Edward and Ruth Kelly - Page 11

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            direct benefit from the income tax refunds they received.                                     
            Mr. Kelly deposited the refund checks in his separate bank                                    
            account and used the proceeds to finance further options trading.                             

                  Petitioners bear the burden of proof on all issues.  Rule                               
            1.  Character of Trading Losses                                                               
                  Respondent determined that the stock options sold by                                    
            Mr. Kelly during the years at issue were capital assets, and                                  
            that the net losses he realized were accordingly capital losses                               
            subject to the limitations of sections 165(f) and 1211(b).  We                                
            sustain respondent's determination.                                                           
                  Under section 1234, unless an option to buy or sell stock                               
            constitutes property described in section 1221(1), gain or loss                               
            from the sale of the option is treated as gain or loss from the                               
            sale of property having the same character as the stock would                                 
            have in the taxpayer's hands.  Sec. 1234(a)(1), (3)(A).  Section                              
            1221(1) creates an exception to the definition of a capital asset                             
                        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;                                                               

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Last modified: May 25, 2011