                      118 T.C. No. 21



                UNITED STATES TAX COURT



            KEITH M. RUDMAN, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 3445-00.                Filed April 29, 2002.



     Held: Earnings realized by petitioner, a member
of the Chicago Board of Trade, from trading in
commodities futures contracts are subject to self-
employment tax.



Harlan M. Ten Pas, for petitioner.

David S. Weiner, for respondent.
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                               OPINION


     SWIFT, Judge:    For 1994, respondent determined a deficiency

in petitioner’s Federal income tax and an accuracy-related

penalty as follows:


                                   Accuracy-Related Penalty
       Year    Deficiency                 Sec. 6662(a)
       1994     $312,026                    $57,203


     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

     After concessions, the remaining issue for decision is

whether petitioner, a commodities dealer, is subject to self-

employment tax on earnings from trading U.S. Treasury bond

commodities futures contracts.


                              Background

     The facts of this case were submitted fully stipulated under

Rule 122, and are so found.

     At the time the petition was filed, petitioner resided in

Winnetka, Illinois.

     In years prior to 1994, petitioner was a member of the

Chicago Board of Trade (CBOT), and petitioner actively traded
                                 - 3 -

U.S. Treasury bond futures contracts for his own account on the

trading floor of the CBOT.

     In 1994, the Commodity Futures Trading Commission (CFTC)

initiated an investigation of petitioner regarding alleged

improper trading conduct, the specifics of which are not in the

record.   Petitioner remained a member of the CBOT.   Because of

the ongoing CFTC investigation, however, in 1994 while the

investigation was pending, petitioner chose to conduct his trades

through a floor broker rather than conduct his trades directly on

the trading floor of the CBOT.

     In 1994, petitioner realized a total of $1,541,926 in net

gains relating to his trading in commodities futures contracts

through the broker, and petitioner paid more than $89,000 in

commissions to the floor broker.

     On November 21, 1994, as a result of the settlement with the

CFTC of the above investigation, petitioner was allowed to trade

directly on the floor of the CBOT under the supervision of

another trader.

     On his timely filed 1994 Federal income tax return,

petitioner treated the total $1,541,926 in net gains (that

petitioner realized in 1994 relating to his trading activity in

commodities futures contracts through the broker) as capital

gains and reported them on Schedule D, Capital Gains and Losses,

of his income tax return.    On his Schedule C, Profit or Loss from
                                - 4 -

Business, of his income tax return, petitioner claimed $160,446

as ordinary and necessary business expenses relating to his

commodity trading activity, and petitioner indicated that he was

in the trade or business of a commodities dealer.    The record

does not indicate that the $89,000 in commission expenses paid to

the floor broker was not included in the ordinary and necessary

expenses claimed on petitioner’s 1994 Federal income tax return.

     In a notice of deficiency mailed to petitioner, respondent

determined that the earnings relating to petitioner’s trading in

futures contracts were subject to self-employment tax.


                            Discussion

     Section 1401 imposes a tax on self-employment income from a

taxpayer’s trade or business.   Generally, capital gains are

excluded from self-employment income.    See sec. 1402(a)(3)(A).

     In 1984, however, Congress enacted section 1402(i) which

provided that gains realized by commodities dealers in the

ordinary course of trading in futures contracts are subject to

self-employment tax.   Deficit Reduction Act of 1984, Pub. L. 98-

369, sec. 102(c), 98 Stat. 622.

     Section 1402(i)(1) specifically states that


          in determining the net earnings from self-
          employment of any options dealer or
          commodities dealer, there shall not be
          excluded any gain or loss (in the normal
          course of the taxpayer’s activity of dealing
          in or trading section 1256 contracts) from
                               - 5 -

           section 1256 contracts or property related to
           such contracts. [Emphasis added.]


     A commodities dealer is defined in section 1402(i)(2)(B) as

“a person who is actively engaged in trading section 1256

contracts and is registered with a domestic board of trade which

is designated as a contract market by the Commodities Futures

Trading Commission.”   The term “section 1256 contract” means any

regulated futures contract -- such as the U.S. Treasury bond

futures contracts in which petitioner traded.   Sec. 1402(i)(2)(C).

     Petitioner argues that his trading activity in 1994 through

a broker did not occur in the normal course of his commodities

trading activity and therefore that section 1402(i) does not

apply.   Petitioner argues that his regular trading activity in

prior years (which involved petitioner’s personally making trades

on the floor of the CBOT) is distinguishable from the trades in

1994 which petitioner, because of the CFTC investigation,

conducted through a floor broker.   Petitioner notes particularly

that he incurred $89,000 in broker’s fees relating to the latter

transactions.

     Respondent contends that throughout 1994 petitioner was a

commodities dealer and that the $1,541,926 in earnings petitioner

realized from his commodities futures trades is subject to self-

employment tax.
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     We conclude that petitioner’s earnings in 1994 from his

commodities trading transactions do not qualify for an exception

from self-employment tax.   Petitioner has not established that

his trading activity in commodities futures contracts in 1994 was

outside the scope of his normal trading activity.   Petitioner has

not established that the trades on his behalf in 1994 were less

frequent or regular than the trades in prior years.   Other than

the use of a broker on the floor of the CBOT (in lieu of

petitioner himself being on the floor), the evidence in this case

does not establish any significant factual differences in

petitioner’s trading activity.

     Petitioner remained a member of the CBOT.   On his 1994

Federal income tax return, petitioner indicated that he was in

the trade or business of trading commodities futures contracts,

and he claimed his related expenses as ordinary and necessary

expenses of a trade or business.

     We conclude that the use of a floor broker by petitioner

does not substantially alter the normal course of petitioner’s

commodities trading activity and that the earnings petitioner

realized therefrom in 1994 are subject to self-employment tax.

     In Kovner v. Commissioner, 94 T.C. 893, 906 (1990), for

purposes of qualifying losses as ordinary losses under sec.

108(a) of the Deficit Reduction Act of 1984, Pub. L. 98-369, 98
                                 - 7 -

Stat. 630, we distinguished brokers and investors who were not

floor traders, floor brokers, or members of an exchange from

commodities dealers.   Among other reasons, Kovner is

distinguishable from the instant case in that the parties herein

concede that petitioner was a commodities dealer and that

petitioner at all times remained a member of the CBOT and had the

ability to conduct trades on the floor of the CBOT.

     To reflect the foregoing,

                                             Decision will be entered

                                         under Rule 155.
