*733 Taxpayer is an individual and was in the years involved engaged in the growing and selling of barley, cotton, and wheat. During these years he entered into certain futures contracts on the Chicago Grain Exchange for sales and purchases of corn, rye, cotton, and wheat. Certain of these purchase contracts were offset at a profit by sales contracts. Certain others resulted in losses. Petitioner was not a dealer. Held, on the facts that certain of the transactions were hedging transactions the resultant losses from which are deductible in full, and that other losses did not result from hedging transactions, and therefore were capital losses. Held, further, that selling commissions paid to brokers on all futures transactions are additional cost and may not be deducted as expenses. Spreckels v. Helvering,315 U.S. 626">315 U.S. 626.
*117 These proceedings involve deficiencies determined by respondent in petitioners' income tax for the years 1936 (Docket No. 104656), and 1937 (Docket No. 104655), in the respective amounts of $2,275.68 and*734 $8,335.44. Kenneth S. Battelle, involved in each proceeding, conceded at the hearing that any liability finally determined by the Board shall *118 be assessable against him in its entirety. Hereinafter any reference to "petitioner" refers to Kenneth S. Battelle.
The issues involved in this controversy center around certain "futures" transactions entered into by the petitioner, K. S. Battelle, with regard to losses sustained and expenses incurred in "short" and "long" transactions on the Chicago grain market. Respondent disallowed as ordinary business deductions the net losses sustained from these transactions and allowed such losses only to the extent of $2,000 in each of the taxable years on the theory that they were losses sustained on the sale of capital assets. Respondent also disallowed as ordinary and necessary business expenses the brokers' selling commissions on petitioner's futures transactions during the taxable years. Petitioner's original position was that all commodity "futures" transactions were so related to his business of producing and selling cotton and grain that these losses should have been allowed in full. Petitioner now concedes that he is not*735 entitled to deduct the full amount of losses and has reduced his claim, accordingly, to include only the full loss from certain of the transactions plus the $2,000 limited loss on the remaining transactions. Petitioner, in addition, claims he is entitled to deduct all selling commissions.
FINDINGS OF FACT.
Petitioner K. S. Battelle, is an individual residing at Corcoran, California. During 1936 and until April 11, 1937, the date of her death, Esther C. Battelle, his wife, resided with him at this address. Petitioner was appointed administrator of her estate on July 6, 1937. Petitioner and his wife filed a joint return on the cash basis for 1936; and petitioner filed a return on the cash basis for 1937. Both returns were filed with the collector of internal revenue for the first district of California. K. S. Battelle, hereinafter referred to as the petitioner, individually, is the sole interested taxpayer in these consolidated proceedings and is liable for any deficiency finally determined herein.
Petitioner was engaged during the taxable years in large scale farming operations in the San Joaquin Valley, California, an occupation he had pursued for approximately twenty-five*736 years. In the taxable years he farmed 5,737 acres, of which he owned 557 acres and leased the remainder.
Prior to the taxable years here involved petitioner became convinced that the marketing of farm products was carried on in an unbusinesslike manner. He concluded that most farmers sold their crops simultaneously, with the result that they customarily received a low price for their crops, due to the natural consequences of an application of the law of supply and demand. The reason, in his estimation, why farmers continued to sell simultaneously in view of this condition was that at harvest time they were always pressed with the necessity *119 of liquidating the obligations incurred in planting, raising, and harvesting.
In 1927 petitioner began studying the intricacies and trends of the commodity markets. He saw no reason why farmers should not use these markets for price protection and, in 1928 or 1929, commenced to trade in grains on the futures market.
During the taxable years the petitioner engaged in futures transactions by means of short and long transactions in wheat, corn, cotton, and rye. On a long transaction, or any contract for future delivery, the*737 buyer was required to put up margin of 10 percent. During the taxable years petitioner spent approximately 50 percent of his active time in the study of and dealings on the futures market. In addition, petitioner engaged in some transactions on the commodity market in which actual delivery of the physical commodity was involved.
