Gordon v. Commissioner
| Decision Date | 24 April 1997 |
| Docket Number | Docket No. 9887-95.,Docket No. 9900-95. |
| Citation | 73 T.C.M. 2638 |
| Parties | Beverly Gordon v. Commissioner. Ronald Gordon v. Commissioner. |
| Court | U.S. Tax Court |
Vincent R. Barrella, New York, N.Y., for the petitioner in Docket No. 9887-95. Ronald Gordon, pro se in Docket No. 9900-95. Rajiv Madan and Anthony J. Kim, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined the following deficiencies in petitioners' Federal income tax:1
The issues remaining for decision are:
Year Deficiency
1988 ..................... $88,979
1989 ..................... 18,979
1990 ..................... 1,330
(1) Are petitioners Ronald Gordon (Mr. Gordon) and Beverly Gordon (Ms. Gordon) entitled to a net operating loss deduction for 1988 that is attributable to an alleged net operating loss carryover from their taxable year 1986? We hold that they are not.
(2) Is respondent equitably estopped from claiming that petitioners are not entitled to a net operating loss deduction for 1988? We hold that she is not.
(3) Is Ms. Gordon entitled to innocent spouse relief under section 6013(e)(1)2 with respect to the understatement of tax for 1988 that is attributable to the net operating loss deduction that petitioners claimed for that year? We hold that she is not.
Most of the facts have been stipulated and are so found.
Mr. Gordon and Ms. Gordon resided in New York, New York, at the time their respective petitions in these cases were filed. (Mr. Gordon and Ms. Gordon are sometimes referred to as the Gordons.)
The Gordons were married on April 2, 1959, separated during March 1991, and divorced on July 14, 1994. They have two children, a daughter Jodi and a son Eric.
Throughout most of the period 1965 through 1996, Mr. Gordon, who majored in accounting, held a bachelor's degree in business administration, and was licensed by the National Association of Security Dealers (NASD) to sell securities to the public, earned his livelihood as a trader either for his own account or for the accounts of the various investment or securities firms (firms) that employed him. A trader is a professional investor in securities, commodities, or options, who is in the trade or business of buying and selling such products, with the aim of profiting from increases in the market prices of his or her positions.
Mr. Gordon's compensation as a trader for the firms that employed him was based on a percentage of the profits that his trading activities generated for those firms, and not on a fixed salary. Those firms generally protected themselves against any losses incurred by traders whom they employed by requiring them to deposit money as security for any such losses and/or by retaining for a certain period of time a portion of the compensation to which those traders were entitled.
At various periods of time during the years 1965 through 1996, Mr. Gordon, acting as either a floor trader (i.e., one who is, or is employed by, a member of a securities or commodities exchange and who trades on the floor of such an exchange for his or her own account or for the account of his or her employer) or an upstairs trader (i.e., one who executes such trades off the floor of such an exchange from his or her office) traded options for his own account or for the accounts of the various firms that employed him. An option is a contract under which (1) the buyer or holder has the right, but not the obligation, for a specified period of time to buy (i.e., call option) or sell (i.e., put option) a specified portion of the underlying interest (e.g., stocks, bonds, or commodities) at a fixed or determinable price and (2) the seller or writer is obligated to perform if the buyer or holder exercises the option.
A trader on the floor of an exchange who buys and sells options acts as either a market maker, a specialist, or a floor broker. Such a trader who acts as a market maker (options market maker) buys and sells options on the floor of an exchange either for his or her own account or for the accounts of others, competes with other options market makers to make a market in various options that are traded on that exchange, is registered with that exchange as a market maker in options, and is registered with the Securities and Exchange Commission (SEC) as a broker/dealer. A trader on the floor of an exchange who acts as a specialist in buying and selling options buys and sells options either for his or her own account or for the accounts of others, has less competition than an options market maker, is assigned to a particular option class or classes for which he or she is obligated to make a market, does not compete with other specialists in those option classes to which he or she is assigned, is the principal dealer responsible for making a market in the options in which he or she specializes, is registered with that exchange as a specialist in options, and is registered with the SEC as a broker/dealer. A trader on the floor of an exchange who acts as a floor broker in buying and selling options executes orders for others on the floor of that exchange, including orders for options market makers.
