Moller v. United States

• Decision Date: 13 December 1982
• Docket Number: No. 208-81T.,208-81T.
• Citation: 553 F. Supp. 1071,1 CI. Ct. 25
• Parties: Joseph A. & Dorothy D. MOLLER v. The UNITED STATES.
• Court: U.S. Claims Court

553 F. Supp. 1071

1 CI. Ct. 25

Joseph A. & Dorothy D. MOLLER v. The UNITED STATES.

No. 208-81T.

United States Claims Court.

November 19, 1982.

As Amended December 13, 1982.

David R. Frazer, Phoenix, Ariz., attorney of record, for plaintiffs. Yale F. Goldberg and Lewis & Roca, Phoenix, Ariz., of counsel.

David C. Hickman, Washington, D.C., with whom was Asst. Atty. Gen. Glenn L. Archer, Jr., Washington, D.C., for defendant. Donald H. Olson and Theodore D. Peyser, Washington, D.C., of counsel.

OPINION

WHITE, Judge.

This case is related to the considerable number of cases in which courts, through the years, have dealt with the problem of whether taxpayers, in determining their income tax liabilities, may properly deduct from gross income expenses incurred by the taxpayers in connection with the management of their investments.

A common question in such cases is whether the activities of a taxpayer with respect to his investments constitute the carrying on of a "trade or business," as the pertinent provision of the Internal Revenue Code (now contained in 26 U.S.C. § 162(a)) states in part that "* * * there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *." In this case, because of its unusual facts, the question just stated must be answered in the affirmative.

In the present case, Joseph A. and Dorothy D. Moller (plaintiffs) are husband and wife, and they are residents of Scottsdale, Arizona. During 1976 and 1977, the plaintiffs actively managed four separate portfolios of stocks and other securities, and, in doing so, they incurred expenses totaling $22,659.91 in 1976 and $29,561.69 in 1977.

The 1976 expenses included $5,832.88 as the cost of maintaining an office in the plaintiffs' principal residence at Scottsdale and $1,606.77 as the cost of maintaining a second office in the plaintiffs' summertime residence at Santa Barbara, California. The 1977 expenses included $5,350.55 as the cost of maintaining the office in Scottsdale and $1,896.66 as the cost of maintaining the office in Santa Barbara.

In preparing and filing their joint income tax returns for 1976 and 1977, the plaintiffs deducted from gross income the respective amounts which they had expended during 1976 and 1977 in connection with the management of the four portfolios.

On audit, the Internal Revenue Service (IRS) disallowed the portions of the plaintiffs' deductions based on the costs involved in maintaining the Scottsdale and Santa Barbara offices; and the IRS assessed deficiencies in income taxes, plus interest thereon, for 1976 and 1977.

The plaintiffs paid the deficiencies and interest, sought refunds from the IRS, and, having failed to secure administrative relief, filed the present action.

The Government has conceded that the office expenses with which the court is concerned in the present case were "ordinary and necessary expenses," but the Government disputes the plaintiffs' contention that they were carrying on a "trade or business" during the years in question.

The answer to the question of whether a taxpayer was carrying on a "trade or business" during a taxable period must be determined on the facts of the particular case. Higgins v. Commissioner, 312 U.S. 212, 217, 61 S.Ct. 475, 478, 85 L.Ed. 783 (1941); Chang Hsiao Liang v. Commissioner, 23 T.C. 1040, 1045 (1957). Consequently, in resolving the issue that is before the court in the present action, it is necessary to set out in considerable detail the facts concerning the plaintiffs' investment activities.

It has been mentioned earlier in the opinion that, during 1976 and 1977, the plaintiffs were actively engaged in the management of four portfolios of stocks and other securities. The same four portfolios were managed by the plaintiffs before 1976, and the plaintiffs have continued to manage them since 1977. One of these portfolios consists of securities held by the plaintiff Joseph A. Moller (Mr. Moller) individually, a second consists of securities held by the plaintiff Dorothy D. Moller (Mrs. Moller) individually, a third consists of securities held by Northern Trust No. 1-29551 (Northern Trust), and the fourth consists of securities held by the First Interstate Bank Trust No. XX-XX-XXXX (First Interstate Trust).