As previously related, petitioner was also engaged in the growing and marketing of crops. At the commencement of the year 1936 petitioner had on hand 70,531 bushels of barley, which he sold on August 16, 1936. During June 1936 he harvested 51,699 additional bushels of barley, which he sold in June and July of that year. He neither had any wheat on hand at his farms at the commencement of the year, nor did he harvest any during the year. During September, October, November, and December of 1936, 528 bales of cotton were picked on his farms. There is no indication that any cotton was on hand at the commencement of the year and, since 528 bales were sold in 1936, it is concluded that no cotton remained on hand at the close of the year.
In late May and early June 1937 petitioner harvested 39,822 bushels of barley, which had been planted in November*738 of the preceding year. All this barley was sold June 12, 1937. In addition, petitioner harvested 133,723 bushels of wheat between June 8 and July 27, 1937. This wheat had been planted in November of the preceding year. It was all sold on December 31, 1937, by contracts made not over two or three days before the sale. In January of 1937, three bales of cotton were picked, which were apparently sold a week later. In April more cotton was planted, which was picked in October and December. This cotton, 114 bales in all, was all sold within 10 days after having been picked.
The following detailed tables show petitioner's futures transactions (both short and long) in 1936. The amounts listed under the heading "expense" do not include taxes which were allowed as a deduction by the Commissioner in the deficiency notice, but represent commissions paid on purchases and sales.
Petitioner's futures transactions (short) in corn during the period *120 of raising barley in 1936 and while any barley remained on hand in 1936, were as follows:
| Bushels | Sale date | Purchase date | Profit | Loss | Expense | Net gain or (loss) |
| 10,000 July | 3/30/36 | 4/3/36 | $87.50 | $25 | $62.50 | |
| 10,000 Sept | 7/3/36 | 7/11/36 | $1,137.50 | 25 | (1,162.50) | |
| 10,000 July | 7/11/36 | 7/14/36 | 2,656.25 | 25 | (2,681.25) | |
| 10,000 Dec | 8/15/36 | |||||
| 10,000 Dec | 8/17/36 | 9/1/36 | 1,025.00 | 50 | 975.00 | |
| 10,000 Dec | 8/11/36 | |||||
| 10,000 Dec | 8/12/36 | 11/10/36 | 1,550.00 | 50 | (1,600.00) | |
| Rebate on corn | 30.00 | 30.00 | ||||
| Total | (4,376.25) |
*739 Petitioner's futures transactions (short) in corn during 1936 after the sale of all barley on hand and before planting of the 1937 barley crop were as follows:
| Bushels | Sale date | Purchase date | Profit | Loss | Expense |
| 9/3/36 | |||||
| 30,000 Dec | 9/10/36 | 12/28/36 | $4,850 | $75 |
Petitioner's futures transactions (short) in cotton during 1936, during period crop was in soil or on hand unsold, were as follows:
| Bales | Sale date | Purchase date | Profit | Loss | Expense | Net gain or (loss) |
| 100 Dec | 4/6/36 | 7/2/36 | $760 | $35 | ($795.00) | |
| 200 Dec | 4/6/36 | 7/8/36 | 1,960 | 70 | (2,030.00) | |
| 200 Dec | 9/9/36 | 9/10/36 | $70 | 60 | 10.00 | |
| Total | (2,815.00) |
Petitioner's futures transactions (short) in cotton during that part of 1936 prior to planting of the 1936 cotton crop and while there was no apparent cotton on hand were as follows:
| Bales | Sale date | Purchase date | Profit | Loss | Expense | Net gain or (loss) |
| 200 Oct | 1/13/36 | 7/8/36 | $2,260.00 | $70.00 | ($2,330.00) | |
| 100 Oct | 1/18/36 | 7/2/36 | 775.00 | 35.00 | (810.00) | |
| Total | (3,140.00) |
At the time of these latter transactions*740 petitioner intended to plant a cotton crop and they were not closed out until after the crop was planted.
