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The parties advanced several arguments, and the pivotal
question for each is whether petitioner was in a trade or
business. Although respondent determined that petitioner is
entitled to a deduction for the disgorgement, an NOL was
disallowed because of the determination that petitioner’s
activity was not a trade or business, a prerequisite here for a
carryback.4 In that context, we must decide whether petitioner
was in a separate trade and/or business of selling insider
information or whether the expenses were connected with
petitioner’s status as an employee.
Petitioner stipulated that he had unreported income of
$154,0005 in 1987 from the sale of insider information.
Petitioner contends that he is not liable for an income tax
deficiency for 1987 because he sustained NOL’s for 1988 and 1989
that may be carried back to 1987. In particular, petitioner
argues that he is entitled to deduct legal expenses in 1988 and
1989 and the disgorgement of his insider trading profits in 1988
as business expenses. He contends that the legal fees and
4 Respondent did not argue or determine that the deduction
for the disgorgement or the allowance of a net operating loss
(NOL) was against public policy.
5 In the deficiency notice, respondent determined unreported
income of $150,000. Respondent did not seek to amend the answer,
but at trial and on brief sought an increased deficiency and
additions to tax. Petitioner’s admission that he had unreported
income of $154,000 caused the issue to have been tried by consent
of the parties. See Rule 41(b).
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