How can I remove "First Volume"(Macintosh HD) on the disk. Minus sign is grayed out. Unable to remove it via recovery either. Even if I erase the volume, I can't use that space for macOS10.12.1... volume.
You can't work on the volume you are booted from. The recovery mode is a minimalist partition at the start of the volume.
Easiest way is to create a bootable USB stick, boot from that.
A second way is to install onto a external hard drive, boot from that, then work on your main disk.