83 ATC 388
MB Hogan Ch
P Gerber M
GW Beck M
No. 3 Board of Review
Judgment date: 5 September 1983.
M.B. Hogan (Chairman): The central issue in this reference is whether the profits emerging from a series of transactions in the futures market over a period of about one month constitute assessable income. The secondary question, which emerges if the Board should so find, is whether this taxpayer, in whose name the dealings were conducted, acted on her own behalf, or on behalf of herself and three of her four children, as the claim was put to the Board at the hearing, or whether she acted on behalf of herself and four children as documents entered as exhibits on behalf of the taxpayer tend to suggest. It is of some relevance in dealing with this matter that the children involved were all over the age of 18 years at the time the transactions took place. It may also be relevant to bear in mind that the children were apparently all living at home when the basic transactions took place in January/February 1979. The three elder children were students at tertiary institutions, and presumably were on summer vacation at the time, and the youngest, who may have commenced work as a bank clerk at some stage during the relevant period, appears to have completed his secondary schooling at
83 ATC 389
the end of the calendar year 1978. The taxpayer was ably represented by her husband. I believe it is also necessary for a full appreciation of the facts of this reference to observe that, though the taxpayer and her husband are not natives of Australia, they have resided in Australia for many years and are fully integrated citizens who are completely fluent in the English language.
2. The taxpayer's evidence is to the effect that, towards mid-January 1979, she gave attention to intensive advertising by the Australian Bullion Company in regard to ``safety of the investment'' which reflected some of her personal fears about the inflation rate at that time. At that time, she held in a savings account in her name an accumulation of funds which comprised in part family allowances paid to her by the Federal Government in respect of her student children. As she explained in her own words -
``Every month I got money for them from the Department of Social Security as student allowances, and since I was working I preferred to save this money for the children. When we were in... my husband used to give them pocket-money, but this was to buy anything extra that we wanted. When we came here I thought it was better that we start saving it for something really big when they finish their studies, instead of frittering it away. It was better to have a nest-egg so they would have something to start with.''
She was to elaborate on this later in her evidence in the following passage:
``Like earlier on, when I first started getting money, if anybody wanted a cardigan or some special thing I would spend the money on it and fritter it away, but later on as they grew older and I was earning and had sufficient money I would buy them things out of my own money or my husband's money, and then we kept this like for a nest-egg: when they left school that was theirs.''
and, later, as to distribution of the funds:
``... only as each one stopped their studies and went on to something else. It was a nest-egg for when they left school, when they finished their studies. They had something to start life with.''
She had already advanced the claim that she viewed herself as holding and investing the family allowances she received personally, on behalf of the children. In the result, as a result of calculations reflected in notes kept by her at the back of her personal diaries (tendered in evidence) she regarded herself as holding in the account on behalf of each of her four children an amount of $533 per child as at the end of the 1978 calendar year. Accordingly, she and the children (who were all of age) formed a plan that -
``... if we invested $1,500 or $2,000 that we had in something that would retain its value it would be a good idea because they were students at the time. They would need money in about two or three years time. So they were advertising all the time and saying what a good investment it was, so I thought we would go into it, and I went down to the Australian Bullion Company.''
The taxpayer was to add that she ``only had $1,500 to invest''. Now the diary summaries show that, in January 1979, the sum of $533 standing to the credit of each child was debited with an amount of $300, in total a sum of $1,200. If one adds a further $300 as the taxpayer's personal contribution, a sum of $1,500 is the result, which, in fact, turned out to be the capital sum on which the venture into the futures market was founded.
3. The taxpayer originally went to the Australian Bullion Company with the idea of ``buying an investment diamond'' which the company had been advertising but a consultant/adviser to whom she was directed (a Mr. D) told her it was safer to go into the futures market. Though she did not understand the operation of the futures market, as will be apparent from later evidence, she accepted his advice and left with him a bank cheque for $1,500 which she had acquired on 10 January 1979. Shortly after (the records indicate 12 January 1979) Mr. D phoned the taxpayer to advise that he had invested the funds in silver. I should interpose here from the taxpayer's later evidence that, on the advice of Mr. D, she signed all contracts on her own behalf and on the behalf of the children, but she emphasised on more than one occasion that she consulted with the children continuously in relation to her operations. It emerged that
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Mr. D would sometimes act first and the taxpayer would be required to sign later. On other occasions, he would not proceed until the taxpayer signed. The subsequent history of the silver transaction is that, though the taxpayer believed she had entered a long-term contract maturing in December 1979, Mr. D rang her within a couple of days saying ``silver was volatile - and that it would be better to buy lead''. After consultation with the children, she agreed and the silver contract which had been opened on 12 January 1979 was closed out on 16 January 1979 at a profit of $645.50 (after commission of $230 and transfer charges of $10). The whole history of the transactions, for which an agreed summary was prepared, is as set out hereunder:
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Date Details Qty. Price Amount Dr. Cr. Bal.
