Losses on corporate stock investments.

Losses on stock investments are best classified as ordinary because capital losses can be used only to offset capital gains while ordinary losses can offset any variety of income. However, based on a string of recent court cases, companies may not have the liberty of choosing how stock losses will be classified.

Historically, corporations have been able to attain ordinary loss treatment for stock that was acquired and held for business purposes. Thus, if a corporation acquired stock to ensure a supply source a needed raw material, the so-called Corn Products doctrine (Corn Products Refining Co. v. Commissioner, 350 US 46, 1955) enabled the corporation to classify the stock as ordinary.

In Arkansas Best v. Commissioner (485 US 212, 1988), however, the U.S. Supreme Court rejected the notion that the Corn Products doctrine created an exception for capital assets acquired for business purposes. Nevertheless, even after Arkansas Best, Circle K v. United States (Court of Federal Claims, 12-86T, 1996) suggested that a "source of supply stock purchase" could qualify as a hedging transaction (the stock would be considered ordinary) if it was an integral part of an inventory purchase system.

However, in the most recent ruling on this issue, Cenex v. Commissioner, the Circle K reasoning is rejected. Why? Cenex stands for the proposition that, except in the case of a securities dealer, corporate stock always is a capital asset and a loss sustained thereon is a capital loss.

Observation: As a result of Cenex, the Arkansas Best decision was reinforced -- the Arkansas Best case intended to create a fixed classification for corporate stock.