Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 78-94

1978-1 C.B. 58

Sec. 165
Sec. 1221
Sec. 7805

IRS Headnote

Losses; ordinary v. capital; stock. A predominant business motive for the purchase of stock, purchased with both substantial business and investment motives, cannot preclude the stock from capital gain or loss treatment on the sale or exchange of the stock; Rev. Rul. 75-13 revoked.

Full Text

Rev. Rul. 78-94

The Internal Revenue Service has reconsidered Rev. Rul. 75-13, 1975-1 C.B. 67, because of the decisions by the United States Tax Court in W.W. Windle v. Commissioner, 65 T.C. 694 (1976), appeal dismissed, 550 F.2d 43 (1st Cir. 1977), and Bell Fibre Products Corporation, T.C. Memo 1977-42 (1977). Rev. Rul. 75-13 holds that the sale or exchange of shares of stock gives rise to capital gain or loss if investment is the predominant motive for purchasing and holding the stock; sale or exchange of shares of stock gives rise to ordinary gain or loss if business is the predominant motive for purchasing and holding the stock. In the Windle and Bell Fibre cases the court concluded that stock purchased with a substantial investment purpose is a capital asset even though there was a more substantial business motive for the purchase.

Revenue Ruling 75-13 is revoked since it is now the Service's position that even a predominant business motive cannot preclude the stock from capital gain or loss treatment, as long as there was a substantial investment motive for acquiring or holding the stock.

Pursuant to the authority of section 7805(b) of the Internal Revenue Code of 1954 this Revenue Ruling will not be applied adversely to taxpayers who acquired stock before March 13, 1978, if such stock is disposed of or becomes worthless before September 13, 1978. For a taxpayer who meets these conditions and wishes to receive the benefit of the Service's grant of section 7805(b) authority, the Service is free to contest the taxpayer's assertion that business rather than investment was the predominant motive for acquiring and holding the stock.