*258 Decision will be entered under Rule 50.
1. Contracts to purchase packed dried raisins to be delivered in the latter part of the year f. o. b. dock, entered into as a speculation by taxpayer in May, 1937, long prior to the maturity and harvest of grapes, such contracts not being sold until the succeeding year, held, to be capital assets.
2. Held, that the loss sustained on the sales of such contracts in June, 1938, is excludable under section 711 (b) (1) (B), I. R. C., in computing excess profits net income.
*374 The Commissioner determined deficiencies as follows:
| Tax | 1943 | 1944 |
| Declared value excess profits tax | $ 939.38 | |
| Excess profits tax | 43,621.55 | |
| Excess profits tax | $ 31,202.86 |
*259 The question to be determined is whether certain losses sustained by the petitioner in 1937 and 1938 are disallowable under section 711 (b) (1) (B) or section 711 (b) (1) (J) of the Internal Revenue Code.
Other issues raised by the pleadings were stipulated, to which stipulation effect will be given on recomputation under Rule 50. The respondent affirmatively alleged that, if the Court determines that such losses were abnormal within the provisions of section 711 (b)*375 (1) (J), then it will permit the petitioner to maintain an inconsistent position with respect to such losses entitling the respondent to an adjustment under section 734 in the taxable years. On brief, the respondent concedes that his position with respect to the application of section 734 to the alleged abnormal losses was not well taken (sec. 734-1 (d), Regulations 112). He accordingly withdrew from his position and concedes the issue so raised.
The case was submitted upon a stipulation of facts, exhibits, and oral testimony. The facts stipulated are so found. Other facts are found from the evidence.
FINDINGS OF FACT.
The petitioner was incorporated under the laws of California on December 30, 1931. Its*260 principal office is located at Modesto, California. Its returns for the years involved herein were filed with the collector for the first district of California.
Since its incorporation the petitioner has been engaged in the dried fruit business. The petitioner's business activities, except for transactions hereinafter described, consisted of the purchasing of fresh fruits, drying or dehydrating them, and selling them unpacked to packers. It occasionally bought dried fruit from farmers which it sold in the same manner. Petitioner in its plant dried the fruits, which when dry were placed in either picking boxes or sweat boxes. The picking boxes with dried fruit in them weighed from 40 to 55 pounds and the sweat boxes with dried fruit in them weighed from 60 to 75 pounds, depending on the type and size of the fruit. Peaches were dried in about two to three weeks. It took about 36 to 40 hours to dehydrate grapes. Prior to 1942 the grapes, from which petitioner made golden bleached raisins, were not stemmed. They were dried on trays, from which they were transferred to picking or sweat boxes. Petitioner usually disposed of all its dried fruits by the end of the year.
The packers, *261 to whom petitioner sold its unpacked dried fruits, in turn processed the fruits, i. e., washed, cleaned, and resulphured them, and then packed them as directed by the ultimate purchaser in 25, 30, or 50-pound fiber boxes or in 12 1/2 kilo (27 1/2 pounds) boxes or cartons.
In 1942 petitioner started to use, and has ever since used, raisin stemmers, machines which remove the stems from raisins and clean and wash them. When the process was completed the raisins were packed in fiber cases and sold as packed and processed raisins. Petitioner in 1943 and 1944 sold raisins so processed and packed in its own plant.
Prior to 1937 the petitioner had occasionally bought peaches and apricots on trees. In such transactions the petitioner took all the responsibility for the crop maturing, harvesting it, and bringing it to *376 its plant for drying. In 1937 it bought from several farmers apricots on a substantial acreage of trees, from which it expected to harvest around 2,500 to 3,000 tons of apricots. This was a larger amount of fruit than it had ever purchased on trees before. This transaction further differed from previous transactions in that the apricots suited for that purpose *262 were intended for sale to canneries, because petitioner thought it would realize a greater profit in so doing. However, due to an unusual heat wave, most of the apricots were ruined and became unmerchantable. The petitioner picked a small part of the apricots and left the remainder on the trees. As a result of a compromise with respect to payments for the apricots, the loss to petitioner on the transaction was considerably less than expected. Thereafter petitioner never again purchased fruit on trees.
