Edward and Ruth Kelly - Page 14

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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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