of wheat on the Chicago Board of Trade. Grote spends three-fourths of his time while the board of trade is in *248 session investigating the markets and prospects for wheat. Short sales and purchases in 1935 on the Chicago Board of Trade, and the gains and losses, were as follows:
| Bushels sold | Bushels bought | Gain | Loss |
| Mar. 15 150,000 | Mar. 20 200,000 | ||
| Mar. 18 50,000 | $4,111.45 | ||
| Mar. 27 150,000 | Apr. 1 150,000 | $357.04 | |
| Apr. 2 150,000 | Apr. 2 150,000 | 417.54 | |
| June 19 150,000 | June 28 150,000 | 7,567.31 | |
| July 3 100,000 | |||
| July 5 50,000 | |||
| July 6 50,000 | July 9 200,000 | 154.26 | |
| July 10 100,000 | July 15 100,000 | 2,136.40 | |
| July 16 100,000 | July 31 100,000 | 13,256.39 | |
| Aug. 31 100,000 | Sept. 5 100,000 | 2,826.97 | |
| Dec. 16 100,000 | Dec. 17 100,000 | 367.05 | |
| 2,647.70 | 28,546.71 |
*1212 Purchases and sales in 1935 other than short sales, and the gains and losses, were as follows:
| Bushels bought | Bushels sold | Gain | Loss |
| Aug. 1 150,000 | Aug. 2 150,000 | $2,104.59 | |
| Aug. 19 100,000 | Aug. 28 100,000 | $1,560.50 | |
| Dec. 14 100,000 | Dec. 16 100,000 | 760.83 | |
| 1,560.50 | 2,865.42 |
All petitioners' transactions on the Chicago Board of Trade in 1935 were marginal transactions. They did not take delivery of any of the wheat purchased. On January 1, 1935, and on December 31, 1935, they did not hold any wheat, either produced or purchased. Their accounting system included inventories.
OPINION.
STERNHAGEN: The taxpayers were wheat farmers and as shown by the evidence they bought and sold wheat futures on the Chicago Board of Trade entirely for the purpose of protection against price fluctuation. They were not speculators in the grain market as was the taxpayer in Staerker v.United States (U.S. Dist. Ct., N. Dist. of Texas, Sept. 23, 1938), or on the stock exchange as in O. L. Burnett,40 B.T.A. 605">40 B.T.A. 605. All of their transactions were related to their business of production and sale. They had books of account which included*1213 inventories and apparently the only reason that there were no inventories at the beginning and end of 1935 was that no wheat and no wheat contracts were on hand on those dates. Whether it *249 would be sensible to include in such an inventory wheat covered by a contract for future delivery, we do not know. See G.C.M. 18658, C.B. XVI-2, p. 77; Paul and Mertens, sec. 13.43; id. 1939 C.S., sec. 13.43.
The Commissioner has interpreted and administered section 117 as excluding hedging transactions, G.C.M. 17322, C.B. XV-2, p. 151, and the evidence shows that petitioners' transactions were all hedging transactions. The Commissioner seems, as indicated by the deficiency notice, to have thought that petitioners' transactions were merely speculations in future contracts having no relation to their production business. This being untrue, the determination is reversed.
Reviewed by the Board.
Decision will be entered under Rule 50.
HILL dissents.
DISNEY concurs only in the result.