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The Badges of Trade: Frequency of Transactions

Updated: Nov 10, 2022

Even if a single transaction could be considered a trade, the idea of trading is more likely to be implied when a lot of transactions are done in a planned way.

When different sets of actions, none of which are traded on their own, are done on various occasions that aren't too far apart, the series of actions may be considered a trade.

You need to consider not only the total number of transactions but also the rate at which they are carried out repeatedly.

So, 10 transactions a year are more likely to be trading than, say, two transactions a year, as long as everything else stays the same.





High Court of Justice

(King's Bench Division)


Court of Appeal

Pickford and Quirke

In 1919 there was a boom in the Lancashire cotton spinning trade.

Many mills were changing ownership, and many transactions took the place of a kind known locally as "turning over a mill".

The transaction commonly involved the purchase by a syndicate of the shares of a mill-owning company, the liquidation of the company, and the formation of a new company to purchase the old company's assets at a profit to the syndicate.

The Appellant, who was at the time a manager of one spinning company and director of another, was approached by certain interested parties to form a syndicate for the purpose described above.

The transaction was successfully carried through and resulted in a profit to the Appellant, who was appointed a director of the new company.

The success of the Appellant and his associates in this venture became common knowledge in the district, and proposals for similar transactions were made to him in some twenty other cases.

Still, after enquiry, he rejected all but three.

In these three cases, syndicates were formed, not always consisting of the same persons.

In each case, the transaction resulted in a profit to the Appellant and his appointment as a director of the new company.

The Appellant was assessed to Income Tax and Excess Profits Duty in respect of the profits resulting from these four transactions, and on appeal, the Special Commissioners confirmed the assessments.

They found that the Appellant's main object was to establish himself in a position of power as a director of new companies;

  • that it was necessary for this purpose that the transactions should be financially profitable;

  • that the transactions considered separately were capital transactions, and that anyone by itself would not have constituted a trade, but that considered together they did constitute a trade.

The Special Commissioners further held that the Income Tax assessment for the year 1919-20, which had been signed by the Additional Commissioners on the 24th March 1923, had been made in due time.

Held: that the Appellant's participation in the four transactions constituted a trade and that he was assessable to Income Tax and Excess Profits Duty in respect of his share of the profits; and that the additional assessment to Income Tax had been made within the time allowed by Section 125 of the Income Tax Act, 1918.

What It Means

When more than one transaction is involved, the case for trading will be much stronger if the pattern looks like a series of related transactions happening not too far apart and giving the impression of regular and continuous activity.

On the other hand, the case will be less strong if the appearance is of several irregular transactions spread over several years.

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