The following schedule shows the tons of fruit dried by petitioner in the years 1934 to 1944, inclusive:
| Peaches | ||||||
| Year | Total | Apricots | Black | Raisins | ||
| raisins | ||||||
| Freestone | Cling | |||||
| Tons | Tons | Tons | Tons | Tons | Tons | |
| 1934 | 140 | 1,055 | ||||
| 1935 | 1,971 | 117 | 76 | 185 | 1,593 | |
| 1936 | 1,642 | 315 | 131 | 290 | 906 | |
| 1937 | 2,008 | 110 | 102 | 98 | 1,698 | |
| 1938 | 2,164 | 128 | 207 | 34 | 1,795 | |
| 1939 | 2,158 | 240 | 216 | 2 | 1,700 | |
| 1940 | 640 | 12 | 137 | 41 | 450 | |
| 1941 | 1,061 | 20 | 108 | 43 | 110 | 780 |
| 1942 | 1,653 | 45 | 312 | 46 | 1,250 | |
| 1943 | 2,003 1/2 | 51 | 2 1/2 | 1,950 | ||
| 1944 | 1,597 | 118 | 199 | 1,280 |
*263 The following schedule shows the petitioner's sales in dollars by products in the years 1936 to 1944, inclusive:
| Year | Apricots | Raisins | Peaches | Miscellaneous | Total |
| 1936 | $ 93,088.70 | $ 25,726.49 | $ 55,396.45 | $ 34,441.37 | $ 208,653.01 |
| 1937 | 46,102.93 | 197,398.17 | 22,484.25 | 26,274.01 | 292,259.36 |
| 1938 | 35,572.17 | 82,932.41 | 23,122.62 | 2,686.23 | 144,313.43 |
| 1939 | 47,366.71 | 105,021.89 | 31,337.35 | 15,500.86 | 199,226.81 |
| 1940 | 3,988.60 | 31,430.98 | 21,517.89 | 14,263.40 | 71,200.87 |
| 1941 | 12,811.96 | 59,729.61 | 21,089.54 | 41,786.82 | 135,417.93 |
| 1942 | 19,324.38 | 239,433.38 | 65,242.77 | 2,630.14 | 326,630.67 |
| 1943 | 445,311.51 | 26,548.09 | 70,923.39 | 542,782.99 | |
| 1944 | 38,008.70 | 328,659.67 | 97,016.58 | 4,854.09 | 468,539.04 |
The respective amounts of petitioner's net income and adjusted net income shown on its income tax returns for the taxable years 1936, 1937, 1938, and 1939 were as follows:
| 1936 | $ 738.50 |
| 1937 | (8,187.37) |
| 1938 | (413.08) |
| 1939 | 2,530.97 |
*377 The actual respective amounts of petitioner's net income and adjusted net income for the taxable years 1936, 1937, 1938, and 1939 are as follows:
| 1936 | $ 831.58 |
| 1937 | (14,817.91) |
| 1938 | 5,628.99 |
| 1939 | 2,738.99 |
*264 The net increases in adjusting net income for such taxable years result from adjustments (A) to (O), inclusive, inconsistent with their treatment for prior years' income taxes, as follows:
| 1936 | (A) | Purchases of fruit overstated and deducted in 1936, | |
| adjusted in 1938 | $ 45.16 | ||
| (D) | Rent, Modesto Terminal, disputed but deducted in 1936; | ||
| dispute settled and adjusted in 1942 | 50.00 | ||
| (G) | Modesto Refrigeration Co. invoice deducted in 1939 | ||
| should have been deducted in 1936 | (2.08) | ||
| 1937 | (B) | Purchases of fruit overstated and deducted in 1937, | |
| adjusted in 1938 | 4.21 | ||
| (C) | Overstatement of charitable contributions, deducted in | ||
| 1937, adjusted in 1938 | 100.00 | ||
| (H) | Pacific Gas & Electric Co. charges deducted in 1938, | ||
| should have been deducted in 1937 | (1,805.35) | ||
| (I) | Loss on speculation in packed apricots and packed Golden | ||
| Bleach raisins, inadvertently deducted in 1938; should | |||
| have been deducted in 1937 | (4,944.50) | ||
| (N) | Rebate from Modesto Irrigation District reported | ||
| in 1938, should have been reported in 1937 | (15.10) | ||
| 1938 | (A) | See (A) above | (45.16) |
| (B) | See (B) above | (4.21) | |
| (C) | See (C) above | (100.00) | |
| (H) | See (H) above | 1,805.35 | |
| (I) | See (I) above | 4,944.50 | |
| (J) | Charges by Modesto Refrigerator Co. deducted in 1939; | ||
| should have been deducted in 1938 | (366.67) | ||
| (K) | Purchases from F. Chekian deducted in 1939; should have | ||
| been deducted in 1938 | (200.00) | ||
| (N) | See (N) above | (15.10) | |
| (O) | Purchases of fruit overstated and deducted in 1935; | ||
| adjusted in 1938 | (23.36) | ||
| 1939 | (E) | Purchases of fruit overstated and deducted in 1939; | |
| adjusted in 1941 | 11.56 | ||
| (F) | Purchases from Talbot Welding Co. overstated and | ||
| deducted in 1939; adjusted in 1941 | 65.91 | ||
| (G) | See (G) above | 2.08 | |
| (J) | See (J) above | 366.67 | |
| (K) | See (K) above | 200.00 | |
| (L) | Expenses of A. J. George should have been deducted in | ||
| 1939; deducted in 1941 | ($ 418.28) | ||
| (M) | Purchases from M. Shamgochian should have been deducted | ||
| in 1939, deducted in 1941 | (19.92) |
*265 *378 The petitioner's excess profits net incomes for the taxable years 1936, 1937, 1938, and 1939 are the same as the respective amounts of adjusted net income for such years as hereinabove set forth, excepting for adjustments in the amounts of $ 6,393.12 and $ 3,689.92 for the years 1937 and 1938, respectively, which adjustments are in controversy herein.
