The opinion
WHALEN, J., dissenting: We are again confronted with section 108 of the Deficit Reduction Act of 1984, Pub. L. 98-369, 98 Stat. 630 (hereinafter section 108). In this case, we are called upon to decide whether petitioner qualifies as a “commodities dealer” within the meaning of section 108(b) as amended by section 1808(d), Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2817.
The majority construes the term “commodities dealer” to exclude everyone other than floor traders, floor brokers, and members of an exchange. In my view, there is no basis for such limitation in the statute or its legislative history. The majority arrives at this narrow construction by focusing on section 108(b), a provision of limited applicability intended to allow a deduction for certain pre-1982 straddle losses. The majority appears to overlook or dismiss as having “little or no practical effect” the impact of its opinion on the application of the self-employment tax to commodities traders and on their ability to contribute to qualified self-employment plans. (Majority op. at 902 note 2.) By limiting the term “commodities dealers” to floor traders, floor brokers, and members of an exchange, the majority limits the application of self-employment taxes to the same group. Other commodities traders escape self-employment tax on the gains and losses realized from their trading of section 1256 contracts. Similarly, they are not entitled to treat such gains and losses as “earned income” under the rules governing contributions to self-employment plans. See sec. 401(c)(2). I cannot accept the majority’s view that Congress intended this anomalous result or that we should disregard it as having “little or no practical effect.”
In general, section 108(b) treats losses from certain pre-1982 straddles as “incurred in a trade or business” and, thus, as losses deductible under section 108(a). The losses which qualify for such treatment are those incurred by a “commodities dealer in the trading of commodities.”
For purposes of section 108(b), the term “commodities dealer” is defined by section 108(f) to mean “an individual described in section 1402(i)(2)(B)” and certain members of his family. Section 1402(i)(2)(B) provides as follows:
(B) Commodities dealer. — The term “commodities dealer” means a person who is actively engaged in trading section 1256 contracts and is registered with a domestic board of trade which is designated as a contract market by the Commodity Futures Trading Commission.
Respondent’s position is that the above definition prescribes a two-part test. First, he contends that “the term ‘registered’ as used in section 1402(i)(2)(B) was intended to mean registered as a member.” (Emphasis supplied.) Second, he contends, “In determining whether the petitioner ‘actively engaged in trading section 1256 contracts,’ the Court must look only to the trades personally executed by him on the floor of a domestic exchange designated as a contract market by the CFTC.” (Emphasis supplied.) Respondent’s position is that only a member of an exchange who personally executes sufficient trades on the floor of a domestic exchange (or, alternatively, has them executed for his own account) is a “commodities dealer,” as that term is used in section 108(b). Respondent argues, “Congress intended section 108(b) to give preferential treatment only to professional traders that operated on the floor of an exchange.”
The majority accepts respondent’s construction of the “actively engaged” requirement. It construes the phrase “actively engaged in trading section 1256 contracts” to exclude persons “who are not floor traders, floor brokers or members of an exchange.” (Majority op. at 906.) As I read its opinion, if a taxpayer does not fall into one of those narrow categories, he is not a “commodities dealer,” regardless of the maimer in which he engages in commodities trading or the volume of such activity. Petitioner conced-edly does not fall within those categories. Therefore, the majority holds that petitioner is not a “commodities dealer” because “he does not buy and sell commodities futures on the floor of, and subject to the rules of, an exchange.” (Majority op. at 906.) In view of that holding, the majority does not construe the term “registered” or reach respondent’s contention that such term in section 1402(i)(2)(B) means membership on an exchange.
Unlike the majority, I believe that qualification under the words “actively engaged in trading section 1256 contracts” was intended to be determined using the facts and circumstances analysis which we have traditionally employed in such cases. See, e.g., King v. Commissioner, 89 T.C. 445 (1987); Liang v. Commissioner, 23 T.C. 1040 (1955); Polacheck v. Commissioner, 22 T.C. 858 (1954); Kemon v. Commissioner, 16 T.C. 1026 (1951). Under that analysis, the location at which a person buys and sells securities or commodities contracts, and his membership on an exchange, are factors which may be taken into account, but they are not determinative of the taxpayer’s status as a trader, broker, or investor. For example, in King v. Commissioner, supra 457 et seq., we distinguished traders from dealers and investors by the nature and extent of their activities. In that case, the Court noted that persons who regularly buy and sell on an exchange may be either dealers or traders. The difference between the two is that dealers have customers, whereas traders do not. Accordingly, the stocks or commodity contracts held by a trader in his business may qualify as capital assets under the definition in section 1221. King v. Commissioner, supra at 457. Thus, traders occupy an unusual position under the tax law because they may engage in a trade or business which produces capital gains and losses, rather than ordinary income and losses. King v. Commissioner, supra at 457. Traders are distinguished from investors by the nature of the activity in which they are engaged. Traders seek to profit from short-term market swings and receive income principally from selling rather than from dividends, interest, or long-term appreciation. Trading, as compared to investing, implies more frequent and substantial purchases and sedes. King v. Commissioner, supra at 458.
