Holsinger v. The Commissioner of Internal Revenue 1. Citation: Holsinger v.

The Commissioner of Internal Revenue, (Tax Court Memo 2008-191) 2. Facts: The taxpayer, William Holsinger, retired in 1992 after a 30 year career with Eli Lilly & Co. In 1999 he married Joann and they began buying and selling stocks in 2000. They earned approximately $280,000 in 2000 and reported their gains on the purchase and sale of securities as capital gains. In April of 2001, the taxpayers formed Alpha a limited liability company (LLC) to conduct their security transactions and the LLC made a timely mark to market election. The LLC maintained two trading accounts with E-Trade, two with Options Xpress and one with Ameritrade-Comdisco. The taxpayers claimed ordinary losses from trading, depreciation and interest in the amount of $180,174 from the LLC on their 2001 tax return. The taxpayers also claimed a net loss of $80,100 as sole proprietors acting as agents for the LLC. In 2002, the taxpayers claimed an ordinary loss of $45,241 comprised of trading losses and related business expenses. The taxpayers operated from an office in their home. The office contained computers, internet access and four monitors because Mr. Holsinger wanted to be able to trade simultaneously. Respondent determined deficiencies of $54,462 and $43,423 in petitioners 2001 and 2002 Federal income taxes, respectively. Respondent amended his answer and increased petitioners 2001 deficiency by $20,278, for a total 2001 deficiency of $74,740. 3. Issue: 1. Whether losses from purchases and sales of securities are deductible by petitioners subject to the limitations applicable to capital losses? 2. Whether expenses attributable to those purchases and sales are deductible by petitioners as business expenses? 4. Ruling: No and No. 5. a. Rules of Law: The law invoked here is the timely mark-to-market election pursuant to section 475(f) of IRS code. (IRS CODE TITLE 26 > Subtitle A > CHAPTER 1 > Subchapter E > PART II > Subpart D > 475). Section 475(f) applies only to those engaged in a trade or business as traders in securities. A trader in securities would be eligible to recognize gain or loss on any security held in connection with such a trade or business at the close of any taxable year as if the security were sold at its fair market value on the last business day of the taxable year. 475(f)(1)(A)(I). In general any gains or losses with respect to the securities, whether deemed sold at year end under the mark-to-market method of accounting or actually sold during the taxable year, shall be treated as ordinary income or loss. Sec. 475(d)(3)(A)(I). Under these rules, the 2001 and 2002 net losses from the purchases and sales of securities would be capital losses and only partially deductible to petitioners. b. Rationale: The Court deemed the petitioners to be investors rather than traders, thus making the petitioners unqualified to take losses as business deductions and did not fall under limits of capital losses. In coming to this conclusion the Court looked at the evidence their trading operations. The petitioners used a four computer monitor set-up for their trading station but the expense for this equipment was not reported on the LLC tax return. The brokerage accounts were continued to be held under petitioners names and not under LLC. The number of trades was only 289 in 2001 in 63 trading days. These number of trades fall below definition of active traders. The court found that the most positions were open for more than 31 days and there were very few daily flips a requirement for being qualified as trader. The court found the petitioners greedy when they took another $80,100 of business expenses after losses of $180,174 in 2001 and they made similar adjustments in their 2002 returns. The petitioners also failed to show that they sought to catch the swings in the daily market movements and to profit from these short-term changes."