Originally published on Forbes.com July 17th, 2013
If you fail to file a tax return, you may find that after a while the IRS will prepare one for you. You may not like their computations and think that you could have done a better job yourself. It may, however, be too late. That may happen to Dean M. Youngquist if the US District Court in Oregon follows a magistrate’s recommendation.
Mr. Youngquist took up day trading for a while in 1996. Also, according to the ruling, he had not filed a valid tax return since the 1980s. If you are not filing returns, day trading is probably one of the worst things for you to take up. Whatever else day trading does for you, it is bound to get you one or more 1099’s with significant numbers on them. Your 1099 from stock trading showed your gross proceeds. Although most brokers also provided basis information and sometimes even nice gain/loss schedules, they were not required to send any of that information to the IRS until recently.
It took a while for the IRS computers to catch up with Mr. Youngquist, but when they did the result was ugly:
On April 9, 2001, the IRS made a tax assessment against Youngquist. The IRS assigned a cost basis of zero to his 1996 stock sales. As a result of his stock sales and interest/dividend income, an individual income tax of $791,200 was assessed against Youngquist based on an adjusted gross income of $2,053,557, and a taxable income of $2,049,557. The following penalties and interest were also assessed against Youngquist on April 9, 2001: (1) $42,112.41 estimated tax penalty; (2) $178,020.00 late filing penalty; (3) $386,706.57 interest assessment; and (4) $189,888.00 failure to pay tax penalty.
Mr. Youngquist did not disagree with the gross numbers:
Through his deposition testimony, answers to interrogatories, and requests for admissions, Youngquist agrees that in 1996 he sold a total of $1,451,076 in stock through his Protrade account. He also agrees that he sold $601,612.50 in stock through the Datek account in 1996.
Just as the IRS was slow to assess Mr. Youngquist, they were slow to get him into court.
On March 31, 2010, the United States instituted this action to reduce Youngquist’s tax assessments to judgment, to foreclose its liens, and to sell Youngquist’s property and distribute the proceeds from the sale to satisfy lienholders.
Mr. Youngquist got serious about showing that the assessment was overstated.
During the course of this proceeding, Youngquist has been able to provide some evidence of his cost basis in stock sold in 1996.
He managed to find a series of e-mails that documented the basis and trading dates on one of his two accounts which prompted the magistrate to recommend a significant adjustment to the assessment. On the other account, he came empty as to details. He did have a theory of how to back into his basis. He opened the account with $73,000 and when he closed it there was less than $68,000. From that you can infer that his basis in the 1.4 million of sales was about $5,000 more than the sales. That works for me, but not the magistrate.
Youngquist’s basis in the stock he sold is determined by the amount he paid to purchase those stocks. See, 26 U.S.C. §1012 (“The basis of property shall be the cost of such property.”) It is the taxpayer’s burden to establish that they have a basis in property. Coloman v. Comm’r, 540 F.2d 427, 429 (9 th Cir. 1976). “The fact that basis may be difficult to establish does not relieve a taxpayer from his burden.” Id. at 430. If the taxpayer fails to satisfy the burden, the basis is deemed to be zero. Id. at 431. Where it is clear that some amount has been paid for property, but it is not possible to determine the amount “with exactitude,” then it may not be appropriate to declare the basis to be zero. Cohan v. Comm’r, 39 F.2d 540, 544 (2 nd Cir. 1930). However, in order to apply the rationale of Cohan, there must be sufficient evidence to make an estimation, and “elf-serving, vague, and undocumented testimony is insufficient.” Williams v. Comm’r, 1994 WL 50462, 67 T.C.M. (CCH) 2185, T.C.M. (RIA) 94,063 (U.S. Tax Ct. 1994).
I’m really torn as to who to root for in this case. It is pretty clear that the assessment is overblown, but there is another factor:
Ultimately, we have a failure by Youngquist to maintain his Protrade records and a failure to file a timely tax return. This 1996 tax liability is being litigated in 2013. “It is not the task of this or any court to restructure a taxpayer’s dealings, in lieu of his facing a prescribed burden of proof, in order justify his entitlement to some tax benefit.” Better Beverages, Inc. v. U.S., 619 F.2d 424, 430 (1980). “hen a taxpayer has failed to arrange his affairs so as to minimize his taxes, he cannot expect the court to do it for him nunc pro tunc.”
The biggest practical lesson here is to not ignore 1099s.
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