T.C. Memo. 2007-260
UNITED STATES TAX COURT
STANLEY C. CAMERON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21726-05. Filed August 30, 2007.
Stanley C. Cameron, pro se.
M. Jeanne Peterson, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
LARO, Judge: Petitioner petitioned the Court to redetermine
deficiencies in Federal income tax of $2,071 for 2002 and $1,545
for 2003. We decide whether petitioner’s activities involving
the purchase and sale of stocks, options, and futures contracts
constituted a trade or business. We hold they did not.
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FINDINGS OF FACT
Some facts have been stipulated and are so found. The
stipulated facts and the exhibits submitted therewith are
incorporated herein by this reference. Petitioner resided in
Colorado Springs, Colorado, when his petition was filed.
Petitioner holds a bachelor’s degree in accounting and began
investing in the stock market in 2001. In 2002, he developed
software as an employee of Analysts International and was paid
wages of $28,543. In January 2002, he suffered severe injuries
from a car accident which left him unable to work for 4 months.
In August 2002, he received a settlement of $71,553 (after the
payment of legal fees and other expenses) as to the accident.
Afterwards, he ceased his employment and began trading in the
market to a greater extent. He purchased software and opened
brokerage accounts to enable him execute trades quickly.
Petitioner’s 2002 trading activity was conducted through
Datek, a brokerage subsequently acquired by Ameritrade. In 2002,
petitioner made 46 purchases totaling $26,108 and 14 sales
totaling $17,004. At the close of 2002, his brokerage account
was worth $11,774. On a Schedule D, Capital Gains and Losses,
attached to his 2002 Federal income tax return, petitioner
reported that he had realized a $2,127 capital gain from 11
sales. As reported, six transactions had a holding period of
less than 61 days, and three of the transactions had a holding
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period of less than 31 days. The holding periods of the
remaining 2 of the 11 transactions were not available. The
proceeds received on each of the transactions ranged from a high
of $5,739 to a low of $529.
Petitioner also included with his 2002 tax return a Schedule
C, Profit or Loss from Business, reporting that he had a sole
proprietorship named “Cameron Enterprises”, the principal
business of which was “Cameron Trading”. The 2002 Schedule C
reported that the business had received gross income of ($18),
after taking into account $59 for cost of goods sold reported as
a withdrawal for petitioner’s personal use.1 The Schedule C
reported that the business paid $200 for “office expenses”, $28
for “supplies”, and $12,211 for “continuing education”.
Petitioner’s 2002 tax return reported that petitioner was
entitled to deduct the $12,457 business loss (negative $18 of
gross income less the sum of $200, $28, and $12,211) to arrive at
his gross income.
In 2003, all of petitioner’s trading activity was conducted
through Datek/Ameritrade, OptionsXpress, and Trade Station
Securities, Inc. In 2003, petitioner made 109 purchases totaling
$79,409 and 103 sales totaling $89,204. His brokerage account at
the end of 2003 was worth $10,287, and his futures account was
1
With the exception of this $59 withdrawal, the Schedule C
reports no item for cost of goods sold.
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worth $2,541. On his 2003 Schedule D, he reported 65 sales
totaling $88,799. He also reported on Form 6781, Gains and
Losses from Section 1256 Contracts and Straddles, losses from
futures transactions as a loss from section 12562 contracts
marked to market. Petitioner held 30 futures contracts for 1 to
30 days. He held 21 futures contracts for 31 to 60 days. He
held seven futures contracts for 60 to 90 days. He held seven
futures contracts for 91 to 180 days. Petitioner’s 2003 Schedule
C for Cameron Enterprises reported that its “principal business
or profession” was “SERVICE MARKET TRADI”. The Schedule C
reported no income from the business and expenses totaling
$8,797. The expenses consisted of $959 for travel, $6,043 for
continuing education, and $1,795 for “ongoing services”. Also in
2003, petitioner reported receiving unemployment compensation of
$11,971.
During the years at issue, petitioner did not conduct trades
5 days a week. Of the years at issue, there were only 2 months
in which petitioner conducted trading activity on more than 10
days. On the days he was not conducting trades, petitioner was
maintaining a cash position.
Petitioner’s continuing education expenses for 2002 and 2003
were attributable to his attending seminars related to his
2
Unless otherwise indicated, section references are to the
Internal Revenue Code, and Rule references are to the Tax Court
Rules of Practice and Procedure.
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trading activities. These expenses consisted of amounts spent on
supplies, books, journals, computer software, online services,
classes, seminars, travel, and meals.
Respondent determined in the notice of deficiency that the
$200 and $28 expenses deducted for 2002 were deductible under
section 212. Respondent also determined that petitioner was not
entitled to deduct any of the remaining expenses claimed on his
2002 and 2003 Schedules C. As to all of the expenses, the notice
states that petitioner had not established that they were
“ordinary and necessary business expenses” or were “expended for
the purpose designated”. The notice also states as to the
claimed expenses for continuing education and ongoing services
that petitioner did not establish that any of those expenses were
incurred for the production of income or, to the extent of the
expenses claimed for education, that they “were incurred
primarily to maintain or improve skills required in your present
employment, trade, or business, or to meet the express
requirements of your employer”.
OPINION
Petitioner argues that he was in the trade or business of
trading securities and entitled to deduct expenses related to his
trading activities as “above the line” deductions pursuant to
section 162(a). Respondent argues that petitioner did not trade
his securities in a trade or business and, to the extent that his
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expenses are deductible, they are deductible as “below the line”
deductions pursuant to section 212. We agree with respondent.
