Disposition of Less Than the Whole: The Need to Identify the Securities Sold

by Andrew W. Singer

Excerpt:

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Beginning January 1, 2011, brokers previously required to report to the Internal Revenue Service the gross proceeds from sales of stock by their customers are also required to report the adjusted basis of the stock sold and whether gain or loss on the sale is long-term or short-term. The Energy Improvement and Extension Act of 2008, which amended 26 USCS § 6045 (IRC Section 6045) to impose the new basis and holding period reporting requirements, also changed certain of the substantive basis rules so that brokers could more easily comply with the new reporting requirements, especially when the customer sells less than all of his holdings in a specific security. If only a part of the total investment is sold, it becomes necessary to identify the lot from which the securities were sold in order to fix gain or loss. Identification is also important in determining the holding period of the securities, and thus whether capital gain or loss is long- or short-term.

The First-In, First-Out Default Method

If the taxpayer is unable adequately to identify the lot from which the securities were sold, regulations provide that the sale is deemed to be of those securities acquired first, irrespective of the manner in which the securities were acquired or the time at which the securities were placed in a particular account.

There are, however, certain instances in which the earliest-acquired securities in a total holding will not be considered the ones sold. If the securities are held in a number of depositories or accounts, and the taxpayer can identify the depository or account from which delivery has been made, the first-in, first-out rule will be applied solely with respect to the securities in the particular depository. In addition, if it can be shown that it would have been impossible to sell the first-acquired securities, as the same were held as collateral, these securities can be disregarded when applying the first-in, first-out rule. [footnotes omitted]

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Andrew W. Singer is a retired partner of the Washington DC firm of Covington & Burling. Mr. Singer specializes in all areas involving federal and state taxation and has extensive experience in international taxation which includes representation of the Commonwealth of Puerto Rico and the Marshall Islands in negotiating tax agreements with the US and participation in competent authority negotiations under US tax treaties. Mr. Singer served as Chairman for the Committee on Court Procedure, American Bar Association and as Chairman for the Committee on Taxation, District of Columbia Bar Association; lectured at American University, Washington College of Law, Washington, DC and George Washington University, National Law Center, Washington, DC; and has published articles in various tax journals, including articles on income taxation of bankrupt companies and individuals, litigation in US Claims Court, District Courts and Tax Court.