Tax Law

Henricus v. Comm’r.: a Trader v. Investor Déjà vu

It seems like as of late the Tax Court is set on slamming every person that comes through its doors claiming a trader status.  It feels like it was yesterday when I talked about the Richard Kay case on this blog. There I alluded that a taxpayer who seemed to fall within the category of what most people in the trading community would call a swing trader ended up being treated as an investor.  On top of that the taxpayer was hammered with a Section 6662 penalty. Well, roll forward a few months and we have the same story all over again. The Tax Court just decided the following case Henricus C. van der Lee et ux. v. Comm'r., T.C. Memo. 2011-234 (September 29, 2011).  In Henricus we have a former Merrill Lynch trader who at some point branched out on his own. He left Merrill and started trading stocks, options and futures from his home. Throughout the year at issue the taxpayer executed a total of 189 trades.

As in Richard Kay the Tax Court applied the 3 prong trader v. investor facts and circumstances test, namely, it weighed the: (1) the taxpayer's 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. As with Richard Kay, the Tax Court thought that the holding period and the frequency of the trading did not rise to trader status. In this case the Court took an issue with the fact that Henricus never sold stock on the day of its acquisition and that his trading activity was, in the court's view, sporadic. As a result, just as in Richard Kay, the taxpayer was slapped with a penalty.

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