The Internal Revenue Code does not define the term “trade or
business”. Commissioner v. Groetzinger, 480 U.S. 23, 27 (1987);
Estate of Yaeger v. Commissioner, 889 F.2d 29, 33 (2d Cir. 1989),
affg. 92 T.C. 180 (1989). Whether petitioner’s activities
constituted a trade or business is a question of fact. See
Higgins v. Commissioner, 312 U.S. 212, 217 (1941); Estate of
Yaeger v. Commissioner, supra at 33; Mayer v. Commissioner, T.C.
Memo. 1994-209; Paoli v. Commissioner, T.C. Memo. 1991-351.
Petitioner has the burden of proof. See Rule 142(a)(1); Welch v.
Helvering, 290 U.S. 111, 115 (1933).3
In determining whether a taxpayer’s trading activities
constituted a trade or business, courts have distinguished
between “traders” and “investors”. Moller v. United States, 721
F.2d 810, 813 (Fed. Cir. 1983); see also Levin v. United States,
220 Ct. Cl. 197, 597 F.2d 760, 765 (1979). Management of
securities investments, regardless of the extent and scope of
such activity, is seen as the work of a mere investor, “not the
trade or business of a trader.” Estate of Yaeger v.
3
Under sec. 7491(a)(1), the burden of proof may shift to
the Commissioner if the taxpayer introduces credible evidence
with respect to any factual issue relevant to ascertaining the
taxpayer’s proper tax liability and meets certain requirements
under sec. 7491(a)(2). Petitioner did not raise an issue as to
the application of sec. 7491, and we find that section is
inapplicable to this case.
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Commissioner, supra at 34; see also Whipple v. Commissioner, 373
U.S. 193, 202 (1963); Higgins v. Commissioner, supra at 217;
Paoli v. Commissioner, supra; Beals v. Commissioner, T.C. Memo.
1987-171. This result is the same notwithstanding the amount of
time the individual devotes to the activity. Mayer v.
Commissioner, supra. Even “full-time market activity in managing
and preserving one’s own estate is not embraced within the phrase
‘carrying on a business,’ and * * * salaries and other expenses
incident to the operation are not deductible as having been paid
or incurred in a trade or business.” Commissioner v.
Groetzinger, supra at 30. Instead, an investor’s expenses may be
deductible under section 212 to the extent that expenses were
incurred in the production of income.4 Sec. 212; Whipple v.
Commissioner, supra at 200; United States v. Gilmore, 372 U.S.
39, 45 (1963).
In determining whether a taxpayer who manages his own
investments is a trader, nonexclusive factors to consider are:
(1) The taxpayer’s investment intent, (2) the nature of the
income to be derived from the activity, and (3) the frequency,
extent, and regularity of the taxpayer’s securities transactions.
Moller v. United States, supra at 813. For a taxpayer to be a
4
In contrast to trade or business expenses, a taxpayer’s
investment-related expenses that are deductible under sec. 212
are subject to a limitation under sec. 67(a) and do not reduce
alternative minimum taxable income.
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trader, the trading activity must be substantial, which means
“frequent, regular, and continuous enough to constitute a trade
or business” as opposed to sporadic trading. Ball v.
Commissioner, T.C. Memo. 2000-245. A taxpayer’s activities
constitute a trade or business where both of the following
requirements are met: (1) The taxpayer’s trading is substantial,
and (2) the taxpayer seeks to catch the swings in the daily
market movements and to profit from these short-term changes
rather than to profit from the long-term holding of investments.
Mayer v. Commissioner, supra. Respondent concedes that petitioner
meets the second requirement; thus, we focus on the first
requirement.
As to the first requirement, we find petitioner’s trading
activity was not substantial. Courts consider the number of
executed trades in a year and the amount of money involved in
those trades when evaluating whether a taxpayer’s trading
activities were substantial. See, e.g., Mayer v. Commissioner,
supra; Paoli v. Commissioner, supra. In Paoli, the Court held
trading activities were substantial when the taxpayers traded
stocks or options worth approximately $9 million. In Mayer, the
Court considered over 1,100 executed sales and purchases in each
of the years at issue there to be substantial trading activity.
Trading activity was found to be insubstantial when a taxpayer
executed at most 83 purchases and 41 sales in one year and 76
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purchases and 30 sales in the second year. Moller v. United
States, supra at 813.
In 2002, petitioner’s trading activity consisted of 46
purchases and 14 sales. In 2003, he completed 109 purchases and
103 sales. During the years at issue, petitioner did not trade 5
days a week. Of the years at issue, he traded on more than 10
days in a given month only twice. We also note that petitioner’s
collecting unemployment compensation during 2003 further
undermines his argument that he was engaged in a trade or
business during that year. We conclude that petitioner was not
engaged in a trade or business of trading securities during the
years at issue and thus that his expenses related to his trading
activities are not deductible under section 162. We also agree
with respondent’s determination that none of the expenses, but
for the $200 and $28 expenses allowed in the notice of
deficiency, are deductible by petitioner under section 212, in
that petitioner has failed to demonstrate that the expenses were
incurred for the production of income. We also note in this
regard the applicability of section 274(h)(7), which disallows
any deduction under section 212 for expenses allocable to a
convention, seminar, or similar meeting.
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We have considered all petitioner’s arguments for holdings
contrary to those expressed herein and reject the arguments not
discussed herein as irrelevant or without merit.
Decision will be entered
for respondent.