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mechanism deductions. The result for such a loss
is that the cumulative effect of the business
usage of the asset resulted in even greater
degradation in its value than anticipated and
provided by the depreciation or other cost
recovery mechanism which was utilized for the
asset. As with section 1245 or 1250 recapture,
such a loss is logically patronage-sourced unless
proved otherwise. The same conclusion also
results under the operating versus nonoperating
focus of the provisions of subchapter T since the
loss is directly attributable to cooperative
activities unless proven otherwise. Thus, the
classification of section 1231 losses as
patronage-sourced makes economic sense.
The flaw in respondent’s argument, however, is that the
classification of section 1231 gains and losses is based
upon whether there is a net section 1231 gain or loss
for the taxable year. Thus, section 1231 losses which
respondent asserts are “logically patronage-sourced” will
be treated as nonpatronage income under respondent’s
position if there is a net section 1231 gain for the
taxable year.
In light of the foregoing, we decline to abandon the
directly related test that has been used by this and other
courts to distinguish patronage from nonpatronage items and
to adopt respondent’s per se nonpatronage rule for capital
gains and losses. Accordingly, in this case our task is to
determine whether each of the gains and losses at issue was
realized in a transaction that was directly related to the
cooperative enterprise, or in one which generated
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