Significantly, the Deficit Reduction Act of 1984 added section 1256(f)(3) to provide that, with the exception of certain hedging transactions, gains and losses “from trading of section 1256 contracts” are to be treated as capital gains and losses. The conference report accompanying the act notes that Congress merely intended to codify prior law “with respect to professional commodity traders.” H. Rept. 98-861 (Conf.), at 903 (1984), 1984-3 C.B. (Vol. 2) 157. The conference report in effect recognized that traders occupy a special position under the tax law, as summarized above.
Congress also enacted section 1402(i) in the Deficit Reduction Act of 1984 and further recognized that the capital gains and losses realized by a commodities trader “in the normal course of the taxpayer’s activity of * * * trading section 1256 contracts” are, in reality, business income which should be subject to self-employment tax and taken into account in making contributions to self-employment plans. Congress defined the term “commodities dealers” in section 1402(i)(2)(B) to describe the group who would be treated as professional commodities traders and subject to self-employment tax on their gains and losses from trading. That is, persons who are “actively engaged in trading section 1256 contracts” and who are “registered with a domestic board of trade.”
The words “actively engaged in trading” are meant to identify “traders,” as determined under the facts and circumstances analysis described above. Thus, in my view, the definition of commodities dealer in section 1402(i)(2)(B) is intended to include traders who, like petitioner, are registered with a domestic exchange. The definition was intended to exclude investors and traders who, unlike petitioner, are not registered with a domestic exchange.
In any event, there is nothing to suggest that Congress intended the term “commodities dealer” to refer only to floor traders, floor brokers, or members of an exchange. If Congress had wanted to limit the definition of commodities dealer to floor brokers, floor traders, and members of an exchange, it could have simply used those words, rather than the phrase “actively engaged in trading section 1256 contracts.” It has done so in other similar provisions. For example, in section 1236(d)(2) Congress specifically defined the term “floor specialist” as follows:
(2) FLOOR specialist. — The term “floor specialist” means a person who is—
(A) a member of a national securities exchange,
(B) is registered as a specialist with the exchange, and
(C) meets the requirements for specialists established by the Securities and Exchange Commission.
Although the majority sets forth its view that Congress intended to limit the definition of “commodities dealer” to floor traders, floor brokers, and members of an exchange, it never explains how the Words “actively engaged in trading section 1256 contracts” convey that intent. Implicit in the majority opinion is the proposition that only floor traders, floor brokers, and members engage in “trading” commodities futures contracts. Also implicit is the proposition that only floor traders, floor brokers, and members can be “actively engaged” in such activity. I cannot accept either proposition.
Indeed, respondent’s own regulation defining the term “commodities dealer” in section 1402(i)(2)(B) does not limit it to floor traders, floor brokers, and members of an exchange. That regulation states as follows:
Q-7. Who qualifies as a commodities dealer or as a person regularly engaged in investing in regulated futures contracts for purposes of the profit presumption?
A-7. For purposes of this section, the term “commodities dealer” has the meaning given to such term by section 1402(i)(2)(B) of the Code. Section 1402(i)(2)(B) defines a commodities dealer as a person who is actively engaged in trading section 1256 contracts (which includes regulated futures contracts as defined in Q&A-6) and is registered with a domestic board of trade which is designated as a contract market by the Commodity Futures Trading Commission. To determine if a person is regularly engaged in investing in regulated futures contracts all the facts and circumstances should be considered including, but not limited to, the following factors: (1) regularity of trading at all times throughout the year; (2) the level of transaction costs; (3) substantial volume and economic consequences of trading at all times through the year; (4) percentage of time dedicated to commodity trading activities as compared to other activities; and (5) the person’s knowledge of the regulated futures contract market. [Sec. 1.165-13T, Temporary Income Tax Regs., 49 Fed. Reg. 33445 (Aug. 23, 1984).]
The majority appears to base its narrow construction of the term “commodities dealer” solely on the legislative history of section 108. Although the majority admits that the “actively engaged in trading” requirement “appears clear on its face,” it nevertheless undertakes an examination of the legislative history of section 108(b) on the ground that the Court “may seek , out any reliable evidence as to legislative purpose.” (Majority op. at 904.) While I agree that the Court can look to clear legislative history to construe the terms of an ambiguous statute, the majority appears to do the opposite. The legislative history cited by the majority is anything but clear, and thus the majority appears to rely upon ambiguous legislative history to vary the terms of a clear statute. Moreover, the majority appears to focus on the legislative history of section 108(b) and, in the process, loses sight of the broader implications of the term “commodities dealers” contained in section 1402(i).
