T.C. Memo. 2000-245

UNITED STATES TAX COURT

SANDRA B. BALL & KEITH M. NORTHROP, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 14273-98. Filed August 8, 2000.

Keith M. Northrop, pro se.

Sheila R. Pattison, for respondent.

MEMORANDUM OPINION

PAJAK, Special Trial Judge: Respondent determined

deficiencies in petitioners' Federal income taxes in the amounts

of $2,799 and $2,991 for the taxable years 1995 and 1996. Unless

otherwise indicated, subsequent section references are to the

Internal Revenue Code in effect for the years in issue, and all

Rule references are to the Tax Court Rules of Practice and

Procedure.
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After concessions by the parties, this Court must decide

whether petitioner Keith M. Northrop (petitioner) was in the

trade or business of being a stock trader or whether he was an

investor during 1995 and 1996, and whether petitioner in his

investment activity is entitled to deduct: (1) Office expense of

$920 and $1,935 in 1995 and 1996, respectively, (2) depreciation

of $3,854 in 1995, and (3) interest expense of $2,411 and $4,233

in 1995 and 1996, respectively. Respondent determined that

petitioners were liable for self-employment tax for 1995 and

1996, respectively, on the earnings of petitioner from his

counter top resurfacing business and of petitioner Sandra B. Ball

from her real estate business. Respondent allowed petitioners

corresponding deductions of one-half of the self-employment tax. 

Because petitioners did not address the self-employment tax issue

at trial, we deem it conceded.

Some of the facts have been stipulated and are so found.

Petitioners resided in Austin, Texas, at the time they filed

their petition.

At the outset, we note that petitioners reported $15,209 and

$12,556 of adjusted gross income in 1995 and 1996, respectively. 

Petitioner claimed he had a credit line of $150,000 from various

credit card companies and used only borrowed money to invest in

stock. On his 1996 return, petitioner claimed he purchased

$878,146.26 worth of stock in February 1996. We find it hard to
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believe that petitioner could have so exceeded his lines of

credit with the credit card companies that he was able to make

such purchases. Petitioner reported a $14,691 net short-term

loss from the sale of stock and petitioner deducted $3,000 of

that loss in 1996. Despite our misgivings, we shall assume,

arguendo, for purposes of this opinion and in accordance with the

way the case was tried, that the stock sales were in fact made.

During the years in issue, petitioner, in business as

Chameleon Counters, resurfaced countertops for property owners. 

In 1993, petitioner began investing money in stocks with an

initial sum of $2,000. Prior to this time, he had no experience

in investing in the stock market. 

In 1995, petitioner decided to put more effort into the

stock market activity. As noted, petitioner asserted that he

only invested borrowed money. Petitioner claimed that he had a

credit line of more than $150,000 which he used exclusively for

investing. Petitioner purchased a computer and software. 

Petitioner claimed that he spent his days from 8:30 a.m. to 3:00

p.m. on the computer or watching CNBC on the television to get

stock quotes. He also read newsletters on trading. Petitioner

made eight short-term stock sales in 1995 and seven short-term

stock sales in 1996. Petitioner did not invest on behalf of

other people.
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Petitioner filed a Schedule C, Profit or Loss from Business,

for Chameleon Counters in 1995 and 1996. On the Schedules C, he

listed office expenses, interest, and depreciation which he

asserted were related to his business as a stock trader. 

Petitioner listed his gains and losses from the stock trades on

Schedule D, Capital Gains and Losses. Respondent disallowed the

expenses because it was determined that petitioner is not in the

trade or business of being a stock trader, but is instead an

investor, and because petitioners did not substantiate the

expenses. Petitioner claims he is a trader, not an investor, and

should be entitled to deduct the above expenses on Schedule C.

We briefly comment on the question which was the focus of

the parties at trial; whether petitioner was a trader or

investor. In determining whether a taxpayer who manages his own

investments is a trader or merely an investor, we consider the

following factors: "(1) The taxpayer's investment intent; (2) the

nature of the income to be derived from the activity; and (3) the

frequency, extent, and regularity of the taxpayer's securities

transactions." Hart v. Commissioner, T.C. Memo. 1997-11. To be

a trader, the trading activity must be substantial, which means

"frequent, regular, and continuous enough to constitute a trade

or business" as opposed to sporadic trading.

It is apparent that petitioner's trading activity, eight

sales transactions in 1995 and seven sales transactions in 1996,
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was not substantial. Hart v. Commissioner, supra (trading was

not substantial where taxpayer had 36, 30, and 15 sales of stock

during each of the years in question); Paoli v. Commissioner,

T.C. Memo. 1991-351 (trading was not substantial where taxpayer

had 326 sales transactions, but sales were not regular and

continuous). Accordingly, we find that petitioner was an

investor, not a trader, and he is not allowed to deduct

investment related expenses under section 162.

Petitioners failed to substantiate the expenses in dispute

as required under section 6001. Petitioner had no books and

records. His handwritten notes do not constitute evidence of

interest payments. His cash register receipts for alleged

computer purchases do not total the amount claimed, nor do they

show the method of depreciation used. There is nothing in the

record about office expenses. In short, respondent disallowed

these expenses for, inter alia, lack of substantiation. 

Nevertheless, at trial petitioner failed to substantiate his

expenses. Therefore, petitioners may not deduct such expenses

under section 212. We hold for respondent on these issues.
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To the extent that we have not addressed any of petitioners'

arguments, we have considered them and find them to be without

merit.

Decision will be entered

under Rule 155.