Edward and Ruth Kelly - Page 12

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                  Mr. Kelly contends that his options trading activity was                                
            sufficiently regular, substantial, and time-consuming to                                      
            constitute a trade or business for Federal income tax purposes,                               
            so that the losses arising from the activity qualify for ordinary                             
            treatment.  This argument confuses a necessary with a sufficient                              
            condition.  Buying and selling securities on an exchange must                                 
            constitute a trade or business in order for the securities to                                 
            qualify for the exception to capital asset treatment.  But a                                  
            taxpayer who meets this trade or business requirement may be                                  
            either a trader or a dealer.  Unless he is a dealer, the                                      
            securities he holds in connection with his business are capital                               
            assets.  Laureys v. Commissioner, 92 T.C. 101, 136-137 (1989);                                
            King v. Commissioner, 89 T.C. 445, 457-458 (1987); Polacheck v.                               
            Commissioner, 22 T.C. 858, 862 (1954); Kemon v. Commissioner, 16                              
            T.C. 1026, 1032-1033 (1951).  The distinction between trader and                              
            dealer turns on whether the taxpayer's business activities have                               
            the characteristics specified in section 1221(1).  The parties                                
            have stipulated that Mr. Kelly's options trading lacked these                                 
            characteristics:  Mr. Kelly did not hold his options as                                       
            inventory; he did not sell to customers; he performed no                                      
            merchandising function.  Therefore, if he was engaged in the                                  
            business of buying and selling options, it was as a trader rather                             
            than a dealer, and the options would not constitute property                                  
            described in section 1221(1).  Kemon v. Commissioner, supra;                                  

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