Attorney-at-Law

“THE LAST SHALL BE THE FIRST”

In Uncategorized on 07/17/2017 at 19:26

Notwithstanding the exalted status of the speaker of the captioned phrase, the first in is the first out, when it comes to sellers of securities.

Here’s Kenan Turan, 2017 T. C. Memo. 141, filed 7/17/17, real estate agent, paid tax return preparer and day trader, who claims his broker did him wrong by not letting him use LIFO.

Judge Nega: “As a general rule, when taxpayers hold multiple lots or shares of identical stock, they must compute their gains or losses against the basis of those shares actually sold, not the shares the taxpayer intended to sell.  As this rule may prove onerous for high-volume or high-frequency traders, regulations have been promulgated to provide relief.  Under the regulations, by default, taxpayers owning blocks of identical stock acquired on different dates or for different prices determine their stock’s basis by using the FIFO method.  Sec. 1.1012-1(c)(1), Income Tax Regs.” 2017 T. C. Memo. 141, at pp. 4-5. (Citation omitted).

Kenan is an in-and-out trader. Even though he has only 51 trades for the year at issue, IRS lets him stay a day trader. Kenan claims he told his broker he wanted LIFO, but the broker’s website played him false.

So Kenan never bothered to disclose the trades, or the gains therefrom, on his 1040.

“Petitioner argues that respondent and [broker] both erred in failing to use the last-in-first-out (LIFO) method to determine the bases of his FNMA shares. Petitioner testified that in mid-2013 he attempted to inform [broker] 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 [broker]’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 [year at issue] or otherwise contacted [broker] during the seven months that followed his initial attempt.

“Petitioner offered no documentation or other objective indicia to corroborate his claim of a computer error or any misfeasance on the part of [broker].”  2017 T. C. Memo. 143, at p. 6. (Name omitted).

I can’t say I’m surprised. The broker in this case is a well-known online outfit, and even though Judge Nega seems to think the FIFO rule was promulgated for the trader’s benefit, my bet is that the brokers wanted a hard-and-fast rule, so they could deal with the multiple customers, all trading their heads off at seven bucks a throw, on a one-size-fits-all basis. I’m no day trader, but I doubt anyone who isn’t a mega-whale can get an online broker to modify their software so as to switch from FIFO to LIFO just for him/her.

Howbeit, I’m open to correction if anybody has written evidence.

But Kenan’s little omission doesn’t sit well with Judge Nega. He doubts the credibility of Kenan’s testimony about his interaction (or lack thereof) with the broker. And Kenan’s argument about using average basis falls flat, as he wasn’t trading mutual fund shares or shares from a dividend reinvestment plan.

Finally, “When we consider his sophistication and–more concerning–his training and employment as a paid preparer of income tax returns, we find his failure characteristic of an unreasonably insufficient effort to ascertain his proper tax liability.“  2017 T. C. Memo. 143, at p. 10.

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