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  Copyright© 2006 Colin M. Cody, CPA and TraderStatus.com, LLC, All Rights Reserved.
   




 


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


The CPA, Never Underestimate The Value





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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