In 1976, the total value of all four portfolios was approximately $13,500,000. In 1977, the total value of the four portfolios was approximately $14,500,000.

The First Northern Trust originated through stock put in trust for Mrs. Moller by her former husband. She is entitled to receive the income from this trust during her lifetime; and, upon her death, the corpus will pass to the other heirs of her former husband.

The First Interstate Trust originated through stock put in trust by Mr. Moller's first wife (now deceased). Mr. Moller receives the income from this trust during his lifetime; and, upon his death, the corpus will pass to the children of his first marriage.

The Northern Trust Company is the trustee of the Northern Trust. Mr. Moller is the trustee of the First Interstate Trust. However, Mr. and Mrs. Moller make all the investment decisions in regard to both of the trusts, as well as with respect to the two portfolios held by them individually.

During 1976 and 1977, the plaintiffs devoted their full time to their investment activities; and each regularly spent between 40 and 42 hours per week in conducting such activities. The plaintiffs kept regular office hours and, on a daily basis, monitored the stock market and their four portfolios. This included studying the performance of the securities held in the four portfolios, and also the performance of securities that were regarded as prospects for purchase and inclusion in the portfolios.

With respect to the stocks that were considered as candidates for purchase, the plaintiffs maintained the following records on a current basis:

(1) A watch list, listing all stocks on the New York Stock Exchange that were considered to be candidates for possible purchase. This list was updated at least once or twice per week.

(2) A book of product research notes, containing information concerning the product of the industry in which any company under study was engaged. These notes contained definitions and information concerning product uses, manner of use, and supply and sales market data for the product.

(3) A portfolio information book, containing information on stocks promoted from the watch list but not yet purchased. These were stocks which were more actively and closely followed than those on the watch list. They were highly eligible for purchase and, depending on the circumstances, would probably be purchased.

Before a decision was made by the plaintiffs to purchase a stock, it was generally watched by the plaintiffs for a period of between 2 to 6 months; and often a stock was watched as long as 1 year.

The monitoring and study of stocks held in the four portfolios included the assembly and maintenance of information regarding the corporations invested in, their products, and their performance. The following records on such stocks were maintained by the plaintiffs on a current basis:

(1) A stock note data book which contained an alphabetical list of the stocks held and included the earning percentage of each company's product in its market and the company's profit percentage in that market, as well as other information which would affect the value of the stock.

(2) A stock record book for each portfolio, listing all stocks currently held, in which entries were made whenever a stock was purchased.

(3) A current stock purchase book, containing a sheet for each stock, prepared on the date of purchase, recording the number of shares purchased, the date of purchase, and the cost. A master sheet was made up of these purchases, to indicate the stock-of-record dates so that the plaintiffs could determine whether dividends would be paid on the current purchases. The sheet made up for each stock was placed in the stock record book only when the stock certificate was received. On receipt of the stock certificate, the certificate number and the date were recorded on the stock purchase sheet and inserted in the stock record book.

(4) Current capital gains records, which provided a detailed record of gains and losses.

(5) Dividend record books, indicating the number of shares held in each stock, the dividend for each, and the total dividend, as well as the information from Forms 1099 at the end of each year to check those totals against the dividend record books' totals.

The plaintiffs kept the following records on a current basis both for stocks held and for stocks that were being considered for purchase:

(1) Stock purchase worksheets, which were projections for stocks based on study and the daily quotations. These sheets contained projections for possible use in examining options of purchasing one stock as opposed to another, the likely stocks to be sold if cash were to be needed, and the relative desirability of various stocks. The stocks to be purchased were drawn from this list.

(2) Market information on all securities held in the portfolios and on some securities that were being watched for possible purchase, including certain securities which might have been held in the past and were regarded as candidates for repurchase. The weekly price for each stock as of the close of the market on Friday night was entered, as well as the type of stock, its rating, symbol, and range of prices, and an indication of the last purchase.

The plaintiffs made all of their investment decisions "on their own." They did not employ an investment advisor, and they did not seek investment advice from their stockbroker.

In order to assist them in their investment studies and decisions, the plaintiffs subscribed to and regularly studied a number of publications and services. Three of these (including the Wall...