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A taxpayer's motivation in purchasing an asset is irrelevant to the question of whether the asset is "property held by a taxpayer whether or not connected with his business" and is thus within 26 U.S.C.S. § 1221's general definition of "capital asset." When the capital stock held by the taxpayer falls within the broad definition of the term "capital asset" in § 1221 and is outside the classes of property excluded from capital-asset status, the loss arising from the sale of the stock is a capital loss.
In 1968, a diversified holding company acquired about 65% of the stock of a bank. As a result of federal legislation enacted in 1970 pertaining to bank holding companies, in 1971 the holding company filed a notice of divestiture and began trying to sell its bank stock. Because the bank had made a series of bad loans, selling the bank stock proved difficult. While trying to sell its bank stock, the holding company, in response to the concerns of federal regulators that the bank was not adequately capitalized, bought additional shares of the bank's stock. By 1974, the holding company more than tripled the number of shares it owned in the bank, although its percentage interest remained relatively stable. In 1975, the holding company was finally able to sell most of its bank stock. On its federal income tax return for 1975, the holding company claimed a deduction for an ordinary loss resulting from the sale of the bank stock. The Commissioner of Internal Revenue disallowed the ordinary loss deduction, ruling that the loss incurred was a capital loss rather than an ordinary loss and was therefore subject to the capital loss limitations of the Internal Revenue Code. The holding company challenged this determination in the United States Tax Court, which held that bank stock purchased by the holding company through 1972 was purchased with a substantial investment purpose and was thus a "capital asset" within the meaning of 26 USCS 1221, so that, when sold, it gave rise to a capital loss, while bank stock purchased by the holding company after 1972 was held for a business purpose, without any substantial investment motive, and was thus an ordinary asset whose sale gave rise to an ordinary loss (83 TC 640). On appeal, the United States Court of Appeals for the Eighth Circuit reversed in part, holding that, regardless of the purpose for which it was acquired, all of the bank stock sold in 1975 (1) was included within the general definition of "capital asset" in 1221, (2) fell outside any of the specific statutory exceptions to this definition, and (3) was thus subject to capital-loss treatment (800 F2d 215).
Is bank stock purchased by holding company a "capital asset" under 26 USCS 1221, regardless of holding company's motivation in purchasing stock?
The Court evaluated the language of 26 U.S.C.S. § 1221 and concluded the broad definition of the term "capital asset" explicitly made irrelevant any consideration of the property's connection with the taxpayer's business. Concluding that petitioner's purpose in acquiring and holding the stock was irrelevant to the determination whether the stock was a capital asset, the Court affirmed the appeals court judgment.