T.C. Mem o. 2 01 4- 33

UNITED STAT ES TAX COURT

FARIB ORZ ASSADERAGHI AND MIAO-FEN LIN, Peti ti on ers v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 76 77 -1 2. File d F eb ru ary 25 , 20 14
.
Mark R . She ph erdan d Kri st in R. W u, fo r pe ti ti on ers . Kael yn J . Rom ey , forres po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION MARVEL, Ju dg e: Res po nd en t d et erm in edde fic ie nc ie s o f $1 14 ,65 0 a nd $6 ,26 9 i n p et it io ne rs ’ Fed eral in co m e ta x fo r 20 08 an d 2 00 9, re sp ect iv el y , and
accu racy-rela te d p en al ti es un de r se ct io n 6 66 2( a) of $ 22 ,93 0 a nd$1 ,25 4 fo r 20 08 1
Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o the Int ern al 1 (co nt in ue d...)- 2 -

[* 2] an d 2 00 9, re sp ect iv el y . After c on ces si on s, th e is su es forde ci si on are: (1) 2 whe th er p et it io ne r hu sb an d F ari bo rz As sa de rag hi was atra de r insec ur it ie s dur in g 3 20 08 an d 2 00 9; an d (2 ) if so , whet he r pe ti ti on ers m ad e a t im el y an d e ffec ti ve m ark -to -m ark etacco un ti ng m etho d e le ct io n p ur su an t t o s ect io n 4 75 (f). 4

(...co nt inue d) 1 Rev enue Co de ineffe ctforth e y ears at i ss ue , andall Ru le refe ren ces are t o the Tax Co urt Ru le s o f Prac ti ce an d P ro cedur e. All m on et ary am ou nt s ar e ro un de d t o th e n eare stdo ll ar. Res po nd en t co nc ed es th atpe ti ti on ers are n otli ab le forth e acc ur acy-rela te d 2 pe na lty un de r se c. 66 62 (a) fo r ei th er o f th e y ears at i ss ue . Peti ti on ers co nc ed e th at th ey rece iv edin te res t i nc om e o f $1 ,90 1 i n 2 00 8. W e u se th e te rm

“ tra de r” t o re fer t o atax pa y er wh o, as di sc us se d b el ow, 3 en ga ge s i n atra de or b us in es s wi th in th e m ean in g o f se c. 16 2( a) o f se ll in g se cu rit ie s fo r hi s o r he r own acco un t. Inth ei r pe ti ti on , pet it io ne rs alt ern at iv el y co nt en d tha t i f Mr. As sa de rag hi 4 was anin ve st oran d n ota tr ad er dur in g the y ears at i ss ue , res po nd en t fa il edto al lo w deduc ti on s fo r or di na ry an d n eces sa ry

ex pe ns es pa idor i nc urreddu rin g the ta xabl e y ear f

orth e p ro du ct io n o r co ll ect io n o f in co m e. See s ec. 2 12 (1 ). The ex pe ns es of a n i nv es to r th atothe rwis e sa ti sf y th e requi rem en ts of s ec. 2 12 are de du ct ib le un de r th atsec ti on as i te m iz edde du ct io ns th atare s ub ject t o the 2% flo orim po se d b y sec . 67 (a). Sec . 16 3( d) als o l im it s the de du ct ib il ity of i nv es tm en t in te res t. See End ic ot t v . Comm is si on er, T.C. Mem o. 2 01 3- 19 9. Res po nd en t s ta te s tha t the ad jus tm en t t o p et it io ne rs ’ se c. 21 2 d educ ti on s i s co m pu ta ti on al an d d oe s n otad dr es s thi s i ss ue onbri ef. Pet it io ne rs als o d o n ot di sc us s the ir s ec. 2 12 de du ct io ns on bri ef. W e n eedno t ad dr es s thi s i ss ue furth er.- 3 -

[* 3] FINDINGS OF FACT So m e o f th e fac ts ha ve be enst ip ul at edan d a re s o fo un d. Th e st ip ul at io ns of fact s ar e in co rp or at edhe rei n b y th is refer en ce. Pet it io ne rs res id edinCal ifo rn ia whe n the y

pe ti ti on edth is Co urt. I. Bac kg ro un d Mr. As sa de rag hi ho ld s an un de rg radua te de gr ee fr om SanDieg o S ta te Uni ve rs ity

an d a n M .S. an d aPh .D. inele ctric al en gi ne eri ng an d c om pu te r sc ie nc e fro m th e Uni ve rs ity

of C al ifo rn iaat B erk el ey . His p rimary ba ck gr ou ndis in ph y si cs an d m athe m at ic s. Dur in g the y ears at i ss ue Mr. Ass ad erag hi was the vi ce p res id en t o f
en gi ne eri ng at S iTi m e, In c. (Si Tim e), wh ere h is an nu al sal ary in 20 08 was $2 30 ,00 0. He ty

pi cal ly beg anhi s wo rk da y at S iTi m e b etween9: 30 an d 1 0 a .m . 5
an d fi ni sh edhi s wo rk da y be twee n 7 :3 0 a nd8 p .m . He als o wo rk edweek en ds an d la te ho ur s as ne ces sa ry

to co m pl et e Si Tim e p ro

jects
. Thro ug h F eb ru ary 20 08 Mr. Ass ad erag hi was the en gi ne eri ng di rect orat 5 Ram bu s, In c. He was h ire d b y SiTi m e in Feb ru ary 20 08 . By th e ti m e Mr. Ass ad erag hi lef

t Si Tim e in 20 12 , he was th e v ic e p res id en t o f bo th en gi ne eri ng an d o pe rat io ns . Si Tim e was a sm al l s tartup t ech co m pa ny in S il ic on Vall ey

