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Stock Transaction and tax question

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Orebell

Member
What is the name of your state? California

OK here is the situation. I have a friend who for whatever reason chose not to file his tax returns. I don't know for how long he has not filed, but let's just say for the last 20 years ok.

Here is his situation. In 1988, 1989 and 1992 he made some stock transactions that triggered both the IRS and the State of Ca to tax him. Remember, he did not file his returns so if he bought XYZ Co for $1 and sold it for $1, what was reported to the IRS and the state was that he made $1 in income when in fact he made $0.

So here is the dilemma, in 1988 and 1989, he sold roughly $40,000 in stocks and since he did not file his return, he was taxed on $40,000. So for 17 years, the IRS and the state have been accumulating penalties and interest on what they say he owes for those years.

The problem in all this is I cannot find any records so far of any of these transactions. I have been helping my friends brother look through his records and so far we have come up empty handed finding any records of transactions. In addition to that, the broker where he bought and sold the stocks from has changed hands and merged and all that over the years and the company that now handles those stocks is pertty adament that they do not have any records from then. So it looks like I have a complete dead end as far as being able to prove that my friend bought such and such a stock and sold such and such a stock.

So here is what I am really looking for advice wise. I want to know if there is any precedent or court case where possibly something similar was brought up. The way I would like to approach this is if we look at my friend's stock trading history/pattern, he does not make very much money on his trades. I have probably 6 to 7 years of his stock transactions and he follows a similar pattern all the time and does not make much money. I am certain that the $40,000 in stocks sales that were reported for each of those years, maybe he made 10% or $4000 at most. I don't know that, but I am just going by the 6 or 7 years that I have documenation on. I am just wondering if there is any precedent for making the arguement based on other years.

One of the ways I thought about approaching this would be to look at all the years that we do have records on. Let's say on average he sells $80,000 worth of stock a year. And let's just say that on average he makes about 10% of whatever he sells. So if sells $80,000, he made actually $8000 and would be taxed on $8000. If he sells $60,000, he makes $6000 and is taxed on that. Let's say I did that for every year that we have complete records for and figured out a percentage. I am wondering if there is any precedent for applying that same percentage to a different year where no records are available. So let's say that all the years we have, he roughly made about 10% of the actual selling price of the stocks, for tax years 1988 and 1989, he would owe taxes on $4000 instead of $40,000.

I hope I have made myself clear on what I am getting at. I know I am right on this, but I just do not know if there any legal ground for it.

While I am at it, I think it is absurd that the IRS and states would make an assumption that if someone trades stocks and they do not file a return, they assume that the stock was bought for $0 and the sale price is the entire gain. I know they have no way of knowing what the person paid for the stock, but it seems like there should be some middle ground and realistic common sense.

Please do not make any negative comments about my friend. I don't know why he did not file his return. It is his fault. Personally speaking, I don't think he should have been handling his own financial affairs back then. I think he has some form of mental illness although I cannot prove it. If you look at his life, at least from when I have known him, he made a lot of very bad decisions financially. I would say all of the financial decisions that I have seen him make were bad and one would have to question his mental ability to make financial decisions. The sad thing about all the financial decisions is that all of them that I have seen were easily solvable. I know because I have been dealing with at least a half dozen issues for him.

At this point in time, my friend is in a nursing home with a brain tumor. He is never getting out of the nursing home. He cannot deal with anything at this point in time. I have asked him about where some of these records might be and he does not have any idea, if he even understand what I am asking.

I am just trying to help preserve as much money as I can for the guy. If he continues to live, he may need those funds for health care. If he passes away, his brother inherits it all. I am in no way listed in any will or in line to get any money, I am just a friend trying to help a friend who cannot help himself.

I don't know the credentials of the people who post on this forum. I am hoping someone reading this will say I have been through something like that or know someone who has been through something like that and here was the result, good or bad. Or maybe there is a lawyer actually reading this and knows of a similar case, good or bad. One thing I do not want to do is waste money going to an attorney on this when in reality there is not a snowballs chance in hell of winning. That is not doing the best thing for my friend. However, if there is some precedent for something like this, I would really like to know. I want my friend to have as much money as he is entitled to but I do not want to burn it up on attorneys.

I hope someone can answer this.
 



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