The taxpayer, whose business was purchasing, refining and selling sugar, purchased 15,000 tons of raw sugar at elevated prices due to the outbreak of war. In an attempt to recoup part of the loss represented by these high prices, the taxpayer made short sales of sugar on a New York commodities exchange over the following month. The taxpayer’s president testified that these transaction were speculations (similar to share trades) and not hedges.
In finding that the gains of the taxpayer from closing out these transactions were profits from a trade under s. 3 of the Income War Tax Act, Locke J stated (at 711-712, SCR):
While not carried out contemporaneously with the purchases, the short sales were in effect a hedge by the company against a possible loss on the purchases made… . 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.