Haig Simmons v. Baltimore and Arundel Tax Collection Offices U.S. xxx (2014)
Facts about the taxpayer
Haig Simmons owns and manages an anthracite coal home and delivery service in Baltimore and Anne Arundel counties. She has realized that the demand for coal is lower during summer and higher and during winter. To ensure that her customers get regular supply of coal throughout the year, she has put in place measures to make certain that coal remains accessible and cheap regardless of the season. Through this, her clients can purchase the product in advance and pay for it later in the year. Recently, Simmons signed a contract to ensure that she gets stable, consistent, and cost effective supply of coal and cushion herself against price fluctuations in the future. In the pact, she specified that the contract would enable her to secure the supply of the product and to cushion her business from losses. Equally, the contract indicated that she did not aim to increase her profits from the agreements. A few months after signing the contract, her business began to experience losses because of the pending deal.
- Should Simmons classify her losses as ordinary or capital?
- Should Simmons classify her assets as operating or as capital?
Analysis code section
In the past, efforts have been made to identify between the taxation of capital earnings and ordinary earnings (Escoffier & Fortin, 2008). According to US Code – Section 1221, capital assets are identified as properties that are traded, substituted, or otherwise predisposed of by a taxpayer (Hoffman, 2013). The section exempts the following things from being referred to as capital assets:
- Stockpile in trade that can be incorporated into the taxpayer’s inventory
- Possessions held by a taxpayer for the purpose of trade.
- A patent, a literary, a song, or creative work of art, or comparable possessions held by a taxpayer whose labors led to the establishments of the works.
- Financial records or annotations receivable accrued from trade or business for service provided or from the auctioned possessions contained in the inventory.
- The USA’s government periodical obtained by a taxpayer for free or below its public price from the government.
- Any miscellaneous class of property
Conversely, operating assets are classified based on enumeration (Hoffman, 2013). As such, they refer to all properties exempted from being classified as capital assets. The properties are indicated above.
Based on the above illustrations, capital losses are accrued when the selling price of a capital asset is lower that the buying price (Escoffier & Fortin, 2008). On the other hand, ordinary losses are experienced when tax deductions are higher than taxable incomes. Therefore, ordinary losses can be generalized as losses accrued by a business from its daily activities (Escoffier & Fortin, 2008).
In this situation, it is apparent that the losses accrued by Simmons were capital losses. In the contract, Simmons indicated that her intentions of entering into the agreement were not to increase her profits. Therefore, this clause eliminates the property being covered by the contract from being considered as operating assets. As such, operating assets are all the possessions held by the taxpayer for the purpose of trade of business and ultimately profits. Therefore, her losses are fit to be classified as capital losses (Escoffier & Fortin, 2008).
Escoffier, S., & Fortin, K. (2008). Taxation for decision makers. Upper Saddle River, NJ: Pearson Prentice Hall.
Hoffman, W. (2013). South-Western Federal Taxation: Individual Income Taxes. Nashville: South-Western.