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It is determined that the amounts of
$101,938.26 and $54,529.65 shown on Schedule C
of your respective 1989 and 1990 income tax
returns as research and experimentation to
improve trading system formula for sale are
not allowed because it has not been established
that any amount was for an ordinary and necessary
business expense. Instead, the commodities
futures transactions constitute capital assets
and are includable as capital gains and losses on
Schedule D. Accordingly, your taxable income is
increased $101,938.26 for 1989 and $54,529.65 for
1990.
Respondent allowed petitioner to treat the losses as short-
term capital losses deductible on Schedule D, Capital Gains
and Losses. The notice states as follows:
It is determined that you are entitled to short-
term capital losses in the amounts of $102,158.00
for 1989 and $54,530.00 for 1990, limited to
$3,000.00 for each of the years 1989 and 1990,
resulting from commodities futures transactions.
As a consequence of disallowing the deductions that
petitioner claimed for his commodity trading losses,
respondent also determined that petitioner is liable for
additional self-employment taxes in 1989 and 1990, and
respondent allowed petitioner a deduction in the amount
of one-half of his self-employment tax liability in 1990.
OPINION
The principal issue in this case is whether
petitioner's losses from trading commodity futures are
capital or ordinary. Petitioner realized losses of
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