During the years 1937 and 1938 petitioner entered into certain transactions with Jack Gomperts & Co., hereinafter referred to as Gomperts, as a result of which petitioner realized losses during the year 1937 in the amount of $ 6,393.12, and during the year 1938 in the amount of $ 3,689.92. The transactions, in so far as they concern petitioner and Gomperts, were made on credit, and the amount of the losses were represented by payments made by petitioner to Gomperts in settlement thereof.
The parties stipulated that, in the event the Court should hold that petitioner is entitled to relief under section 711 (b) (1) (J) with respect to the item of $ 3,689.92 for 1938, the transactions resulting in the loss of $ 6,393.12 for 1937 were of the same nature.
Gomperts was engaged in 1937 and 1938 in the packed dried fruit business *266 as a broker in San Francisco, California. His business activities consisted of obtaining orders for packed dried fruits from buyers, either foreign or domestic, and executing such orders by purchasing the quantities ordered from packers. He treated the sales and purchases as offsetting one another at all times. He did not deal with consumers; only with packers of dried fruits and traders in packed dried fruits. His only remuneration was the commission charged. He made sales for immediate delivery during the season and for future delivery before the season started.
In all his transactions, purchases or sales, he used the form of contract adopted by the California Dried Fruit Export Association. This contract is in part as follows:
Seller
193
[Buyer's Order No.]
[Contract No.]
Sold to
Address
F. O. B.Routing
Consigned to
Time of Shipment
(Seller's Option)
| Number | Weight of Boxes | |||
| of | or Bags | Grade & Variety | Brand | Price |
| Packages | (about) |
*379 Remarks
Seller
By
Buyer
By
If Gomperts made a purchase he was designated as the buyer and if he made a sale he was designated as the seller in the contract. On the line where the letters "F. O. B." appear, the words*267 "dock, San Francisco Bay Area" were inserted. The routing and the name of the consignee were not inserted, as the routing and consignee generally were not known at the time of purchase or sale. The time of shipment would be stated as "July or August," or "August or September," or "September or October," or whatever time of delivery was agreed upon. Usually no brand was designated. As a rule the ultimate buyer used his own brand.
Provisions printed on the back of such contracts were, in part, as follows:
(This form is intended solely for use between buyers and sellers in California in Export Trade.)
Terms: F. O. B. at shipping point named on reverse side. * * *
Payment: At sight against documents, less two per cent (2%).
Documents: Documents shall consist of receipted dock permit, or rail bill of lading in case of overland shipment, invoice, sworn or public weighmaster's certificate of weight at packing or shipping point (which shall be final as to weight) and a quality certificate of the Dried Fruit Association of California which shall be final as to quality, grade, count and condition. * * *
* * * *
Unless Buyer furnishes, at least fifteen (15) days before expiration*268 of shipping period, shipping instructions sufficient to enable Seller to ship as herein specified within the time herein fixed, Seller may warehouse the goods in public warehouse for Buyer's account, packed (unless other packing is herein specified) in any standard containers, and the warehouse receipt shall in such case take the place of dock receipt or rail bill of lading as a document hereunder.