Petitioner's futures transactions (short) in wheat in 1936, in which year no wheat was grown nor any crop planted for 1936 harvest, were as follows:
| Bushels | Sale date | Purchase date | Profit | Loss | Expense | Net gain or (loss) |
| 20,000 May | 2/4/36 | 2/10/36 | $500.00 | $50.00 | $450.00 | |
| 20,000 May | 2/14/36 | 3/27/36 | 375.00 | 50.00 | 325.00 | |
| 10,000 Sept | 3/28/36 | 4/2/36 | 275.00 | 25.00 | 250.00 | |
| 10,000 May | 3/28/36 | 4/2/36 | 125.00 | 25.00 | 100.00 | |
| 20,000 May | 4/14/36 | 5/25/36 | 531.25 | 50.00 | 481.25 | |
| 10,000 Sept | 4/16/36 | |||||
| 10,000 Sept | 5/21/36 | 5/29/36 | 462.50 | 50.00 | 412.50 | |
| 10,000 July | 6/2/36 | 6/5/36 | $50.00 | 25.00 | (75.00) | |
| 10,000 July | 6/2/36 | 6/10/36 | 87.50 | 25.00 | (112.50) | |
| 10,000 Dec | 8/11/36 | |||||
| 10,000 Dec | 8/12/36 | 11/10/36 | 1,025.00 | 50.00 | (1,075.00) | |
| Total | 756.25 |
*121 Petitioner's futures transactions (long) in wheat in 1936, consisting both of sales of 1935 purchases or purchases made in 1936 when no sales obligations were outstanding, were as follows:
| Bushels | Purchase date | Sale date | Profit | Loss | Expense | Net gain or (loss) |
| 10,000 May | 10/3/35 | 3/10/36 | $575.00 | $25.00 | ($600.00) | |
| 10,000 May | 11/7/35 | |||||
| 10,000 May | 12/18/35 | 2/4/36 | $400.00 | 50.00 | 350.00 | |
| 10,000 July | 4/2/36 | 5/10/36 | 537.50 | 25.00 | 512.50 | |
| 10,000 May | 4/3/36 | 4/3/36 | 25.00 | 25.00 | ||
| 10,000 Sept | 5/29/36 | 6/2/36 | 25.00 | 25.00 | (50.00) | |
| 10,000 July | 5/29/36 | 6/2/36 | 25.00 | (25.00) | ||
| 5,000 Sept | 7/14/36 | |||||
| 5,000 Sept | 7/15/36 | 8/11/36 | 600.00 | 25.00 | 575.00 | |
| 10,000 Dec | 8/4/36 | 8/11/36 | 162.50 | 25.00 | (187.50) | |
| 40,000 May | 11/10/36 | 12/1/36 | 2,100.00 | 100.00 | 2,000.00 | |
| 10,000 May | 12/1/36 | 12/2/36 | 237.50 | 25.00 | 212.50 | |
| 10,000 May | 12/2/36 | 12/8/36 | 137.50 | 25.00 | 112.50 | |
| Total | 2,900.00 |
*741 The foregoing futures transactions were the only transactions of that nature consummated in the year 1936. The following additional futures transactions were closed in the year 1937. As before, the item entitled "expense" does not include taxes for which deduction has been allowed.
Petitioner's futures transactions (short) in corn and rye in 1937, entered into while petitioner's barley was either in the field or harvested and on hand prior to sale, were as follows:
| Bushels | Date sale | Purchase date | Profit | Loss | Expense | Net gain or (loss) |
| Corn: | ||||||
| 10,000 July | 4/19/37 | |||||
| 10,000 July | 4/26/37 | 4/30/37 | $150.00 | $50 | ($200.00) | |
| 10,000 May | 4/19/37 | |||||
