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YOUR BASIS IS ZERO UNTIL YOU SHOW IT'S NOT

July 31, 2008

Yes, it can be inconvenient to keep track of your cost of stocks in a taxable brokerage account. Yet it can be expensive not to. A Virginia man learned this lesson the hard way in Tax Court yesterday.

Stanley Cook, an EPA employee, didn't get around to filing his 2003 tax return. As typically happens, the IRS noticed that he was still getting issued W-2s and 1099 forms, including a 1099B showing proceeds of $972.79 on a stock sale. The IRS assessed taxes based on the 1099s and W-2s assuming that he had a basis of $0 in the stock he sold.

Mr. Cook then finally sent the IRS a 1040. He said that he really lost $2,427.93 on his stock. The IRS didn't buy it, and they ended up in Tax Court. Mr. Cook didn't show the Tax Court any evidence of what he paid for the stock, so the Tax Court upheld the IRS (citations omitted):

To overcome respondent's determinations, petitioner must prove that he is entitled to claim a $2,427.93 long-term capital loss, and he must prove a basis greater than zero.

Citing certain IRS publications that refer to the time within which one may timely file a refund claim, petitioner argues that his Form 1040 was timely filed and therefore the IRS's "policy" of using a zero basis "leads [the] IRS to make false claims of indebtedness."

The language he refers to does not, however, negate a taxpayer's obligation to file a timely Federal income tax return... Petitioner did not provide any evidence to respondent or to the Court to substantiate the $3,400.72 amount that he claimed as his basis or the claimed $2,427.93 long-term capital loss, as required by the IRC and the regulations

The Moral? Mr. Cook made two false moves. Had he filed his return without IRS prompting, it's unlikely the IRS would have ever questioned the capital loss he claimed later. Once he tried to claim the loss, he failed to present checks or brokerage statements to prove his basis - which almost certainly was higher than zero. So file on time, and keep your cost records for your stock purchases.

Cite: Stanley A. Cook, T.C. Memo 2008-182.

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