Originally published on Passive Activities and Other Oxymorons on April 8th, 2011.
VINES v. COMM., Cite as 107 AFTR 2d 2011-XXXX, 03/24/2011
I won't make you hold your breath for the punch line. As with real estate and many other endeavors, the only sure way to make a small fortune in day trading is to start with a large fortune. Of course the small fortune may be a stepping stone to no fortune. Mr. Vines was a veteran attorney who settled a class action suit receiving fees in the vicinity of 25 million dollars. Maybe a bit over 10 million (allowing for taxes and a few celebratory impulse purchases) isn't exactly a large fortune. I mean if you're married they won't even bother taxing a joint estate with a lousy 10 mil any more, I'm going to stick my neck out a call it a moderately large fortune.
Having done so well as an attorney, he decided to take up day trading. He did moderately well initially, but in relatively short order lost 23 million. Kind of odd because by my reckoning he would have had maybe 16 million tops to start with. Well meaning no disrespect to the profession but attorneys in general have pretty strong egos or at least that's what they project. So Mr. Vine threw the whole 25 million into his day trading and thanks to the magic of margin loans was able to lose almost all of it before his taxes were due.
The IRS assessed a failure to pay penalty. Talk about rubbing salt into the wound. I mean he would have paid, probably anyway, if he had the money. He just didn't have it. Tough luck, says the Court:
A failure to pay will be considered to be due to reasonable cause to the extent that the taxpayer has made a satisfactory showing that he exercised ordinary business care and prudence in providing for payment of his tax liability and was nevertheless ... unable to pay the tax.... Further, a taxpayer who invests funds in speculative ... assets has not exercised ordinary business care and prudence in providing for the payment of his tax liability unless, at the time of the investment, the remainder of the taxpayer's assets and estimated income will be sufficient to pay his tax or it can be reasonably foreseen that the speculative or illiquid investment made by the taxpayer can be utilized (by sale or as security for a loan) to realize sufficient funds to satisfy the tax liability.
Somewhere in this story, there is a lesson. When I figure it out, I will let you know.