Herman N. and Veronica Welter - Page 4

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          through those accounts after the incorporation, without                     
          transferring the accounts to the corporations.  Petitioners                 
          represented to respondent that they continued to maintain the               
          brokerage accounts in Mr. Welter’s name after the incorporation             
          as a matter of convenience and to avoid additional filing and               
          account maintenance fees and expenses.  During the years at                 
          issue, Mr. Welter’s commodities trading activity consisted                  
          primarily of futures transactions in soybeans, oats, and corn.              
               On their Federal income tax returns for the years at issue,            
          petitioners reported the following amounts as gain or loss from             
          Mr. Welter’s commodities trading activity:                                  
                              Year        Gain (Loss)                                 
                              1994      ($189,164.00)                                 
                              1995      33,248.07                                     
                              1996      (142,345.30)                                  
          In each instance, petitioners treated the gain or loss as                   
          ordinary income or loss.  In the notice of deficiency, respondent           
          recharacterized such amounts as capital gain or loss, as                    
          I.  Commodities Trading Activity                                            
               A.  Arguments of the Parties                                           
               Petitioners claim ordinary income and loss treatment with              
          respect to Mr. Welter’s commodities trading activity on the                 
          ground that such activity consisted of hedging transactions                 

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