OT*Traders v investors
It is a facts and circumstances test(i.e. a "smell" test).
More info avaialable, if needed.
Securities Investors and Traders
Taxpayers who are mere investors may not deduct trade or business expenses or ordinary losses.189 However, they may be allowed
deductions of expenses for the production of income.190 Unlike securities traders, securities investors are not engaged in a
trade or business.191
189 See Code Secs. 162, 165.
190 See Code Sec. 212; see also Mallinckrodt v Nunam, 2 TC 1128 (1943), affd 146 F2d 1 (8th Cir 1945), cert denied 324 US 781.
191 Snyder v Commr, 295 US 134 (1935), 55 S Ct 737, 35-1 USTC ¶9344.
A facts and circumstances test is applied to determine whether an individual taxpayer is merely an investor or whether his activities rise
to the level of the trade or business of securities trading.192 The following factors are relevant to this determination:
192 Higgins v Commr, 312 US 212 (1941), 61 S Ct 475, 41-1 USTC ¶9233.
l the taxpayer's investment intent;
l the nature of the income to be derived from the securities; and
l the frequency, extent and regularity of the taxpayer's securities transactions.193
193 Moller v US, 721 F2d 810 (Fed Cir 1983), 83-2 USTC ¶9698.
Although traders and investors both hold securities in their own accounts, investors generally purchase securities for capital
appreciation and income, regardless of short-term market developments, while traders tend to buy and sell securities with an aim to profit
from the daily changes in the market.194 A trader's activities are directed toward short-term trading and an investor's are toward long-term
holding of investments. A trader principally derives income from the sale of securities and an investor from dividends and interest paid on
securities.195 The trader's profits are derived from the direct management of purchasing and selling.196
194 Purvis v Commr, 530 F2d 1332 (9th Cir 1976), 76-1 USTC ¶9270.
195 Moller v US, 721 F2d 810 (Fed Cir 1983), 83-2 USTC ¶9698.
196 Levin v US, 597 F2d 760 (Ct Cl 1979), 79-1 USTC ¶9331.
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.197
197 Id.
In the following circumstances, taxpayers were not engaged in a trade or business:
l Taxpayers, husband and wife, devoted full time to the management of their portfolios. They made over 100 securities transactions
in each tax year examined, but nearly one half of the transactions involved stock splits, withdrawals of trust accounts and other
nonspeculative activity. Interest and dividend income was over 98 percent of their gross income.198
198 Moller v US, 721 F2d 810 (Fed Cir 1983), 83-2 USTC ¶9698.
l A taxpayer's entire income was derived from dividends and interest.199
199 Klawa v Commr, TC Memo 1968-85, 27 TCM 403.
l A taxpayer, a retired accountant, acquired oil and mineral rights and engaged in occasional transactions in connection with those
interests.200
200 Rothbart v Commr, 26 TC 680 (1956).
l A taxpayer was a partner in an investment club partnership.201
201 Rev. Rul. 75-523, 1975-2 CB 257. |
