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Petitioner never recorded its Mex-Am stock in an account
identified as an “inventory”, “hedge”, or “hedging”
account. Petitioner never sold any Mex-Am stock and never
received any dividends from Mex-Am.
Supply conditions for crude oil improved in late 1983
making it unnecessary for petitioner to obtain crude oil
from Mex-Am. Accordingly, petitioner surrendered its
stock in Mex-Am for no consideration, thereby relieving
itself of the obligation to purchase a portion of Mex-Am's
crude oil.
On its Federal income tax return for 1984, petitioner
reported an ordinary loss of $25,000 from the surrender of
its Mex-Am stock. Petitioner treated $22,643 of this
amount as an ordinary patronage loss and $2,357 as an
ordinary nonpatronage loss.
In the notice of deficiency, respondent recharacter-
izes the loss as a nonpatronage capital loss that cannot
be offset by patronage income. The notice of deficiency
describes this adjustment as follows:
The loss realized on the surrender of the Mex-Am
Crude Corporation stock must be recognized as
non-patronage capital loss and may not be offset
by patronage income. Accordingly, your non-
patronage capital losses are increased by
$(25,000); the patronage ordinary loss you
reported is decreased by $22,643; and the non-
patronage ordinary loss you reported is
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