
USCA1 Opinion

	




                            UNITED STATES COURT OF APPEALS                            UNITED STATES COURT OF APPEALS                                FOR THE FIRST CIRCUIT                                FOR THE FIRST CIRCUIT                                 ____________________        No. 95-2358                           MILO L. PIKE and PENNY P. PIKE,                               Plaintiffs, Appellants,                                          v.                              UNITED STATES OF AMERICA,                                 Defendant, Appellee.                                 ____________________                     APPEAL FROM THE UNITED STATES DISTRICT COURT                          FOR THE DISTRICT OF NEW HAMPSHIRE                 [Hon. Joseph A. DiClerico, Jr., U.S. District Judge]                                                 ___________________                                 ____________________                                        Before                                  Cyr, Circuit Judge,                                       _____________                            Aldrich, Senior Circuit Judge,                                     ____________________                            and Gertner,* District Judge.                                          ______________                                 ____________________            Eugene M.  Van Loan, III with  whom Richard  Thorner and Wadleigh,            ________________________            ________________     _________        Starr, Peters, Dunn & Chiesa were on brief for appellants.        ____________________________            Thomas V.M. Linguanti with whom Gary  R. Allen, Jonathan S. Cohen,            _____________________           ______________  _________________        Attorneys, Tax  Division, Department  of Justice, Loretta  C. Argrett,                                                          ___________________        Assistant  Attorney  General,  and   Paul  M.  Gagnon,  United  States                                             ________________        Attorney, were on brief for appellee.                                 ____________________                                    July 12, 1996                                 ____________________                                    ____________________        *Of the District of Massachusetts, sitting by designation.                      ALDRICH, Senior Circuit Judge.   This case involves                               ____________________            the government's  familiar  income tax  principle  of  taxing            gains  in  the  sale  or   exchange  of  capital  assets  but            disallowing  deduction of  losses, except  against comparable            taxable gains.  See 26 U.S.C.   1211.  During the 1980s, Milo                            ___            Pike ("Taxpayer")  made substantial  purchases of stock  in a            number of New  England banks  with the intent  of creating  a            regional bank holding company, whose stock he could sell at a            profit.   Before  realizing  this goal,  however, the  shares            universally declined in value and, in 1989, he sold them at a            substantial loss.  He classified the loss as "capital" on his            1989 federal  tax return, which precluded  deduction in full.            See id.  In  this action to recover taxes  overpaid, Taxpayer            ___ __            claims  his  special  scheme   and  purpose  for  making  the            purchases   requires   that  the   stock  be   classified  as            "inventory,"  a non-capital asset  under 26 U.S.C.   1221(1),            entitling  him to full  deduction.  The  Commissioner did not            agree.  Nor did  the district court.   Taxpayer appeals.   We            affirm.                      Under    1221  of  the Revenue  Code  all  taxpayer            property not qualifying for  a specific exception, whether or            not held in connection with the taxpayer's trade or business,            is deemed capital.  Five "exclusive" categories are excepted,            Arkansas  Best Corp.  v. Commissioner,  485 U.S.  212, 217-18            ____________________     ____________            (1988), including                                         -2-                      (1)   Stock in  trade of the  taxpayer or                      other  property  of  a kind  which  would                      properly be included in the  inventory of                      the taxpayer  if on hand at  the close of                      the taxable year, or property held by the                      taxpayer primarily for sale  to customers                      in  the ordinary  course of his  trade or                      business.            26 U.S.C.   1221(1).  Taxpayer does not contend that the bank            shares  were "stock in trade,"  nor that he  was holding them            for sale to customers in the ordinary course of his business,            nor that  they can be  exempted under  any of the  other four            provisions of   1221.  He does not even claim that  the stock            was "inventory"  in the usual  sense.  He  nonetheless claims            that  summary  judgment  was  improper because  there  remain            unresolved  issues of material  fact as to  whether the stock            was  sufficiently "inventory-like"  to qualify  for exemption            from capital asset  status under the  above-quoted exception,            based on his intent in acquiring it.  We disagree.                      In  determining  whether  property   qualifies  for            exclusion from capital asset treatment, the Supreme Court has            indicated that a taxpayer's business purpose is relevant only                                                                     ____            in  the very  narrow circumstance  wherein an  otherwise non-            inventory asset may be regarded as a substitute for inventory                                                 __________            -- i.e., property acquired  in a "hedging  transaction[] that            [was]  an  integral  part of  a  business' inventory-purchase            system."    Arkansas Best,  485  U.S.  at 221-22  (explicitly                        _____________            narrowing  Corn Products  Refining Co.  v. Commissioner,  350                       ___________________________     ____________            U.S.  46,  52-53  (1955)).   Even  then  there  must be  some                                         -3-            objectively  demonstrable  nexus  to  an  "inventory-purchase            system,"  beyond the  taxpayer's subjective  intent.   Id. at                                                                   ___            221, 222.  In Arkansas Best,  the Court ruled that stock in a                          _____________            local bank  acquired  for  the  business-related  purpose  of            preserving the taxpayer's financial  reputation, id. at  215,                                                             ___            fell "outside the classes  of property excluded from capital-            asset status" under    1221, thus the  loss arising from  its            sale was "a  capital loss."   Id. at  223.  Here,  Taxpayer's                                          ___            project  was to  purchase enough  shares of stock  in certain            banks sufficient to obtain the ability to persuade management            to join in his  plan of forming the overall  holding company,            whose stock he would then sell.  He claims the bank stock was            the "raw material"  in his business  of building the  holding            company and, as such, qualifies for the inventory exception.                      Overall, Taxpayer was  simply seeking capital gains            by   an  intermediate  step   --  acquiring   enough  capital            investments,  that,  jointly,  might  be  converted  into new            assets.   His scheme was manifestly not a "hedge" integral to            protecting inventory or an  inventory-purchase system.   That            it involved work on his part and was necessary to his overall            business  plan does not change the basic picture.  His theory            that  the  building  blocks  of his  would-be  empire  should            qualify as  "inventory"  would allow  aspiring  entrepreneurs            significant influence over whether losses receive capital  or            ordinary treatment.   Id. at  222.  An  ordinary investor  in                                  ___                                         -4-            capital stock,  objectively not  entitled to take  losses not            offset  by gains,  could do so  if he could  show a business-            related  motive  to  realize  gains  through  conversion  and            disposition  of  those assets.    Such an  alluring  door for            escaping taxpayers was firmly locked in Arkansas Best.                                                    _____________                      Affirmed.                      ________                                         -5-
