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Pepperdine University School of Law

Tuesday, July 29, 2008

Tax Court Denies Deduction for Course in Day Trading

The Tax Court yesterday denied a taxpayer's claimed § 212 deduction for the expense of a five-day course in day trading. Serrato v. Commissioner, 131 T.C. No. 3 (7/28/08):

Petitioner spent approximately 6.5 hours a day Monday through Friday reviewing, studying, and executing trades. In order to improve his day trading abilities, petitioner signed up for a 5-day one-on-one course called (the course) that he had read about online. The course was held in Cartersville, Georgia, approximately 750 miles from petitioner’s home in Florida. Petitioner drove by himself to the course. Petitioner stayed at a modest local hotel just off the interstate highway approximately 5 miles from the course location. The course consisted of 5 days of intensive training and instruction taught by Paul Quillen. ...

[Petitioners claimed a § 212 deducted for $6,053.06:]  $5,247 for the course, $416.64 for lodging, $224.10 for round trip travel from petitioner’s home to and from Cartersville, Georgia, where the course was held, $145.32 for food, and $20 for a course book. ... Section 212(1) allows as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income. Petitioners argue that the course was necessary in order for petitioner to become a better day trader and to maximize profits and minimize losses on his trading activity.

Section 274(h)(7) provides that no deduction shall be allowed under § 212 for expenses allocable to a convention, seminar, or similar meeting. Petitioners argue that the course is not a convention, seminar, or similar meeting as contemplated by § 274(h)(7). We disagree. ...

Merriam-Webster’s Collegiate Dictionary (9th ed. 1985) defines a seminar as a meeting for giving and discussing information. Over 5 days petitioner received hours of information about day trading in the course taught by Mr. Quillen. In the light of the terms and purpose of § 274(h)(7), we conclude that the course was a seminar, or a similar meeting within the scope of that statute, and therefore the expenses relating to the course cannot be deducted pursuant to § 212(1).

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I wonder why the taxpayer didn't claim he was in the business of day trading. I don't see what the downside of that would be since a day trader's holding period, by definition, isn't more than a year and capital gain issues wouldn't have come into play. As Judge Vasquez made clear, the prohibition of deducting seminar type expenses doesn't apply to Section 162 expenses.

I'd be interested in hearing your thoughts on this.

Thanks for the excellent posts and timely updates.

Posted by: Peter | Jul 29, 2008 5:40:07 PM

Just to give my two cents. If the taxpayer treated his activities as a trade or business, would not his gains also be subject to an additional 15.3% SECA tax? Looks like the taxpayer may have wanted to have his cake and eat it, too...

Posted by: Tomas Simon | Jul 31, 2008 6:45:16 AM

Taxpayers whose trading activity rises to the level of trader in securities can treat their trading expenses as a bonafide trade or business. If this taxpayer had filed a trader Schedule C (assuming he qualified) instead of reporting his trading expenses as investor expenses on Schedule A the tax court would have allowed those seminar/continuing ed costs as hinted to at the end of this decision. Unfortunately investors can't deduct continuing ed/seminar expenses because IRC Section 274 explicitly disallows it.

With respect to Simon's comment, traders in securities income is not subject to self-employment taxes. This particularly type of business is unique in that regard since the traders income is reported elsewhere on Schedule D or Form 4797 but the business expenses on Schedule C. For further information about trader tax rules, I recommend reviewing IRS 2007 Publication 550 Investment Income and Expenses page 72 Special Rules for Traders.

Posted by: Beth Walter | Aug 1, 2008 10:14:31 AM

purely arbitrary to treat the $5000 as a course or a seminar. Should the owner of the course have given a certificate as a "Certified Master Day Trader" Then it would be a course with a graduation? What kind of convention costs $5000? This is a ridiculous decision, if it is being taught by someone for 6.5 hours a day for 5 days and costs $5000, then how is it a convention or seminar?

Posted by: ankur sethi | Jan 27, 2009 3:44:23 PM