* * * *
Responsibility: Goods are at risk of Buyer and shipment shall be deemed completed from and after delivery to initial carrier or such carrier's agent. * * *
* * * *
Insurance: From the time the goods become at risk of Buyer and until Seller is paid in full therefor, Buyer shall at Buyer's expense insure the same and keep them insured for at least their invoice value * * *, and shall upon demand of Seller assign and deliver such policies to Seller to secure the payment in full to Seller of the purchase price of such goods.
* * * *
Miscellaneous: * * * This contract is not assignable without written consent of Seller.
In May and June, 1937, the petitioner made numerous purchases from Gomperts in the aggregate amount of 8,430 25-pound boxes of dried apricots. These were sold*269 in various transactions by Gomperts in September, October, and November, 1937. In March, April, and May, 1937, the petitioner made numerous purchases from Gomperts *380 aggregating 33,000 25-pound boxes of golden bleach raisins. All of these raisins were sold by Gomperts in September, November, and December, 1937. On May 7 and 10, 1937, the petitioner also purchased from Gomperts 10,000 25-pound boxes of Thompson natural seedless raisins. On June 13, 1938, 2,400 25-pound boxes of these raisins were sold to Gomperts. The remaining 7,600 boxes were sold by petitioner to Consolidated Packing Corporation on June 13 and 18, 1938. All the purchases were made long prior to the time any of the 1937 crops were ready for harvest and hence were for future delivery in October, November, or December, 1937. None of the fruits so purchased were ever delivered to petitioner. Some time after the above purchases by petitioner, the market prices of packed and processed apricots and raisins declined. The petitioner delayed disposition thereof as long as it could and, no increase in prices being indicated, it made disposition thereof. Petitioner made the above purchases from Gomperts for*270 the purpose of speculation and resale later in the year at a profit.
In all transactions between Gomperts and petitioner, a contract in the form hereinbefore set forth was entered into by them. Both petitioner and Gomperts had destroyed their copies of the contracts. It was their practice to destroy such records after the passage of a certain number of years or after the statute of limitations had tolled.
Typical transactions by petitioner through Gomperts were carried out as follows: On order of petitioner, Gomperts on May 19, 1937, purchased from a packer 350 cases of choice apricots, 350 cases extra choice apricots, and 350 cases of fancy apricots, or a total of 1,050 cases, at an average price of 12 3/4 cents a pound, less 2 per cent discount and 3 1/2 per cent brokerage, f. o. b. dock. These apricots were in turn sold by Gomperts to petitioner on the same date at the same price, less 2 per cent discount, f. o. b. dock. Similar additional purchases for and sales to petitioner were made on May 24, 1937, of 1,200 and 225 25-pound boxes of apricots, at a price to the petitioner of 12 7/8 cents a pound, less 2 per cent discount, f. o. b. dock, aggregating in all 2,475 boxes. *271 On September 20, 1937, Gomperts purchased from petitioner the 2,475 boxes of apricots at 10 3/4 cents a pound, less 2 per cent discount and 2 1/2 per cent brokerage, f. o. b. dock, which he in turn sold to a foreign importer at the same price, less 2 per cent discount, as follows: 750 12 1/2-kilo boxes of choice northern apricots, 750 12 1/2-kilo boxes extra choice northern apricots, and 750 12 1/2-kilo boxes fancy northern apricots, or the equivalent of 2,475 25-pound boxes.
Prior to shipping instructions, the packer did not segregate any of its dried fruit to any particular order or contract which it held. The fruit could not be packed until the packer had received shipping and packing instructions, i. e., whether the fruit was to be packed *381 in 25- or 50-pound boxes or in kilo boxes or cartons. Since in all the transactions herein involved Gomperts was the buyer in so far as the packers were concerned, shipping and packing instructions were transmitted through and by him to the packers.
As heretofore stated, the petitioner purchased through Gomperts in May, 1937, 10,000 25-pound boxes of Thompson natural seedless raisins. Gomperts, on order of petitioner, purchased on*272 May 7, 1937, 5,000 25-pound fiber cases of Thompson raisins from Vagim Packing Co., at $ 4.90 per 100 pounds, less 2 and 2 1/2 per cent, f. o. b. dock. On May 10, 1937, he purchased from the same packing company another 5,000 25-pound cases of Thompson raisins at $ 4.90 per 100 pounds, less 2 and 2 1/2 per cent, f. o. b. dock. Gomperts sold such raisins so purchased by him to petitioner on the respective dates at the same price less 2 per cent, f. o. b. dock. Since the 1937 crop was not available until about October, 1937, delivery under the contract would be October, November, or December, 1937, before the end of the year.