| 10,000 May | 4/26/37 | 4/30/37 | 975.00 | 50 | (1,025.00) | |
| 10,000 Sept | 4/19/37 | 4/30/37 | $62.50 | 25 | 37.50 | |
| 10,000 Sept | 4/29/37 | 4/29/37 | 37.50 | 25 | 12.50 | |
| Rye | ||||||
| 10,000 May | 3/8/37 | |||||
| 10,000 May | 3/9/37 | 3/10/37 | 462.50 | 50 | (512.50) | |
| Total | (1,687.50) |
Petitioner's futures transactions (short) in corn in 1937, entered into after harvest and sale of 1937 barley crop, when no barley remained *122 on hand unsold and prior to planting of 1938 barley crop, were as*742 follows:
| Bushels | Date sale | Purchase date | Profit | Loss | Expense | Net gain or (loss) |
| 20,000 Dec | 6/28/37 | 7/3/37 | $125 | $50.00 | ($175.00) | |
| 50,000 Sept | 7/19/37 | 7/21/37 | $3,387.50 | 125.70 | 3,261.80 | |
| Total | 3,086.80 |
Petitioner's futures transactions (long) in corn and rye in 1937, entered into at times when no sales obligations were outstanding, were as follows:
| Bushels | Purchase date | Sale date | Profit | Loss | Expense | Net gain or (loss) |
| Corn | ||||||
| 10,000 May | 2/13/37 | 3/8/37 | $75.00 | $25.00 | ($100.00) | |
| 5,000 July | 2/16/37 | 3/8/37 | 25.00 | 12.50 | (37.50) | |
| 10,000 July | 3/22/37 | 3/25/37 | $225.00 | 25.00 | 200.00 | |
| 10,000 Sept | 6/17/37 | 6/28/37 | 1,362.50 | 25.00 | 1,337.50 | |
| 50,000 Sept | 8/11/37 | 8/11/37 | 650.00 | 125.00 | 525.00 | |
| 20,000 Sept | 8/12/37 | 8/14/37 | 100.00 | 50.00 | 50.00 | |
| 45,000 Sept | 8/12/37 | 8/16/37 | 168.75 | 112.00 | 56.75 | |
| 35,000 Sept | 8/12/37 | 9/7/37 | 787.50 | 87.50 | 700.00 | |
| Rye | ||||||
| 10,000 May | 2/4/37 | 3/8/37 | 512.50 | 25.00 | (537.50) | |
| Total | 2,194.25 |
Petitioner's futures transactions (short) in wheat in 1937, entered into during the time petitioner's wheat crop*743 was in the field or prior to sale of wheat on hand therefrom, were as follows:
| Bushels | Date sale | Purchase date | Profit | Loss | Expense | Net gain or (loss) |
| 20,000 July | 12/8/36 | |||||
| 10,000 July | 12/9/36 | 2/4/37 | $1,493.75 | $100.00 | ($1,593.75) | |
| 10,000 July | 1/13/37 | |||||
| 30,000 May | 3/9/37 | 3/13/37 | $775.00 | 75.00 | 700.00 | |
| 20,000 May | 3/20/37 | 3/22/37 | 500.00 | 50.00 | (550.00) | |
| 20,000 July | 3/27/37 | |||||
| 20,000 July | 3/30/37 | 3/31/37 | 100.00 | 100.00 | (200.00) | |
| 20,000 July | 4/3/37 | 4/16/37 | 2,075.00 | 50.00 | 2,025.00 | |
| 20,000 Sept | 4/6/37 | 4/16/37 | 2,093.75 | 50.00 | 2,043.75 | |
| 20,000 July 4/2/37 | 4/29/37 | 1,900.00 | 50.00 | 1,850.00 | ||
| 10,000 Sept | 4/19/37 | 4/29/37 | 350.00 | 25.00 | 325.00 | |
| 50,000 Dec | 6/28/37 | 7/3/37 | 3,662.50 | 125.00 | (3,787.50) | |
| 100,000 July 1 | 7/12/37 | 7/22/37 | 256.25 | 250.00 | 6.25 | |
