The precise question is whether an options dealer, without statutory blessing, should be treated as a dealer for tax purposes with respect to his non-market-making activities. In Reinach v. Commissioner, T.C. Memo. 1965-288, affd. 373 F.2d 900 (2d Cir. [1967]), cert. denied, 389 U.S. 841 (1967), a professional writer of options deducted option losses as ordinary losses incurred in his trade or business as a dealer in options. The taxpayer's principal source of income was the writing of options, and he maintained an office with a salaried staff with rented private telephone lines to brokers and wrote option contracts over a three year period. The Tax Court held that since the taxpayer held no securities for sale to customers, he was not a dealer in securities and, therefore, his losses were capital in nature. Therefore, while the literal language of section 1234(b)(3) appears to apply to taxpayers who are in the trade or business of writing options, the Tax Court did not recognize the writing of options, alone, as a trade or business.

Judicial decisions have recognized that a specialist may be a dealer with respect to some securities, but not as to others. Vaughan v. Commissioner, 85 F.2d 497 (2d Cir. [1936]), cert. denied 299 U.S. 606 (1936); Stern Brothers & Co. v. Commissioner, 16 T.C. 295, 313 (1951). Vaughan v. Commissioner, supra, is factually indistinguishable from this

case.

Petitioner, on the other hand, the other hand, argues that he he was registered, as required by the CBOE, with the SEC as a dealer and the trades in question were conducted through his CBOE market maker account. Petitioner argues that Reinach v. Commissioner, T.C. Memo. 1965-288, affd. 373 F.2d 900 (2d Cir. 1967), relied on by respondent, categorized the taxpayer as a dealer in options but that the loss in question resulted from trading in stocks, which were capital

assets.

Petitioner argues that Vaughan v. Commissioner, 85 F.2d 497 (2d Cir. 1936), is distinguishable on the ground that the taxpayer in that case was a specialist on the New York Stock Exchange (NYSE), which designates dealers in certain stocks. According to petitioner: A specialist on the NYSE is "unique" because such specialist is the only dealer on the floor in a listed stock; because the CBOE system does not employ specialists and separates the broker function from the dealer function, a CBOE market maker is treated as a dealer in all classes of CBOE options; thus, Vaughan has no application to a CBOE market maker.

The issue, as we see it, is whether the specific transactions in issue were engaged in by petitioner as a dealer or, to the extent that those transactions constitute granting of options, whether they were engaged in "in the ordinary course of" petitioner's trade or business. Neither registration nor regulation of petitioner as a dealer under CBOE rules controls the categorization of these transactions for tax purposes. Thus, the distinctions between NYSE specialists and CBOE market makers are not persuasive. We will not here resolve disputes between the parties about the significance of the size of the trading floor, the location or post at which specific options were traded and the distance from the locations where petitioner spent most of his time during the period in issue, and the percentage of transactions represented by the trades in issue. That petitioner's trades were conducted through his market maker account rather than through a personal investment account is merely evidentiary and not conclusive. See Stephens, Inc. v. United States, 464 F.2d 53, 60 (8th Cir. 1972); Stern Brothers & Co. v. Commissioner, 16 T.C. 295, 316-319 (1951).

In analogous contexts, we have considered whether transactions conducted on a regular basis were "dealer" transactions. In King v. Commissioner, 89 T.C. 445 (1987), we considered whether certain commodities were held as a part of the taxpayer's trade or business or for investment within the meaning of section 163(d). In that context, we discussed the distinctions for tax purposes among a dealer, a trader, and an investor. We noted that one who regularly buys and sells on any exchange may be either a dealer or a trader, and that:

a primary distinction for Federal tax purposes between a trader and a dealer in securities or commodities is that a dealer does not hold securities or commodities as capital assets if held in connection with his trade or business, whereas a trader holds securities or commodities as capital assets whether or not such assets are held in connection with his trade or business. A dealer falls within an exception to capital asset treatment because he deals in property held primarily for sale to customers in the ordinary course of his trade or business. A trader, onthe other hand, does not have customers and is therefore not considered to fall within an exception to capital asset treatment.

The distinction between a "trader" and an "investor" also turns on the nature of the activity in which the taxpayer is involved. A trader seeks profit from short-term market swings and receives income principally

from selling on an exchange rather than from dividends, interest, or long-term appreciation. Groetzinger v. Commissioner, 771 F.2d 269, 274-275 (7th Cir. 1985), affd. 480 U.S. [23] (1987); Moller v. United States, 721 F.2d 810, 813 (Fed. Cir. 1983). Further, a trader will be deemed to be engaged in a trade or business if his trading is frequent and substantial. Groetzinger v. Commissioner, supra at 275; Fuld v. Commissioner, 139 F.2d 465 (2d Cir. 1943), affg. 44 B.T.A. 1268 (1941). An investor, on the other hand, makes purchases for capital appreciation and income, usually without regard to short-term developments that would influence prices on the daily market. Groetzinger v. Commissioner, 82 T.C. 793, 801 (1984), affd. 771 F.2d 269 (7th Cir. 1985), affd. 480 U.S. [23] (1987); Liang v. Commissioner, 23 T.C. 1040, 1043 (1955). No matter how extensive his activities might be, an investor is never considered to be engaged in a trade or business with respect to his investment activities. Higgins v. Commissioner, 312 U.S. 212, 216, 218 (1941); Groetzinger v. Commissioner, 771 F.2d at 275.

