Cost Basis After Reverse Stock Split - Good for a Laugh

[JohnH]

Had a humorous situation occur with a financial advisor today.
Here's what happened (in round numbers)

In 2009 taxpayer inherited 900 shares of stock which was selling for $42 per share on the date of death.
In mid 2012 the company did a 3-1 reverse split, so they were then holding 300 shares with no change in cost basis.
In late 2012, taxpayer sold 250 of the shares for $64 per share.
We have to report gain (or loss) on the sale.

They called the financial advisor to ask for cost basis.
He told them to use $14 per share as the basis for the shares sold. ($42 divided by 3)

I'm still trying to explain why the cost basis is $126 per share rather than $14 per share,
since they got that good info from the investment pro.

[Y2KEA]

Reminds me of the investment "pro" who advised my client that the stocks he inherited get a DOD step up but if they were worth less, he got to keep the original basis.

[FEDUKE404]

Crunching those numbers

Well, at least the broker DID have the correct numbers. It was just that pesky difference between "multiply by" versus "divide by" that created the apparent problem.

I've long ago learned to avoid anything resembling obtaining tax information from a stock broker. Such must not be a point of emphasis for them? I have a couple of clients with inherited stock/trusts/etc and every now and then I have no choice but to ask the broker what the basis is (the client has no clue). Some of the numbers have me shaking my head when I look at the underlying historical prices. I just document the source of the information and trudge forward through the haze.

BTW: I do find it somewhat unusual that a stock with a value somewhere in the range of $42/share would ever effect a reverse stock split. On the surface, that just seems a bit weird. Hope there was no (unknown) corporate reorganization that might have occurred and (gasp!) the broker is somehow correct.

Are you at liberty to divulge the stock symbol??

FE

[JohnH]

Duke Energy - Aug 2011

They said they were approaching their authorized number of shares with the Progress merger, so it was easier to do a reverse split than to increase the number of authorized shares.

[FEDUKE404]

DUK issues

Duke Energy - Aug 2011

They said they were approaching their authorized number of shares with the Progress merger, so it was easier to do a reverse split than to increase the number of authorized shares.

If it was merely DUK, then you should be OK for the 07/02/2012 reverse split. (Tuning out the stock broker, of course! )

One caveat: Depending on how "old" the original DUK stock was, you might have a reduced cost basis of the pre-reverse split stock due to the Spectra Energy spin-off in 2007. At that time, of the original DUK cost basis ~58% went to DUK and ~42% went to SE.

FE

[Snaggletooth]

Convincing the Client

should be real easy when you point out the difference in taxes due to the gain/loss.

[ATSMAN]

I have had one too many bad advice from stock brokers in my career. They will refuse to put their advice in writing citing NASD or SEC rules that prohibit them.

If the taxpayer does not agree with me and wants to use the stockbrokers advice in spite of it being in writing, I have the taxpayer sign an indemnification.

[JohnH]

If it was merely DUK, then you should be OK for the 07/02/2012 reverse split. (Tuning out the stock broker, of course! )

One caveat: Depending on how "old" the original DUK stock was, you might have a reduced cost basis of the pre-reverse split stock due to the Spectra Energy spin-off in 2007. At that time, of the original DUK cost basis ~58% went to DUK and ~42% went to SE.

FE

Thanks for bringing this up. This, plus your previous question, have caused me to re-think the entire issue. I'm holding the final return until Ive had a chance to review this in more detail after the holidays. I'm becoming more convinced that neither my numbers nor the advisor's number are correct. So the last laugh may be on me.

Anyhow, I appreciate your quizzing me on this since the end result will be a client with a correct return.

[FEDUKE404]

Dealing with stock reorganizations

Thanks for bringing this up. This, plus your previous question, have caused me to re-think the entire issue. I'm holding the final return until Ive had a chance to review this in more detail after the holidays. I'm becoming more convinced that neither my numbers nor the advisor's number are correct. So the last laugh may be on me.

Anyhow, I appreciate your quizzing me on this since the end result will be a client with a correct return.

Sounds like a very prudent move.

Assuming you have some records to show the complete investment holdings and/or dividend income of the client, I would look around to see if there is anything related to Spectra Energy (symbol SE). If so, that is a bright red flag of something more involved than merely dealing with the difference between "3" and "1/3" !!

I have a pretty good history of DUK stock over the years, so let me know if you might need more info. Also, there is probably a lot of useful information available from the IR folks at Duke Energy, via their website.

FE

[Burke]

Spectra spin-off was in 2007. Based on OP, DUK stock was inherited at date of death in 2009 with stepped-up basis. So, it does not really come into play, noi? Even if there were Spectra shares, they also would have a stepped-up basis to 2009. Or did I miss something?

[FEDUKE404]

O k

Spectra spin-off was in 2007. Based on OP, DUK stock was inherited at date of death in 2009 with stepped-up basis. So, it does not really come into play, noi? Even if there were Spectra shares, they also would have a stepped-up basis to 2009. Or did I miss something?

Assuming ALL of your facts are correct, your conclusion is valid.

The only "adjustment" that would be needed is to correct for the 1:3 reverse stock split for DUK, which occurred post 2009.

Since JohnH has a history here of being thorough, I'm quite certain he appreciated the extra historical facts especially since there was obviously SOME confusion, SOMEWHERE, as to the adjusted cost basis of the DUK stock.

IIRC, JohnH resides in the central NC area, where there are likely many stockholders of DUK/SE. Some of those folks may even become his future tax clients. "You can never have too much information."

FE