| 35,000 May | 9/14/37 | 9/18/37 | 437.50 | 87.50 | 350.00 | |
| 65,000 May 2 | 9/14/37 | 10/11/37 | 6,662.50 | 162.50 | 6,500.00 | |
| 100,000 May 2 | 9/14/37 | 10/11/37 | 9,500.00 | 250.00 | 9,250.00 | |
| 165,000 May 2 | 10/13/37 | 10/27/37 | 412.50 | 412.50 | (825.00) | |
| 115,000 May 2 | 10/28/37 | |||||
| 50,000 May 2 | 10/30/37 | 11/9/37 | 13,325.00 | 412.50 | 12,912.50 | |
| 165,000 May 2 | 11/10/37 | 11/16/37 | 1,362.50 | 412.50 | (1,775.00) | |
| 165,000 May 2 | 11/17/37 | 11/18/37 | 3,093.75 | 412.60 | 2,681.15 | |
| 165,000 May 2 | 11/19/37 | 11/22/37 | 818.75 | 412.50 | ||
| (1,231.25) | ||||||
| 65,000 May 2 | 11/26/37 | 12/29/37 | 487.50 | 162.50 | (650.00) | |
| 20,000 Dec. 2 | 6/9/37 | |||||
| 50,000 Dec. 2 | 6/10/37 | 6/10/37 | 175.00 | (175.00) | ||
| 50,000 Dec | 7/1/37 | 7/1/37 | 1,125.00 | 125.00 | (1,250.00) | |
| Total | 26,606.15 |
*123 Petitioner's futures transactions (long) in wheat in 1937, entered into when no sales obligations were outstanding, were as follows:
| Bushels | Purchase date | Sale date | Profit | Loss | Expense | Net gain or (loss) |
| 20,000 May | 2/4/37 | 3/5/37 | $650.00 | $50.00 | $600.00 | |
| 10,000 May | 3/13/37 | 3/16/37 | 275.00 | 25.00 | 250.00 | |
| 30,000 May | 3/22/37 | |||||
| 10,000 May | 3/26/37 | 3/27/37 | 787.50 | 100.00 | 687.50 | |
| 10,000 July | 3/22/37 | 3/27/37 | 225.00 | 25.00 | 200.00 | |
| 40,000 July | 3/31/37 | 4/2/37 | $500.00 | 100.00 | (600.00) | |
| 30,000 May | 4/2/37 | 4/2/37 | 450.00 | 75.00 | 375.00 | |
| 80,000 Dec | 6/9/37 | 6/9/37 | 656.25 | 200.00 | 456.25 | |
| 10,000 July | 6/3/37 | |||||
| 10,000 July | 6/5/37 | 6/9/37 | 162.50 | 50.00 | 112.50 | |
| 30,000 Dec | 6/11/37 | 6/11/37 | 187.50 | 75.00 | 112.50 | |
| 10,000 Sept | 5/8/37 | |||||
| 10,000 Sept | 5/25/37 | 6/28/37 | 475.00 | 50.00 | 425.0010,000 July | |
| 4/29/37 | ||||||
| 20,000 July | 4/30/37 | |||||
| 10,000 July | 5/5/37 | |||||
| 20,000 July | 5/8/37 | 6/28/37 | 1,087.50 | 200.00 | 887.50 | |
| 10,000 July | 5/25/37 | |||||
| 10,000 July | 6/11/37 | |||||
| 100,000 May | 9/8/37 | 9/10/37 | 3,250.00 | 250.00 | (3,500.00) | |
| 10,000 Dec | 9/17/37 | 9/21/37 | 100.00 | 25.00 | 75.00 | |
| 35,000 Sept | 7/22/37 | 9/21/37 | 4,418.75 | 87.50 | (4,506.25) | |
| 65,000 Dec | 7/24/37 | 9/27/37 | 812.50 | 162.50 | 650.00 | |
| 50,000 Dec | 7/3/37 | |||||
| 50,000 Dec | 7/23/37 | 12/14/37 | 39,262.50 | 412.50 | (39,675.00) | |
| 65,000 Dec | 9/30/37 | |||||
| Total | (43,450.00) |
*745 In addition to his futures transactions, petitioner in 1937 also purchased, took delivery, and sold wheat produced by others, as per the following schedule. This wheat was held in storage for him and he had to pay storage charges thereon.
