Tax Brief 1

Subject

Haig Simmons Anthracite Coal Futures Contracts - Capital versus Ordinary Loss

Facts

1) Haig Simmons operates a home heating supply company. Her main business resource is anthracite coal and she must maintain steady supply of it throughout the year in order for her customers to have the consistent supply they will require. As a courtesy to her customers, Simmons permits them to purchase her coal in advance at a set price, the cost of which is charged and paid throughout the year. Simmons enters into futures contracts with her suppliers to hedge against price fluctuations in the coal market. These are known as futures contracts. It is critical to note that Simmons indicates the purchase of the futures contracts is not for profit. She maintains that it is to ensure a steady supply of coal for her customers and to protect them from potentially higher costs. In addition to that Simmons is hedging against her own future potential losses by contracting the future coal at a set price. Simmons’s current contract price for the coal is higher than the actual market price of the coal she is actually getting. She has committed to the higher purchase price via her futures contract.

2) The anthracite coal is not a capital asset per USC 26 & 1221 which specifically states exceptions to capital asset classification;

“(a) In general

For purposes of this subtitle, the term “capital asset” means property held by the

taxpayer (whether or not connected with his trade or business), but does not include—

(7) any hedging transaction which is clearly identified as such before the close of the

day on which it was acquired, originated, or entered into (or such other time as the

Secretary may by regulations prescribe); or

(8) supplies of a type regularly used or consumed by the taxpayer in the ordinary

course of a trade or business of the taxpayer”....