Brainteaser - stock sale

[FEDUKE404]

How would you handle this situation?

1 - Client bought shares of stock in company XYZ, which were certificated to client.
2 - From date of original purchase, all dividends had been reinvested in company's DRIP.
3 - From shortly after the original purchase, a large portion of the quarterly dividends were return of capital (= eventual downward cost basis adjustment).
4 - In 2006, DRIP account was closed and all shares (original + DRIPpers) were transferred to a brokerage account, with no more reinvested dividends.
5 - During late 2006, approximately 25% of the shares from the broker account were donated to charity and reported on Form 8283.
6 - During 2007, cash tender was made for all of the remaining shares.

I have Forms 1099-DIV for the certificated shares, annual statements for the DRIP shares, and can fairly easily reconstruct the dividends/return of capital within the broker account.

My concern is what kind of adjustment do I now make for the donated shares, as there was no specific allocation at the time. Should I go the FIFO route (gave away less shares than the originally purchased number of shares) or perhaps just do some ratio of the remaining shares versus the overall adjusted cost basis for everything? Remember the return of capital thing is really going to mess up all calculations!!

Thanks for your input.

FE

[Snaggletooth]

We can Try

FEDUP - we can see all the factors going in different directions for this brainteaser. Problem is, your theoretical case could walk in on any of us and become not theoretical, but true-to-life.

I would like to respond to this, but could you supply specific dates , dollars, and numbers? I'm thinking I might just could figger this one out if I knew specifics. Deal in nice round numbers and dates less than 5 years old, to make sure we can focus upon theory instead getting lost in the minutia of calculations.

[FEDUKE404]

We're not in Kansas anymore....

FEDUP - we can see all the factors going in different directions for this brainteaser. Problem is, your theoretical case could walk in on any of us and become not theoretical, but true-to-life.

I would like to respond to this, but could you supply specific dates , dollars, and numbers? I'm thinking I might just could figger this one out if I knew specifics. Deal in nice round numbers and dates less than 5 years old, to make sure we can focus upon theory instead getting lost in the minutia of calculations.

S'tooth: Rest assured this is not a theoretical case.....I'm sitting here looking at the real numbers. That includes purchase document, DRIP annual statements, 2006 Form 8283, and return of capital amounts for each year (most!) since purchase.

It's a bit tough to give you "real" numbers at this stage. To somewhat answer your question, 100 original shares became approximately 350 shares through DRIPping, and return of capital occurred at some point in every year since the 1994 purchase. Roughly 1/3 of the shares were donated in 2006, and the remainder sold in 2007.

With more time than I really have at this stage of tax season (why didn't I get this challenge last fall???), I feel reasonably confident I can reach a meaningful cost basis for ALL shares, namely original cost + cost of DRIPped shares - cumulative return of capital.

My basic question, which somewhat stumps me, is how to adjust that amount for the shares that were donated in tax year 2006 prior to the sale of all remaining shares in 2007. (Considering, I suppose, that some portion of the return of capital should apply to those donated shares where their cost basis was more or less a non-factor for the donation.) Although the cost basis decreased over time, it never really approached zero, so at least that problem is not on the table! Also, most of the 2006 and 2007 dividends were returns of capital.

I hope this clarifies things.

FE

[Snaggletooth]

Fried

I'll give it a try - I came in 30 minutes ago from a long day and my brain is fried. Will try it when I'm fresh.

If you care to post again, it appears from your situation that the return of capital every year since 1994 is intentional. (How else could it occur?) Don't think it affects the outcome, but interesting nonetheless.

[FEDUKE404]

ROC not a factor????

I'll give it a try - I came in 30 minutes ago from a long day and my brain is fried. Will try it when I'm fresh.

If you care to post again, it appears from your situation that the return of capital every year since 1994 is intentional. (How else could it occur?) Don't think it affects the outcome, but interesting nonetheless.

Sorry, maybe I have been up too long today, but I do not understand your reference to "intentional."

I feel the non-taxable distributions ("returns of capital") shown over the years on Forms 1099-DIV must result in a reduction in the owner's original cost basis. (The stock is somewhat of a REIT anyway.) For those folks who bought the stock at the IPO, and held it without reinvesting any dividends along the way (plain vanilla approach), their adjusted cost basis at the time of buy-out was less than 10% of their original cost. This situation means that although they did not make a great profit, as far as the IRS is concerned....they did! This problem, of course, is the offset to the fact that they received a lot of "tax-free" dividends along the way.

The only wrinkle in my posed situation is 1) adjusting for the ROC on the DRIP shares and 2) similar adjustment for those donated shares. So far I have been able to completely reconstruct the "cost" of all original and DRIP shares from quarterly statements, but now the fun begins when the cost basis starts downward (and the taxable gain starts upward!).

FE

[Snaggletooth]

Annual Calculation

OK, Still don't know that I have a handle on this one, but I'll give it a try.

The calculation of basis must be done every year since 1994. One interesting unanswered question is whether his basis is going up every year or downward. It will go up by the amount of reinvested dividends and downward by the amount of liquidating dividends. I have concluded that the company's plan is intentional -- no company could issue liquidating dividends every year as a happenstance and not go broke. The liquidating dividends are thus part of a carefully controlled distribution plan. The fact that this is similar to a REIT also confirms this.

Taxpayer invests $50,000 in 1994. He receives $3,000 in dividends which are reinvested instead of distributed, but also receives $2000 in "liquidating" dividends. His basis has increased to $51,000. In like fashion, his basis goes either upward or downward every year, and the calculation must be performed for each year, with the stipulation that in no year can his basis fall below zero. Along comes 2006, and his shares are now turned over to a brokerage house. Let's assume by now his basis is $44,000.

He donates 25% of his shares to charity. His basis for these shares is $11,000 pure and simple. He is entitled to deduct the fair market value, which I'm assuming cannot be much different than $11,000 under this carefully contrived plan.

Cash offered in 2007 (if accepted by the stockholder) is measured against $33,000 basis for purposes of gain or loss.