Regi’s Stock Sale Dilemma
Regi Philman is in a dilemma whether he should use the specific identification method or the FIFO method (first in first out) to calculate his tax returns. On the audit of Regi’s 2010 return, the IRS has taken the conclusion under Reg. Section 1.1012-1(c) (3) that he should report the sale using FIFO method of his stake in Rippa shares, resulting in a gain of $140,000. Research
Section 1.1012-1(c)(3)(II)(b) of the IRS regulations states: “ Where part of the stock represented by a one certificate is sold directly by the taxpayer to the purchaser, an adequate identification is made if the concern person maintains a clear record of the particular stock which he intended to transfer” ( 67 TCM 3036, T.C. Memo. 1994-248).
According to this rule, Regi could not have used the direct identification method to calculate his tax returns. The reasons are as follows: the stock of Rippa is not under one certificate its purchase was during different times. Regi did not transfer the shares directly to the purchaser, and the transaction was through Sam Waterson his broker, and finally Regi did not have a written record showing the particular stock that he intended to transfer.
Section 1.1012-1(c)(2), provides that if the taxpayer shows that stock certificates from the lot purchased on a particular date or for a certain value were delivered to the taxpayer's owner.
Conclusion
Regi should have used the FIFO method according to the audit report in calculating his tax returns. This is because as the detailed research has shown above he has violated the IRS Regulations act Section 1.1012-1(c)(3)(ii)(b) , Section 1.1012-1(c)(1) and the income tax regulation 21, Section 1.1012-1(c)(2) , and Section 1.1012-1(c)(3).He was, therefore, supposed to report a sales gain of $140,000 instead of $75,000.
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