                          T.C. Memo. 2008-191



                       UNITED STATES TAX COURT



     WILLIAM G. HOLSINGER AND JOANN MICKLER, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 15563-06.                Filed August 11, 2008.



     V. Jean Owens and James S. Eggert, for petitioners.

     Stephen R. Takeuchi, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge:     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.    After concessions by both parties, the

issues for decision are:    (1) Whether losses from purchases and
                               - 2 -

sales of securities are deductible by petitioners as ordinary

losses or are instead subject to the limitations applicable to

capital losses; and (2) whether expenses attributable to those

purchases and sales are deductible by petitioners as business

expenses or are instead subject to the limitations applicable to

itemized deductions.

                         FINDINGS OF FACT

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.   At the time they filed

the petition, petitioners resided in Florida.

     William Holsinger (petitioner) retired in 1992, having

worked approximately 30 years for Eli Lilly & Co.   In 1999

petitioners married.   In 2000 petitioners began buying and

selling stocks, earning approximately $280,000 from that source

during 2000.   Petitioner opened brokerage accounts in his name,

using his Social Security number.   Petitioners reported their

trading1 income as capital gains in 2000.

     On April 19, 2001, petitioners incorporated Alpha Trading

Co. of Sarasota, L.L.C. (Alpha) under the laws of Florida.

Petitioner owns 67 percent of Alpha, and petitioner Mickler owns

the remaining 33 percent.   On or about May 17, 2001, Alpha made a


     1
        The use of the term “trading income” is not a conclusion
that petitioners or Alpha were engaged in a business of trading
in securities.
                                - 3 -

timely election pursuant to section 475(f) to use the mark-to-

market method of accounting.2

     Petitioners maintained two trading accounts with E-Trade,

two with Options Xpress, and one with Ameritrade-Comdisco.    From

April 19 until December 31, 2001, petitioners executed

approximately 289 trades on their various trading accounts.    In

2002 petitioners executed approximately 372 trades.

     In 2001 petitioners claimed an ordinary loss of $180,1743

from Alpha on their 2001 Schedule E, Supplemental Income and

Loss.    The loss consists of trading losses of $178,870,

depreciation of $1,284, and interest of $40.    The aggregate cost

or other basis of the securities sold in 2001 was $933,147.    The

sale prices in 2001 collectively were $754,277.    Also in 2001

petitioners claimed a net loss of $80,100 on their Schedule C,

Profit or Loss From Business.    Respondent disallowed the $80,100

as business expenses but allowed itemized deductions for

investment interest of $7,620 and miscellaneous deductions of




     2
        Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
     3
        The 2001 ordinary loss petitioners claimed on Schedule E
is $20 less than the total claimed of the trading losses,
depreciation, and interest. Both parties have stipulated the
amounts, and there appears to be no explanation for the $20
discrepancy. The $20 discrepancy has no effect as to the outcome
of the case.
                                - 4 -

$72,480.   After adjustments for gross income limitations,

respondent allowed net itemized deductions of $69,153.

     In 2002 petitioners claimed an ordinary loss of $45,521.

This loss comprises $11,227 in trading losses related to Alpha

and $34,294 in claimed business expenses related to Alpha.

Respondent disallowed the $34,294 as business expenses but

allowed a net itemized deduction of $26,181.

     After petitioner incorporated Alpha, he did not switch the

name on his trading accounts.   Petitioner’s Social Security

number also remained on the trading accounts.   Petitioners

continued to trade stocks and options during 2001 and 2002 with

the accounts they had used before the incorporation of Alpha.     In

December 2002 petitioners had one trading account in Alpha’s

name.   During the years in issue petitioners used five accounts

to conduct trades.

     Petitioners traded from a room in their house.   The room

contained computers with Internet access in order for petitioners

to trade and do research.   Additionally, petitioner had four

monitors connected to his computer because he wanted to be able

to trade and track different investments and potential

investments simultaneously.   Petitioner purchased the computer

equipment around July 1, 2000, before incorporating Alpha.     None

of the computer equipment was transferred to Alpha.
                                  - 5 -

                                 OPINION

I.    Mark-to-Market Election

       Respondent concedes that Alpha made a timely mark-to-market

election pursuant to section 475(f).       Section 475(f) applies only

to those engaged in a trade or business as traders in securities.

Having made a timely election, if Alpha were a trader in

securities, it 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.

See sec. 475(f)(1)(A)(I).      In general any gains or losses with

respect to the securities, whether deemed sold at yearend 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).      If Alpha is considered an investor in

securities, the 2001 and 2002 net losses from the purchases and

sales of securities would be capital losses and only partially

deductible to petitioners.

II.    Trade or Business

       The Internal Revenue Code does not define the term “trade or

business” for purposes of section 162.       Commissioner v.

Groetzinger, 480 U.S. 23, 27 (1987); Estate of Yaeger v.

Commissioner, 889 F.2d 29, 33 (2d Cir. 1989), affg. T.C. Memo.

