Partner in trader partnership may claim partnership's, operating expenses as trade or business expense.

• Author: Fiore, Nicholas J.

T is a partnership, acting as a trader in securities. T is a partner in other partnerships that are traders in securities. Some such partnerships are, in turn, partners in additional partnerships that are investors in securities. For Year 1, T claimed $a of trade or business expenses and $b of portfolio expenses. For Year 2, T claimed $c of trade or business expenses and $d of portfolio expenses. In both years, the portfolio expenses resulted from T's investments in partnerships in which it held an indirect interest.

Analysis

For a partnership involved in securities transactions, there is a distinction between a securities "dealer" and all other partnerships. A securities dealer is a taxpayer that regularly purchases securities from (or sells securities to) customers in the ordinary course of a trade or business. Based on the assumption made for purposes of this advice, T is not a securities dealer partnership.

To the extent a partnership is not a securities dealer partnership, it may be a trader or investor partnership. In general, a trader buys and sells securities with reasonable frequency in an endeavor to catch the swings in the daily market movement and profit thereby on a short-term basis. A trader can be engaged in a trade or business if the activity is conducted with continuity and regularity and with a primary purpose of producing income or profit; expenses incurred in the trading activity would constitute trade or business expenses. An investor purchases securities for capital appreciation and income, usually without regard to short-term developments that would influence the price of the securities on the daily market. Investing is not a trade or business, regardless of the amount and regularity of the activity; expenses incidental to investing are not deductible as having been paid or incurred in a trade or business. Based on the assumption made for purposes of this advice, T is a trader partnership.

Trade or Business Expenses

The taxable income of a partnership is computed in the same manner as an individual, except that certain items described in Sec. 702 must be separately stated and certain itemized deductions for individuals are not allowed to the partnership. In determining his income tax, each partner is required to take into account separately his distributive share of the partnership items of income, gain, loss, deduction and credit. Sec. 212 expenses are separately passed through to (and accounted for by) the partners...