Higgins v. Commissioner, 312 U.S. 212 (1941) (U.S. Supreme Court)
Higgins v. Commissioner is a foundational federal income tax case that delineates the boundary between investment activity and a "trade or business" for purposes of deducting expenses.
Whether expenses incurred in managing one's own investments—such as salaries, rent, and office costs—are deductible as "ordinary and necessary expenses" of "carrying on a trade or business" under I.R.C. § 23(a).
Under I.R.C. § 23(a) (the predecessor to current § 162), only expenses that are ordinary and necessary and paid or incurred during the taxable year in carrying on a trade or business are deductible as business expenses. The active management of one's own investments, regardless of their size, the continuity of oversight, or the use of offices and employees, does not constitute a trade or business within the meaning of the statute.
No. The management of one's own investments is not a trade or business; therefore, the related expenses are not deductible under § 23(a) as business expenses. The Court left open the possibility that expenses properly and specifically attributable to a distinct real estate business could be treated differently and remanded for consideration of any permissible allocation.
Higgins is a cornerstone of federal tax doctrine distinguishing investment activity from a trade or business under what is now § 162. Its bright-line rule—that managing one's own investments is not a trade or business—continues to guide the "trader vs. investor" analysis and limits above-the-line deductions. The decision also catalyzed Congress to enact what is now § 212, permitting limited deductions for nonbusiness investment expenses (historically as itemized deductions). Beyond taxation, Higgins is frequently cited for the proposition that not all profit-seeking endeavors qualify as a trade or business, a theme later elaborated in cases like Commissioner v. Groetzinger. The case thus remains essential for understanding deductibility, statutory interpretation via consistent administrative practice and legislative reenactment, and the architecture of personal versus business expense deductions.