T.C. Memo. 2000-245
UNITED STATES TAX COURT
SANDRA B. BALL & KEITH M. NORTHROP, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14273-98. Filed August 8, 2000.
Keith M. Northrop, pro se.
Sheila R. Pattison, for respondent.
MEMORANDUM OPINION
PAJAK, Special Trial Judge: Respondent determined
deficiencies in petitioners' Federal income taxes in the amounts
of $2,799 and $2,991 for the taxable years 1995 and 1996. Unless
otherwise indicated, subsequent section references are to the
Internal Revenue Code in effect for the years in issue, and all
Rule references are to the Tax Court Rules of Practice and
Procedure.
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After concessions by the parties, this Court must decide
whether petitioner Keith M. Northrop (petitioner) was in the
trade or business of being a stock trader or whether he was an
investor during 1995 and 1996, and whether petitioner in his
investment activity is entitled to deduct: (1) Office expense of
$920 and $1,935 in 1995 and 1996, respectively, (2) depreciation
of $3,854 in 1995, and (3) interest expense of $2,411 and $4,233
in 1995 and 1996, respectively. Respondent determined that
petitioners were liable for self-employment tax for 1995 and
1996, respectively, on the earnings of petitioner from his
counter top resurfacing business and of petitioner Sandra B. Ball
from her real estate business. Respondent allowed petitioners
corresponding deductions of one-half of the self-employment tax.
Because petitioners did not address the self-employment tax issue
at trial, we deem it conceded.
Some of the facts have been stipulated and are so found.
Petitioners resided in Austin, Texas, at the time they filed
their petition.
At the outset, we note that petitioners reported $15,209 and
$12,556 of adjusted gross income in 1995 and 1996, respectively.
Petitioner claimed he had a credit line of $150,000 from various
credit card companies and used only borrowed money to invest in
stock. On his 1996 return, petitioner claimed he purchased
$878,146.26 worth of stock in February 1996. We find it hard to
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believe that petitioner could have so exceeded his lines of
credit with the credit card companies that he was able to make
such purchases. Petitioner reported a $14,691 net short-term
loss from the sale of stock and petitioner deducted $3,000 of
that loss in 1996. Despite our misgivings, we shall assume,
arguendo, for purposes of this opinion and in accordance with the
way the case was tried, that the stock sales were in fact made.
During the years in issue, petitioner, in business as
Chameleon Counters, resurfaced countertops for property owners.
In 1993, petitioner began investing money in stocks with an
initial sum of $2,000. Prior to this time, he had no experience
in investing in the stock market.
In 1995, petitioner decided to put more effort into the
stock market activity. As noted, petitioner asserted that he
only invested borrowed money. Petitioner claimed that he had a
credit line of more than $150,000 which he used exclusively for
investing. Petitioner purchased a computer and software.
Petitioner claimed that he spent his days from 8:30 a.m. to 3:00
p.m. on the computer or watching CNBC on the television to get
stock quotes. He also read newsletters on trading. Petitioner
made eight short-term stock sales in 1995 and seven short-term
stock sales in 1996. Petitioner did not invest on behalf of
other people.
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Petitioner filed a Schedule C, Profit or Loss from Business,
for Chameleon Counters in 1995 and 1996. On the Schedules C, he
listed office expenses, interest, and depreciation which he
asserted were related to his business as a stock trader.
Petitioner listed his gains and losses from the stock trades on
Schedule D, Capital Gains and Losses. Respondent disallowed the
expenses because it was determined that petitioner is not in the
trade or business of being a stock trader, but is instead an
investor, and because petitioners did not substantiate the
expenses. Petitioner claims he is a trader, not an investor, and
should be entitled to deduct the above expenses on Schedule C.
We briefly comment on the question which was the focus of
the parties at trial; whether petitioner was a trader or
investor. In determining whether a taxpayer who manages his own
investments is a trader or merely an investor, we consider the
following factors: "(1) The taxpayer's investment intent; (2) the
nature of the income to be derived from the activity; and (3) the
frequency, extent, and regularity of the taxpayer's securities
transactions." Hart v. Commissioner, T.C. Memo. 1997-11. To be
a trader, the trading activity must be substantial, which means
"frequent, regular, and continuous enough to constitute a trade
or business" as opposed to sporadic trading.
It is apparent that petitioner's trading activity, eight
sales transactions in 1995 and seven sales transactions in 1996,
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was not substantial. Hart v. Commissioner, supra (trading was
not substantial where taxpayer had 36, 30, and 15 sales of stock
during each of the years in question); Paoli v. Commissioner,
T.C. Memo. 1991-351 (trading was not substantial where taxpayer
had 326 sales transactions, but sales were not regular and
continuous). Accordingly, we find that petitioner was an
investor, not a trader, and he is not allowed to deduct
investment related expenses under section 162.
Petitioners failed to substantiate the expenses in dispute
as required under section 6001. Petitioner had no books and
records. His handwritten notes do not constitute evidence of
interest payments. His cash register receipts for alleged
computer purchases do not total the amount claimed, nor do they
show the method of depreciation used. There is nothing in the
record about office expenses. In short, respondent disallowed
these expenses for, inter alia, lack of substantiation.
Nevertheless, at trial petitioner failed to substantiate his
expenses. Therefore, petitioners may not deduct such expenses
under section 212. We hold for respondent on these issues.
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To the extent that we have not addressed any of petitioners'
arguments, we have considered them and find them to be without
merit.
Decision will be entered
under Rule 155.