| Bushels | Purchase date | Cost | Sale date | Sale price | Expense | Net gain or (loss) |
| 10,000 | 7/3/37 | $12,725.00 | 9/16/37 | $10,300.00 | $25.00 | ($2,450.00) |
| 10,000 | 7/3/37 | 12,725.00 | 9/18/37 | 10,312.50 | 25.00 | (2,437.50) |
| 10,000 | 9/17/37 | 10,200.00 | 9/16/37 | 10,118.75 | (81.25) | |
| 20,000 | 7/3/37 | 25,456.25 | 9/20/37 | 20,650.00 | 50.00 | (4,856.25) |
| 20,000 | 7/22/37 | 30,493.75 | 9/20/37 | 25,706.25 | 62.50 | (4,850.00) |
| 20,000 | 9/21/37 | 20,550.00 | 9/21/37 | 20,387.50 | (162.50) | |
| Cash - Wheat delivered on contracts | 209.46 | (209.46) | ||||
| Total | (15,046.96) |
Petitioner's futures transactions (long) in cotton in 1937, entered into when no sales obligations were outstanding, were:
| Bales | Purchase date | Sale date | Profit | Loss | Expense | Net gain or (loss) |
| 100 Dec | 6/29/37 | |||||
| 100 Dec | 7/1/37 | 10/27/37 | $5,895.00 | $105.00 | ($6,000.00) | |
| 100 Dec | 7/3/37 |
While petitioner maintained this*746 long position in cotton on August 30, 1937, he entered into a transaction for future (October) delivery *124 of 300 bales of cotton, but offset this with a purchase on October 14, 1937, of a like amount, which resulted in a profit of $1,455 on the completed transaction. There was incurred an expense of $105, resulting in a net gain of $1,350.
A summary of the profits and losses of the above transactions for the years 1936 and 1937 discloses net loss results in each year in the following amounts:
| 1936 | ($11,600.00) |
| 1937 | (32,947.26) |
Taxes were allowed in the deficiency notice on these transactions in the amount of $126.66 and $874.47 for the years 1936 and 1937, respectively.
The 1936 futures transactions on cotton were hedges, but none of the other transactions constituted a hedge by the petitioner against his crops in hand or in production.
The purchase and resale of the 90,000 bushels of wheat of which petitioner took delivery in 1937 was not a capital transaction. The wheat involved therein constituted property held by the taxpayer primarily for sale to customers in the ordinary course of his business.
The following tables indicate the dates*747 of planting, harvest, and sale of the various crops raised by petitioner and his farms for resale in 1936 and 1937:
1936
Barley - 70,531 bushels on hand on January 1, 1936. No date of planting indicated. Harvest: June 23, 17,676 bu.; July 1, 34,023 bu. Sales - June 24, 3,324 bu.; June 29, 14,352 bu.; July 13, 25,664 bu.; July 22, 8,359 bu.; Aug. 8, 70,531 bu. Nothing on hand at close of year.
Wheat - No evidence of any crop planted until November when 1937 crop sown. No wheat on hand in 1936.
Cotton - None on hand on January 1, 1936. No date of planting indicated. Harvest: September 10-13th, 46 bales; Sep. 1-Oct. 28, 165 bales; Oct. 1-7, 66 bales; Oct. 8-10, 29 bales; Nov. 1-Dec. 23, 145 bales; Nov. 21-25, 20 bales; Nov. 27-Dec. 11, 57 bales. Sales - Sept. 12, 19 bales; Sep. 15, 26 bales; Sep. 22, 5 bales; Sep. 23, 10 bales; Sep. 24, 14 bales; Sep. 25. 14 bales; Sep. 26, 6 bales; Sep. 28, 4 bales; Oct. 8, 33 bales; Oct. 23, 100 bales; Oct. 31, 59 bales; Nov. 16, 151 bales; Dec. 16, 72 bales; Dec. 18, 15 bales. Left on hand at close of year: small amount on the plants.
1937
Barley - Planted crop Nov. 1936. Harvest:*748 May 31, 11,576 bu.; June 2, 9,836 bu.; June 4, 7,695 bu.; June 7, 10,715 bu.; Sales: June 12, 39,822 bu. No barley left on hand at close of 1937.
Wheat - Planted Nov. 1936. Harvest: June 10-26, 30,164 bu.; June 15, 1,620 bu.; June 12-18, 5,845 bu.; June 11-July 2, 27,104 bu.; June 8-July 5, 15,380 bu.; July 5-15, 24,305 bu.; July 5-27, 29,305 bu.; Sales: Dec. 31, 133,723 bu.; No wheat left on hand at close of 1937.
*125 Cotton - Planted April, 1937. Harvest: January 4, 3 bales (1936 crop); Oct.
12-20, 79 bales; Dec. 6-23, 35 bales, Sales * Jan. 11, 3 bales; Oct. 30, 79 bales; Dec. 31, 35 bales. None left on hand at close of 1937.
