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It first started for us back in the mid 1980's. A client came in
with his regular tax paperwork as a W-2'd post office employee who
worked evenings in the mail sorting facility and this time he also brought in a
pile of paperwork supporting his new daytime occupation as an active
trader. As you can imagine, no one else in the office gave it a
second thought, calling it mere investing resulting with the huge
six-figure trading loss characterized as capital loss to be taken against income at
$3,000 per year.
This taxpayer by now had also lost another hefty amount during the
following year (this being by the time his tax return was being prepared
"on extension"). At $3,000 per year, he'd have to live to be 100+
years old to use up all the capital losses against his annual W-2 wages.
So rather than just go with the accepted thought that these losses were
limited to $3,000 per year, I started researching the matter. This
client was really too small to warrant such an undertaking delving into
the "unknown" but I was
interested in doing some pro-bono research because I
and a couple other partners at the CPA firm were fairly active traders
ourselves (by 1980's standards). Heck, we'd often be found observing the holy
grail: the "Level II" monitors at the small boutique brokerage /
private banker offices that were next door to our CPA offices.
Well, that first client with trader status was the initial building
block to which many years of further research have been added.
Years of Tax Court cases supporting or challenging certain facets of
trader status taxation have come down since then and since the landmark
US Supreme Court Groetzinger cases of 1985 to 1987.
In the later 1980's I was active on the IBM owned online service PRODIGY along
with many active traders and active tax practitioners. I was the
only person active on both boards though, and as such I further honed my
skills by dealing with situations and questions from traders and
taxpayers at large. By 1991 the occasional trader status discussions were becoming more
and more common on PRODIGY.
PRODIGY offered web pages to their members and in 1996 my first web site
(just a few pages, actually) was on-line!
Those early PRODIGY days were something! Just prior to its demise in
October 1999 or shortly thereafter, many in our group of early, active PRODIGY
members went on to form their own presence on the internet during the
late nineties and thereafter, including:
Brad and Jeff Dryer:
http://www.siliconinvestor.com/
Kaye A Thomas:
http://www.fairmark.com/
Greg Meadors:
http://www.tradesforaliving.com/
Kenny Carter: http://www.sku.com/
http://www.bizwiz.com/ezcommerce/scorekeepersunitedsku.htm
Frank CAT Catalano:
http://www.siliconinvestor.com/profile.aspx?userid=4207602#recentposts
Gary Grobbel:
http://www.siliconinvestor.com/profile.aspx?userid=302502#recentposts
Kerry Goodson BBNS Bacon Butt News Service (how to find him varies)
Gayle Essary: http://investrend.com/
David & Tom Gardner: http://www.fool.com/
(just a short period of time before they were on AOL exclusively)
Ian Woodward:
http://tip.wallstreetcity.com/Newsletters/highlights/highlights1.asp
http://www.tscn.com/wscWin/The_Woodward_Investment_Letter.html
Bruce A. Brotnov:
http://www.poormans.com/
Jim Sheffield, FT$$ Follow the Money (deceased)
Brookins Buys:
http://www.runstockrun.com/
Trader Status taxation had remained a deeply unknown "cult" section of
the IRS tax code and then in June 1997 IRS Code Section 475(f) was
added, regulating the election to use the mark-to-market method of
accounting for the gains and losses of an active trader. At the
same time on-line brokers and real-time quotes are becoming available
to anyone with enough computing power at home to support it. So
now, nearly ten years later, it has become a "well known cult"
section of the IRS tax code.
After the first release by the IRS of the new law, I was in ongoing
communication with the authors of the IRS Code regarding technical
corrections and needed clarifications, the result of which was less
confusion regarding the intent of Congress with regards to this new law.
Specifically: IRS Code Section 475(f)(1)(D); IRS Rev Proc 99-17 Sec. 5;
Proposed Regs 104924-1998 par. 9; par. 24 through 32; and
1.475(f)-2(a)(3).
By March 1999 the business became so active that the web site was moved over
to www.traderstatus.com
In September 2000 the SEC was seeking comments about CPA firms. A
number of CPA's as well as myself came forth and blasted the festering cancer we saw in one or
more of the largest CPA firms.
http://www.sec.gov/rules/proposed/s71300/0911b02s.htm This
commentary to the SEC gave them an ominous insight to the coming Arthur
Anderson / Enron fiascos. Unfortunately they did not heed the
warnings, they let the massive accounting frauds to continue until it
was too late before they took the needed action.
With availability of the new targeted www.traderstatus.com website and the service mark "TraderStatus"
we've been brought into contact with taxpayers all over the USA and in
many countries throughout the world. From partners in the largest
international CPA firms, to litigation attorneys, to IRS employees, as
well of course to active traders themselves - advice and research has been sought out.
A manual explaining the detailed tax issues and grey areas of trader status was written and made
available for purchase for several years.
Audits of both individual and entity level trader status tax returns
have been referred here for advisory or even actual lead
representation. Audits have been handled here in CT by
transferring all the books and records to our offices, or they are
handled via telephone, fax and US Mail with the IRS office nearer to the
taxpayer, depending on the circumstances. Litigation attorneys in
need of expert witness testimony have consulted to obtain insight on
this complex area of the tax law..
To date (knock on wood) our consulting and recommendations regarding
trader status for individuals and for pure-play trader status entities
have been upheld in every case, without exception. This includes
the so-called "new idea" of the husband & wife partnership, which my
original CPA firm had been doing long before I joined them right out of
college
(UConn Huskies!).
We haven't been able to uphold trader status for every audit client who
eventually came here for representation when their trader status tax returns were prepared elsewhere
improperly, resulting in an IRS examination. But
satisfactory negotiations, even going to IRS Appeals when appropriate,
have seen improved conclusion of even these difficult IRS examinations.
Going forward, more and more successful traders are opting for
entities. Often it's a multi-member LLC (used over the GP mostly
because of the added asset protection) but often General Partnerships
and even Corporations are used. Litigation services are active
as more and more taxpayers seek to have attorneys litigate
malfeasance/errors over trader status/mark-to-market against their former tax advisors. Also satisfying is
that some successful traders from across the country are now
diversifying by plowing their trading gains into real estate and other
ventures and they've chosen to retain us for these non-trader
situations as well.
Colin M. Cody, CPA, CMA
TraderStatus.com LLC
6004 Main Street
Trumbull, Connecticut 06611-2400
(203) 268-7000
http://www.sec.gov/rules/proposed/s71300/0911b02s.htm
Author: "TaxSpecialist"
at Internet
Date: 09/11/2000 7:03 PM
Normal
TO: RULE-COMMENTS at 03SEC
Subject: Comments on file no. S7-13-00
------------------------------- Message Contents
Dear Sirs:
I have been a CPA and a member of the AICPA since 1976. I have
seen the changes
over the years as the large firms put DOLLARS before the long and
hard-won
integrity that the initials "CPA" stood for back when I was in school.
It has been far too long that the SEC has remained silent. You
should have
jumped on this back in the 1980s. Of course, the big money
behind the national
CPA firms will be fighting you tooth and nail. DON'T BACK DOWN!
Help put INTEGRITY back into the "CPA" initials that I worked (and my
predecessors worked) so hard to earn.
The licenses of the partners of the firms doing consulting and
investing in the
very same companies that they are so-called "auditing" should be
permanently
REVOKED as these charlatans have proven by their actions to care
solely for
their own pocketbooks and not the integrity (or even the appearance of
integrity) of the profession.
Colin M. Cody, CPA, CMA
6004 Main St
Trumbull CT 06611
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