1988-264.    Whether activities constitute a trade or business is a
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question of fact.    See Higgins v. Commissioner, 312 U.S. 212, 217

(1941); Estate of Yaeger v. Commissioner, supra at 33; Mayer v.

Commissioner, T.C. Memo. 1994-209; Paoli v. Commissioner, T.C.

Memo. 1991-351.    Petitioners have neither claimed nor shown that

they satisfied the requirements of section 7491(a) to shift the

burden of proof to respondent with regard to any factual issue.

Accordingly, petitioners bear the burden of proof.    See Rule

142(a).

     Petitioners argue that they were traders, trading as agents

of Alpha.   With the incorporation of Alpha, petitioners argue

they became traders.    In determining whether a taxpayer’s trading

activity constituted a trade or business, courts have

distinguished between “traders” and “investors”.     Moller v.

United States, 721 F.2d 810, 813 (Fed. Cir. 1983); see also Levin

v. United States, 220 Ct. Cl. 197, 597 F.2d 760, 765 (1979).

     In determining whether a taxpayer is a trader, nonexclusive

factors to consider are:    (1) The taxpayer’s 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.     Moller v. United States, supra at 813.   For a

taxpayer 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.

Ball v. Commissioner, T.C. Memo. 2000-245 (quoting Hart v.
                                - 7 -

Commissioner, T.C. Memo. 1997-11).      A taxpayer’s activities

constitute a trade or business where both of the following

requirements are met:    (1) The taxpayer’s trading is substantial,

and (2) the taxpayer seeks to catch the swings in the daily

market movements and to profit from these short-term

changes rather than to profit from the long-term holding of

investments.   Mayer v. Commissioner, supra.

     As to the first requirement, we find petitioners’ trading

was not substantial.    Courts consider the number of executed

trades in a year and the amount of money involved in those trades

when evaluating whether a taxpayer’s trading activities were

substantial.   See, e.g., Mayer v. Commissioner, supra; Paoli v.

Commissioner, supra.    In Paoli, the Court held trading activities

were substantial when the taxpayers traded stocks or options

worth approximately $9 million.    In Mayer, the Court considered

over 1,100 executed sales and purchases in each of the years at

issue therein to be substantial trading activity.     Trading

activity was found to be insubstantial when a taxpayer executed

at most 83 purchases and 41 sales in one year and 76 purchases

and 30 sales in the second year.     Moller v. United States, supra

at 813.   In 2001 petitioners executed approximately 289 trades.

An analysis of petitioners’ trading activity reveals that in 2001

they traded on 63 days.    This total represents less than 40

percent of the trading days from April 19, 2001, the day
                               - 8 -

petitioners incorporated Alpha, until December 31, 2001.   In 2002

petitioners traded on 110 days and executed approximately 372

trades.   This total represents less than 45 percent of the

trading days in 2002.   We find it doubtful whether the trades

were conducted with the frequency, continuity, and regularity

indicative of a business.

     As to the second requirement, petitioners have failed to

prove that they sought to catch the swings in the daily

market movements and to profit from these short-term changes

rather than to profit from the long-term holding of investments.

Petitioner testified that his goal in forming Alpha was to profit

from short-term swings in the market.   Additionally, petitioner

testified that he usually closed his account at the end of the

day and tried to avoid holding stocks and options overnight.      The

documentary evidence, however, paints a different picture.    A

list of petitioners’ trades shows they rarely bought and sold on

the same day.   Furthermore, a significant amount of petitioners’

holdings was held for more than 31 days.   As a result, we find

that petitioners have not demonstrated that they sought to

capture the daily swings in the market.    We find that they were

not traders, but investors.   Petitioners’ trading pattern is

consistent with that of an investor, not of a trader.
                                   - 9 -

III.    Business Expenses

       Deductions are a matter of legislative grace, and the

taxpayer has the burden of showing entitlement to any deduction

claimed.    See Rule 142(a); INDOPCO, Inc. v. Commissioner, 503

U.S. 79, 84 (1992).    Taxpayers must substantiate amounts claimed

as deductions by maintaining the records necessary to establish

such entitlement.    Sec. 6001; sec. 1.6001-1(a), Income Tax Regs.;

see Hradesky v. Commissioner, 65 T.C. 87 (1975), affd. per curiam

540 F.2d 821 (5th Cir. 1976).

       Petitioners claimed business deductions for 2001 and 2002.

Petitioners argue that their trading activity was on behalf of

Alpha, not for themselves as individuals.       Petitioners claim they

were Alpha’s agents and therefore had the authority to conduct

trades on its behalf.       Even if petitioners acted on Alpha’s

behalf, because their activity, as we have already found, did not

rise to the level of a business (the business of trading

securities), the expenses petitioners attributed to that

activity, even if incurred on Alpha’s behalf, are not deductible

as business expenses.

       In reaching all of our holdings herein, we have considered

all arguments made by the parties, and to the extent not

mentioned above, we find them to be irrelevant or without merit.
                        - 10 -

To reflect the foregoing,


                                  Decision will be entered

                             under Rule 155.