th atbe gan op erat io ns in20 05 m anuf actur in g m ic ro el ectro m ech an ic al syste m s. Itha d be twee n 5 0 a nd70 em

pl oyees dur in g the ti m e o f Mr. As sa de rag hi ’s em pl oym en t. Of th os e em

pl oyees, ap pr ox im at el y

20 rep orte d t o M r. Ass ad erag hi
.- 4 -

[* 4] II. Secu rit ie s Trans act io ns Mr. As sa de rag hi be ga n b uyin g a ndsel li ng sec ur it ie s i n 1 99 4. In19 95 he be ga n trad in g o pt io ns . His t rad in g i nc reas edfro m fewer tha n 1 00 tra de s i n 2 00 5 to 53 5 trad es in20 08
. He m ad e 1 80 tra de s i n 2 00 9. Of tho se tra de s, 2 14 in20 08 6
an d 3 4 i n 2 00 9 wer e tr ad es of the same secu rit y du rin g the same m ark etda y (s am e-d ay

tra de s)
. Thu s, 4 0% o f Mr. As sa de rag hi ’s tra de s wer e sa m e-d ay tra de s 7 in 20 08 an d 1 9% wer e sa m e-d ay tra de s i n 2 00 9. 8 Dur in g 2 00 8 a nd20 09 Mr. Ass ad erag hi tra de d thr ou gh anin ve stm en t acco un t tha t h e m ai nt ai ne d at Fi de li ty Brok erag e (Fi de li ty). H e tr ad edona m arg in
acco un t wi th Fid el ity , andhi s trad es in cl ud edsec ur ity sal es , cal l an d p utop ti on s, an d s ho rt s al es . To ex ecu te hi s trad es he us eda so ftwa re p ro gr am cal le d F id el ity Acti ve Trad er Pro (Act iv e Trad er Pro ). He in st al le d andus edActi ve Trad er Pro
on bo th hi s wo rkan d h om e co m pu te rs .

Mr. As sa de rag hi est im at edth athe m ad e 6 00 tra de s i n 2 00 7. 6 The pu rch as e an d s al e o f th e sa m e se cu rity du rin g the same m ark etda y is 7 al so kn own as a“ ro un d trip ” d ay tra de . Mr. Ass ad erag hi ’s 21 4 s am e-d ay tra de s i n 20 08 an d 3 4 s am e-d ay

tra de s i n 2 00 9 a re the equi va le ntof 1 07 an d 1 7 ro un d trip tra de s i n 2 00 8 and20 09 , res pe ct iv el y . The pa rti es di sa gr ee o n the ho ld in g p eri odforMr. Ass ad erag hi ’s tra de s tha t 8 were n otsame-day trad es . See i nf ra p p. 1 7- 18
.- 5 -

[* 5] Mr. As sa de rag hi ex ecu te d trad es on15 4 d ay s i n 2 00 8 a nd94 da y s i n 2 00 9. 9 Mo re tha n h al f of

th e 5 35 tra de s m ad e in 20 08 were ex ecu te d i n J anua ry , Ju ne , and Ju ly. He tra de d o n fe wer tha n 1 0 d ay s i n the m on th s o f Feb ru ary, Aug us t, an d Octo be r 20 08 an d o n fe wer than 1 0 d ay s i n e ach m on th fro m Jan ua ry th ro ug h J un e 20 09 . Mr. Ass ad erag hi m ad e zer o trad es inFeb ru ary 20 09
. Mr. As sa de rag hi ge ne ral ly m on it or edan d trad edbe twee n 2 0 a nd30 di ffer en t s to ck s an d o pt io ns . To an al yze m ark ettre nd s h e res earc he d 9 -d ay an d 26 -d ay m ark etin di cat or s an d u se d t ech ni cal to ol s s uc h a s s to ckop ti on pri ci ng , m ov in g a ve rag e co nv erg en ce d iv erg en ce, an d e xp on en ti al m ov in g a ve rag es an d lo ok edforov ers ol d a ndov erb ou gh t co nd it io ns . 1 0

Pet it io ne rs co nt en d tha t M r. Ass ad erag hi ex ecu te d trad es on 15 6 d ay s i n 9 20 08 an d 1 02 da y s i n 2 00 9. Pe ti ti on ers m ak e n o c it at io n o f th e rec or d t o s up po rt th ei r co nt en ti on s re ga rd in g M r. Ass ad erag hi ’s freque nc y of t rad in g, s ee Ru le 15 1( e)(3 ), an d we c an no t fi ndan y pe rs ua si ve ev id en ce i n the reco rdto supp ort pe ti ti on ers ’ co nt en ti on s. Mr. As sa de rag hi di d n otreco rdor l og hi s t im e tr ad in g s ecu rit ie s. He 1 0 te st ifi ed , ho wev er, tha t h e sp en t a s ig ni fic an t am ou ntof t im e eac h wo rk da y an d ap pr ox im at el y

15 ho ur s ea chweek en d trad in g, s tu dyin g, an d a na lyzin g the m ark et by, am on g o th er thi ng s, re ad in g the W al l St reetJo urna l an d wat ch in g m ark et an al y si s o n t el ev is io n. We do no t fi ndMr. Ass ad erag hi ’s cla im s re gard in g h is ti m e sp en t trad in g c red ib le , parti cu larly in t he li gh t o f hi s wo rkco m m it m en ts at Si Tim e. Neve rth el es s, ev enif M r. Ass ad erag hi ’s est im at e o f hi s t im e sp en t tra di ng was c red ib le an d s ub st an ti at ed , itwou ldno t al te r ou r co nc lu si on th athe was no t i n the tra de or b us in es s o f tr ad in g s ecurit ie s wi th inth e m ean in g o f se c. 16 2( a).- 6 -

