                  T.C. Memo. 2004-132



                UNITED STATES TAX COURT



               FRANK CHEN, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 1271-03.             Filed June 1, 2004.



     During 1999, P incurred a net loss of $84,794 in
connection with 323 transactions involving the purchase
or sale of securities, most of which P held for less
than 1 month. Approximately 94 percent (303) of those
transactions occurred during February, March, and April
1999, with no transactions occurring in 6 of the other
9 months. Attached to P’s petition was a purported
retroactive election under sec. 475(f)(1), I.R.C., of
mark-to-market accounting, available to “traders in
securities”, to be effective as of Jan. 1, 1999. P
claims that, pursuant to that election, he is entitled
to treat the loss arising out of his 1999 trading
activities as a fully deductible, ordinary loss
incurred in a trade or business under sec. 165(c)(1),
I.R.C.

     1. Held: During 1999, P was not a “trader in
securities” eligible to make a mark-to-market election
under sec. 475(f)(1), I.R.C.
                               - 2 -

          2. Held, further, P is entitled to deduct his
     1999 net loss from purchases and sales of securities to
     the extent of $3,000. Secs. 165(f), 1211(b)(1), I.R.C.


     Frank Chen, pro se.

     Paul T. Butler and Lindsey D. Stellwagen, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     HALPERN, Judge:   By notice of deficiency mailed to

petitioner on October 15, 20021 (the notice), respondent

determined a deficiency in petitioner’s 1999 Federal income tax

of $611,357 and additions to tax totaling $252,093.    On brief,

respondent concedes the additions to tax.   As a result of an

agreement between the parties, the only issue remaining for

decision is whether petitioner’s net loss of $84,794 from the

purchase and sale of securities during 19992 is, for that year,

deductible in full, or, pursuant to a limitation applicable to

capital losses, only to the extent of $3,000.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for 1999, and all Rule




     1
        Because of administrative error, the notice of deficiency
was dated Oct. 15, 2003.
     2
        We assume from the stipulation of the parties that the
net loss of $84,794 was realized upon actual sales of the
securities in question.
                              - 3 -

references are to the Tax Court Rules of Practice and Procedure.

All dollar amounts have been rounded to the nearest dollar.

                        FINDINGS OF FACT

     Some facts are stipulated and are so found.    The stipulation

of facts, with accompanying exhibits, is incorporated herein by

this reference.

     At the time the petition was filed, petitioner resided in

Shanghai, China.

Petitioner’s Purchases and Sales of Securities

     During 1999, petitioner maintained two brokerage accounts

for conducting securities transactions: one with Charles Schwab &

Co., Inc., and one with Datek Online Brokerage Services, which

subsequently merged with Ameritrade.   During 1999, through those

two accounts, petitioner initiated 323 transactions involving the

purchase or sale of securities (including short sales), broken

down by month as follows:

             Month                         Number of Trades
           January                                 12
           February                              133
           March                                 145
           April                                   25
           May                                      4
           July                                     4

     Petitioner held most of those securities for less than a

month, and petitioner’s 1999 short sales were generally covered
                               - 4 -

by the purchase of securities within a month.   To assist him in

deciding which securities to invest or trade in, petitioner used

software that enabled him to receive up-to-date information such

as “Level II NASDAQ quotations” and Dow Jones “real time” data.

     For all of 1999, petitioner resided in San Jose, California,

and was employed, full time, by MediaQ, Inc. as a computer chip

engineer.   He received wages of $74,699 from his employer in

1999.

Petitioner’s Purported Election Under Section 475(f)

     Petitioner did not timely file a Federal income tax return

for 1999.   After receipt of the notice, petitioner timely filed

an “imperfect” petition3 on January 22, 2003, which was later

perfected by the filing of an amended petition on March 14, 2003.

Attached to the amended petition is a copy of a Form 1040, U.S.

Individual Income Tax Return, for 1999 together with various

documents attached to that return, including copies of (1) a

purported retroactive election, under section 475(f) (dated March

9, 2003, to be effective January 1, 1999), of the mark-to-market

method of accounting for traders in securities (the election),

and (2) a purported cover letter conveying the election to the

IRS and describing the election as “an application for making

election under section 475(f)”.   In the election itself, under


     3
        The petition was signed by a representative of
petitioner’s who was not admitted to practice before this Court.
                               - 5 -

the heading “RULING REQUESTED”, petitioner “[requests] Service

authority [to] implement mark-to-market accounting methods [sic]

to Jan. 1, 1999,” and he affirmatively states that he became a

daily trader effective as of that date.

