The taxpayer was in the business of purchasing, refining and selling sugar. It did not normally engage in hedging transactions. However, on the outbreak of the Second World War, it faced price controls on the sale of its product but was required to purchase large quantities of sugar at a rapidly escalating spot price. In order to try to offset its anticipated losses from this situation, it made short sales of sugar future contracts on the applicable New York exchange, and realized gains when it closed out the contracts.
Locke J rejected a submission that "this was simply a speculation in raw sugar resulting in a capital profit such as might have resulted from a speculation in shares" and stated (at p. 604):
In trades where natural products are purchased in large quantities, hedging is a common, and in some cases, a necessary practice, and the cost of such operations in trades of this nature is properly allowable as an operating expense of the business. Where, as in the present case, the trader elects to close out his short sales and take a profit, this is, in my opinion, properly classified as profit from carrying on the trade.