Case Law Examples

 

A taxpayer was held to be engaged in a trade or business when he devoted nearly all of his working time to the purchase and sale of securities. He made direct judgments regarding the purchase and sale of securities based on his personal knowledge of issuing corporations. In one year, he conducted 332 transactions involving the transfer of 112,400 shares worth $3,452,125. The dollar volume was over one-third the value of his entire holdings, and 70 percent of his net worth. He routinely visited the corporations in which he invested and talked to company officers and attended lectures on securities topics. Levin v US, 597 F2d 760 (Ct Cl 1979), 79-1 USTC ¶9331.

A taxpayer's sole occupation was trading his own account and was conducted from an office at a brokerage firm, which allowed him the use of a secretarial pool and telephone and access to its research staff and other facilities. He had over 1,000 purchase and sales transactions for over 1 million shares of stock in the companies in which he invested. The Tax Court, as affirmed by the Second Circuit, held that despite the taxpayer's extensive market activities and his generally professional attitude toward his stock holdings, the fact that a majority of his positions were held for more than 12 months indicated that he was not a trader. Est of Louis Yaeger v Commr, 55 TCM 1101, Dec. 44,843(M) LK:NON: LINKTCM DEC44843(M) , TC Memo. 1988-264, 55 TCM 1101 LK:NON: LINKTCM 55TCM1101 , aff'd, CA-2, 89-2 USTC ¶9633 LK:NON: USTCLINK 89-2USTCP9633 , 889 F2d 29, cert. denied, 495 US 946.

A taxpayer averaged over 1,000 trades per year but primarily sought to profit through capital appreciation, dividends and interest. Both the Tax Court1 and the Court of Federal Claims,2 ruling on different tax years but essentially the same facts, held against him when his securities had a weighted average holding period of over nine months, with about two thirds of the securities being held for over six months and less than 6 percent being held for 30 or fewer days. In addition, he did not direct the trades himself but instead hired at least eight money managers to whom he made clear his investment objectives in writing, and who had discretionary authority over the trades and were given three to five years without interference to prove themselves. 1 F. Mayer v Commr, 67 TCM 2949, Dec 49,838(M) LK:NON: LINKTCM DEC49838(M) , TC Memo. 1994-209. 2 F. Mayer v US, FedCl, 94-2 USTC ¶50,509 LK:NON: USTCLINK 94-2USTCP50509 .

A stockbroker managed his family's investments, carefully investigated companies before he purchased stock, and would generally hold the stock for long-term appreciation. He treated dividends from the securities purchased as personal service income. The Tax Court found that the taxpayer was merely an investor managing his investments and not an active trader in securities engaging in a trade or business. Beals v Commr, 53 TCM 492, Dec. 43,811(M) LK:NON: LINKTCM DEC43811(M) , TC Memo. 1987-171.