If shipping instructions are not given by December 31, the seller has the right to demand that the buyer accept delivery and pay for the merchandise. However, the parties may agree upon an extension of the time of delivery. If the seller is requested to extend the time of shipment beyond the first Monday in March, he will do so only upon payment of a substantial amount against the contract, payment of the taxes which accrue early in March, and sometimes the fire insurance premium covering the quantity contracted for. If such payments are made, the dried fruit*273 is not segregated, but held by the seller with his other fruit on hand in sweat boxes for future shipping and packing instructions.
As the market was lower, petitioner obtained an extension of the time of delivery. It borrowed $ 9,000 from Gomperts, which was paid to Vagim Packing Co. on the purchase contracts of 10,000 25-pound boxes of Thompson raisins. Petitioner also paid insurance in the amount of $ 55.26 and taxes in the amount of $ 122.59 to obtain the extension of the time of delivery. In addition it paid interest in the amounts of $ 141.97 and $ 107.82 to Gomperts.
On June 13, 1938, the petitioner sold through Gomperts 2,400 25-pound boxes of the above 10,000 boxes at $ 3.55 a hundred pounds. These were sold by Gomperts as follows: 2,000 12 1/2-kilo cases (the equivalent of 2,200 25-pound boxes) to an importer in Copenhagen and 200 25-pound boxes to an importer in Rotterdam, Holland. On June 13, 1938, petitioner sold 2,000 boxes of the above 10,000 boxes to Consolidated Packing Corporation at $ 3.85 a hundred pounds, and on June 18, 1938, it sold the remaining 5,600 boxes at $ 3.55 a hundred pounds to the same corporation. This transaction was not handled through Gomperts. *274 However, since Gomperts was the buyer so far as Vagim Packing Co. was concerned, the third party gave shipping *382 instructions to Gomperts, who in turn transmitted them to the Vagim Packing Co. The latter sent an invoice at its sale price to Gomperts, who in turn billed either the petitioner or its buyer. Petitioner's sale price to Consolidated Packing Corporation being less than its purchase price from Gomperts, it was required to pay the difference to Gomperts.
In connection with the above described transactions, a memorandum record was set up by petitioner in 1937, and maintained thereafter, which was included in its accounts payable ledger. The detail shown thereon is in substance as follows:
| 1937 | ||||
| Loss on Apricots | $ 5,059.28 | |||
| 6/13 Loss on Naturals- | 2,000 -- $ 3.85 | |||
| 6/13 Loss on Naturals- | 2,400 -- 3.55 | |||
| 6/18 Loss on Naturals- | 5,600 -- 3.55 | |||
| Total | 10,000 | |||
| Taxes on 10,000 to Vagim | ||||
| Interest on $ 9,000 -- 4 Mos | ||||
| 5,059.28 | ||||
| Deduct: | ||||
| Net Profit on Golden Bleached | $ 312.01 | |||
| Less: | ||||
| Insurance | $ 55.26 | |||
| Interest | 141.97 | |||
| 197.23 | ||||
| $ 114.78 | ||||
| 4,944.50 | ||||
| Loss to Con. on cots | 1,448.62 | |||
| Interest to date | ||||
| 6,393.12 |
| 1938 | ||
| Loss on Apricots | ||
| 6/13 Loss on Naturals- | 2,000 -- $ 3.85 | $ 556.34 |
| 6/13 Loss on Naturals- | 2,400 -- 3.55 | 816.95 |
| 6/18 Loss on Naturals- | 5,600 -- 3.55 | 1,906.22 |
| Total | 10,000 | 3,279.51 |
| Taxes on 10,000 to Vagim | 122.59 | |
| Interest on $ 9,000 -- 4 Mos | 180.00 | |
| 3,582.10 | ||
| Deduct: | ||
| Net Profit on Golden Bleaced | ||
| Less: | ||
| Insurance | ||
| Interest | ||
| Loss to Con. on cots | ||
| Interest to date | $ 107.82 | |
| 3,689.92 |
The above mentioned memorandum record also listed disbursements to J. Gomperts & Co. as follows:
| 10/14/37 | $ 2,153.11 |
| 11/18/37 | 2,000.00 |
| 12/16/37 | 250.00 |
| 9/1/38 | 1,000.00 |
| 10/15/38 | 1,000.00 |
| 1/14/39 | 907.86 |
| 7,310.97 | |
| 58,820 lbs. seedless at 2 1/4 cents a lb | 1,323.45 |
| Total | 8,634.42 |
The above items aggregating $ 7,310.97 were also entered in petitioner's disbursement record, which showed payment to Gomperts, in the various amounts stated, by checks drawn on the Bank of America.
