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Under case law, a bona fide hedge requires: (1) A risk of
loss by unfavorable changes in the price of something expected to
be used or marketed in the taxpayer's business; (2) a possibility
of shifting the risk to someone else, through the purchase or
sale of futures contracts; and (3) an intention and attempt to so
shift the risk. FNMA v. Commissioner, 100 T.C. 541, 569 (1993).
In every hedge there must be a direct relationship between the
product that is the basis of the taxpayer's business and the
commodity futures in which the taxpayer deals for protection.
Cullin v. Commissioner, T.C. Memo. 1997-292. There must also be
a close relationship between the price of the product and the
price of the commodity future. United States v. Rogers, 286 F.2d
277, 282 (6th Cir. 1961); Hoover Co. v. Commissioner, 72 T.C.
206, 231 (1979); Cullin v. Commissioner, supra.
In this case, respondent disallowed the ordinary treatment
of losses on hog futures. Petitioner did not produce hogs. In
Myers v. Commissioner, supra, we stated that the taxpayer "had
little, if any, reason to hedge" soybean and feeder cattle where
the taxpayer did not produce soybeans or feeder cattle. We found
that such transactions resulted in capital losses. Id.
Petitioner argues that although it did not produce hogs, it did
sell corn and soybeans to other corporations which produced hogs.
Petitioner presented no evidence that it could not sell the
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Last modified: May 25, 2011