$ $ $ $ $
11.1.79 Deposit 1,500.00 1,500.00
Silver 12.1.79 Bought Silver 5000 oz. 5.5825 27,912.50
Delivery 16.1.79 Sold Silver 5000 oz. 5.7596 28,798.00
Gross profit 885.50
Brokerage, etc. 240.00
Net profit 645.50 645.50 2,145.50
Lead 17.1.79 Bought Lead 25 tonne 797.9656 19,949.14
Delivery 24.1.79 Sold Lead 25 tonne 834.7948 20,869.87
Gross profit 920.73
Brokerage, etc. 316.13
Net profit 604.60 604.60 2,750.10
Copper 26.1.79 Bought Copper 25 tonne 1,545.34 38,633.57
Delivery 5.2.79 Sold Copper 25 tonne1,749.6930 43,742.32
Gross profit 5,108.75
Brokerage, etc. 782.65
Net profit 4,326.10 4,326.10 7,076.20
Gold 26.1.79 Bought Gold 100 oz. 227.5369 22,753.69
Delivery 13.2.79 Sold Gold 100 oz. 229.0345 22,903.45
Gross profit 149.76
Brokerage, etc. 240.00
Net loss 90.24 90.24 6,985.86
Gold 7.2.79 Bought Gold 100 oz. 242.2480 24,224.80
Delivery 13.2.79 Sold Gold 100 oz. 229.0345 22,903.45
Gross loss 1,321.35
Brokerage, etc. 240.00
Net loss 1,561.35 1,561.35 5,424.61
8.3.79 Withdraw: 5,424.61 0.00
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4. The venture into gold futures which ultimately closed out the contracts at a loss was explained by the taxpayer. At the time Mr. D had switched from lead to copper along with gold, 26 January 1979, he informed the taxpayer that she ``had 1,000 tonnes of copper'' - an exaggeration - it was in fact a contract for 25 tonnes. Her reaction is summarised in the following passage -
``I had really gone in there to buy an investment diamond and if you do not realise the money, you can have the diamond. I would not have known what to do with 1,000 tonnes of copper. You cannot keep it in your backyard or anything. I said, `I do not want this. Get me something smaller that I can keep, like a diamond.' He suggested gold. I said, `All right, sell the copper and get some gold', because I did not want this copper, especially so many tonnes of it.''
The taxpayer indicated to my colleague, Dr. Gerber, that she believed at that time she might actually have to take possession of several tonnes of copper, her reaction being -
``I did not know what to do with copper. With gold or a diamond I could have coped, but I could not keep copper.''
It was not until this time that she appreciated to some degree the nature of the dealings in which she was involved. Finally, she was advised to sell her gold contracts and her reaction is summarised in the following evidence -
``I said no; I had taken a contract for a long term, and did not want to be buying and selling like that. I wanted it to be there for a long time, I did not want to sell. He said if I bought it and it keeps going down, not only do I have to pay the loss, I would have to pay back money to keep this going, whatever I put in, even after the value drops. I have to keep paying money in to keep it up, and also pay his commission for still dealing with it. Not only would we lose all the money we put in, but I would have to put in money that I did not have to keep it going. I was not going to sell, I was going to keep it for a year at least, the period of the contract. When he said I would have to pay all this money I thought I do not want any more of it, and I got out of it.''
At this stage, the taxpayer decided to abandon the venture, and, after some argument, obtained payment for all moneys due on 8 March 1979. Her evidence was that, as soon as she appreciated the gambling nature of the transactions, she wanted none of it and ``got out''; she did not gamble and ``did not like the gambling bit''. All this evidence I accept without question; it is full, clear and frank and has a freshness that reflects the clear recall of what proved to be overall a highly successful venture.
