Higgins v. Commissioner

Background

A taxpayer with large investments in real estate, stocks, and bonds claimed salary and office expenses as tax deductions for 1932 and 1933 under the Revenue Act of 1932. He ran his affairs from a New York office (while living in Paris), hired staff, and used the same office to handle both rental properties and securities. The tax agency disallowed the deductions; the Board of Tax Appeals allowed amounts clearly tied to the rental business but disallowed the larger sums tied to managing stocks and bonds.

Reasoning

The Court considered whether managing one’s own securities counts as “carrying on a business” so those expenses could be deducted. It accepted that the taxpayer’s real estate renting was a business and that expenses properly allocable to that activity could be deducted. But the Court agreed with the Board that the taxpayer’s securities work—keeping records, collecting interest and dividends, and issuing orders for purchases through a financial institution—did not amount to carrying on a business. The Court found no controlling administrative practice to the contrary and held the Board’s factual conclusion was supported by the record.

Real world impact

The decision means expenses for personally managing stocks and bonds are not deductible as business costs, even if the work is continuous and sizable. Expenses tied to a recognized business activity, like renting real estate, may still be deducted if properly allocated. The ruling affirms the tax agency’s authority to distinguish personal investment management from business activities for deduction purposes.