*383 As of December 31, 1938, the following entry was made in petitioner's journal:
| Dr. | Cr. | |
| Purchases Misc | $ 8,634.42 | |
| a/c Payable -- Jack Gomperts | $ 8,634.42 | |
| To set up purchases from J. Gomperts -- packed cots | ||
| and bleached raisins. |
*276 The losses heretofore referred to were not reflected in petitioner's income tax return for the year 1937. The "Purchases Misc. $ 8,634.42" item was transferred to the net income account and was reflected in petitioner's income tax return for 1938 by being included in cost of sales. By stipulation of the parties, $ 4,944.50 of that amount was transferred from 1938 to 1937. (See adjustment (I)).
In its 1937 and 1938 income and excess profits tax returns the petitioner reported gross sales, cost of sales, and gross profit from sales as follows:
| 1937 | 1938 | |
| Gross sales | $ 294,246.73 | $ 144,313.43 |
| Less cost of goods sold | 267,881.08 | 109,433.76 |
| Gross profit from sales | 26,365.65 | 34,879.67 |
Cost of goods sold was reported in petitioner's 1937 and 1938 income and excess profits tax returns, respectively, as follows:
| 1937 | 1938 | |
| 1. Inventory at beginning of year | $ 27,000.00 | None |
| 2. Material or merchandise bought for | ||
| manufacture or sale | 199,131.10 | $ 80,460.06 |
| 3. Salaries and wages | 40,799.99 | 31,523.70 |
| 4. Other costs | 949.99 | |
| 5. Total | 267,881.08 | 111,983.76 |
| 6. Less inventory at end of year | None | 2,550.00 |
| 7. Cost of goods sold | 267,881.08 | 109,433.76 |
The*277 question, "State whether the inventories at the beginning and end of the taxable year were valued at cost, or cost or market, whichever is lower," was answered in the 1937 return, "C/M," and in the 1938 return, "C. or M."
OPINION.
The excess profits credit for the taxable years 1943 and 1944 is based on income and is computed under section 713 (f) (6) of the Internal Revenue Code. In its brief the petitioner confines its arguments to the 1938 loss, stating that, "irrespective of the allowance or disallowance of the 1937 loss, the average base period net income would be the same since it is limited to the highest excess profits net income for a taxable year in the base period (§ 713 (f) (6)), *384 in this case the year 1938." It contends that the 1938 loss in the amount of $ 3,689.92 should be excluded in the computation of excess profits net income for 1938 under section 711 (b) (1) (B) of the Internal Revenue Code, which provides that in computing the excess profits net income for any taxable year in the base period, "There shall be excluded gains and losses from sales or exchanges of capital assets held for more than 6 months."
The petitioner argues that the loss resulted *278 from the sale of contracts or rights thereunder and that such contracts or rights constituted capital assets, since they were purchased for speculation and were not held for resale to its customers.
The respondent contends that the petitioner did not merely match sales against purchases, but actually sold raisins which had become a part of its inventory; that the raisins were not capital assets; that even if they were capital assets, the holding period was not shown to be more than six months; that hence section 711 (b) (1) (B) is not applicable; and that the Commissioner's determination must be approved.
Section 117 (a) (1) of the Revenue Act of 1938, applicable herein, defines capital assets as all property held by the taxpayer (whether or not connected with his trade or business) except (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 (2) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or (3) property, used in the trade or business, of a character which is subject to the allowance of depreciation*279 provided in section 23 (l).
The petitioner's business during 1937 and 1938 consisted of buying fresh fruits from farmers, drying such fruit in its own plant, and selling it in its natural condition and unpacked to packers, who in turn processed and packed the fruit in various sized containers as directed by their respective customers.
In the forepart of 1937, long before the 1937 fruit had matured and was harvested, the petitioner purchased as a speculation from Gomperts, a broker, for delivery in the latter part of 1937, 8,430 25-pound boxes of dried apricots, 33,000 25-pound boxes of golden bleach raisins, and 10,000 25-pound boxes of Thompson natural seedless raisins. Although 25-pound boxes were designated, it was the custom of the trade that the ultimate purchaser, at the time shipping instructions were given to the packer, could designate the size boxes in which the fruit was to be packed and shipped. All of these packed dried fruits were sold in the latter part of 1937 by petitioner to Gomperts, who disposed of them in turn, with the exception of the 10,000 25-pound boxes of Thompson natural seedless raisins, which were sold *385 in 1938. The loss in the stipulated *280 amount of $ 3,689.92 resulted from the sale of such raisins.