[* 6] III. Pet it io ne rs ’ Tax Rep orti ng an d the Not ic e o f Defi ci en cy Pet it io ne rs rep orte d the ir g ai ns an d l os se s fr om Mr. Ass ad erag hi ’s sec ur it ie s tra ns act io ns as c ap it al ga in s an d l os se s o n e ach of t he ir 1 99 4 thr ou gh 20 06 Fed eral in co m e ta x re tu rn s. In20 08 pe ti ti on ers en ga ge d Leo Ro si , a cert ifi edpubl ic
acco un tant , to pre pa re the ir 2 00 7 F ed eral in co m e ta x re tu rn . Mr. Ro si
subs eque nt ly prep aredpe ti ti on ers ’ 20 08 an d 2 00 9 F ed eral in co m e ta x re tu rn s an d
anam en de d re tu rnfor20 06 . In J anua ry 20 08 be fo re fi li ng pe ti ti on ers ’ 20 07 Fed eral in co m e ta x re tu rn , Mr. Ass ad erag hi em ai le d M r. Ro si to in qu ire ab ou t de cl ari ng tra de r st atus an d u si ng th e m ark -to -m ark etm etho d o f acc ou nt in g. Mr . Ro si di d n otres po ndto Mr. Ass ad erag hi ’s in qu iry. Mr. Ro si lac ke d e xp ert is e an d e xp eri en ce i n fi li ng in co m e ta x re turn s fo r se cu rit ie s trad ers an d was un fam il iar with h ow t o re po rt m ark -to -m ark et acco un ti ng . Beg in ni ng in20 07 an d wi th ou t m ak in g am ark -to -m ark etele ct io n, pe ti ti on ers rep orte d the ir g ai ns an d l os se s fr om Mr. Ass ad erag hi ’s sec ur it ie s tra ns act io ns as o rd in ary in co m e an d l os s o n aSch edul e C, Pro fitor Lo ss Fro m Bu si ne ss , att ach edto th ei r Fo rm 10 40 , U.S. Ind iv idua l In co m e Tax Return. 1 1

Pet it io ne rs als o fi le d a20 06 Fo rm 10 40 X, Am en de d U.S. In di vi du al 1 1 In co m e Tax Return, t o a m en d the ir o rig in al 20 06 return a ndrep ort the ir s ecu rit y lo ss es as o rd in ary lo ss es on Sch edul e C.- 7 -

[* 7] Pet it io ne rs fil edFo rm s 1 04 0 fo r 20 08 an d 2 00 9. Pet it io ne rs rep orte d g ro ss 1 2
rece ip ts fro m

sec ur it ie s trad in g o f $2 ,65 9,6 96 an d $ 34 9,9 91 for 20 08 an d 2 00 9,
res pe ct iv el y . They cl ai m edde du ct io ns forbu si ne ss lo ss es on th ei r Sch edul es C fro m th e sa le of s ecu rit ie s o f $3 74 ,00 8 a nd$1 9,2 89 for20 08 an d 2 00 9,
res pe ct iv el y . Pet it io ne rs de sc rib edth ei r “ Pri nc ip al bu si ne ss or p ro fes si on ” o n

1 3 each Sch edul e C as “ Secu rit ie s Tra de r”. Pet it io ne rs di d n otfil e a s ect io n 4 75 (f) m ark -to -m ark etele ct io n wi th th ei r 20 07 , 20 08 , or 2 00 9 F orm 10 40 . Ind eed , Mr. Ro si an d M r. Ass ad erag hi fir st le arn edof t he requi rem en ts of s ect io n 4 75 (f) i n 2 01 1 dur in g re sp on de nt ’s aud itof pe ti ti on ers ’ returns . Sub se qu en tl y pe ti ti on ers fil edanam en de d F orm 10 40 X for 20 07 an d a tt ach eda “pr ot ect iv e” m ark -to -m ark etele ct io n p ur su an t t o s ect io n 47 5( f). On J anua ry

4, 2 01 2, re sp on de ntis su edto pe ti ti on ers th e n ot ic e o f de fic ie nc y . Res po nd en t d et erm in edth atMr. Ass ad erag hi was n ota tr ad er an d tha t pe ti ti on ers ha d s us ta in edsh ort-t erm an d l on g- te rm

sec ur it ie s l os se s fo r 20 08 of

Pet it io ne rs rep orte d wag e in co m e o n F orm s 1 04 0 o f $7 04 ,60 1 a nd 1 2 $2 97 ,86 9 fo r 20 08 an d 2 00 9, re sp ect iv el y . Mr. Ro si pre pa redan d fi le d p et it io ne rs ’ in co m e ta x re tu rn s u si ng Sch edul e 1 3 C in a m an ne r si m il ar t o h ow h e an al yzedan d p rep aredreturns forothe r cl ie nt bu si ne ss act iv ity .- 8 -

[* 8] $2 60 ,39 4 and$5 9,3 22 , res pe ct iv el y , andsh ort-t erm an d l on g- te rm

sec ur it ie s lo ss es for20 09 of $ 19 ,76 6 a nd$4 8,1 39 , res pe ct iv el y . OPINION I. Bu rd enof P ro of Ord in ari ly, th e Co m

m is si on er’s d et erm in at io ns ina no ti ce o f de fic ie nc y are pr es um edco rrec t, an d the tax pa y er b ears th e b ur de n o f pr ov in g tha t the de te rm in at io ns are erro ne ou s. Ru le 14 2( a); W el chv. Hel ve rin g, 2 90 U.S. 11 1, 11 5 (1 93 3) . The b ur de n o f pr oo f sh ift s t o the Co m m is si on er, h owe ve r, if t he ta xp ay er p ro du ces cred ib le ev id en ce t o s up po rt t he de du ct io n o r po si ti on , th e ta xp ay er co m

pl ie d wi th th e subs tant ia ti on requi rem en ts , andth e ta xp ay er co op erat edwith the Secr et ary with re ga rdto all reas on ab le reque st s fo r 1 4 in fo rm at io n. Se c. 74 91 (a); see als o Hi gb ee v . Commis si on er, 1 16 T.C. 43 8, 4 40
- 44 1 (2 00 1)
. Pet it io ne rs do no t as se rt n orha ve th ey pro ve n tha t the y

are en ti tl edto a sh ift in th e b ur de n o f pr oo f un de r se ct io n 7 49 1( a)(1 ). Acco rd in gl y , pet it io ne rs be ar the bu rd enof p ro of

with re sp ectto res po nd en t’s d efi ci en cy de te rm in at io n.

