Cross References
• Bilyeu, T.C. Memo. 2012-161, June 11, 2012

There is a long history of court decisions that say if the taxpayer cannot prove basis in stock, the basis is zero. A recent court case illustrates this rule.

During the year, the taxpayer received gross proceeds of $23,542 from the disposition of certain securities. The taxpayer claimed that the gross proceeds should be reduced by the total amount of the basis that he had in each of those securities. In court, the taxpayer relied solely on his own testimony with respect to the basis. He presented no documentation to support his claimed basis, not even any notes made at the time he purchased the securities showing what he paid for, and the date on which he purchased them.

The Court said: “We are not required to, and we shall not, rely on petitioner’s testimony to establish the basis that he had in each of the securities disposed of...” The Court ruled the taxpayer could not reduce the gross proceeds received by the total amount of basis that he claimed he had.

Author's Comment: In Cohan, 2nd Cir., March 3, 1930, the Court ruled that estimates could be used to substantiate business deductions when no records are kept. The Court said the taxpayer had to have incurred some expenses in order to carry on his trade or business. In contrast, even if it is likely a taxpayer incurred some expense in purchasing stock, Courts have repeatedly ruled that basis is zero when there are no records to substantiate the amount paid.