The fact that the merchandise ordinarily dealt in (unpacked dried fruits in their natural condition) was similar in kind or nature to that involved in the so-called Gomperts transactions (processed and packed dried fruits) is not determinative. See Nelson A. Farry, 13 T. C. 8; Carl Marks & Co., 12 T.C. 1196">12 T. C. 1196; E. Everett Van Tuyl, 12 T. C. 900; Edward E. Trost, 34 B. T. A. 24; and Commissioner v. Farmers & Ginners Cotton Oil Co., 120 Fed. (2d) 772; certiorari denied, 314 U.S. 683">314 U.S. 683.
The contracts entered into by petitioner in the forepart of 1937 were executory contracts for the delivery at a future date of packed dried and processed fruits. Neither Gomperts nor petitioner, at any time, accepted delivery of the packed dried fruits involved. Such executory contracts are futures contracts. Gomperts testified as follows:
In our trade language, we say that we buy and sell raisins, but actually we do not handle the raisins; so it is really that*281 we buy and sell the right to receive raisins.
It is stated in "Future Trading" by Hoffman that "in dealing in futures one is dealing not in the actual commodity but in claims on or contracts for the commodity." In Commissioner v. Covington, 120 Fed (2d) 768; certiorari denied, 315 U.S. 822">315 U.S. 822, it is stated:
Transactions in commodity futures are commonly spoken of as purchases and sales of a specific commodity such as corn, wheat, or cotton, but the traders really acquire rights to the specific commodity rather than the commodity itself. These rights are intangible property which may appreciate or depreciate in value. They are capital assets held by the taxpayer (whether or not connected with his trade or business), * * *
It is well established that such contracts are not includible in inventory. Estate of Dorothy Makransky, 5 T. C. 397, 411-412; affirmed per curiam, 154 Fed. (2d) 59; Farmers & Ginners Cotton Oil Co. v. Commissioner, 130 Fed. (2d) 941, affirming per curiam B. T. A. memorandum opinion, March 3, 1942, wherein*282 it was held that futures contracts are not includible in inventory if on hand at the end of the year. Commissioner v. Covington, supra;TennesseeEgg Co., 47 B. T. A. 558, 560.
The respondent argues that shipping instructions were due sometime between October, 1937, and February, 1938; that it "was solely the petitioner's own act which prevented the effecting of the transfer of title, even though a substantial part of the purchase price had been paid"; that "beneficial title" to the raisins had clearly passed to petitioner; that the seller was clearly thereafter holding the raisins merely as agent for the petitioner; and that the raisins were, under article 22 (c)-1 of Regulations 94 and 101, properly includible in petitioner's inventory and hence were not capital assets. The arguments of respondent have no factual basis.
*386 Article 22 (c)-1 of Regulations 94 and 101 provides, in part, that "A purchaser * * * should not include [in inventory] goods ordered for future delivery, transfer of title to which has not yet been effected."
The raisins involved were not included in petitioner's inventory, nor were they entered*283 in 1937 in the books of account as purchases of fresh fruits to be dried and sold in their natural condition in sweat or picking boxes in the ordinary course of its business. Furthermore, prior to receipt of shipping instructions, the fruit could not be and was not segregated by the packer to any particular contract. The packer was required to segregate the raisins, weigh them, pack them into specified pound or kilo boxes, and deliver them f. o. b. dock. Under the contracts, delivery was to be made by the packers in the latter part of 1937. In order to extend the time of delivery, petitioner made payment of a part of the purchase price and also paid taxes, which accrued early in March, 1938, and insurance premium, covering the quantity of raisins involved but not yet segregated from other raisins held by the packer. Time of delivery, and hence time of giving shipping instructions, was extended beyond February, 1938, not solely by the act of the petitioner, but by the agreement of the parties.