Throughout the period 1965 until sometime in 1969, First Hanover employed Mr. Gordon as a broker/trader for listed securities. As a broker, he sold listed securities to the public.3
Throughout the period that commenced sometime in 1969 until sometime in 1976, Mr. Gordon acted as an upstairs trader of securities listed on the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX) for the account of Chartered New England, a partnership that he and seven other individuals had organized in 1969.
Throughout the period that commenced sometime in 1976 until sometime in 1981, Mr. Gordon traded securities, commodities, and options for his own account.4
Throughout the period that commenced sometime in 1981 until sometime in 1982, Bear, Sterns employed Mr. Gordon as a stockbroker of listed securities, and, as such, he sold listed securities to the public.
Throughout the period that commenced sometime in 1982 until sometime in 1983, Mr. Gordon traded futures on the New York Futures Exchange for his own account.5
Throughout the period that commenced sometime in 1983 until sometime in 1984, Mr. Gordon was employed by Rosenkrantz, Ehrenkrantz, Lyons, and Ross to act for its account as an upstairs trader of listed securities.
Throughout the period that commenced sometime in 1984 through 1985, Moore and Schley, Cameron and Co. Securities (Moore), a firm that owned a seat on the AMEX, employed Mr. Gordon to act for its account as an options market maker and paid him Form W-2 wages (W-2 wages) for those services that were based on a percentage of the profits that he generated for that firm.
On December 31, 1985, Mr. Gordon purchased a seat on and became a member of the AMEX by purchasing an option-trading permit from Moore. Thereafter, during 1986 Mr. Gordon, who was registered with the SEC as a broker/dealer, registered with and operated on the AMEX as a market maker in stock options (i.e., options in which the underlying interest is stock) and index options (i.e., options in which the underlying interest is an index that is the measure of the value of a group of stocks or other securities).6 All of those options were listed and traded on the AMEX and subject to the respective rules and regulations of that exchange and the SEC.
As an options market maker, during 1986 Mr. Gordon (1) was obligated to comply with the respective rules and regulations prescribed by the SEC and the AMEX, (2) was required to provide liquidity for customer orders to be filled on the AMEX, (3) was obligated to create a market in options by offering simultaneously to buy and sell options at a particular price for certain stock, and (4) was required to make bids and offers in all option classes consistent with a fair and orderly market. As an options market maker, during 1986 Mr. Gordon had the opportunity to stand at a post on the AMEX trading floor, where buyers and sellers in a particular option are concentrated and where trades occur by open outcry, and to participate in public orders that came into that post. For example, as an options market maker, during 1986 Mr. Gordon may have been obligated to provide a bid price for an option on a particular stock, and traders on the floor of the AMEX could go to him either to buy or sell options at that bid price.
As an options market maker, during 1986 Mr. Gordon purchased a particular option at a certain bid price, owned that option for his own account, and expected to sell it at a slightly higher offered price. As such, Mr. Gordon took a position, that is, held an options, with a profit expectation derived from the fluctuations in the market. A great deal of Mr. Gordon's trading activity as an options market maker during 1986 was in options on the stock index, XMI. XMI is a stock index gauging the top 20 capitalized stocks on the NYSE.
During 1986, Mr. Gordon bought and sold over 50,000 option contracts in the normal course of his trade or business as an options market maker, and he did not identify any of those trades in options as a hedging transaction. All of the options that Mr. Gordon traded during that year were marked to market contracts. During 1986, Mr. Gordon was not a specialist on the NYSE who made a market in the stocks underlying the options that he traded.
During 1986, Mr. Gordon used Wagner Stott Clearing Corporation (Wagner Stott) as one of his clearing organizations. A clearing organization like Wagner Stott provides financing to, and sets margin requirements for, its clearing members. All standardized security options are issued and guaranteed by clearing organizations like Wagner Stott that are regulated by the SEC. During 1986, Wagner Stott provided Mr. Gordon with financing to trade during that year.
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