                        T.C. Memo. 2007-22



                      UNITED STATES TAX COURT



         SHAHROOZ S. AND SHIDA S. JAMIE, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18497-05.             Filed February 5, 2007.



     Shahrooz S. and Shida S. Jamie, pro sese.

     Terry Serena, for respondent.



                        MEMORANDUM OPINION


     COHEN, Judge:   Respondent determined the following

deficiencies and penalties with respect to petitioners’ Federal

income tax:
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                                                      Penalty
Petitioner(s)          Year       Deficiency    I.R.C. Sec. 6662(a)

Shahrooz S. and        2000       $478,890          $95,778.00
Shida S. Jamie

Shahrooz S. Jamie      2001        137,839           27,567.80

Shahrooz S. Jamie      2002        200,138           40,027.60

The notice of deficiency for 2000 was addressed to both

Shahrooz S. Jamie (petitioner) and Shida S. Jamie, his wife

(Mrs. Jamie), and was based on a joint return that they filed for

that year.   The notice of deficiency for 2001 and 2002 was

addressed only to petitioner.    Respondent has agreed that

Mrs. Jamie is entitled to relief as an innocent spouse.

     The issues for decision are:

     (1) Whether petitioner is entitled and limited to a $3,000

per year deduction for capital losses from his trading activity

for 2000, 2001, and 2002;

     (2) whether petitioner may claim net operating loss

carryovers in 2001 and 2002 with regard to losses sustained in

his transactions as a trader in securities in 2000 and 2001; and

     (3) whether petitioner is liable for penalties under section

6662(a) of the Internal Revenue Code for substantial

understatements of income tax.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and
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all Rule references are to the Tax Court Rules of Practice and

Procedure.   All amounts have been rounded to the nearest dollar.

                              Background

     All of the facts have been stipulated as to petitioner, and

these stipulated facts are incorporated in our findings by this

reference.   Petitioners resided in Clay, West Virginia, at the

time that the petition was filed.

     During the relevant period, petitioner was a licensed

physician in Clay County, West Virginia.    During the years in

issue, petitioner also engaged in business as a “day trader” of

securities, buying and selling on his own account the same

securities on the same day or within a few days (trading

activity).   Petitioner engaged in the trading activity for the

sole purpose of profiting from short-term fluctuations in the

market price of securities.    Petitioner did not have any

customers for his trading activity, did not earn or attempt to

earn any commissions with regard to his trading activity, and did

not maintain a place of business for his trading activity.

Petitioner did not earn dividends or interest from the securities

in which he traded, and he did not engage in his trading activity

with the purpose of earning dividends or interest.    Petitioner

was not, for Federal income tax purposes, a dealer in the

securities that he traded.
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     For the years in issue, petitioner reported income and basis

and claimed losses with regard to his trading activity on

Schedules C, Profit or Loss From Business, identifying his

profession as “Stock Day Trader” in 2000, “Trader” in 2001, and

“Day Trader” in 2002.   The number of transactions, gross

receipts, total basis, and losses with respect to petitioner’s

trading activity for each of the years in issue were as follows:

        No. of      Gross                      Direct        Total
 Year   Trans.    Receipts     Total Basis     Losses       Losses
 2000    118     $14,487,667   $16,409,654   $1,921,987   $1,978,747
 2001     81         655,764       993,906      338,142      377,388
 2002     53       1,788,341     2,040,663      252,322      252,322

The total losses indicated above include allowable interest

expenses claimed by petitioner in the amounts of $56,760 for 2000

and $39,246 for 2001.   On his returns for the years in issue,

petitioner did not elect to use a “mark to market” method of

accounting for his trading activity.   Petitioner reported income

and expenses associated with his medical practice, identifying

his profession as “Physician” in all years, on Schedules C

separate from those reporting his trading activity.

     From losses sustained in his trading activity, petitioner

claimed net operating loss (NOL) carryovers in the amounts of

$545,907 in 2001 and $2,027,136 in 2002.     He used the claimed NOL

carryovers to offset his reported net income from his medical

practice in those years.
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                              Discussion

     As a general rule, any loss sustained in a business or other

profit-seeking activity by a taxpayer during the taxable year for

which the taxpayer is not compensated by insurance or otherwise

is allowed as a deduction in calculating the taxpayer’s taxable

income.    Sec. 165(a).   However, losses from sales or exchanges of

capital assets are allowed only to the extent allowed in sections

1211 and 1212.    Sec. 165(f).    Section 1211(b) places limitations

on the allowability of capital losses for individuals as follows:

          SEC. 1211(b). Other Taxpayers.--In the case of a
     taxpayer other than a corporation, losses from sales or
     exchanges of capital assets shall be allowed only to
     the extent of the gains from such sales or exchanges,
     plus (if such losses exceed such gains) the lower of–-

                 (1) $3,000 * * *, or

                 (2) the excess of such losses over such
            gains.

If capital losses exceed capital gains by more than $3,000, the

excess may be carried forward to later taxable years.      Sec.

1212(b).    Section 172 permits a deduction in a current year for

the full amount of net operating loss carrybacks or carryovers

from previous years, as long as taxable income for the current

year is not less than zero.      Sec. 172(a), (b)(2).   However, net

capital losses that are carried forward may be deducted only in

later tax years subject to the limitations of section 1211(b),

which allows capital losses only to the extent of capital gains,
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plus up to $3,000 for individuals each year.    Secs. 172(d)(2),

1211(b); see Fortner v. Commissioner, T.C. Memo. 1993-195.