5. I have difficulties, however, with other sections of the taxpayer's evidence. In opening, it was put to the Board on behalf of the taxpayer that ``she made these investments on behalf of herself and three of her four children''. That was in line with a claim advanced in the objection dated 4 December 1979 to the effect that the investment in the futures market ``was made by me, and nominally in my name but was from capital belonging to me and to three of my four children''. Later, in the letter to the Taxation Office, dated 14 January 1980, the taxpayer was to say -
``Since our arrival in Australia in 1971, all payments made to me by the Department of Social Security as family allowance entitlement for students for my four children, was collected by me on the understanding that it was on our joint behalf. When we were in..., I did so with the... saving account, but after transfer to... opened a Building Society Pass Book. For the past few years these payments were made directly to this pass book account.
Although I maintained this account in my name, I had promised my four children that each of us was entitled to an equal share, and this would be given to them when they finished their student days.
Accordingly, on 10.1.79 when my youngest son obtained employment in the... bank, and no further student allowance was paid on his behalf, he was given $1,500 as his share, which he spent outfitting himself with clothes and paying for a holiday cruise.
The other three children who share with me in this account are -
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(1) Daughter F 24 years
(2) Eldest son M 21 years
(3) Younger son M 20 years
No evidence bearing directly on who participated in the venture was led at the hearing so that the totality of what the Board is left with on this point, apart from the statement made in opening, is material leading to two conflicting views. There are the objection and the letter of 14 January 1980, both of which clearly claim that the taxpayer and three of her four children were parties to the venture into the futures market. On the other hand, the diaries which were tendered as an accounting record show a reduction of the credit balance of each of the four children by $300 in January and a distribution in March to each of the four children of $1,084 - a precise one-fifth share of the funds due to be received back from the Australian Bullion Company after cessation of the venture on the futures market. It is relevant to note that the youngest son, who is shown in the diary records as receiving $1,500 in March, would have had an entitlement according to those records of, at the lowest $233, and, at the highest of $533. The matter may well be one of considerable importance to the taxpayer (and also possibly to the son who commenced work as a bank clerk in January of 1979) as I accept her basic evidence that the venture into the futures market based on a capital of $1,500 was a venture undertaken by her in association with either three or four of her children. I am of the view from the material before the Board that all four children were joint-venturers with their mother in the dealings in her name in the futures market. That, of course, means that I also find that the taxpayer had effectively created herself a trustee for each of the children in respect of the money received by her as student allowances for that child since the year 1976, and that, as trustee, she applied $300 of trust funds in respect of each to the venture into the futures market. A secondary question which may arise if the Board were to find against the taxpayer on the primary question of assessability of the profits accruing from the venture, would be
- full time student in Social Work at... Institute
- full time student in Accountancy at... Institute
- full time student in Dentistry at University of...''
whether, given the limited claim made by the taxpayer in her objection that three only of her four children were involved with her in the venture, the Board would be debarred from giving practical effect to a finding that the taxpayer and all four of her children were involved in the venture; in other words, would the Board's powers be limited by the operation of sec. 190(a) by reason of the misstatement of fact in the taxpayer's ground of objection?
H.R. Lancey Shipping Co. Pty. Ltd. v. F.C. of T. (1951) 9 A.T.D. 267, Williams J. at p. 272 gave some consideration to the purpose of sec. 190 observing that -
``Section 185 provides that an objection shall state fully and in detail the grounds on which the taxpayer relies. Section 190 provides that on every reference to a Board of Review or on an appeal the taxpayer shall be limited to the grounds stated in his objection. This is `an imperative direction to the Court, not... a provision merely for the benefit of the Commissioner which he is in a position to waive. The provision is made for the purpose of protecting public revenue, and the Court is bound to give effect to it';
Molloy v. F.C. of Land Tax (1937) 59 C.L.R. 608 at p. 610.''
