FORTE INVESTMENT FUND vs. STATE TAX COMMISSION.

WILKINS, J. The Forte Investment Fund (taxpayer), a Massachusetts trust with transferable shares, appeals from a decision of the Appellate Tax Board (board) which disallowed certain deductions claimed in the taxpayer's 1971 income tax return. The taxpayer was engaged in investing in stocks, bonds, and real estate for the benefit of its shareholders. The board found that the taxpayer was not "a broker or trader for the public." In its operations during 1971, it incurred expenses for officers' salaries, auditing and legal services, custodian and investment advisor fees and general expenses, and foreign taxes with respect to dividend income (hereinafter called collectively the investment expenses). The Commissioner of Corporations and Taxation disallowed the investment expenses as a deduction on the taxpayer's 1971 return, and the board agreed. We affirm that decision. [Note 1]

The taxpayer, as a trust with transferable shares, was subject to the taxes imposed by G. L. c. 62 and was considered an individual, not a corporation, "[i]n determining the [Internal Revenue Code] deductions allowable" to it under G. L. c. 62. G. L. c. 62, Section 8 (a), as appearing in St. 1971, c. 555, Section 5. The taxpayer's income subject to taxation was its Federal gross income

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(modified in certain respects not relevant here) "less the deductions allowed under [Section 62 and Section 404] of the [Internal Revenue] Code" (and further modified by certain variations also not relevant here). G. L. c. 62, Sections 2, 3. Because Section 404 of the Internal Revenue Code of 1954 (Code) (dealing with employer contributions to an employee pension fund) has no bearing in this case, the general question is whether the taxpayer's investment expenses are deductible in calculating its adjusted gross income under Section 62 of the Code, treating the taxpayer as an individual and not as a corporation.

Section 62 of the Code refers to certain deductions from gross income, including the deduction allowed by Section 162(a) of the Code for "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." Int. Rev. Code of 1954, Sections 62, 162(a). The board found that, "[i]nsofar as it is a question of fact," the taxpayer "was not actively engaged in a trade or business during the taxable year 1971." However, from the board's decision, we think it is clear that the board regarded the question, as we do, as one of law to be decided on undisputed facts. The issue becomes whether the taxpayer was engaged in a "trade or business" within the meaning of those words in Sections 62(1) and 162(a) of the Code when its sole activity was the investing of its assets on its own behalf.

We conclude that the taxpayer was not engaged in a "trade or business." Expenses incurred in managing one's investments are not expenses incurred in a "trade or business," as those words are used in the Code. This principle was established in Higgins v. Commissioner, 312 U.S. 212 (1941), and has been adhered to since. Whipple v. Commissioner, 373 U.S. 193, 200 (1963). Wilson v. United States, 376 F.2d 280, 293 (Ct. Cl. 1967). Mirro-Dynamics Corp. v. United States, 374 F.2d 14, 16 (9th Cir.), cert. denied, 389 U.S. 896 (1967). Although Congress has reversed the result of the Higgins case by the enactment of Section 212 of the Code, it did so by

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establishing a new and separate deduction and not by enlarging the definition of a "trade or business." McDonald v. Commissioner, 323 U.S. 57, 61 (1944). We express no opinion on the result in a situation where the taxpayer makes short term investments designed to profit from fluctuations in a securities or commodities market as opposed to making investments for the purpose of profiting from the success of the enterprises in which the taxpayer has invested. See Whipple v. Commissioner, 373 U.S. 193, 202 (1963). Cf. Commissioner v. Nubar, 185 F.2d 584, 588-589 (4th Cir. 1950), cert. denied, 341 U.S. 925 (1951).

We reject the taxpayer's argument that our opinions interpreting the words "income subject to taxation" under G. L. c. 62, Section 3, indicate that all expenses incurred by an individual in producing income are deductible. In Barnes v. State Tax Comm'n, 363 Mass. 589 (1973), we said that a small loans business was entitled to deduct its expenses of operation. There we were considering the deductability of expenses incurred by a business trust in carrying on its business. In Wheatland v. Commissioner of Corps. & Taxation, 368 Mass. 250 (1975), we recognized that expenses incurred by an individual trust in earning income from and in maintaining timber producing property were allowable deductions. However, that view was based on the fact that these items of expense were deductible in calculating adjusted gross income under Section 62 of the Code, and was not based on any independent judicial view of what deductions should be allowed. [Note 2]

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The taxpayer concedes that by its terms G. L. c. 62, Section 2 (b), does not grant an individual the deduction allowed under Section 212(1) of the Code for "ordinary and necessary expenses paid . . . for the production or collection of income." That is so because, in the calculation of adjusted gross income, Section 62(1) of the Code expressly excludes as a business deduction those expenses which are deductible by an individual under Section 212 of the Code. We decline the taxpayer's invitation to import Section 212 of the Code into the deductions allowable under G. L. c. 62, Section 2 (b).

Accordingly, the decision of the Appellate Tax Board is affirmed.

So ordered.