Colin, the first few paragraphs are to refresh MY memory of MY reference to 75-523.
Securities Investors and Traders
In the following circumstances, taxpayers were not engaged in a trade or business:
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, 52 AFTR2d 83-6333.
A taxpayer's entire income was derived from dividends and interest.199
199 Klawa v Commr, TC Memo 1968-85, 27 TCM 403, 68,085 P-H TC Memo.
A taxpayer, a retired accountant, acquired oil and mineral rights and engaged in occasional transactions in connection with those interests.
200 Rothbart v Commr, 26 TC 680 (1956).
A taxpayer was a partner in an investment club partnership.
201 Rev Rul 75-523, 1975-2 CB 257.
REV-RUL, Investment club partnership expenses., Revenue Ruling 75-523, 1975-2 CB 257, (Jan. 01, 1975)
Revenue Ruling 75-523, 1975-2 CB 257
Section 702.--Income and Credits of Partner
26 CFR 1.702-1: Income and credits of partner.
(Also Sections 212, 703, 761; 1.212-1, 1.703-1, 1.761-1.)
[IRS Headnote] Investment club partnership expenses.--
A member of an investment club partnership, formed solely to invest in securities and whose income is derived solely from taxable dividends, interest, and gains from security sales, may deduct under section 212 of the Code that member's distributive share of the partnership's reasonable operating expenses incurred in its taxable year.
Advice has been requested whether expenses incurred by an "investment club," a partnership availed of for investment purposes only are deductible in arriving at partnership income, or whether each partner may deduct such expenses on the individual Federal income tax return.
An "investment club," a partnership for Federal income tax purposes, was formed by a group of 20 individuals solely for the purpose of
investing in securities. The participants in the investment club contributed cash only. The members owned the property as coowners, and each member reserved the right separately to take or dispose of that member's share of the securities. Income of the partnership is derived solely from taxable dividends, interest, and gains from the sale of the securities. The partnership incurred expenses during the taxable year for such items as postage, stationery, safe deposit box rentals, bank charges, fees for accounting and investment services, rent, and utility charges. These expenses were reasonable in amount and were proximately related to the investment activities of the partnership.
Section 212 of the Internal Revenue Code of 1954 provides for the deduction, in the case of an individual, of all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income or for the management, conservation, or maintenance of property held for the production of income.
Section 1.212-1(d) of the Income Tax Regulations provides that the expenses must be reasonable in amount and must bear a reasonable and
proximate relation to the production or collection of taxable income or to the management, conservation, or maintenance of property held for the production of income.
Sections 7701 and 761 of the Code define the term "partnership" as including a syndicate, group, pool, joint venture or other unincorporated organization through or by means of which any business, financial operation, or venture is carried on, and which is not a trust or estate or a corporation.
Under section 761 of the Code a partnership may be availed of for investment purposes only, and need not be engaged in the active conduct of a business.
While an investment club is considered to have an objective to carry on business for purposes of section 7701 of the Code, it does not
follow that it is engaged in a trade or business for purposes of section 162. The term "trade or business" when considered in connection with section 162 or its predecessor sections has been given a narrow construction by the courts.
It is well settled that expenses relating to the management of one's investment in stocks and bonds, even though the activities include the buying and selling of securities, as well as owning and holding them for the production of income, are not expenses incurred in the carrying on of a trade or business within the meaning of section 162 of the Code. In Higgins v. Commissioner, 312 U.S. 212 (1941), 1941-1 C.B. 339, the Supreme Court of the United States held that investment activities with respect to one's own account are not activities in carrying on a trade or business. Also see City Bank Farmers Trust Co. v. Helvering, 313 U.S. 121 (1941), 1941-1 C.B. 344.
Therefore, an individual taxpayer's personal investment activities are not a trade or business for purposes of section 162 of the Code.
Although investment activities are undertaken jointly in the case of an investment club, this community of operation does not transform
investing activities into business activities insofar as section 162 is concerned. The activities of an investment club-partnership are essentially the same as those of an individual investor.
Accordingly, the expenses incurred by the partnership during the taxable year for postage, stationery, safe deposit box rentals, bank
charges, fees for accounting and investment services, rent, and utility charges are deductible under section 212 of the Code.
Section 703 of the Code provides, in part, that the taxable income of a partnership shall be computed in the same manner as in the case of an individual, except that certain items described in section 702 shall be separately stated, and additional itemized deductions for individuals shall not be allowed to the partnership.
Section 702 of the Code provides, in substance, that in determining income tax, each partner shall take into account separately that partner's distributive share of the partnership's items of income, gain, loss, deduction or credit, to the extent provided by the Code and by the regulations. The character of any such item shall be determined as if the item were realized by the partner directly from the source from which realized by the partnership, or incurred by the partnership. Section 1.702-1(a)(8)(i) of the regulations provides, in part, that each partner shall take into account separately the distributive share of nonbusiness expenses as described in section 212.
Accordingly, since the enumerated expenses incurred by the "investment club" qualify as deductions under section 212 of the code, each partner must separately take into account the distributive share of such expenses and may deduct them on the individual's federal income tax return provided deductions are itemized.
Revenue Ruling 75-525, page 350, this Bulletin, holds that members of a partnership engaged solely in the operation of a group investment
program do not have "net earnings from self-employment" from that operation under section 1402(a) of the Self-Employment Contributions Act of 1954.
Monty |