[89 T.C. at 458-459. Fn. ref. omitted.]

See also Heggestad v. Commissioner, 91 T.C. 778, 785 n. 2 (1988).

Petitioner's explanation of the reasons for the trades in which he engaged persuaded us that those trades were conducted with a profit objective. The extent and nature of them suggests that he was a "trader" rather than an "investor" in options. His explanations, however, all related to his personal profit strategy. None of the trades were justified by reference to CBOE requirements imposed on him as a market maker. He acknowledged that he did not recall any of the trades being attributable to a "call to the post" in which he was required to make a market in a particular stock or option. None of the trades were explained in relation to a customer of the CBOE, except to the extent that petitioner, himself, was a customer. The transactions in issue, therefore, cannot be treated as dealer transactions. See Brown v. United States, 192 Ct. Cl. 203, 220-224, 426 F.2d 355, 363-365 (1970). The options granted for petitioner's own account cannot be said to be in the ordinary course of market maker activity because they were not written for the purpose of meeting demands for a market or even for creating liquidity. Thus, petitioner is not entitled to ordinary loss treatment for those transactions.

Decision will be entered under Rule 155.

ROBERT O. ANDERSON AND BARBARA P. ANDERSON; THE HONDO COMPANY & SUBSIDIARIES, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE,

RESPONDENT

Docket No. 5111-85.

Filed January 26, 1989.

A, the sole shareholder of corporation D, caused D to distribute to him in November 1978 substantially appreciated stock in a public corporation which was being held as collateral for D's debts to bank B. D's debts were also secured by the continuing guarantee of A. As part of the distribution, B agreed to release the stock from collateral but required that A, in his individual capacity, promise not to sell the stock until the outstanding balance of D's debts had been reduced. D was not liquidated following the distribution. B was given custody of the stock after it was retitled in A's name. A, with B's approval, sold the stock in January 1979, prior to the reduction of D's debts. Held, gain from A's January 1979 sale of stock should not be imputed to D because D did not participate in the sale in any significant manner and the distributed stock was not inventory, the sale of which would produce operating profits for an ongoing business. Held, further, the distribution of stock took place, in substance, in November 1978 because A received unrestricted legal control of the stock at that time.

James E. Bye, William S. Huff, Bruce N. Lemons, and Dan A. Sciullo, for the petitioners.

Benjamin deLuna and David P. Monson, for the respondent.

SCOTT, Judge: Respondent determined a deficiency in the Federal income tax of petitioners Robert O. Anderson and Barbara P. Anderson for their tax year ending October 31, 1977, in the amount of $104,263, and for their tax year ending October 31, 1979, in the amount of $3,059,563. Respondent determined a deficiency in the Federal income taxes of petitioner, the Hondo Co., for its tax year ending December 31, 1979, in the amount of $1,795,673.

Some of the issues raised by the pleadings have been disposed of by agreement of the parties, leaving for our decision (1) whether the Hondo Co. distributed 100,000 shares of Atlantic Richfield Co. stock to its sole shareholder, Robert Anderson, in its tax year ending December

31, 1978, or in its tax year ending December 31, 1979, and (2) whether income from the sale in January 1979 by petitioner Robert O. Anderson, of the stock distributed to him should be attributed to the Hondo Co.

FINDINGS OF FACT

Some of the facts have been stipulated and are found accordingly.

Petitioners Robert O. Anderson and Barbara P. Anderson, husband and wife, were residents of Roswell, New Mexico, at the time of the filing of the petition in this case. Petitioner, the Hondo Co., is a New Mexico corporation. Its principal place of business and offices were located in Roswell, New Mexico, at the time of the filing of the petition in this case. During the tax years at issue, and at the time the petition was filed, the Hondo Co. was known as the Diamond A Cattle Co. (Diamond A or the corporation). We will refer to the Hondo Co. as Diamond A throughout the remainder of this opinion. The petition for redetermination of the deficiencies in this case was filed jointly by the Andersons and Diamond A.

Petitioners Robert O. Anderson and Barbara P. Anderson filed joint Federal income tax returns for their taxable year ending October 31, 1979, with the Internal Revenue Service in Austin, Texas. Robert O. Anderson, the principal individual litigant in this case, was the sole shareholder of Diamond A during the years in issue. Diamond A filed consolidated Federal income tax returns, on an accrual basis, with its subsidiaries for its taxable years ending December 31, 1978, and December 31, 1979, with the Internal Revenue Service in Austin, Texas.

Robert Anderson was born in April 1917 in Chicago, Illinois. He was the son of a prominent Chicago banker. After attending the University of Chicago and working for a small oil company, Mr. Anderson bought a 50-percent interest in a small refinery in New Mexico. Under Mr. Anderson's stewardship, the refinery became a successful independent oil company. In 1963, the company was merged with a corporation which would later become the Atlantic Richfield Co. (ARCO). After the merger in 1963, Mr. Anderson became chairman of the board of directors of