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principal. It follows that his status as a registered options
principal, whatever that entails, has no bearing on our
disposition of these cases.
Because Mr. Kelly was not an options dealer with respect to
the transactions in which his losses arose, the character of the
stock options depends on the character that the underlying stock
would have had in his hands. Sec. 1234(a). Mr. Kelly does not
argue that he was a dealer in stock, and the record affords no
basis for that conclusion. Therefore the options that Mr. Kelly
traded were capital assets, and the net losses he realized in
these transactions were capital losses.
2. Treatment of Commissions Earned and Paid
On their tax returns for the years at issue, petitioners
apparently treated commissions paid to Mr. Kelly by his employer
on account of his options trades as ordinary income, and treated
commissions paid by Mr. Kelly to his employer in connection with
these trades either as part of the cost basis of the options or
as an adjustment to the gain or loss realized. In these
proceedings petitioners take the position that if they are not
entitled to deduct Mr. Kelly's options trading losses in full as
ordinary losses, then an "absurd" inconsistency arises between
the treatment of the commissions Mr. Kelly earned and paid on the
same transactions. Either the earned commissions should be
treated as a rebate that reduced his costs to acquire and sell
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