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We turn first to the securities. The proper treatment of
these losses depends on whether the disposed assets were "capital
assets". Section 1221 defines "capital asset" very broadly as
"property held by the taxpayer (whether or not connected with his
trade or business)" and then provides several exclusions from
this definition. One such exclusion, section 1221(1), covers:
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 * * *
Petitioners contend that the securities disposed of in the years
in issue are excluded from the definition of capital assets under
section 1221(1) because petitioner essentially functioned as a
dealer in such securities, and thus the securities were stock in
trade or inventory or property held primarily for sale to
customers within the meaning of section 1221(1).
With one exception, petitioner's securities transactions
were in options. Section 1234(a)(1) provides that gains and
losses from options take on the same character that the property
to which the option relates would have in the hands of the
taxpayer. However, this general rule does not apply to options
which constitute property described in section 1221(1). Sec.
1234(a)(3)(A). Thus, the proper characterization of the losses
from the options, as well as the one stock transaction, turns
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