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During the taxable year ended February 28, 1995, petitioner,
through the Frontier commodity account, was involved in numerous
futures transactions for corn, soybeans, cattle, and hogs. The
net result of these transactions was a loss of $40,934.80.
Petitioner deducted $40,798 for "hedging expense" as an ordinary
loss on its return for the year ending February 28, 1995. The
reason why approximately $137 of losses was not deducted by
petitioner is unknown to the parties. Of the total amount of the
losses, $6,441.52 of the losses was generated by transactions in
hog futures. In the notice of deficiency, respondent disallowed
$6,305 of petitioner's hedging expense deduction (i.e., $6,441.52
of hog future losses less the approximately $137 of losses
petitioner did not deduct), on the ground that petitioner was not
engaged in the production of hogs. Respondent determined that
the $6,305 loss was a capital loss.
Respondent contends that because petitioner was not engaged
in the hog business it could not have hedging transactions in
that commodity and its losses incurred from transactions in hog
futures are capital losses in nature, not ordinary losses.
Petitioner contends that its method of involvement with hog
operations is sufficient to allow the losses from the
transactions to be deducted as hedging losses.
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