Higgins v. Commissioner
312 U.S. 212 (1941)

  • Higgins had extensive investments in real estate, stocks, and bonds. He had a staff, and spent his time buying and selling securities.
  • When he filed his taxes, Higgins deducted the costs of salaries and expenses in looking after his properties as a business expense. The IRS denied the deduction. Higgins appealed.
    • The IRS claimed that Higgins' activities were not a "trade or business," and so they were not deductible under the applicable section of the tax code (now known as 26 U.S.C. 162(a)).
  • The Tax Court affirmed. Higgins appealed.
    • The Tax Court found that rental incomes from Higgins' rental properties did count as a business, but that the money he made from buying and selling stocks did not. Since there was no way to apportion which expenses came from the rentals and which came from the stock trading, none of it should be deductible.
  • The Appellate Courts affirmed. Higgins appealed.
  • The US Supreme Court affirmed.
    • The US Supreme Court found that buying and selling stock is not a "trade or business," it is personal investment. And personal investment is not deductible no matter how big those investments are.
    • The Court noted that the terms in the tax code were vague and "trade or business" was not well defined, so they deferred interpreting the Statute to the IRS.
  • After this case was decided, Congress enacted 26 U.S.C. 212, which allows individuals like Higgins to claim deductions related to the production and collection of income.