The remarks of the Court in Molloy (supra) were directed to sec. 44M(3) of the Land Tax Assessment Act 1910 as amended, a provision which contained the forerunner of the present sec. 190 of the Income Tax Assessment Act. In
Mercantile Credits Ltd. v. F.C. of T. 71 ATC 4015, Windeyer J. came to the conclusion that the Commissioner's assessments were erroneous though the ground on which his Honour found the assessments to be erroneous was not precisely covered by any of the grounds in the taxpayer's objection; nevertheless his Honour had regard to sec. 199 which provides that the Court may make such order as it thinks fit, to provide authority for the adjustments to the assessments which he
83 ATC 394
embodied in his decision. A Board has not such escape hatch. It is as much bound by the ``imperative direction'' of sec. 190 as the Court or the Commissioner, vide Lancey Shipping Co. (supra). In Case D82,
72 ATC 495, Mr. R.C. Smith Q.C. faced a problem similar to that confronting this Board in this reference; though, on the facts of that case, I would find myself more in line with the majority decision on the point, what Mr. Smith had to say at p. 503 appears to me to be, in the light of the emphatic views of the Court in Molloy and Lancey as to the ``imperative direction'' founded on a ``purpose of protecting public revenue'', an appropriate expression of the rigidity of the limits imposed by the section, vide -
``However sympathetic one may be it is not, in my opinion, possible to go outside the grounds of objection and confer upon an objecting taxpayer a relief he did not claim within the limits laid down by the Act.''
I believe, therefore, that I would be precluded from a finding that the assessment should be adjusted to reduce the taxable income by the exclusion of that proportion of the profit which would be attributable to the four children and would have to be content with finding that the assessment should be adjusted to exclude three-fourths of the profit of $3,921 included in the assessment dated 22 October 1979.
7. Before dealing with the substantial point at issue here, i.e. whether the profits arising from the futures venture represent assessable income, there is another matter arising from the material before the Board, going to credit of the taxpayer as a witness, which requires examination. When questioned about major withdrawals from her savings pass book during the period of the operations on the futures market, she appeared to be quite remarkably forgetful. The particular entries of which she professed ignorance, were -
Date Amount of
10 January 1979 2,907
2 April 1979 1,450
17 May 1979 4,000
For completeness, I should add that the code entered under the heading ``Type'' in respect of each of these withdrawals indicates that the first was a withdrawal representing a cheque payable to a third party and the other two represented cheques payable to the holder of the pass book. Directly questioned in cross-examination, the taxpayer could not remember what any one of the withdrawals (quite sizeable by reference to the generally small cash and cheque withdrawals) represented. Later she was to raise various suggestions as to how they may have been applied but these at best were reconstructions. She was emphatic that the withdrawals ``definitely'' did not represent funds for other forms of investment. I must observe that I find the taxpayer's failure to be able to provide from recollection any explanation of such uncharacteristically large withdrawals, centred in a very short time frame, to be somewhat disturbing. I have noted Dr. Beck's observation from the diary that the taxpayer recorded the purchase on 10 January 1979 of a diamond contract for the amount of the first of the three withdrawals and it may well be that that withdrawal and possibly the later withdrawals have some relationship to an adventure such as that. But, no questions were raised in respect of it at the hearing, and, as there is no obvious connection between the withdrawals and the very clearly recollected transactions the subject of the reference, the occurrence of which is backed by documentary evidence, I am not prepared to make any findings on those transactions adverse to the taxpayer on the basis of her unsatisfactory answers in relation to the withdrawals.
8. I turn now to the basic question underlying this reference: are the profits from the venture into the futures market based on the limited capital of $1,500 assessable income? As to this aspect, it was argued before the Board on two bases that the profits were not so assessable -
- (i) the sum was so invested ``as a hedge against inflation with no purpose of profit-making, but would maintain its value over the period''; and
- (ii) ``the profit from the investment... (was) a gambling one and on that account'' was excluded from assessment.
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To deal with the second argument first; the taxpayer clearly did not consciously indulge in the legalised gambling transactions which constitute operations in the futures market. She was emphatic that, as soon as she realised the gambling nature of the contracts, she ``got out''. That was her prime reason for withdrawing altogether. That is all a far cry from
Graham v. Green (1925) 9 T.C. 309 where Green, who escaped tax on his gambling winnings because Rowlatt J. found them not to be ``profits or gains... arising... from any trade, profession, employment or vocation'', was found by the Judge to be ``addicted to gambling'' and ``made an income out of it... that substantially... was his means of living'' (at p. 311). The question then has to be adjudged by other criteria.