The term “ Secr et ary” m ean s the Secr et ary of th e Treas ury

or h is de le ga te . 1 4 Sec. 7 70 1( a)(1 1) (B).- 9 -

[* 9] II. Purch as es an d S al es of S ecu rit ie s A. Trad er o r In ve st or Sect io n 1 65 ge ne ral ly allo ws a d educ ti on foran y lo ss su st ai ne d dur in g the ta xabl e y ear t ha t i s n otco m pe ns at edby ins ur an ce o r ot he rwis e. Howev er, s ect io n 16 5( f) p ro vi de s tha t l os se s fr om sal es or e xc hang es of c ap it al ass et s ar e al lo wed
on ly to the ex te ntall owe d u nd er s ect io ns 12 11 an d 1 21 2. Se ct io n 1 21 1( b) li m it s th e al lo wan ce o f su chlo ss es to th e ex te ntof g ai ns fro m su chsal es or e xc ha ng es , pl us th e lo wer o f (1 ) $3 ,00 0 ($ 1,5 00 inth e cas e o f a m arri edin di vi du al fil in g a se pa rat e return) or ( 2) th e ex ces s o f su chlo ss es ov er s uc h g ai ns . Sect io n 1 22 1 d efi ne s a c ap it al ass etas a ny pro pe rty hel d b y th e ta xp ay er, whe th er o r no t co nn ect edwith h is tra de or b us in es s. Sec ti on 12 21 (a)( 1) crea te s an ex cep ti on to th e d efi ni ti on of acap it al ass et :

(1 ) st oc k i n trad e o f th e ta xp ay er o r ot he r pr op erty of aki nd whi chwou ldpro pe rly be i nc lu de d i n the in ve nt ory of t he tax pa y er i f on ha ndat the clo se of t he tax ab le y ear, o r pr op erty he ldby the ta xp ay er p rimaril y

forsal e to cu st om ers inth e o rd in ary co ur se of h is tra de or b us in es s * * * Acco rd in gl y , tax pa y ers who are n otde al ers insec ur it ie s g en eral ly recog ni ze cap it al ga in or l os s upo n the sal e o r ex ch an ge of t he ir s ecu rit ie s, ra th er tha n or di na ry ga in s o r lo ss es .- 10 -

[* 10 ] If a t ax pa y er i s n ota de al er b utis en ga ge d i n b us in es s as a se cu rit ie s trad er, se ct io n 4 75 (f) al lo ws the tax pay er t o e le ctth e m ark -to -m ark etm etho d o f
acco un ti ng forsec ur it ie s h el d i n h is or h er b us in es s. Und er the m ark -to -m ark et 1 5
m etho d o f acc ou nt in g atra de r ge ne ral ly recog ni zes at the en d o f th e y ear o rd in ary ga in or l os s o n a ll sec ur it ie s h el d i n the bu si ne ss as i f th e se cu rit ie s wer e so ldat th e en d o f th e y ear f

or fai r m ark etva lu e. Sec. 4 75 (d )(3 )(A), (f) (1 )(A)(i ); Kn is h v
. Co m m is si on er, T.C. Mem o. 2 00 6- 26 8; Lehr er v . Comm is si on er, T.C. Mem o. 20 05 -1 67 , aff’d, 2 79 Fed . App x. 5 49 (9t h C ir. 2 00 8) . Whe re the tra de r ha s n ot
m ad e a p ro pe r el ect io n, the lo ss es are treat edas c ap it al lo ss es an d a re d educ ti bl e on ly to the ex te ntof c ap it al ga in s p lu s $ 3,0 00 . Secs . 16 5( a), (c) , (f), 1 21 1( b) (1 ); Kni shv. Co m

m is si on er, T.C. Mem o. 2 00 6- 26 8. Acco rd in gl y , th e p ro pe r ta xa ti on of g ai ns an d l os se s fr om a ta xp ay er’s
se cu rit ie s ac ti vi ty dep en ds on whet he r he or s he is a de al er, a tr ad er, o r an 1 6 in ve st or . See Est at e o f Yaeg er v . Comm is si on er, 8 89 F.2d29 , 33 (2dCir . 19 89 ), On Fe br ua ry 16 , 19 99 , th e In te rn al Rev enue Serv ic e p ub li sh edRev . Pro c. 1 5 99 -1 7, 1 99 9- 1 C .B. 50 3 (s ec. 6 supe rs ed edby Rev. Pro c. 99 -4 9, 1 99 9- 2 C .B. 72 5, whi chwas c larif

ie d, m od ifi ed , am

pl ifi ed , andsupe rs ed edby Rev. Pro c. 20 02 -9 , 20 02 -1 C.B. 3 27 ). Duri ng th e y ears at i ss ue Rev . Pro c. 99 -1 7, s up ra, as m od ifi ed , pr ov id edth e ex cl us iv e p ro cedur e fo r tr ad ers insec ur it ie s t o m ak e anele ct io n t o us e th e m ark -to -m ark etm etho d o f acc ou nt in g u nd er s ec. 4 75 (f). Neit he r party ass ert s tha t M r. Ass ad erag hi was ade al er i n s ecurit ie s dur in g 1 6 th e y ears at i ss ue .- 11 -

