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.
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.
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.