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on line 29 of Schedule C, Profit or Loss From Business, of his
Forms 1040, U.S. Individual Income Tax Return, for taxable years
1999 and 2000, respectively.
During the fall of 1999, petitioner decided to begin a new
career as a securities trader. Petitioner established brokerage
accounts with DLJdirect and Ameritrade, deposited $5 million in
each of those accounts, and became engaged in the trade or
business of trading securities on January 28, 2000.1
Petitioner used margin borrowing as part of his securities
trading strategy. On April 14, 2000, DLJdirect forced the
liquidation of petitioner’s entire account because petitioner
failed to cover a margin call after technology stocks declined
sharply during early April 2000. As of April 14, 2000,
petitioner’s net trading losses totaled $25,196,151.54.
Petitioner relied on certified public accountants to advise
him on Federal tax matters and to prepare his Federal tax
returns. J. Wray Pearce (Mr. Pearce), a certified public
accountant with over 30 years of experience, had served as
petitioner’s business and personal accountant for more than 13
years and was very familiar with petitioner’s securities trading
business.
1The parties stipulated this fact based on the volume and
frequency of petitioner’s trading.
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