[* 11 ] aff’g i n p art , rev ’g inpa rt o n a no th er i ss ue an d re m an di ng T.C. Mem o. 19 88 -2 64 ; Ki ng v. Co m

m is si on er, 8 9 T.C. 4 45 , 45 8- 45 9 (1 98 7) . Peti ti on ers co nt en d tha t M r. Ass ad erag hi was atra de r in 20 08 an d 2 00 9, wh il e res po nd en t co nt en ds he was an i nv es to r. Gen eral ly, tra de rs are en ga ge d i n the tra de or b us in es s o f se ll in g s ecu rit ie s fo r th ei r own acco un t. See Kin g v . Comm is si on er, 8 9 T.C. at45 7- 45 8. Al th ou gh in ve st or s al so bu y

an d s el l s ecu rit ie s fo r th ei r own acco un t, the y are n ot co ns id eredto be inth e tr ad e o r bu si ne ss of s el li ng sec ur it ie s. See Kay v. Co m m is si on er, T.C. Mem o. 2 01 1- 15 9; Arbe rg v. Co m mis si on er, T.C. Mem o. 20 07 -2 44 . Unl ik e anin ve st or ’s exp en se s, a trad er’s ex pe ns es are d educ te d i n de te rm in in g a dju st edgro ss in co m e rat he r th anbe in g re po rte d a s i te m iz ed
ex pe ns es . See, e.g ., Kay

v. Co m m is si on er, T.C. Mem o. 2 01 1- 15 9. Whethe r a ta xp ay er’s act iv it ie s co ns ti tu te a tr ad e o r bu si ne ss is a qu es ti on of f act . See Hig gi ns v. Co m

m is si on er, 3 12 U.S. 21 2, 2 17 (19 41 ). Indi st in gu is hi ng a tr ad er fro m anin ve st or , cou rts co ns id er the fol lo win g no ne xc lu si ve fact or s: (1) th e ta xp ay er’s i nt en t, (2 ) th e n atur e o f th e in co m e to be de riv edfro m

th e act iv ity , and(3) th e freque nc y , ext en t, an d re gu larit y of t he ta xp ay er’s s ecu rit ie s tran sa ct io ns . See Pu rv is v. Co m m is si on er, 5 30 F.2d13 32 , 13 34 (9t h C ir. 1 97 6) , aff’g T.C. Mem o. 1 97 4- 16 4. In de ed , a tax pa y er’s trad in g- 12 -

[* 12 ] act iv ity

m us t b e “ freque nt , reg ul ar, an d c on ti nu ou s t o b e co ns id eredpa rt o f a tra de or b us in es s. * * * Sp or ad ic tra di ng do es no t co ns ti tu te a tr ad e o r bu si ne ss .” Bo atne r v. C ommis si on er, T.C. Mem o. 1 99 7- 37 9, af f’d witho utpubl is he d o pi ni on , 16 4 F .3d62 9 (9 thCir . 19 98 ). The C ou rt o f App eal s fo r th e Nin thCir cu it , to whi chanap pe al inth is cas e wou ldli e ab se nta st ip ul at io n t o the co nt rary, see s ec. 74 82 (b )(1 )(A), (2 ), ha s d is ti ng ui sh edtra de rs fro m in ve st or s b y

st at in g tha t “ ‘[i]n a tra di ng acco un t, s ecurit ie s ar e b ou gh t an d s ol d wi th reas on ab le freque nc y inan en de av orto cat chth e swi ng s i n the da il y m ark etm ov em en ts an d p ro fitth ereb y on a sh ort t erm

ba si s.”’, Purvi s v . Comm is si on er, 5 30 F.2dat 1 33 4 (quo ti ng Lian g v . Co m m is si on er, 2 3 T.C. 1 04 0, 1 04 3 (1 95 5) ). Inv es to rs ge ne ral ly deri ve pro fitfro m in te res t p aym en ts , di vi de nd s, an d c ap it al ap pr eci at io n o f se cu rit ie s. Est at e o f Yaeg er v . Comm is si on er, 8 89 F.2dat 3 3. Trad ers , onth e o th er h an d, b uy andsel l
se cu rit ie s wi th reas on ab le freque nc y with the pu rp os e o f cat ch in g the swi ng s i n th e d ai ly m ark etm ov em en ts an d p ro fit in g o n ash ort-t erm ba si s. Id
. A tax pa y er’s trad in g a ct iv it ie s co ns ti tu te a tr ad e o r bu si ne ss withi n the
m ean in g o f se ct io n 1 62 (a) wh ere b ot h o f th e fo ll owi ng requi rem en ts are s at is fie d: (1 ) th e ta xp ay er’s trad in g i s s ub st an ti al , and(2) th e ta xp ay er s eek s t o c at chth e swi ng s i n the da il y

m ark etm ov em en ts an d t o p ro fitfro m th os e sh ort-t erm

ch an ge s rathe r th anto pro fitfro m th e lo ng -te rm

ho ld in g o f in ve st m en ts . See, e.g ., May er- 13 -

[* 13 ] v. Co m

m is si on er, T.C. Mem o. 1 99 4- 20 9. Inde te rm in in g wh ethe r a ta xp ay er’s trad in g a ct iv ity is subs tant ia l, we co ns id er the nu m be r of tra de s ex ecu te d i n ay ear, the am ou ntof m on ey in vo lv edinth os e tr ad es , andth e num be r of da y s o n wh ic h trad es were ex ecu te d. Se e Nel so n v . Comm is si on er, T.C. Mem o. 20 13 -2 59 ; En di co ttv. Co m m is si on er, T.C. Mem o. 2 01 3- 19 9. W ith re sp ectto th e num