                              OPINION

I.   Background: Effect of Trader Status and a Mark-To-Market
     Election Under Section 475(f)

     Assuming that, during 1999, petitioner was engaged in a

trade or business (sometimes, without distinction, business) as a

“trader in securities”, he would have been eligible to elect to

“recognize gain or loss on any security held in connection with

such trade or business at the close of any taxable year as if

such security were sold at its fair market value * * * [at

yearend]”.   Sec. 475(f)(1)(A)(i).   In general, any gains or

losses with respect to such 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), (f)(1)(D).   If, during 1999,

petitioner was in business as a trader in securities and he made

a mark-to-market election under section 475(f)(1) with respect to

sales of securities held in connection with that business,

petitioner’s 1999 net loss from that business would be an

ordinary loss, deductible in full under section 165(c)(1).

Conversely, if petitioner is considered an investor in securities

during 1999, or, assuming trader status, he failed to make an
                                   - 6 -

effective mark-to-market election for that year under section

475(f)(1), his 1999 net loss from purchases and sales of

securities would be a capital loss deductible only to the extent

of $3,000.    See secs. 165(f), 1211(b)(1).

II.   Arguments of the Parties

      A.   Petitioner’s Argument

      Petitioner argues that, by virtue of the volume and short-

term nature of his securities trades during 1999, the time

devoted daily to his trading activities, and his substantial

investment in software used to provide information regarding up-

to-the-minute market conditions, he qualified as a “trader in

securities” for purposes of section 475(f)(1).4

      Petitioner further argues that, because he was, in fact, a

trader as of January 1, 1999, and was unaware of the requirement

to timely elect mark-to-market accounting under section 475(f) in

order to treat his trading losses as fully deductible ordinary

losses under section 165(c)(1), he should be permitted to make an

untimely, retroactive election under that section.   We interpret

petitioner’s “request” to “implement” mark-to-market accounting

and his defense of his right to do so untimely as, in substance,

an argument that we must find that (1) the election of mark-to-

market accounting attached to petitioner’s return was an informal



      4
        The term “trader in securities” is not further defined in
sec. 475 or in the regulations interpreting that section.
                                  - 7 -

request, pursuant to section 301.9100-3, Proced. & Admin. Regs.,

for an extension of time to make the election, and (2) respondent

improperly denied that request.

     B.   Respondent’s Argument

     Respondent argues that petitioner’s brief foray into high-

volume, short-term securities trading, during 1999, was of

insufficient duration to enable him to qualify as a “trader in

securities” for purposes of section 475(f)(1).

     Respondent further argues that, even if petitioner qualified

as a trader in securities as of January 1, 1999, he failed to

make an effective mark-to-market election under section 475(f)

and Rev. Proc. 99-17, 1999-1 C.B. 503, pursuant to which an

election effective for taxable years beginning on or after

January 1, 1999, should have been filed “not later than the due

date (without regard to extensions) of the original * * * return

for the taxable year immediately preceding the election year”,

or, in this case, by April 15, 1999, the due date of petitioner’s

1998 return.   See Rev. Proc. 99-17, 1999-1 C.B. at 504.

     Lastly, respondent argues that petitioner “never made a

request for an extension of time to make the [section 475(f)]

election.”
                                 - 8 -

III.    Petitioner’s Status as a Trader in Securities

        A.   Applicable Principles of Law

       In general, for Federal tax purposes, a person who purchases

and sells securities falls into one of three distinct categories:

dealer, trader, or investor.     See King v. Commissioner, 89 T.C.

445, 458-459 (1987).     Both traders and dealers are engaged in the

trade or business of buying and selling securities.       Only the

dealer’s business, however, involves sales to customers in the

ordinary course of that business.     Consequently, only the

dealer’s securities fall within the exception to capital asset

status that is provided for “property held by the taxpayer

primarily for sale to customers in the ordinary course of his

trade or business”.     Sec. 1221(a)(1).    Thus, “traders * * *

occupy an unusual position with respect to the tax laws.       Traders

may engage in a trade or business which produces capital gains

and losses rather than ordinary income and losses.”       King v.

Commissioner, supra at 457.