[*The crop record which was put in evidence as a joint exhibit discloses sales on January 11, 1937 of eleven additional bales but since we fail to discover any bales on hand or harvested on that date, this figure seems to be in error. We, therefore, have omitted this entry from our findings.]
Petitioner's status on the futures exchange was not that of a dealer.
There being no futures market on the Chicago Grain Exchange for barley as such, it has become a custom of the trade to deal in either corn or*749 rye futures when hedging against a barley crop.
OPINION.
KERN: The issues involved in these proceedings have already been set forth. The first, and main issue, is whether respondent erred in disallowing, as ordinary business deductions, the net losses sustained by the petitioner in 1936 and 1937 from transactions in commodity futures. The respondent classed those losses as losses from the sale of capital assets, allowable only to the extent of $2,000 in each of the two taxable years.
The petitioner, in insisting that respondent has erred in limiting these losses, relies upon , and . These cases do not, however, support the petitioner's position. In the Banfield case, supra, the issue in question was for the first time raised in respondent's amended answer, and therefore respondent had the burden of proof with regard to this issue. Our decision in that case was not on its merits, but to the effect that the respondent had failed to sustain this burden. Moreover the case was later reversed on this point, *750 .
The Grote case, supra, however, is a decision on the merits involving futures transactions, and at first blush appears controlling of the issue herein presented. The decision of the Grote case is that losses sustained in hedging transactions are not capital losses subject to the deduction limitations of section 117 of the Revenue Acts of 1934 and 1936. We shall follow the rule of the Grote case. Having accepted this general rule, the material issue, therefore, is whether any or all of this petitioner's losses were suffered as the result of hedging transactions. This being largely a factual question, it must necessarily be answered in each case upon the peculiar facts presented.
The term "hedging" has, for years, defied concise and exact definition. In (C.C.A., 5th Cir., 1941), reversing (certiorari *126 denied, ), the court gave the following definition of the term:
A hedge is a form of price insurance, it is resorted to by business men to avoid*751 the risk of changes in the market price of a commodity. The basic principle of hedging is the maintenance of an even or balanced market position.
This description of hedging is not sufficiently detailed and exclusive to be used as a complete guide in all factual inquiries without the addition of such further necessary and material qualifications as the facts of the individual case require.
Viewing the facts of the instant proceeding in the light of the court's definition of hedging in the Farmers & Ginners Cotton Oil Co., case, supra, we have concluded that the transactions, with the exception of those in cotton futures in the year 1936, which are discussed infra, do not constitute hedges. None of the 1936 wheat futures transactions, most of which called for deliveries in May, July, and September, are shown to have been a hedge. There was neither any wheat on hand nor in the ground against which to hedge, and petitioner did not plant any wheat until November of that year, whereas all the transactions were initiated in the early part of the year and called for deliveries before any wheat planted by petitioner could be harvested. Likewise, none of petitioner's 1937*752 cotton futures transactions can be considered as a hedge for the reason that the petitioner never once established a short position but, on the contrary, maintained a long position throughout two and one-half months of that year. Petitioner's futures transactions in corn, which commodity market, as that of rye, also, has been through custom of the trade used for the hedging of barley, for which there is no active futures market, do not appear to us to have been hedging transactions. While he never assumed a long position, it will be noted that petitioner's first three short positions were maintained for the unreasonably short periods of four, eight, and three days, respectively, which rapid change of position is not consistent with the basic principle of hedging unless the market during those few days may have taken an unusually sudden drop to the point where the petitioner could have suspected it to be at a low. We have no evidence of such market condition and, without such evidence, we must conclude that this rapid and sporadic action was speculation. It is also pertinent to note that petitioner's final and largest transactions, although the short position was therein maintained*753 for a period of three and one-half months, were entered into subsequent to the disposition of all barley on hand or in the ground and were for a December delivery, although petitioner's 1937 crop had not yet been planted and could not be expected to be ready for harvest until at least six months after that date. Petitioner's two intermediate transactions, though possessing many of the attributes of hedges when viewed as isolated transactions, can not be so considered in view of the *127 general speculative aspect of the corn futures transactions in 1936, regarded as a whole.