9. I would note at once that the evidence, which I accept in relation to the activities in the taxpayer's name in the futures market, does not support a finding that a business was being carried on in her name per the agency of Mr. D, the investment counsellor. Nor is this a case to which the first limb of sec. 26(a) or the provisions of sec. 26AAA have application, because of the nature of operations on the futures market. If the profit is to be assessable, it would appear to be assessable by reason only of the second limb of sec. 26(a).
10. Long ago in the case of
Clowes & Anor. v. F.C. of T. (1953-1954) 91 C.L.R. 209, it was pointed out by Kitto J. that, for the second limb of sec. 26(a) to apply, it was necessary that there be a ``scheme'' in the sense of ``programme, or plan of action'' (at p. 225). The decision in Clowes' case (supra), arose from a statutory majority in an evenly divided Full Court (see the explanation in the judgment of Barwick C.J. in
Milne v. F.C. of T. 76 ATC 4001 at p. 4004) but in Milne (supra), Barwick C.J. with whom Gibbs and Stephen JJ. agreed, indicated his agreement with the analyses of Dixon C.J. and Kitto J. in Clowes contained in passages from those decisions that he had earlier quoted and specifically endorsed a view of Kitto J. on which the above-noted comments in regard to the word ``scheme'' were founded. Here, the evidence is explicit that the taxpayer embarked on the project or ``plan of action'' in the form of investment in the futures market after consideration of advice given her by an investment counsellor. She made it plain that her purpose was to protect her funds against the effects of inflation, and (it seems) of taxation, vide the following question and answer -
``How did you anticipate you would have a hedge against inflation, was it to have something on hand? - I thought it would keep its value. It would be worth $1,500 in two years time rather than not worth that amount. At least we would have the money back that we have already got, instead of losing it. If you keep it in the bank you get a certain amount of interest, and you are taxed.''
That answer is a reflection of her original broad intentions when she approached the Australian Bullion Company, quoted above towards the end of para. 2. But that has to be read in the light of her original intention when she approached the company which was expressed as -
``... I went there for the sole purpose of buying an investment diamond because thay had been advertising so much...''
If, perhaps, the taxpayer had persisted in her original intention, the matter may not have reached this Board, diamonds being historically something of a long-term investment, their value reflecting and responding to fluctuations in the value or worth of the currency. Classically diamonds might appear in such circumstances to fall within the description of ``a hedge against inflation'' - a phrase used by Mason J. firstly in
Gauci & Ors. v. F.C. of T. 75 ATC 4257 at p. 4262 and adverted to again in
F.C. of T. v. Whitfords Beach Pty. Ltd. 82 ATC 4031 at p. 4044, his Honour going on to observe in that case ``that there is now a strong body of authority to support'' the exclusion of profits from the sale of such ``hedge'' investments. Barwick C.J. had earlier commented in
Steinberg v. F.C. of T. 75 ATC 4221 at p. 4227 -
``The presence of sec. 26(a) in the Act does not mean that property cannot be acquired as an investment, as a hedge against the loss of value in the currency; or that the only investment advantage of the acquired property which is outside the reach of sec. 26(a) is the income it will produce. The retention of property in the hope or expectation that its value will increase is a justifiable form of
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investment. That the increased value may only be realised by sale does not deny that the purpose of its acquisition was investment or establish that the purpose of its acquisition was to use it as a subject of trade by reselling it at a profit. No doubt in borderline cases, the distinction may tend to become blurred but it is none the less a valid distinction and capable of resolution by the Court.''
and went on to observe in Gauci (supra) at p. 4260 -
``The purchase of land as a long term investment, or as a hedge against the depreciating value of money does not, in my opinion, come under sec. 26(a).''
Jacobs J. specifically agreed with this observation of the Chief Justice. An even earlier reflection of this view emerges in the decision of Walsh J. in
McGuiness v. F.C. of T. 72 ATC 4023 where, at p. 4027, he concluded that McGuiness when he purchased the interest in land did not acquire it for purpose of profit-making by sale, observing -
``As purchasers often do when buying property, he may have believed that an increase in value would take place later and that in the future he might obtain the benefit of such an increase.''
Clearly, in the context, such hopeful expectations do not constitute a profit-making scheme.
