19 T.C. 246 (1952)
A membership seat on an exchange, used primarily for trading commodities, constitutes a capital asset for tax purposes, and any loss from its sale is subject to capital loss limitations.
Summary
Samuel Cummins purchased a seat on the New York Produce Exchange in 1928. He used it to trade commodities for his own account, saving on commissions. In 1943, after being expelled for failure to pay dues, he sold the seat for significantly less than he purchased it. Cummins claimed an ordinary loss on his income tax return, arguing the seat was not a capital asset. The Commissioner of Internal Revenue determined the loss was a capital loss, subject to limitations. The Tax Court sided with the Commissioner, holding that the exchange seat was a capital asset and the loss was subject to the limitations of Section 117(d)(2) of the Internal Revenue Code.
Facts
In 1928, Samuel Cummins purchased a seat on the New York Produce Exchange for $21,000. He primarily used the seat to trade commodities for his own account, benefiting from reduced commission fees. As a member, Cummins was subject to assessments for the benefit of deceased members’ families, exchange expenses, and amortization payments. Cummins was expelled from the exchange in November 1942 for failing to pay dues and death benefit assessments, and sold his seat in 1943 for $350.
Procedural History
Cummins deducted the loss from the sale of the exchange seat as an ordinary loss on his 1943 income tax return. The Commissioner of Internal Revenue determined that the loss was a long-term capital loss subject to the limitations of Section 117(d) of the Internal Revenue Code. Cummins petitioned the Tax Court, contesting the Commissioner’s determination.
Issue(s)
Whether the loss sustained by the petitioner from the sale of his exchange seat was an ordinary loss deductible in full, or a loss from the sale of a capital asset subject to the limitations imposed on capital losses by Section 117(d)(2) of the Internal Revenue Code.
Holding
No, because the exchange seat was a capital asset as defined by Section 117(a)(1) of the Internal Revenue Code and did not fall under any of the exceptions to that definition.
Court’s Reasoning
The court reasoned that under Section 117(a)(1) of the Internal Revenue Code, a capital asset includes all property held by a taxpayer, with certain exceptions. The court found that the exchange seat was not stock in trade or property held primarily for sale to customers. The court stated that although Cummins used the exchange seat in connection with his trade or business, it did not bring it within any of the exceptions listed in Section 117(a)(1) unless it was property of a character that is subject to the allowance for depreciation provided in Section 23(l), or real property used in his trade or business. The court noted that an exchange seat is intangible personal property and not real property. The court explained that intangible property must have a definitely limited useful life in the trade or business to be subject to depreciation. Because the use of the exchange seat in Cummins’s business was not definitely limited in duration, it did not qualify as property subject to depreciation and was therefore deemed a capital asset. The court also dismissed Cummins’ argument that the seat had become worthless, noting that he received $350 for it in 1943.
Practical Implications
This case clarifies the tax treatment of exchange seats, establishing them as capital assets rather than ordinary business assets. This means that losses from the sale of such seats are subject to capital loss limitations, potentially reducing the amount of the loss that can be deducted in a given tax year. Attorneys advising clients who trade on exchanges must consider this classification when planning for potential losses. The case also highlights the importance of demonstrating a definite useful life for an intangible asset to claim depreciation deductions. This ruling has implications beyond exchange seats, affecting the tax treatment of other similar membership interests or intangible assets used in a trade or business. Later cases would likely cite this to determine if an intangible asset is a capital asset or falls under one of the exceptions. The definition of a capital asset for tax purposes is broad, and this case demonstrates that even assets used in a trade or business can be considered capital assets if they don’t fall under specific exceptions in the tax code.