My principal objection is that the majority’s narrow definition of the term “commodities dealer” for purposes of section 108 does not comport with the intended use of that term for self-employment tax purposes. In fact, as mentioned above, the definition at issue here is drawn from a self-employment tax provision, section 1402(i)(2)(B), It was enacted by the Deficit Reduction Act of 1984 as part of a special rule to prescribe how commodities dealers are to compute “net earnings from self-employment” for purposes of the self-employment income tax under section 1401. Generally, taxpayers other than commodities dealers exclude capital gains and losses in determining net earnings from self-employment. Sec. 1402(a)(3)(A). Commodities dealers, on the other hand, are required by the special rule to take into account gains or losses “from section 1256 contracts or property related to such contracts.” Sec. 1402(i)(l).
In enacting this provision, Congress also intended that commodities dealers would thereby be entitled to treat gains and losses from their trading activity as “earned income” for purposes of section 401(c)(2) and the rules governing contributions to self-employment plans. H. Rept. 98-861, at 910 (1984), .1984-3 C.B. (Vol. 2) 164. Congress made a similar change to the Social Security Act. See sec. 102(c)(2), Deficit Reduction Act of 1984, 98 Stat. 622 .
The definition of “commodities dealer” is the same under section 108 as it is under section 1402(i)(2)(B). Congress intended it to be the same:
For purposes of the provision [section 108], the term “commodities dealer” has the same meaning as such term in the amendments by the bill providing for application [of] the self-employment income tax to such persons. [H. Rept. 98-861, at 917 (1984), 1984-3 C.B. (Vol. 2) 171.]
Thus, the majority’s construction of the term for purposes of section 108 governs for self-employment tax purposes. If, as the majority holds, only floor traders, floor brokers, or members of an exchange tire “commodities dealers” for purposes of section 108, then only such persons are commodities dealers for purposes of section 1402(i)(2)(B). Other commodities traders are not “commodities dealers,” and are not subject to the special rule of section 1402(i). They need not include their gains and losses realized from trading futures contracts and underlying property in computing net earnings from self-employment. Sec. 1402(a)(3)(A). Therefore, under the majority’s construction of the “actively engaged” requirement of section 1402(i)(2)(B), only floor traders, floor brokers, and members of an exchange are subject to self-employment tax on their business income.
I see no reasonable basis to suppose that Congress intended to impose self-employment taxes on floor traders, floor brokers, and members of an exchange, but to allow other professional commodities traders to escape self-employment taxes. In defining the term “commodities dealer,” section 1402(i)(2)(B) says nothing about the physical location at which a taxpayer conducts his trading activity or whether the person is a member of an exchange. The gains and losses which he realizes from his trading activity are the same whether he conducts his activity on the floor of the exchange or elsewhere. They receive the same characterization, as capital or ordinary, regardless whether the trading takes place on or off the floor of .an exchange. See, e.g., sec. 1256(f)(3).
Similarly, the legislative history of section 1402(i)(2)(B) says nothing about the physical location of a taxpayer’s trading. Congress described its definition of “commodities dealer” in section 1402(i)(2)(B) as follows:
Under the conference agreement, gains and losses derived in the ordinary course of trading in section 1256 contracts and property related to such contracts (e.g., stock used to hedge options) are defined as earnings from self-employment for purposes of applying the tax on self-employment income and the rules relating to contributions to self-employment plans. This treatment is extended only to options dealers, and commodity dealers, as defined in the bill. A commodity dealer is any person registered with a domestic board of trade designated as a contract market by the CFTC who buys or sells options or RFCs subject to the rules of such board. This treatment applies to taxable years beginning after the date of enactment except that for options dealers electing 60/40 and mark-to-market rules for the taxable year which includes the date of enactment, it applies for such taxable year. The conferees intend that no inference be made as to whether options dealers and commodity dealers be viewed as engaged in a trade or business in connection with their transactions in section 1256 contracts as a result of the application of self-employment taxes to such persons. [H. Rept. 98-861, at 910 (1984), 1984-3 C.B. (Vol. 2) 164.]
The majority’s narrow construction of “commodities dealer” creates the anomalous result that only floor traders, floor brokers, and members of an exchange are subject to self-employment tax on gains and losses from trading section 1256 contracts. This problem cannot be dismissed, as the majority attempts to do in footnote 2 of its opinion, on the ground that its opinion deals with “associated persons” and has “little or no practical effect for self-employment tax purposes because AP’s are usually employees.” (Majority op. at 902 note 2.) The majority’s holding is not limited to associated persons and investors. Its opinion states “we hold that, under the 1986 amendments, section 108(b) excludes brokers and investors who are not floor traders, floor brokers, or members of an exchange.” (Majority opinion at 906.) Under that holding, every commodities trader who is not a floor trader, floor broker, or member of the exchange is excluded from the term “commodities dealer.”
By disregarding the overall purpose of the term “commodities dealer” as enacted by the Deficit Reduction Act of 1984, the majority drastically limits the application of self-employment taxes to. commodities traders and unfairly curtails the ability of certain commodities traders to make contributions to their self-employment plans. Accordingly, I respectfully dissent.
COHEN and CLAPP, JJ., agree with this dissent.