As the result of a large inheritance from her grandmother, Marcy has a substantial investment portfolio. The securities are held in street name by her brokerage firm. Marcy’s broker, Max, has standing oral instructions from her on sales transactions to sell the shares with the highest cost basis. In October 2008, Marcy phoned Max and instructed him to sell 6,000 shares of Color, Inc. Her portfolio has 15,000 shares of Color, which were purchased in several transactions over a three-year period. At the end of each month, the brokerage firm provides Marcy with a monthly statement that includes sales transactions. It does not identify the specific certificates transferred. In filing her 2008 income tax return, Marcy used the specific identification method to calculate the $75,000 recognized gain on the sale. On audit of her 2008 return, the IRS has taken the position that under Reg. § 1.1012–1(c) Marcy 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, Marcy may not use the specific identification method (and must use the FIFO method) because the broker did not provide written confirmation of Marcy’s sales instructions.

Marcy has come to you for tax advice with respect to this issue.


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