It is elementary that title passes when the parties intend that it shall pass and such intention is to be gathered from the contract and conduct of the parties, usages of trade, and the *284 circumstances of the case. Under a contract to sell unascertained or future goods by description, title thereof does not pass to the purchaser until goods of that description in a deliverable state are unconditionally appropriated to the contract either by the seller or the purchaser with the consent of the other. If the contract requires the seller to deliver the goods to the buyer, or at a particular place, title does not pass until the goods have reached the place agreed upon. Part payment of purchase price is not conclusive that a sale was intended, but is evidence to be considered with other evidence adduced. Civil Code of California, secs. 1738, 1739, and 1796 (4); Goldberg v. Southwestern Metals Corporation, 208 Pac. (2d) 75; Standard Oil Co. v. Johnson, 147 Pac. (2d) 577; 24 Cal. (2d) 40; American Factors, Ltd. v. Goss, 238 Pac. 121; 72 Cal. App. 742">72 Cal. App. 742; Turner, Kuhn & Fraser, Inc. v. Jones, 215 Pac. 1033; 61 Cal. App. 732">61 Cal. App. 732; Walti v. Gaba, 116 Pac. 963;*285 160 Cal. 324">160 Cal. 324; Blackwood v. Cutting Packing Co., 18 Pac. 248; 76 Cal. 212">76 Cal. 212; Haas Bros. v. McLaughlin (CCA-9), 39 Fed. (2d) 381. In the latter case, the court stated:
* * * Its [the taxpayer's] conduct is in harmony with the last provision of Regulation 45 [same as above quoted], and corroborates the record, that the merchandise was not identified, nor were the goods set apart to, or used by, appellant [taxpayer] at any time during 1919 and 1920, respectively. The fact that appellant paid storage and insurance for December, 1920, in view of the record, is of no importance. * * *
*387 Moreover, the contracts involved herein expressly provide that the "Goods are at the risk of Buyer * * * from and after delivery to initial carrier or such carrier's agent." Unless otherwise agreed, and it was not in this case, risk generally follows title. Sec. 1742, Civil Code of California, McKinney v. Sargent, 13 Pac. (2d) 373; 216 Cal. 18">216 Cal. 18; Puritas Coffee & Tea Co. v. DeMartini, 206 Pac. 96;*286 56 Cal. App. 628">56 Cal. App. 628.
Title to the packed dried raisins not having passed to petitioner, he may not include them in his inventory. Brown Lumber Co., 9 B. T. A. 719; affd., 35 Fed. (2d) 880; Barde Steel Products Corporation, 14 B. T. A. 209; affd., 40 Fed. (2d) 412; certiorari denied, 282 U.S. 853">282 U.S. 853; Jagerson Fuel Co., 24 B. T. A. 871; White Oak Transportation Co., 24 B. T. A. 307. See also A. R. M. 100, C. B. No. 3, p. 66, and A. R. M. 135, C. B. No. 5, p. 67, in the former of which publications it is stated that (p. 71) "transactions in 'futures,' unclosed at the end of the taxable year, form no integral part of the cost of the commodity included in the taxpayer's physical inventory," and in the latter of which it is stated that (p. 79) "the commodity covered by such open 'future' contracts shall not be added to nor deducted from the intory of the taxpayer."
The respondent argues that there is no support for petitioner's contention that the loss in question*287 arose from the purchase and sale of contracts, since the contract specifically provides that "This contract is not assignable without the written consent of the seller."
A stipulation against nonassignment of a contract may be waived by the conduct of the parties. Maguire v. Lees, 169 Pac. (2d) 411, 415; 74 Cal. (2d) 697. It appears that the shipments were made under the contracts by the packers to the assignees of petitioner or Gomperts. Hence the packers waived the clause of the contract prohibiting assignment without written consent. Furthermore, the name of the consignee was not inserted in the original contracts running from the packers to Gomperts or in the contracts from Gomperts to petitioner. This custom permitted the insertion of the name of a consignee other than that of the purchaser designated in the contracts, i. e., the name of the assignee of petitioner or Gomperts.
In our opinion the contracts to purchase packed raisins to be delivered at some future time, or futures contracts, acquired in 1937 and held by petitioner until disposed of in 1938, do not fall within any of the exceptions set forth in section*288 117 (a) (1) and hence are capital assets as defined in that section.
The contracts involved or rights thereunder were entered into or acquired on May 7 and 10, 1937, and were disposed of on June 13 and 18, 1938. They were, therefore, held for more than six months.
Since the 1938 loss in the stipulated amount of $ 3,689.92 resulted from the sale of capital assets held for more than six months, such *388 amount is excludable in the computation of excess profits net income under section 711 (b) (1) (B) of the Internal Revenue Code.
In view of our conclusion, it is not necessary to determine the alternative contention of the petitioner that the losses sustained in 1937 and 1938 are disallowable under section 711 (b) (1) (J) of the Internal Revenue Code.
Decision will be entered under Rule 50.