Estate of Yaeger v. Commissioner

Louis Yaeger managed his own investment accounts from 1940 until his death as his full-time occupation. Yaeger grew his investment accounts by purchasing stock in undervalued companies and holding the stock until the company was profitable. Yaeger engaged in extensive research to determine what stock to purchase, often holding the stock for extended periods of time and offering his unsolicited advice to the companies to ensure his stock would be profitable. Yaeger also increased his profit by using margin debt to purchase more stock. On his 1979 and 1980 tax returns, Yaeger deducted his stock-interest expenses on his federal income-tax return. In 1979, 88 percent of the stock Yaeger sold had been held for over 12 months, and he never sold a stock he had held for less than three months. Similarly, in 1980, 91 percent of the stock Yaeger sold had been held for over 12 months, and he never sold a stock he had held for less than six months. The Commissioner of Internal Revenue (the commissioner) (defendant) issued Yaeger a deficiency notice stating that the interest expenses Yaeger incurred when purchasing stock on margin were limitable by Internal Revenue Code § 163(d). Section 163(d) limits a noncorporate taxpayer’s ability to deduct investment interest to the amount of the taxpayer’s investment income plus $10,000. Yaeger, and later his estate (plaintiff), appealed to the United States Tax Court. The tax court upheld the commissioner’s finding that Yaeger was a noncorporate investor, and Yaeger appealed again.