Ewing v. Comm'r of Internal Revenue
| Decision Date | 30 August 1988 |
| Docket Number | 13442-84,13443-84,Docket Nos. 3896-84,14511-84,27900-84 |
| Citation | 91 T.C. 396,91 T.C. No. 32 |
| Parties | PHILIP M. EWING and MARIAN S. EWING, ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
During 1980 and 1981 petitioners were engaged as investors and not as dealers in straddle transactions in gold futures. They deducted ordinary losses on their 1980 returns from the ‘cancellation‘ of the losing legs of straddles and reported long-term capital gains on their 1981 returns from the ‘assignment‘ of winning legs. HELD:
1. For the purpose of determining whether the straddle transactions were ‘entered into for profit‘ within meaning of sec. 108(a) of the Tax Reform Act of 1984, Pub. L. 98-369, sec. 1808 of the Tax Reform Act of 1986, Pub. L. 99- 514, 100 Stat. 2817, the proper test is the ‘primarily for profit‘ standard applicable to losses under section 165(c)(2).
2. Losses disallowed in 1980 by sec. 108(a), as amended, are allowable as offset in 1981 against gains from disposition of the straddle positions. Sec. 108(c); sec. 1.165-13T, Q&A-3, Temporary Income Tax Regs.
3. Petitioners are liable for increased interest under sec. 6621(c), formerly sec. 6621(d), for underpayments attributable to tax motivated transactions.
4. Under the circumstances of these cases, additions for negligence under sec. 6653(a)(1) are not applicable and the award of damages under sec. 6673 is declined. Bruce I. Hochman, Avram Salkin, James V. Looby, 2 and Charles P. Rettig, for the petitioners.
Pamela R. Piland, for the respondent.
In his notices of deficiency, respondent determined deficiencies in and additions to petitioners' Federal income taxes as follows:
By amended answers respondent determined that all petitioners are liable for increased interest under section 6621(c), 4 petitioners in docket no. 3896-84 (Ewings) are liable for an addition to tax under section 6653(a)(2) in 1981 equal to 50% of the interest due on $2,822.00, and petitioners in docket nos. 13442-84 (Tolls) and 13443-84 (Leavitts) are liable for additions to tax under section 6653(a)(1) in 1980 of $4,264.15 and $7,302.08, respectively. At trial respondent orally moved that damages be awarded to the United States and against all petitioners under section 6673.
After concessions, the issues remaining for decision are: (1) whether certain transactions in gold futures were entered into by Mr. Ewing, Mr. Leong, Mr. Czarneski, Mr. Toll and Mr. Leavitt for profit, and if so, whether their losses from such transactions are ordinary losses or short term capital losses and their gains from such transactions are long term or short term capital gains; (2) whether the fees paid by the male petitioners with respect to such transactions are deductible; (3) whether petitioners are liable for additions to tax under section 6621(c), section 6653(a)(1), and section 6653(a)(2) as determined by respondent; and (4) whether damages should be awarded under section 6673.
Some of the facts have been stipulated and are so found. The stipulations and exhibits associated therewith are incorporated herein by reference.
The Ewings, Tolls and Leavitts resided in California at the time their petitions were filed and their joint income tax returns for the years in issue were filed with the Internal Revenue Service Center at Fresno. The Czarneskis and Leongs resided in Texas at the time their petitions were filed and their joint income tax returns for the years in issue were filed with the Internal Revenue Service Center at Austin. The returns of all petitioners were prepared utilizing the cash receipts and disbursements method of accounting.
As used hereinafter, the words ‘petitioner‘ and ‘petitioners‘ will refer only to the male petitioners unless otherwise indicated, and the use in our findings of such words and phrases as loss, gain, forward contract, cancellation, assignment, spread, straddle, short position, long position, transactions and similar words and phrases are for convenience only and are not to be construed as a determination of the nature of any act or thing.
Each male petitioner herein is a successful professional or businessman who had a substantial sum of ordinary income from his profession or business during each of the years in issue. On their income tax returns, each petitioner claimed deductions from his professional or business income for losses from the ‘cancellation‘ of gold futures contracts in the amounts and for the years shown below:
+-------------------------+
¦Petitioner ¦Year¦Loss ¦
+-----------+----+--------¦
¦Ewing ¦1980¦$107,563¦
+-----------+----+--------¦
¦ ¦1981¦116,096 ¦
+-----------+----+--------¦
¦Toll ¦1980¦103,835 ¦
+-----------+----+--------¦
¦Leavitt ¦1980¦103,835 ¦
+-----------+----+--------¦
¦Czarneski ¦1980¦227,400 ¦
+-----------+----+--------¦
¦ ¦1981¦359,600 ¦
+-----------+----+--------¦
¦Leong ¦1980¦35,000 ¦
+-----------+----+--------¦
¦ ¦1981¦198,200 ¦
+-------------------------+
All of the above losses purportedly occurred with respect to transactions in gold futures conducted during 1980 or 1981 in the manner hereinafter described on behalf of petitioners by F.G. Hunter and Associates. Petitioners did not engage in the transactions as dealers.
Trading in futures contracts occurs with respect to commodities including precious metals. In general, a futures contract is an agreement to either deliver (a short position) or receive (a long position) a specified quantity and grade of a designated commodity during a designated month in the future. A single position calling for the purchase or the sale of a designated commodity is described as an ‘open contract.‘ However, if the same person acquires a position calling for the purchase of a specified commodity and a different position calling for the sale of the same commodity, his position is described as a straddle and each of such positions is referred to as a ‘leg‘ of the straddle.
Persons trading in commodity futures seldom hold contracts to the closing date so as to make or receive delivery of the specified commodity. In fact, it is generally understood that less than five percent of all futures contracts actually result in the delivery of the underlying commodity. Instead, such contracts are generally disposed of by a ‘switch transaction,‘ which is the acquisition of an offsetting contract of purchase or sale of the same quantity of the commodity.
Whenever an open position is held, price changes in the commodity future directly affect the economic position of the holder. By contrast, in a straddle the holder is economically affected only by changes in the spread, i.e., the difference between the market price of each leg of the straddle. If the prices of the short and long legs of the straddle move exactly in tandem so that the spread does not change, the holder will suffer no economic consequence since his unrealized loss in one leg will be offset by his unrealized gain in the other. However, if the spread widens or narrows, the holder will incur either an economic gain or loss.
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