Higgins v. Commissioner of Internal Revenue 10 8212 13, 1941, No. 253

• Court: United States Supreme Court
• Writing for the Court: REED
• Citation: 61 S.Ct. 475,312 U.S. 212,85 L.Ed. 783
• Parties: HIGGINS v. COMMISSIONER OF INTERNAL REVENUE. Argued Jan. 10—13, 1941
• Docket Number: No. 253
• Decision Date: 03 February 1941

312 U.S. 212 61 S.Ct. 475 85 L.Ed. 783 HIGGINS

v.

COMMISSIONER OF INTERNAL REVENUE.

No. 253. Argued Jan. 10—13, 1941. Decided Feb. 3, 1941. Rehearing Denied Mar. 3, 1941.

See 312 U.S. 714, 61 S.Ct. 728, 85 L.Ed. —-.

Page 213

Mr. Selden Bacon, of New York City, for petitioner.

Mr. Arnold Raum, of Washington, D.C., for respondent.

Mr. Justice REED delivered the opinion of the Court.

Petitioner, the taxpayer, with extensive investments in real estate, bonds and stocks, devoted a considerable portion of his time to the oversight of his interests and hired others to assist him in offices rented for that purpose. For the tax years in question, 1932 and 1933, he claimed the salaries and expenses incident to looking after his properties were deductible under Section 23(a) of

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the Revenue Act of 1932.¹ The Commissioner refused the deductions. The applicable phrases are: 'In computing net income there shall be allowed as deductions: (a) Expenses. * * * All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *.' There is no dispute over whether the claimed deductions are ordinary and necessary expenses. As the Commissioner also conceded before the Board of Tax Appeals that the real estate activities of the petitioner in renting buildings² constituted a business, the Board allowed such portions of the claimed deductions as were fairly allocable to the handling of the real estate. The same offices and staffs handled both real estate and security matters. After this adjustment there remained for the year 1932 over twenty and for the year 1933 over sixteen thousand dollars expended for managing the stocks and bonds.

Petitioner's financial affairs were conducted through his New York office pursuant to his personal detailed instructions. His residence was in Paris, France, where he had a second office. By cable, telephone and mail, petitioner kept a watchful eye over his securities. While he sought permanent investments, changes, redemptions, maturities and accumulations caused limited shiftings in his portfolio. These were made under his own orders. The offices kept records, received securities, interest and dividend checks, made deposits, forwarded weekly and annual reports and undertook generally the care of the investments as instructed by the owner. Purchases were made by a financial institution. Petitioner did not participate directly or indirectly in the management of the corporations in which he held stock or bonds. The method of handling his affairs under examination had been employed by petitioner for more than thirty years.

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No objection to the deductions had previously been made by the Government.

The Board of Tax Appeals³ held that these activities did not constitute carrying on a business and that the expenses were capable of apportionment between the real estate and the investments. The Circuit Court of Appeals affirmed,⁴ and we granted certiorari, 311 U.S. 626, 61 S.Ct. 34, 85 L.Ed. —-, because of conflict.⁵

Petitioner urges that the 'elements of continuity, constant repetition, regularity and extent' differentiate his activities from the occasional like actions of the small investor. His activity is and the occasional action is not 'carrying on business.' On the other hand, the respondent urges that 'mere personal investment activities never constitute carrying on a trade or business, no matter how much of one's time or of one's employees' time they may occupy.'

Since the first income tax act, the provisions authorizing business deductions have varied only slightly. The Revenue Act of 1913⁶ allowed as a deduction 'the necessary expenses actually paid in carrying on any business.' By 1918 the present form was fixed and has so continued.⁷ No regulation has ever been promulgated which interprets the meaning of 'carrying on a business,' nor any rulings approved by the Secretary of the Treasury, i.e., Treasury Decisions.⁸ Certain rulings of less dignity, favorable to petitioner,⁹ appeared in individual cases but

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they are not determinative.¹⁰

Even acquiescence¹¹ in some Board rulings after defeat does not amount to settled administrative practice.¹² Unless the administratives practice is long continued and substantially uniform in the Bureau and without challenge by the Government in the Board and courts, it should not be assumed, from rulings of this class, that Congressional reenactment of the language which they construed was an adoption of their interpretation.

While the Commissioner has combated views similar to petitioner's in the courts, sometimes successfully¹³ and sometimes unsuccessfully,¹⁴ the petitioner urges that the Bureau accepted for years the doctrine that the management of one's own securities might be a business where there was sufficient extent, continuity,...