As a result of a large inheritance from her grandmother, Sally has a substantial investment portfolio. The securities are held in street name by her brokerage firm. Sally$$s broker, Max, has standing oral instructions from her on sales transactions to sell the shares with the highest cost basis.

In October $2023,$ Sally phoned Max and instructed him to sell $6,000$ shares of Color, Inc. Immediately before the sale, her portfolio had $15,000$ shares of Color, which were purchased in several transactions over a $3$ year period. At the end of each month, the brokerage firm provides Sally with a monthly statement that includes sales transactions. It does not identify the specific certificates transferred.

In filing her $2023$ income tax return, Sally used the specific identification method to calculate a $$75,000$ recognized gain on the sale. On audit of her $2023$ return, the IRS has taken the position that under Reg. $1\mathrm{.}1012-1($c$)$ Sally should have used the FIFO method to report the sale of the Color shares, resulting in a gain of $$140,000.$ According to this interpretation of the Regulations, Sally may not use the specific identification method $($and must use the FIFO method$)$ because the broker did not provide written confirmation of Sally$$s sales instructions.

 

Sally has come to you for tax advice with respect to this issue. What advice you give the sally?

 

Answer rating: 100% (QA)

Answer Given the circumstances described heres the advice I would give to Sally regarding her tax situation Review Documentation Sally should first re... View the full answer