10. But I think that the venture into the futures market undertaken by this taxpayer was not such an investment as would be encompassed in the concept of a ``hedge'' emerging from the dicta quoted above. Inherent in that concept is an intent of long-term holding of an asset, the value of which should reflect depreciation of the currency. It is a case of a hopeful expectation of enhancement rather than an active pursuit of profit. In
XCO Pty. Ltd. v. F.C. of T. 71 ATC 4152, Gibbs J. (as he then was) observed, at p. 4155:
``The second limb of sec. 26(a), unlike the first limb of that paragraph, does not refer in express terms to purpose but, in my opinion, a scheme is not a `profit-making scheme' simply because it yields a profit where none was intended; in the ordinary sense of the words a `profit-making scheme' is a plan devised in order to obtain a profit, and a scheme only answers that description if the taxpayer carries it out with the purpose of making a profit.''
If, then, the taxpayer is not to be assessed under the second limb of sec. 26(a), there must be something in the evidence pointing to a lack of purpose in the taxpayer to make a profit in carrying out the plan she had devised to preserve the true worth of her capital against the twin ravages of depreciation and tax (see generally the views of Mason J. in relation to the onus under sec. 190(b) as expressed in Gauci and affirmed by the majority in
McCormack v. F.C. of T. 79 ATC 4111, in particular the view of Gibbs J. (as he then was) at p. 4121). There can be no doubt from the evidence that the taxpayer was seeking an enhancement in historic accounting terms in the value of her investment in contacting the Australian Bullion Company, that she was talked out of pursuing her original intention of investing ``in investment diamonds for about $1,500'' and that she entered on the venture into the futures market on the advice of a consultant with no understanding in detail of what was entailed. Her primary evidence in this regard is summed up in the answers to two questions as under:
``Please explain what happened on your first visit to the Australian Bullion Company? - I spoke to the girl at the counter and said I would like to invest in investment diamonds for about $1,500 or $2,000. She said I better speak to some consultant there and have advice on it first. She introduced me to a chap called Mr. D who was a consultant at that particular place. He then said to me that even safer than the investment diamond it was safer to go into the futures market, which I knew nothing about. I thought if this company was advising this investment diamond so much and he tells me it is safer to invest in the futures market, he probably knows what he is talking about. I did not understand what he was saying. He was showing books and graphs and explaining. I thought probably this is a good thing.
Was it your original intention to buy a diamond? - Yes. I went there for the sole purpose of buying an investment diamond
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because they had been advertising so much, but the people who were running this place, and this chap, advertising this diamond told me it was safer to go into the futures market. I did not know one or the other. It made no difference to me. I thought they knew what they were talking about, and I believed them.''
In the general context of the taxpayer's overall evidence, it appears that the word ``safer'' as it appears in the answer to these questions, and similar questions in cross-examination, has to be read in the sense of ``more certain'' of achieving the taxpayer's objective of maintaining the value of her funds as appears from this extract from an answer in cross-examination -
``What we wanted was to maintain its value because of inflation. We thought it would not be worth that amount in a couple of years when the kids really needed it.''
It seems clear from this answer that what the taxpayer deliberately sought was enhancement in value of her investment in the relatively short term. That raises the question whether, in the steps she took seeking to ensure that enhancement, the taxpayer devised a plan to obtain a profit and carried it out with the purpose of making a profit. I believe that in seeking enhancement of the value of her investment, the taxpayer was seeking ``profit'' in the sense that that word is used in the phrase profit-making undertaking or scheme. The enhancement was not to be a windfall gain - it was deliberately sought in the broad plan devised by the taxpayer. Though it may have had only the limited aim of safeguarding her against the depredations of inflation and tax, in terms of historic accounting, it was designed to produce a profit (my emphasis). It is to be noted that the Act operates on the basis of historic accounting; where it has been intended to take account of inflationary trends, indexation of income tax rates and rebates, trading stock valuation adjustment, etc., special legislation has been required. The Act does not therefore look for real profit in economic terms, but rather the prospect of gain in historic accounting terms when it speaks of profit. In these terms, the taxpayer had devised a scheme seeking to obtain a profit and had carried it through with the purpose of making a profit.
11. In this reference, I would reduce the assessment to exclude three-fourths of the profit arising from the profit-making scheme, viz. $2,941.