M E M O R A N D U M
Tax Research #2
To: Student
From: Paula Partner
Date: November 1, 2011
Subject: Regis's Stock Sale Dilemma
Last week I met with Regis Philman, a long-time client of mine. Regis inherited a large investment portfolio from his grandfather. The securities are held in street name by his brokerage firm, T.D. Tradehouse. Regis's broker, Sam Waterson, has standing oral instruction from him on sales transactions to sell the shares with the highest cost basis first in any given transaction.
In October of 2010, Regis instructed Sam to sell 6,000 shares of Rippa Corp. Stock. Regis's investment portfolio contains 15,000 shares of Rippa, which were purchased in several transactions over a three year period. At the end of each month, the brokerage firm provides Regis with a monthly statement that includes sales transactions. It does not identify the specific certificates transferred.
In filing his 2010 income tax return, Regis used the specific identification method to calculate the $75,000 recognized gain on the sale, consistent with the instructions he provided to Sam to sell the shares with the highest cost basis first. On audit of his 2010 return, the IRS has taken the position that under Reg. Section 1.1012-1(c)(3), Regis should have used the FIFO method to report the sale of the Rippa shares, resulting in a gain of $140,000. According to the IRS's interpretation of the Regulations, Regis may not use the specific identification method (and must use the FIFO method) because the broker did not provide written confirmation of Regis's sales instructions.
Please provide me with a reply memorandum with your research findings on the issue of whether Regis may use the specific identification method to identify the shares sold, even though he did not technically comply with Reg. Section 1.1012-1(c)(3). I have already done a preliminary research exercise and come across a Tax Court case which will be your exclusive source, in conjunction with Section 1.1012-1(c)(3), for finding your answer. I have provided the cite below.
Sources
Concord Instruments Corporation, 67 TCM 3036, T.C. Memo. 1994-248.
*See Section XI of the opinion: Gain on Sale of Stock.
Treasury Regulation: Section 1.1012-1(c)(3)