Question

Question 3:

1. A business entity must be carrying on a trade or business however, the Internal Revenue Code does not define what is a “trade or business”.

a. When there is no definition of trade or business, what authority should you use to determine the definition of a trade or business?

b. Download and bring to class the highest source of authority that you could locate on the definition of a “trade or business”.

Answer 1

Ans: 1.Business entity- An Organization created by an individual or individuals to conduct business, engage in trade or to get involved in other similar activities. This concept separates the business from the ownership of the business and requires separation of accounting records from personal transactions.

The Internal Revenue Code does not define a "trade or business", the general definition of trade or business is to carry on an activity for livelihood or in good faith to make a profit. The economic activity and the profit motive must be present.  Whether a particular activity is a trade or business is highly dependent upon how regular the transactions have been made, it's source of income and circumstances of each case.

a) We should use the following factors/authorities to determine whether it is a trade or business:

1.Nature of subject matter- This refers to the nature of asset or property that is being bought and sold. Some properties that are being traded in the normal course of business are commodities, manufactured items,etc. Others that are not regarded as the subject matter of trade unless they are bought in bulk are antiques, art work,etc.

2.Holding Period- This refers to the holding period of the asset or property that are being traded. Generally, the shorter the holding period, the more likely it would be regarded as trading. Otherwise it can be termed as an investment.

3.Frequency of transactions- Higher the frequency of similar transaction, more indicative it is or trading or business.

4. Objective- Intention to trade at the time of acquisition of the asset or property.

5.Profit Motive- There must be profit motive while trading the asset or property.

6.Source of financing- This refers to how the asset/property in question has been financed. Short term financing is more indicative of trading than future financing.

7.Trade license- The trader must possess a trade license to commence a particular trade or business in a particular area or region.

8.Other factors- Other factors includes accounting treatment of the company, availability of the documents, other evidence maintained to indicate its intention.

b)Highest source of authority: A trade license is a document/certificate that gives the permission to the applicant to commence a particular trade or business in a particular area/location. However, the license doesn't allow the holder to the other trade or business than for it's issued. Furthermore, this license doesn't expire any quite property ownership to the holder of the license.