IRS investigating futures traders leasing income

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Updated: February 21, 2012 8:43AM

The Internal Revenue Service is investigating futures traders for how they report their income from leasing to others memberships on the Chicago exchanges.

The probe came to light in a federal court filing last week. In it, the Justice Department asked for court authority to serve a so-called “John Doe” summons for records on CME Group Inc., owner of the Chicago Mercantile Exchange and the Chicago Board of Trade.

The John Doe process can be used when information is sought about people whose identities are unknown but whose common activity, owning an exchange membership in this case, may have led them to violate the law.

The filing includes an affidavit from IRS agent Adam Soline, who said he has examined returns from 12 people who lease CME Group memberships. In each case, the Justice Department said, the taxpayers incorrectly reported their leasing income, reducing their tax liability.

But the intent might not be fraudulent. Soline said tax preparation software wrongly categorizes the leasing income.

The issue is whether the income is from a “passive activity” under IRS rules. The agency alleged passive activity involves only tangible property, such as real estate, and not intangible property, such as an exchange membership.

Taxpayers have an incentive to claim passive activity income. Without it, losses from other investments cannot be claimed as a deduction from ordinary income.

An IRS spokesman and Justice Department officials declined to comment, and CME Group also declined.

James Koch, an attorney who represents traders on both sides of the leasing transaction, said the IRS is trying to revise a longstanding interpretation of tax law. “If they come after my guys, I’m going to argue that this is how it’s been done for years and years and years,” he said.

Traders who own memberships, or seats, at the exchanges often lease them to get income during retirement or when they’re not using them for market access. The leases are offered in an open market and exchanges records show that, depending on the seat, they command monthly rents of a few hundred dollars to more than $2,500.

Many traders lease multiple seats. The Chicago Board of Trade has 3,600 seats, while the Chicago Mercantile Exchange has 3,138, but how many are leased could not be learned.

Court records show that the request for the John Doe summons was assigned to U.S. District Court Judge Robert Gettleman and that he has not ruled on it.

The federal petition said the IRS probe covers Jan. 1, 2008 through Dec. 31, 2010.