## Facts

- O. L. Burnett traded securities and commodities extensively on her own account, largely on margin through brokers.
- For 1934, she sustained a stipulated loss of $18,964.21 from purchases and sales of stocks and commodities and claimed it as a fully deductible ordinary loss.
- The Commissioner treated the loss as a capital net loss and limited the allowable deduction to $2,000 under § 117(d) of the Revenue Act of 1934.
- In 1934, Burnett paid $9,600 in attorneys’ fees to secure a refund of income taxes overpaid for an earlier year and deducted the fees on her 1934 return.
- Burnett owned 60 shares of First National Bank of Burkburnett, Texas stock and claimed a $15,420 deduction in 1934 on the ground the stock became worthless that year.
- The Commissioner determined a 1934 income tax deficiency and disallowed (or limited) these items; Burnett sought redetermination, contesting only these three adjustments.

## Issues

1. Whether Burnett’s 1934 loss from trading stocks and commodities on her own account was an ordinary business loss fully deductible, or a capital loss limited by § 117(d) of the Revenue Act of 1934.
2. Whether $9,600 in attorneys’ fees paid in 1934 to obtain a refund of prior income taxes was deductible as an ordinary and necessary expense under § 23(a) of the Revenue Act of 1934.
3. Whether Burnett proved her bank stock became worthless in 1934 so as to allow a loss deduction for that year, and, if deductible, whether the loss was ordinary or capital.

## Decision

- The Board found Burnett was engaged in the trade or business of a trader in securities and commodities on her own account.
- Despite trader status, the Board held the 1934 trading loss was a capital loss governed by § 117 and subject to the $2,000 net capital loss limitation in § 117(d).
- The Board sustained the Commissioner’s full disallowance of the $9,600 attorneys’ fee deduction.
- The Board sustained the Commissioner’s disallowance of the claimed $15,420 bank-stock loss because Burnett did not establish worthlessness occurred in 1934.
- The deficiency was sustained on all contested issues.

## Legal Principles

- A taxpayer may be in the business of trading securities and commodities on their own account based on continuity and volume of activity.
- Under the Revenue Act of 1934, the character of gain or loss turns on § 117’s capital-asset rules; trader status alone does not remove securities (and similar property) from capital-asset treatment absent a statutory exclusion.
- Net capital losses for the year are deductible only to the extent allowed by § 117(d) (here, limited to $2,000).
- Attorneys’ fees incurred to obtain a refund of prior income taxes are not deductible as ordinary and necessary expenses of carrying on a trade or business for the year paid under § 23(a).
- A deduction for worthless securities requires proof that total worthlessness occurred in the claimed taxable year; failure to prove the year of worthlessness defeats the deduction for that year.

## Conclusion

The Board upheld the Commissioner’s deficiency determinations, holding that Burnett’s securities and commodities trading loss was a capital loss limited by § 117(d), that legal fees paid to secure a prior tax refund were not deductible business expenses, and that Burnett failed to prove her bank stock became worthless in 1934.


Burnett v. Commissioner, 40 B.T.A. 605 (1939)