Snyder v. Commissioner
Headline: Court upheld IRS use of first-in, first-out accounting for margin stock trades, rejecting a trader’s claim that his intent identified shares and making past purchases taxable when later sold.
Holding:
- Forces margin traders to use FIFO across years for tax reporting
- Trader’s mere intent can't identify shares for tax purposes
- May increase tax bills for investors who pyramided holdings
Summary
Background
A salaried secretary at an insurance company traded United Gas Improvement stock on margin through brokers during 1928. He made many purchases and sales, used “pyramiding” to increase holdings, and never received or held specific stock certificates himself. The IRS reallocated his 1928 sales against earlier purchases using a First-in, first-out rule and assessed a large tax deficiency. The Board of Tax Appeals and the Court of Appeals upheld the IRS determination, and the case reached this Court.
Reasoning
The Court addressed whether margin-traded shares could be identified so the taxpayer could avoid the First-in, first-out rule, and whether his trading was a business that required a different accounting method. The Court said shares traded on margin are capable of identification for tax rules, but a trader’s mere intention to sell particular lots, without more, does not identify them. The record did not show the taxpayer devoted substantial time to trading or that he was a securities dealer, so he could not use dealer accounting. Therefore the Commissioner’s method—matching sales to earlier purchases under the First-in, first-out rule and taxing gains when the sales occurred—was proper.
Real world impact
Individual margin traders who mix lots and never receive certificates cannot rely on subjective intent to pick which shares were sold. Brokers’ book entries and mingled certificates support the IRS’s FIFO matching across years, which can increase taxable income when older, cheaper purchases are matched to later sales.
Dissents or concurrances
One Justice agreed with the result but emphasized that the taxpayer failed to prove any particular shares could be identified by purchase date.
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