Three years ago, Paul Wilde exercised all his stock options in the start up company he helped establish and walked away with over $100 million. Since that time, he has spent all his energy, time, and effort in managing his portfolio. His investment philosophy is one of steady, careful investment in a
well-balanced portfolio. Thus, although each year he engages in several sales and purchases, he generally buys and holds the securities for both the dividends and the growth potential. Consequently, most of the stock sales he makes are of securities he has held for over one year. Because his investment activities have grown so large, this year he rented a suite of offices and hired two investment advisors and five secretaries to help him. He also purchased several new computers and some new office furniture for the office.
Paul has now come to you for some tax help. Specifically, he would like to know if his activities are considered a business or an investment activity. In your explanation, please include whether the expenses incurred in the activity are deductions for or from AGI.
A partial list of research sources is as follows:
• Higgins v. CIR, 25 AFTR 1160, 41-1 USTC §9233 (USSC, 1941)
• Estate of Louis Yaeger, Deceased, Judith Winters, Ralph Meisels, Abraham J. Weber and the Bank of New York, 889 F2d 29, 89-2 USTC ¶9633 (CA-2)
• Frederick Mayer and Jan Perry Mayer, 67 TCM 2949 (1994)