Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
The Amount of Trading that Makes a “Trade or Business” in Cameron v. Commissioner
Robert J. Wille
In Cameron v. Commissioner, the Tax Court found that a taxpayer’s online trading activities did not rise to the level of a “trade or business.” The court stated that, as a threshold matter, an individual who manages his own investment
securities is just an investor, “regardless of the extent and scope of such activity,” and is not engaged in the “trade or business” of being a trader in securities for purposes of section 162. However, the court also explained, it is possible that a person who manages his own investments can be engaged in the “trade or business” of being a trader in securities. “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.” Although the Commissioner conceded that Cameron satisfied the second requirement, the court concluded that Cameron’s trading activity was not substantial. Thus, Cameron was not entitled to a deduction for expenses related to carrying on a “trade or business.”
The rise of online trading presents new challenges to the criteria courts use in determining whether someone is engaged in a “trade or business.” Courts have not sufficiently updated an outdated body of case law to deal with the novel issue of online traders. This case offers an opportunity to explore the existing case law and regulation with respect to the nature and level of trading activity that qualifies as a “trade or business.” Accordingly, Part I of this Note reviews the background of the relevant Code sections and their interpretation. Part II provides the factual background of the case and describes the Tax Court’s opinion. Part III engages in an analysis of the opinion. Part IV provides recommendations for improving the clarity of the “trade or business” rule with respect to traders. Specifically, it argues in favor of using industry standards for determining whether a specific level of trading constitutes a “trade or business.”