be r of tra de s ex ecu te d e ach y ear a ndth e am ou ntof
m on ey in vo lv edinth e tr ad es , Mr. Ass ad erag hi ex ecu te d 5 35 tra de s i n 2 00 8 a nd 18 0 trad es in20 09 . He hadgro ss rece ip ts fro m sec ur it ie s s al es in20 08 of $2 ,65 9,6 96 an d i n 2 00 9 o f $3 49 ,99 1. InNels on , th ere wer e 5 35 tra de s ex ecu te d o n the tax pa y er’s i nv es tm en t acco un t dur in g the tax y ear. Th e ta xp ay er fa il edto m eethe r bu rd enof
es tabl is hi ng ho w m an y

of t ho se 53 5 trad es were ex ecu te d b y he r an d n ota th ird pa rty with acce ss to th e acc ou nt . Neverth el es s, we s ta te d tha t ev enif the tax pa y er ex ecu te d a ll 53 5 trad es , hertra di ng act iv ity was n otsubs tant ia l. In En di co tt , 1 7 we he ldth at20 4 trad es an d 3 03 tra de s wer e n otsubs tant ia l an d tha t 1 ,54 3 tra de s wer e subs tant ia l. See als o Van de r Lee v . Comm is si on er, T.C. The tax pa y er i n Nel so n v . Commis si on er, T.C. Mem o. 2 01 3- 25 9, m ad e 1 7 pu rch as es of app ro xi m at el y $3 2.5 m il li on an d s al es of app ro xi m at el y $3 2.9 m il li on durin g the tax y ear. We ackno wled ge d tha t the pu rch as e an d s al e am ou nt s were co ns id erab le , bu t s ta te d tha t “ th os e am ount s ar e n otde te rm in at iv e o f whe th er pe ti ti on er’s s ecu rit ie s trad in g a ct iv ity was s ub st an ti al ”. Id
.- 14 -

[* 14 ] Mem o. 2 01 1- 23 4 (h ol di ng th at18 9 trad es were n otsubs tant ia l), a ff’d, 5 01 Fed . App x. 3 0 (2 d C ir. 2 01 2) ; Kay v. Commis si on er, T.C. Mem o. 2 01 1- 15 9 (h ol di ng th at31 3 trad es were n otsubs tant ia l); Hol si ng er v . Commis si on er, T.C. Mem o. 2 00 8- 19 1 (f

in di ng 28 9 trad es with a gg reg at e sa le s o f $7 54 ,27 7 i n o ne y ear, an d 3 72 tra de s i n asubs eque nty ear, wer e n otsubs tant ia l); cf. Mayer v. Co m m is si on er, T.C. Mem o. 1 99 4- 20 9 (h ol di ng th at1,1 36 tra de s wi th gro ss pr oc eed s o f ne arl y

$1 5 m il li on inon e y ear wer e subs tant ia l). We con cl ud e th at Mr. As sa de rag hi ’s to ta l num be r of tra de s an d the am ou ntof m on ey in vo lv edin th os e tr ad es durin g 2 00 8 and20 09 were n otsubs tant ia l. Mr. As sa de rag hi als o d idno t trad e wit h s uf fic ie ntfreque nc y

to qu al ify as a tra de r. “ Inth e cas es inwhi chtax pa y ers ha ve be enhe ldto be tra de rs insec ur it ie s, th e num be r an d fr eque nc y

of t ran sa ct io ns in di cat edth atth ey were en ga ge d i n m ark ettra ns act io ns alm os t d ai ly for a s ub st an ti al an d c on ti nu ou s p eri od , gen eral ly
ex ceed in g asi ng le tax ab le y ear; an d tho se act iv it ie s co ns ti tu te d the tax pa y ers ’ so le
orpri m ary in co m e-p ro du ci ng act iv ity .” Ch env. Co m m is si on er, T.C. Mem o. 20 04 -1 32 , 20 04 WL 11 94 62 5, at*4 (ci ti ng Levi n v . Uni te d S ta te s, 5 97 F.2d76 0 (Ct . Cl. 1 97 9) , andFu ldv. Co m m is si on er, 1 39 F.2d46 5 (2 d C ir. 1 94 3) , aff’g 4 4 B.T.A. 12 68 (19 41 )). Co nv ers el y , wher e th e ta xp ay er’s d ai ly trad in g a ct iv it ie s co ve redon ly a po rti on of t he y ear a ndsec ur it ie s trad in g was no t the so le or e ve n- 15 -

[* 15 ] pr im ary in co m e-p ro du ci ng act iv ity , tra de r st atus was d en ie d. Se e id . (ci ti ng Pao li v. Co m

m is si on er, T.C. Mem o. 1 99 1- 35 1) . Ind eed , dai ly trad in g i n s ecu rit ie s fo r a p orti on of t he tax ab le y ear m ay be reas on ab ly chara ct eri zedas “ sp or ad ic ” rathe r th an“ freque nt , reg ul ar, an d c on ti nu ou s” , andth eref or e in su ffi ci en t t o ach ie ve tra de r st atus . Id. (ci ti ng Bo atne r v. C omm is si on er, T.C. Mem o. 1 99 7- 23 7,
an d C omm is si on er v . Groe tz in ge r, 48 0 U.S. 2 3, 3 5 (1 98 7) ). Mr. As sa de rag hi ex ecu te d trad es on15 4 d ay s i n 2 00 8 a nd94 da y s i n 2 00 9. InHol si ng er, we h el d tha t ex ecu ti ng tra de s o n 1 10 da y s was no t fr eque nt , co nt in uo us , or re gu lar en ou gh to co ns ti tu te a tr ad e o r bu si ne ss . Mor eo ve r, of th e 53 5 trad es in20 08 , m or e th anha lf o ccu rreddurin g the m on th s o f Ja nu ary, Ju ne , an d J ul y . See, e.g ., Pao li v. Co m m is si on er, T.C. Mem o. 1 99 1- 35 1 (f in di ng th at th e ta xp ay ers di d n otpro ve th ei r se cu rit ie s trad in g was su ffi ci en tl y reg ul ar an d
co nt in uo us inpa rt b ecau se 40 % of t he ir yearly sal es were m ad e dur in g aon em on th pe rio d) . Mr. Ass ad erag hi tra de d o n fe wer than 1 0 d ay s i n the m on th s o f Feb ru ary, Aug us t, an d Oct ob er 2 00 8. In20 09 he m ad e tr ad es on fewer than 1 0 da y s i n e ach m on th fro m

