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 Neither the Internal Revenue Code nor the regulations define 'trade or business.' However, the concept of engaging in a trade or business, as distinguished from other activities pursued for profit, has been in the Internal Revenue Code since its inception and has generated much case law. 

In determining whether a taxpayer who manages his own investments is engaged in a trade or business, the courts have distinguished between 'traders,' who are considered to be engaged in a trade or business, and 'investors,' who are not. See, e.g., Levin v. United States, 220 Ct. Cl. 197, 597 F.2d 760, 765 (Ct. Cl. 1979). Investors are considered to be merely engaged in the production of income. See Purvis v. Commissioner, 530 F.2d 1332 (9th Cir. 1976). 

The Court of Claims, has defined a trader as one whose profits are derived from the 'direct management of purchasing and selling.' Levin 597 F.2d at 765. The Ninth Circuit has adopted a similar test to distinguish between investment and trading accounts: In the former, securities are purchased to be held for capital appreciation and income, usually without regard to short-term developments that would influence the price ...

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