Selling investments…with a side of snake oil

I recently received a call from a gentleman who told me he wanted to form a C corporation for his stock trading business. My beef against C corporations aside, it just didn’t sound like he was coming to this decision with all of the relevant information.  So I pressed him on why he wanted to incorporate.  Apparently, he had signed up for an investing class (one of those “Learn to invest like the pros!” type deals) up in Dallas.  He had been told by the instructors in this class, and apparently by a lawyer up in Dallas (who shall remain nameless, but let’s just say referrals won’t ever be going there…) that he could deduct the cost of the classes, the travel expenses related to taking the class, and all of his business expenses relating to investing, as well as pass through a bunch of fringe benefits like company cars, etc., if he just formed a C corporation.  (Actually typing that last sentence was the writing equivalent of nails on a chalkboard for me **shudder**).

Basic tax law provides that expenses incurred by a trade or business are deductible by that trade or business.  Not even getting into whether the things he rattled off to me are actually deductible as trade or business expenses, I recalled during our conversation another case I had worked on years ago in which we tried desperately to convince the IRS that our client was in the business of trading securities, and remembered that there’s something special about investing that makes this a pretty high threshold to meet.  It turns out that not just any old investor can claim to be in the trade or business of trading securities.  There is a very, very high barrier to entry for this, and a long, long line of cases in which taxpayers were unsuccessful in making this claim.  Many of these cases involved people who traded for much of the year (100-200 trading days), but who didn’t trade full time, or had other jobs that made up their primary source of income.  The IRS is really looking for day traders here.  And day traders who are really pursuing trading as their livelihood.

I find it difficult to believe that the attendees of this trading class would meet the threshold set forth for determining whether an investor is engaged in a trade or business.  Yet, here was a room full of people, all being told that they shouldn’t worry about the expenses of the course they’re taking because they could just form a C corporation and just magically deduct all expenses related to their trading activities.  Sorry folks, but the IRS wants its pound of flesh.  If it isn’t immediately obvious where that flesh is coming from, then the bad tax advice you’ve been given is probably too good to be true.

But all that aside, it just burns me up that there are jokers out there spewing this nonsense onto uninformed consumers.  Maybe I will reach out to that law firm….