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Capital gains on grandma's stock

Posted by Andrew Chan  February 18, 2009 02:00 PM

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My husband received 100 shares of stock from his grandmother back in the 90s. The stock split, and a company spun off, and that company was acquired by a private Japanese company in 2007. The Japanese company paid cash for the stock, and we received this cash payment in December 2008. Now we have to declare capital gains on this cash. How on earth do we figure out those capital gains? I understand we're supposed to figure the difference between the sale price and the purchase price all the way back when the stock was purchased by his grandmother, but we have no way to get the initial purchase price. Can you help us figure this out?

The capital gain or loss on the sale of a stock is computed by taking the difference between the proceeds received from the sale and the tax basis of the stock. The tax basis of the stock is the original purchase price plus any associated costs to purchase the stock such as brokerage fees or transaction fees. The difficulty in your situation (as you have alluded to) is determining the tax basis for stock that may have been purchased years or decades ago before your husband received it. The tax basis for your husband’s stock will be determined based on how he received it from his grandmother. In general, if his grandmother gifted the stock to him, the tax basis will be the tax basis that she had before she gifted it or the fair market value of the stock on the date of the gift. If your husband inherited the stock from his grandmother, the tax basis will generally be the fair market value of the stock on the date of her death.

Let’s take a look at each of these situations in more detail starting with the easier of the two. If your husband inherited the stock from his grandmother, you can look up the historical stock price on his grandmother’s date of death and use that as the starting point for your tax basis. In general, inherited securities receive a “step-up” or “step-down” in basis to the value on the date of death so you won’t need to go all the way back to his grandmother’s original purchase date(s) to determine the tax basis. Once you’ve determined the date of death value you can make adjustments to the tax basis from that date forward to account for any capital changes that may have occurred since you inherited the stock. If there were no capital changes, the date-of-death value becomes your tax basis.

For tax purposes, capital changes are changes that the company goes through that effect the value of their stock price and your tax basis in that stock. Examples of capital changes include stock splits, stock redemptions, mergers and acquisitions, etc. There are several ways to find out what capital changes have occurred for a company and how they affected your stock. Some publicly traded companies provide details on their corporate web site. If the company is no longer publicly traded or the information is not available through their web site, the task becomes more difficult and will require more work to find the information you need. There are reference materials that track the capital changes of companies. These materials can be expensive and difficult to find but some libraries may have them. If you use a tax preparer to do your return, see if they have access to this information. I believe many of the larger CPA firms and tax law firms have them. Another source may be your or your grandmother’s broker. Brokers may have access to this type of information through their research departments but I don’t know how easy it is for their clients to access this information.

If your husband received the stock as a gift, determining the starting point for your tax basis will likely involve more work. In this case you will need to know the fair market value of the stock when the gift was received. To make things a little less confusing, we’ll refer to your husband’s grandmother as the donor for purposes of this discussion. If the fair market value of the stock on the date of the gift was higher than the donor’s tax basis (for the stock), the starting point for your tax basis would be the same as the donor’s basis. Therefore, you would need to try to trace the value of the stock from its original purchase plus any capital changes since then to determine the correct tax basis.

If the fair market value of the stock on the date of the gift is lower than the donor’s tax basis, the starting point for your tax basis would be either the fair market value as of the date of the gift or the donor’s basis depending on what you end up selling the stock for. If you sell the stock for more than the donor’s basis, you should use the donor’s basis to compute your gain. If you sell the stock for less than the fair market value of the stock on the date of the gift, you should use the fair market value on the date of the gift as your basis. If you sell the stock for an amount between the donor’s tax basis and the fair market value of the stock on the date of the gift, you will record no gain or loss for the sale.

In the end, if your husband received the stock as a gift, you will need to determine to the best of your ability the original purchase date(s) and then trace the history forward to determine his grandmother’s tax basis in the stock. If possible see if there is any way to find old trade confirmations, account statements and tax returns that may provide you with information about the purchase date(s) and value. Also, try to work with your or your grandmother’s broker to see how they can help. Unfortunately, if all else fails, you may have to consider recording the tax basis as zero and paying capital gains on the entire amount of your proceeds. I would consider this a viable option if the time and expense of determining the basis outweighs your potential tax savings.

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D. Abraham Ringer is a CERTIFIED FINANCIAL PLANNER practitioner and a Financial Adviser with Morgan Stanley Global Wealth Management in Boston. He is registered in MA, NH, NY and several other states to which his articles are directed. For more information please visit www.morganstanleyfa.com/ringer
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