Petitioner's cotton futures transactions in 1936 were, however, of a different nature. There was never an assumption of a long position. The short position assumed by petitioner in January of that year was never fully offset until July, when it is apparent from the figures in evidence that the price per bale had dropped to a very low level. Petitioner planted his crop in the early part of 1936 and anticipated harvest in October. He did not short himself in a greater amount than he might reasonably have anticipated harvesting. Although a short position was assumed prior to planting and at a time*754 when no cotton remained on hand, there was always the reasonable anticipation of the 1936 crop, which was planted sometime in the early part of the year and was harvested on or about the dates upon which delivery was called for by these futures contracts. The fact that a taxpayer does not have the commodity on hand at the time he assumes the short position does not preclude him from correctly terming it a hedge so long as he shows his purpose was to offset the production risk of a commodity he expects to have on hand for sale.
His maximum 1936 short position in cotton was 600 bales, assumed in April. his fall harvest yielded 471 bales. The only transaction in 1936 in cotton futures which appears at all questionable is the 200 bales short position assumed October 9, 1936, and offset the following day. This isolated transaction is unexplained, but, in view of the petitioner's general scheme of transactions, we conclude that these 1936 cotton futures transactions were hedges. We conclude that while petitioner's activities on certain commodity futures markets were speculative, his transactions in cotton were not.
Viewing petitioner's numerous transactions on the corn and rye*755 futures markets in 1937, we conclude that they did not consitute hedges against his barley crop.
Petitioner was "in" and "out", "long" and "short", throughout the year. He never maintained any short position for longer than eleven days and the relinquishment of his sporadic short positions was never correlated with the sale of any of his crop. In addition, he continued to engage in futures transactions after the sale of all barley on hand and at a time when no new crop was planted and, so far as the evidence discloses, these transactions called for delivery on dates long prior to any anticipated future barley harvest. These 1937 futures transactions in corn and rye were not hedges and we so hold.
The sole remaining futures transactions are the 1937 wheat transactions, wherein petitioner did his most active business. Here, again, petitioner was "in" and "out", "long" and "short" and for the first *128 time assumed straddle positions, i.e., the assumption of a short position and a long position, both at the same time, without first offsetting the short position. The effect of these straddle operations was that the petitioner's net straddle position was "long" during*756 two-thirds of the taxable year. His crop was in the ground or on hand at all times during the year. As has already been indicated, we are not disposed under these circumstances to agree with an argument by the taxpayer that any of such transactions were intended to be hedges.
The losses sustained on these transactions discussed above are allowable in each of the two years only to the extent of $2,000 plus the gains from such sales or exchanges, under section 117(d) of the Revenue Act of 1936. The 1936 cotton futures transactions, however, we have held were not speculative transactions but were hedges and, accordingly, the losses sustained on these particular transactions are not so limited, but are allowable in full.
There is one further series of transactions still to be dealt with. In 1937 petitioner bought and accepted delivery of wheat produced by others and resold this wheat at a net loss of $15,046.96. Applying the definition of capital assets contained in section 117(b) of the Revenue Act of 1936 to this wheat so acquired by the taxpayer, we conclude that this was not the purchase and sale of a capital asset. Section 117(b) specifically excludes from its definition*757 of capital assets:
Stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if no 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.
This wheat, of which the taxpayer took delivery with the intention of resale, falls within the latter exception as set forth above.
Therefore, we hold that the losses sustained on the sale of the wheat purchased by the taxpayer are not limited by section 117(d), but are allowable in full.
The final issue for our determination deals with petitioner's right to deduct as business expenses the selling commissions on the transactions outlined above. Since petitioner was not a dealer with regard to contracts for future purchases and sales, these expenses should be considered as part of the cost when computing gain or loss. . We, accordingly, disallow the deduction qua expenses of the selling commissions on those futures transactions here involved.
Decision will be entered under Rule 50.
Footnotes
1. When this transaction was entered into, petitioner had a long position on the futures market of 50,000 bushels. ↩
2. When these transactions were entered into, petitioner was long on futures in amounts equal to or greater than the amounts indicated, and therefore, these transactions were not "short" in the true sense of the word. ↩