How do I calculate a cost basis for transferred stocks?

This answer was provided by Mark Misselbeck, CPA, from Levine, Katz, Nannis & Solomon PC in Needham.

Q: I gave my parents $10k in 1996 and in return they gave me multiple stocks by transferring the stocks to my name. They do not have a cost basis for the stocks that were originally purchased in the 1950's and have since split, merged, and became multiple companies (e.g. AT&T). How do I calculate a cost basis for these stocks if I have no history for them? --Steven, Boston

A: There are several levels to this question.

First, at the time that you "gave" your parents $ 10,000, did that equal the value of the stocks transferred to you (or was it more or less than their value)?

If the value was equal to the amount you paid to your parents, your cost is $ 10,000 and you acquired the stock from them on the date you paid them.

If the value of the stocks was less than the $ 10,000, your cost is the actual value of the stocks on the date you paid them and the "extra" was a gift from you to your parents.

If the value of the stocks was more than the $ 10,000, you have a part gift, part sale transaction. say the stocks were worth $ 30,000. Your parents "sold" you 1/3 for the $ 10,000 and should have reported any gain from the sale, offsetting 1/3 of their cost for the stocks against the $ 10,000 you paid them. The other 2/3 (or $ 20,000, in my example) was a gift from them to you. The 2/3 of their cost of the stocks would carry over from them to you. Your holding period for 1/3 of the stocks would commence on the date of payment and for the 2/3 would carry over to you as the date that your parents acquired the stocks. If you have the dates on which they acquired the original holding and number of shares, you could visit the library and research the stock price on that date, using an average of the high and low price for the day, multiplied by the number of shares originally purchased to determine their cost. You would then have to adjust for stock splits (or spin-offs of companies, in the case of A T & T and the "Baby Bells"). In addition, if you (or your parents) participated in Dividend Reinvestment Programs (DRIPs) with the company(s), you would add the reinvested dividends to the cost of purchasing the stocks (without records, it may be necessary to contact the company(s) for such information).