     Because capital gains and losses are those sustained in the

disposition of capital assets, we consider whether the securities

held by petitioner in relation to his trading activity were

capital assets.   Section 1221 defines the term “capital asset” as

follows:

          SEC. 1221(a). In General.--For purposes of this
     subtitle, the term “capital asset” means property held
     by the taxpayer (whether or not connected with his
     trade or business), but does not include–-

                (1) stock in trade of the taxpayer or other
           property of a kind which would properly be
           included in the inventory of the taxpayer if on
           hand at the close of the taxable year, or property
           held by the taxpayer primarily for sale to
           customers in the ordinary course of his trade or
           business;

Because they deal in securities held primarily for sale to

customers in the ordinary course of their trade or business,

dealers in securities need not treat securities as capital

assets.    King v. Commissioner, 89 T.C. 445, 458 (1987).   However,

because traders buy and sell securities on their own accounts and

have no customers, securities held by traders are capital assets

for Federal income tax purposes.    Id.

     Petitioner and respondent have stipulated that petitioner

was a trader and not a dealer with regard to his securities

trading activity during the years in issue.    The courts have

consistently held, in keeping with the definition of capital
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asset under section 1221, that the character of gains or losses

from a taxpayer’s buying and selling securities on his own

account is capital and not ordinary, even though the taxpayer may

be engaged in a trade or business with regard to such trading

activity.   See, e.g., Marrin v. Commissioner, 147 F.3d 147, 151

(2d Cir. 1998), affg. T.C. Memo. 1997-24; King v. Commissioner,

supra at 458.   Thus, the losses that petitioner sustained as a

securities trader buying and selling stocks are capital losses,

not ordinary losses.   He may not offset his ordinary income in a

taxable year, except to the extent of $3,000, with the capital

losses sustained in that year.    Secs. 172(d)(2), 1211(b).

Because the amounts claimed as NOL carryovers were capital

losses, respondent correctly disallowed the NOL carryover

deductions as offsets to petitioner’s ordinary income in 2001 and

2002.

     Petitioner may offset any capital gains he had in the years

in issue with his capital losses, and he may take an additional

capital loss deduction of up to $3,000 per year for the excess

losses that cannot be offset by capital gains.    Sec. 1211(b).

His nondeductible capital losses may be carried over to be

deducted from capital gains in subsequent years.    Sec. 1212(b).

Because the losses sustained by petitioner in relation to his

trading activity are capital and not ordinary in character, such

excess capital losses carried over are deductible only in
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subsequent years to the extent he has capital gains, plus excess

losses of up to $3,000.   Secs. 172(d)(2), 1211(b); see also Flora

v. Commissioner, T.C. Memo. 1965-64.

     Respondent also determined accuracy-related penalties under

section 6662(a) for a substantial understatement of income tax on

petitioner’s income tax returns for the years in issue.       Under

section 7491(c), respondent has the burden of production with

regard to penalties and must come forward with sufficient

evidence indicating that it is appropriate to impose the penalty.

Higbee v. Commissioner, 116 T.C. 438, 446 (2001).

     Under section 6662(a), a taxpayer may be liable for a

penalty of 20 percent on the portion of an underpayment of tax

due to any substantial understatement of income tax.     Sec.

6662(b)(2).   An understatement of income tax is “substantial” if

it exceeds the greater of 10 percent of the tax required to be

shown on the return or $5,000.    Sec. 6662(d)(1)(A).   The

understatement is reduced to the extent that the taxpayer (1) has

substantial authority for the tax treatment of the item or

(2) adequately disclosed his position and has a reasonable basis

for such position.   Sec. 6662(d)(2)(B).

     In this case, the understatement on petitioner’s returns

meets the section 6662(d)(1)(A) definition of “substantial”, so

respondent has met that burden of production.    Petitioner has not

cited any substantial authority to support his argument that his
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losses from day trading are deductible from his ordinary income.

There is no reasonable basis for his treatment of the losses as

ordinary.    Thus there is no reduction of petitioner’s

understatement of tax that is subject to the section 6662(a)

penalty.    See sec. 6662(d)(2)(B).

      The accuracy-related penalty under section 6662(a) is not

imposed with respect to any portion of the underpayment as to

which the taxpayer acted with reasonable cause and in good faith.

Sec. 6664(c)(1).    The decision as to whether a taxpayer acted

with reasonable cause and in good faith is made by taking into

account all of the pertinent facts and circumstances.       Sec.

1.6664-4(b)(1), Income Tax Regs.      Relevant factors include the

taxpayer’s efforts to assess his or her proper tax liability,

including the taxpayer’s reasonable and good faith reliance on

the advice of a tax professional.      See id.   Petitioner has

presented no evidence that he acted in reasonable reliance on the

advice of a tax professional in asserting the position taken on

his returns or that he otherwise acted with reasonable cause or

in good faith.    Therefore, the penalties for substantial

understatement of tax are sustained for 2000, 2001, and 2002.

     To reflect the foregoing,


                                              Decision will be entered

                                         under Rule 155.
