Whether a hedge fund is deemed to be an “investor fund” or a “trader fund” can have a significant financial impact on its investors because investors in trader funds are able to deduct a greater portion of the fund’s expenses on their personal income tax returns.  Expenses passed through to investors from an investor fund are capped at two percent of the investor’s adjusted gross income, while expenses passed through by a trader fund are fully deductible against hedge fund income.  See “What Critical Issues Must Hedge Fund Managers Understand to Inform Their Preparation of Schedules K-1 for Distribution to Their Investors?,” Hedge Fund Law Report, Vol. 6, No. 11 (Mar. 14, 2013).  A recent U.S. Tax Court decision involving an individual who traded stocks and call options provides an excellent overview of the criteria the Internal Revenue Service considers in determining whether an individual or entity is a “trader.”  Although the decision involves an individual, the criteria considered by the Court are likely to apply to the tax status of hedge funds.  This article summarizes the factual allegations as well as the Court’s legal analysis and holding in the case.