Jan ua ry th ro ug h J un e, in cl ud in g z ero tra de s i n F eb ru ary 20 09 . See En di co ttv. Co m m is si on er, T.C. Mem o. 2 01 3- 19 9 (s ta ti ng th atlo w freque nc y tra di ng m on th s i nd ic at e th atth e ta xp ay er’s trad in g a ct iv ity is no t re gu lar an d c on ti nu ou s) ; s ee al so Nels on v. Co m m is si on er, T.C. Mem o. 2 01 3- 25 9- 16 -

[* 16 ] (ho ld in g tha t ex ecu ti ng 95 ou t o f 53 5 trad es du rin g aon e-wee k p eri odan d
no t m ak in g a ny trad es du rin g e ig htsep arat e se ve n- da y pe rio ds was n otreg ul ar an d
co nt in uo us ). W e co nc lu de th atth e num be r of da y s o n wh ic h a ndth e fre qu en cy with wh ic h M r. Ass ad erag hi ex ecu te d trad es do no t ev id en ce the freque nc y , co nt in ui ty, an d re gu larit y ne ces sa ry

to co ns ti tu te a tr ad e o r bu si ne ss . 1 8 Fo r a t ax pa y er t o b e a trad er h e al so m us t s eekto cat chth e swi ng s i n the da il y m ark etm ov em en ts an d p ro fitfro m th es e sh ort-t erm

ch an ge s. Kay v. Co m m is si on er, T.C. Mem o. 2 01 1- 15 9 (c it in g M ay er v . Comm is si on er, T.C. Mem o. 1 99 4- 20 9) . To de te rm in e whe th er a t ax pay er s eek s t o c at chth e swi ng s i n th e d ai ly m ark etth e Co urt re vi ews th e h ol di ng pe rio d o f th e se cu rit ie s. See Est at e of Yaeg er v . Comm is si on er, 8 89 F.2dat 3 3; Mayer v. Co m m is si on er, T.C. Mem o. 19 94 -2 09 . In Ho ls in ge r, we he ldth atth e ta xp ay er d idno t s eekto cat chth e swi ng s in th e d ai ly m ark etbe cau se a si gn ifi can t am ou ntof h is st oc k was he ldform or e th an31 da y s. Si m il arl y , inKay , we hel d tha t the tax pa y er was no t a trad er b ecau se m os t o f hi s s to ck s wer e h el d fo r ov er 3 0 d ay s.
Mr. As sa de rag hi ’s em

pl oym en t-- an d s ub st an ti al in co m e unr el at edto hi s 1 8 se cu rit ie s ac ti vi ty--du rin g the y ears at i ss ue as t he vi ce p res id en t o f en gi ne eri ng at Si Tim e al so supp orts a fi nd in g tha t h e was no t a t rad er i n s ecu rit ie s. See Pao li v. Co m m is si on er, T.C. Mem o. 1 99 1- 35 1 (f in di ng th e ta xp ay er’s m an ag em en t se rv ic es an d s ub st an ti al servi ce i nc om e rel ev an t i n c on cl ud in g tha t the tax pa y er was no t a t rad er i n s ecu rit ie s)
.- 17 -

[* 17 ] In 2 00 8 M r. Ass ad erag hi ex ecu te d 2 14 , or 4 0%, o f hi s trad es as s am e-d ay tra de s. In20 09 he ex ecu te d 3 4, o r 19 %, of h is tra de s as same-day trad es . The pa rti es di sa gr ee o n the ho ld in g p eri od s fo r Mr. As sa de rag hi ’s rem ai ni ng 32 1 tra de s i n 2 00 8 and14 6 trad es in20 09 . On th e rec or d b efo re u s, we fi ndth at pe ti ti on ers ha ve fai le d t o c arry the ir b ur de n o f es tabl is hi ng , see Ru le 14 2( a), an d th e rec or d d oe s n otothe rwis e es tabl is h, the ho ld in g p eri od s fo r th e rem ai ni ng se cu rit ie s trad edby Mr. Ass ad erag hi
. As a res ul t, we ca nn otco nc lu de th atMr. 1 9

