When a taxpayer acquires multiple blocks of the same security, under Reg. §1.1012-1(c)(1) the taxpayer is deemed to first sell the first shares purchased—or, to put it simply, the taxpayer is put on the first-in, first-out (FIFO) basis. However, a taxpayer with the stocks held by a broker can specifically identify the shares to be sold if the taxpayer adequately advises the broker prior to the sale of the shares he/she wishes to sell. [Reg. §1.1012-1(c)(2) and (3)]
In the case of Turan v. Commissioner, TC Memo 2017-141 the question was whether Mr. Turan had made that adequate identification of shares sold.
The taxpayer maintained a brokerage account with Scottrade. While he had a diverse portfolio, almost all of his holdings were short term, with frequent purchases and sales of small blocks of stock. However in 2013 he did take a long-term investment position in FNMA stock, acquiring shares at various times.
During 2013 the taxpayer had 51 sales with Scottrade, 16 of which involved FNMA stock. Scottrade reported these sales on Form 1099B and reported the basis of shares sold on the FIFO basis. For whatever reason, Mr. Turan failed to include any of these sales on his 2013 income tax return.
When the case got to Tax Court, the taxpayer had conceded he should have reported those sales and also conceded the reported basis on all shares except those involving FNMA stock. For the FNMA stock, Mr. Turan claimed that Scottrade had erred by reporting a FIFO basis for the stock, and that a LIFO method should have been used.
The taxpayer claimed he had attempted to inform Scottrade that he wished to use a LIFO method for his FNMA shares. As the Court opinion notes:
Petitioner testified that in mid-2013 he attempted to inform Scottrade of his desire to use LIFO instead of FIFO, by way of their internet client portal, but was unable to do so because of an error on Scottrade’s website. He stated that he phoned the firm in an attempt to work around this error, but received no assistance. Petitioner did not testify as to whether he ever again attempted to make this election for 2013 or otherwise contacted Scottrade during the seven months that followed his initial attempt.
However, the Court noted that he presented no evidence, aside from his testimony, of this attempted contact with Scottrade, and Scottrade indicated that they had no evidence of any contact by or on behalf of the taxpayer at all. Based on that, the opinion notes:
We find that petitioner never instructed his broker to administer his account using any method other than the regulatory default FIFO method, or otherwise adequately identified the specific stock to be sold at the time of sale. Respondent’s determinations are sustained.