       In order to qualify as a trader (as opposed to an investor)

petitioner’s purchases and sales of securities during 1999 must

have constituted a trade or business.       “In determining whether a

taxpayer who manages his own investments is a trader, and thus

engaged in a trade or business, relevant considerations are the

taxpayer’s investment intent, the nature of the income to be

derived from the activity, and the frequency, extent, and
                                - 9 -

regularity of the taxpayer’s securities transactions.”      Moller v.

United States, 721 F.2d 810, 813 (Fed. Cir. 1983).      In general,

investors purchase and hold securities “for capital appreciation

and income” whereas traders buy and sell “with reasonable

frequency in an endeavor to catch the swings in the daily market

movements and profit thereby on a short-term basis.”      Liang v.

Commissioner, 23 T.C. 1040, 1043 (1955).    For a taxpayer to be

considered a trader, the taxpayer’s trading activity must be

“substantial”, and it must be “frequent, regular, and continuous

to be considered part of a trade or business.   * * *    Sporadic

trading does not constitute a trade or business.”    Boatner v.

Commissioner, T.C. Memo. 1997-379, affd. 164 F.3d 629 (9th Cir.

1998); see also Commissioner v. Groetzinger, 480 U.S. 23, 35

(1987) (“We accept the fact that to be engaged in a trade or

business, the taxpayer must be involved in the activity with

continuity and regularity * * *.   A sporadic activity * * * does

not qualify.”).

     B.   Application of Trader Status Criteria to Petitioner

     Respondent concedes that for “parts of the months of

February, March, and April, petitioner engaged in daily

transactions.”    It also seems clear that, during those 3 months,

petitioner satisfied the first requirement for trader status,

that he buy and sell with frequency in order “to catch the swings

in the daily market movements”.    See Liang v. Commissioner, supra
                               - 10 -

at 1043.   Petitioner’s problem is that he fails to satisfy the

second, equally important requirement for trader status, that his

purchases and sales of securities be “frequent, regular, and

continuous”.    See Boatner v. Commissioner, supra.

     Because 303, or approximately 94 percent, of the 323

transactions in which petitioner either purchased or sold

securities during 1999 occurred in the February to April

timeframe, with the balance occurring in January, May, and July

and no trades occurring in any of the other 6 months,

petitioner’s 1999 trading activity reasonably qualified as

“frequent, regular, and continuous” only during February, March,

and April.5    Moreover, throughout 1999, petitioner maintained a

full-time job as a computer chip engineer.

     In the cases in which taxpayers have been held to be traders

in securities, the number and frequency of transactions indicated

that they were engaged in market transactions almost daily for a

substantial and continuous period, generally exceeding a single

taxable year; and those activities constituted the taxpayers’

sole or primary income-producing activity.    See Levin v. United


     5
        In his purported election of the mark-to-market
accounting method, petitioner represents that he became a “daily
trader” as of Jan. 1, 1999. Moreover, his 2000 and 2001 returns
report his gains and losses from purchases and sales of
securities on Schedule D, Capital Gains and Losses, not on
Schedule C, Profit or Loss From Business. Thus, the evidence
indicates that petitioner’s daily trading activities occurred
only during the 3 months of February, March, and April 1999.
                               - 11 -

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

Commissioner, 139 F.2d 465 (2d Cir. 1943), affg. 44 B.T.A. 1268

(1941).    Conversely, where, as in this case, (1) the taxpayer’s

daily trading activities covered only a portion of a single

taxable year, and (2) securities trading was not the sole or even

primary activity in which the taxpayer engaged for the production

of income, trader status was denied.    See Paoli v. Commissioner,

T.C. Memo. 1991-351.    Daily trading in securities for only a

quarter of a single taxable year is reasonably characterized as

“sporadic” rather than “frequent, regular, and continuous”, and,

therefore, insufficient to achieve trader status.    Boatner v.

Commissioner, supra; see also Commissioner v. Groetzinger, supra.

      C.   Conclusion

      Petitioner failed to qualify as a trader in securities

during 1999.

IV.   Effect of Petitioner’s Purported Retroactive Election of the
      Mark-to-Market Method of Accounting Under Section 475(f)

      Because we find that petitioner was not a trader in

securities during 1999, a mark-to-market election under section

475(f) is not available to petitioner for that year.    Sec.

475(f)(1).    Therefore, we do not address petitioner’s argument

that he was improperly denied the right to make such an election.
                              - 12 -

V.   Conclusion

      Petitioner is entitled to deduct his 1999 net loss from

purchases and sales of securities to the extent of $3,000.   See

secs. 165(f), 1211(b)(1).

                                         Decision will be entered

                                    under Rule 155.