The reco rdco nt ai ns co pi es of M r. Ass ad erag hi ’s Fid el ity acco un t 1 9 st at em en ts for20 08 an d 2 00 9. Re sp on de nt , rel y in g o n the Fid el ity acco un t st at em en ts , con te nd s tha t M r. Ass ad erag hi he ld60 % an d 4 6% o f hi s s ecu rit ie s fo r m or e th an30 da y s i n 2 00 8 a nd20 09 , res pe ct iv el y . Peti ti on ers ass ert edat t ria l an d on bri ef tha t M r. Ass ad erag hi ’s ho ld in g p eri odwas l es s tha n 3 0 d ay s fo r 80 % of hi s trad es inbo th 20 08 an d 2 00 9. Pe ti ti on ers co nt en d, wi th ou t p ro vi di ng sp eci fic an d d et ai le d s up po rt i n the reco rd , th atres po nd en t erredinhi s an al y si s o f Mr. Ass ad erag hi ’s ho ld in g p eri od s i n p artbe cau se of am is ap pl ic at io n o f th e was h s al e ru le . Peti ti on ers in tro du cedin to ev id en ce a s umm ary st at em en t tha t M r. Ass ad erag hi crea te d s up po rti ng th ei r co nt en ti on reg ard in g the ho ld in g p eri od s. The y di d n ot , ho wev er, s ho w inde ta il whatba ck gr ou ndda tawas u se d t o c reat e th is su m m ary orsp eci fic al ly how re sp on de nt ’s ana lysis was i na ccu rat e. Inad di ti on , pet it io ne rs att ach edto th ei r br ie f a l arg e num be r of graph s tha t th ey ha d n otoff

eredin to ev id en ce. The graph s p ur po rt t o e xp la in or e st ab li sh Mr. Ass ad erag hi ’s ho ld in g p eri od s i n the sec ur it ie s h e so ldin20 08 an d 2 00 9. Doc um en ts att ach edto a pa rty’ s b rie f are n otinev id en ce, s ee Ru le 14 3( c), an d we wil l n otco ns id er the m , see Godwinv. Co m m is si on er, T.C. Mem o. 2 00 3- 28 9, aff’d, 1 32 Fed . App x. 7 85 (11 thCir . 20 05 ).- 18 -

[* 18 ] Ass ad erag hi so ug htto pro fitfro m th e swi ng s i n the da il y

m ark et . 2 0 On the ba si s o f th e fo reg oi ng , we con cl ud e th atMr. Ass ad erag hi ’s tra di ng act iv ity di d n otco ns ti tu te a tr ad e o r bu si ne ss in20 08 or 2 00 9. Pe ti ti on ers are th eref or e li m it edto a $3 ,00 0 d educ ti on of l os se s fr om th e p ur ch as e an d s al e o f
se cu rit ie s u nd er s ect io n 1 21 1( b) foreach y ear i n i ss ue . 2 1 B. Mark- to -Ma rk etMetho d o f Acco un ti ng Res po nd en t co nt en ds th atreg ard le ss of wh ethe r Mr. As sa de rag hi was a tra de r in 20 08 an d 2 00 9, p et it io ne rs fai le d t o m ak e a t im el y m ark -to -m ark et el ect io n a ndth eref

or e are no t en ti tl edto cla im de du ct io ns forord in ary lo ss es on th ei r sa le s o f se cu rit ie s. Pet it io ne rs co nt en d tha t the y m ad e a d eem edele ct io n un de r se ct io n 4 75 (f) o r, al te rn at iv el y , are en ti tl edto m ak e a l at e el ect io n u nd er se ct io n 3 01 .91 00 -3 , Pro ced . & Adm in . Reg s., an d Vi ne s v . Comm is si on er, 1 26 Ass um in g a rg ue nd o tha t p et it io ne rs di d e st ab li sh th atMr. Ass ad erag hi 2 0 so ug htto cat chth e swi ng s i n the da il y m ark etm ov em en ts an d t o p ro fitfro m th os e sh ort-t erm

ch an ge s, we wo ul d s ti ll co nc lu de th athe was n otinth e tr ad e o r bu si ne ss of b ei ng a se cu rit ie s trad er. See Mayer v. Co m m is si on er, T.C. Mem o. 19 94 -2 09 (ho ld in g tha t a t axpa y er’s trad in g a ct iv it ie s co ns ti tu te a tr ad e o r bu si ne ss withi n the m ean in g o f se c. 16 2( a) wh ere b ot h o f th e fo ll owi ng requi rem en ts are s at is fie d: (1) th e ta xp ay er’s trad in g i s s ub st an ti al an d (2 ) th e ta xp ay er s eek s t o c at chth e swi ng s i n the da il y m ark etm ov em en ts an d t o p ro fit fro m th os e sh ort-t erm

ch an ge s ra th er tha n t o p ro fitfro m th e lo ng -te rm

ho ld in g o f in ve st m en ts ). Sec. 1 21 1( b) li mit s the all owa nc e o f cap it al lo ss es to th e ex te ntof c ap it al 2 1 ga in s p lu s $ 3,0 00
.- 19 -

[* 19 ] T.C. 27 9 (2 00 6) . Becau se we co nc lu de th atMr. Ass ad erag hi ’s tra di ng act iv ity di d n otco ns ti tu te a tr ad e o r bu si ne ss in20 08 or 2 00 9, an d thu s M r. Ass ad erag hi is no t el ig ib le for a m ark -to -m ark etele ct io n u nd er s ect io n 4 75 (f), s ee, e.g ., Arber g v . Comm is si on er, 2 00 7 WL 24 16 23 0, at*1 2 (“ Onl y a tr ad er, an d n ot
anin ve st or , is en ti tl edto m ak e a m ark -to -m ark etele ct io n p ur su an t t o s ect io n 47 5( f)[.]”), we ne edno t ad dr es s the pa rti es ’ arg um en ts on th is is su e. W e h av e co ns id eredth e rem ai ni ng arg um en ts m ad e b y th e p art ie s an d, t o th e ex te ntno t d is cu ss edab ov e, co nc lu de th os e arg um en ts are i rrel ev an t, m oo t, o r witho utm eri t. To re fle ctth e p art ie s’ con ces si on s an d the for eg oi ng , Deci si on wil l b e en te redfor
res po nd en t as to th e d efi ci en ci es an d fo r pe ti ti on ers as t o the accu racy-rela te d pe na lt ie s u nd er s ect io n 6 66 2( a).