Stock Cost, Dividends Reinvested

[geekgirldany]

I just want to make sure I am correct on this.

Customer inherited 263 shares in 1995. Don't know the cost basis but I have sheet printed by the taxpayer showing the amount shares were trading for during that year. I believe I will use that as my cost on these shares.

He then in 1995 started purchasing shares by dividends reinvestment. These come to 218. He provided statements showing the dividends reinvested from 2001 to 2007. Am I correct that the dividends reinvested are the cost on the 218 shares? Also since there is no information from 1995 to 2000, is there a way to figure the cost on those years?

The other printed sheets by the customer show the "Common Stock Qtrly Dividend Rates" and "DRIP Qtrly Investment Prices" from 1955 to 2007. I've tried to figure out if I could get something off of them but I am not sure I am doing it right.

Thank you for any help

[Koss]

DRIP = Dividend Reinvestment Insanity Program

Customer inherited 263 shares in 1995. Don't know the cost basis but I have sheet printed by the taxpayer showing the amount shares were trading for during that year. I believe I will use that as my cost on these shares.

Basis should be FMV on the date of death. So some sort of estimate of what the shares were worth when the original owner died is probably a good starting point.

Unless they used an "alternate valuation date" for the estate. [Don't go there.]

He then in 1995 started purchasing shares by dividends reinvestment. These come to 218. He provided statements showing the dividends reinvested from 2001 to 2007. Am I correct that the dividends reinvested are the cost on the 218 shares? Also since there is no information from 1995 to 2000, is there a way to figure the cost on those years?

Boy, you got a real winner. The toughest part of this return is determining what you're going to charge the guy for doing all the recordkeeping that he should have done for the last 13 years...

The other printed sheets by the customer show the "Common Stock Qtrly Dividend Rates" and "DRIP Qtrly Investment Prices" from 1955 to 2007. I've tried to figure out if I could get something off of them but I am not sure I am doing it right.

The dividend history may indeed allow you to interpolate some sort of cost basis, or to "back into" the price that he paid per share. The problem is that the operation involves a function that is similar to compounding. Each time the stock paid a dividend, the number of shares that he owned was different, because each dividend payment was used to purchase more shares.

If you really know what you're doing, you might be able to write a formula or macro in Excel to do most of the work for you. [I certainly don't know how to do that. I'm not kidding. I really don't. I might let the client pay me an hourly rate to learn how. LMFAO]

Suppose he inherited the stock on 01/01/95, and that it paid a dividend of 25 cents per share every quarter. So on 03/31/95, he received $65.75 in dividends and used it to buy more stock. The trouble is that you don't know how many shares he bought, because he hasn't given you data on the share prices during those years. So you know how much he spent at that point, but you can't figure out how much he received for the next dividend, since you don't know how many more shares he acquired...

Wait a minute. Yes, you do. I had to re-read your original post. The price he paid for new shares each time he received a dividend is the "Drip Quarterly Investment Prices." The dollar amount of the purchase that he made each time he received a dividend can be determined from the "Common Stock Quarterly Dividend Rates."

Is this making any sense?

What stock is it, anyway?

Burton

[LMathey]

Price for inherited stock

I had a similar situation with a client regarding basis. He bought shares 15 yrs ago and had no idea what he paid. Noone had any records. We called the library and got the price on 1/1 and 12/31 of that year and used the average. The return was audited and the agent agreed with us that we had done the best we could and accepted the basis.

[Koss]

Estimated Basis

I had a similar situation with a client regarding basis. He bought shares 15 yrs ago and had no idea what he paid. Noone had any records. We called the library and got the price on 1/1 and 12/31 of that year and used the average. The return was audited and the agent agreed with us that we had done the best we could and accepted the basis.

That's a great story. Maybe you should enter it into that contest that someone was babbling about in some other thread...

The fact pattern described by GeekGirlDany is a bit different, though, because the guy bought shares over a long period of time. I certainly agree that you can use a reasonable estimate, and the meaning of reasonable is going to vary on a case by case basis. But this guy didn't buy all the shares at one time...

Burton

[dodgedipduck]

I just want to make sure I am correct on this.

Customer inherited 263 shares in 1995. Don't know the cost basis but I have sheet printed by the taxpayer showing the amount shares were trading for during that year. I believe I will use that as my cost on these shares.

He then in 1995 started purchasing shares by dividends reinvestment. These come to 218. He provided statements showing the dividends reinvested from 2001 to 2007. Am I correct that the dividends reinvested are the cost on the 218 shares? Also since there is no information from 1995 to 2000, is there a way to figure the cost on those years?

The other printed sheets by the customer show the "Common Stock Qtrly Dividend Rates" and "DRIP Qtrly Investment Prices" from 1955 to 2007. I've tried to figure out if I could get something off of them but I am not sure I am doing it right.

Thank you for any help

Your theory is correct.

Your ticking time bomb is the statement "I believe I will use that as my cost on these shares."

If the client does not have good records it's not part of your job to take responsibility for their lack of records. You can help them. Fine. But don't say it's YOUR cost you're using. If anybody is going to make up figures, it better be the client. You can make suggestions, but you'd better get a signed statement from the client that the figures are correct. Ever heard "I just gave my papers to the tax preparer and they prepared the taxes."

You can get historical stock quotes from BigCharts, I think it's bigcharts.com. That will give you the price on the date of death. The reinvested dividends should be shown on the tax returns each year. If the client has no records, don't put yourself in the position of grabbing numbers out of the sky. If they get audited, the first thing they'll say is where did you come up with those numbers.

I had that situation last week. I called the client and explained what numbers I needed and why. She called me back an hour later. They had their records and she gave me the number. I would have helped them reconstruct basis, but it would have cost them a bunch and I would have made them sign a statement saying the numbers were theirs. We both breathed a sigh of relief. It's the client's responsibility to keep records unless they pay somebody else to do it for them. If there's any guessing that has to be done, make the client do it.

If you can't prove basis, the basis is zero. That's in the regulations. Picking a date in the year and calling it basis isn't going to help if you get audited, even if you think it's "reasonable."

[geekgirldany]

Thank you all for posting.

I should not have put "my cost" should have put "their cost". I was leaving the office when I wrote the post so I worded that wrong. Your right dodge it is their place to provide me with records. I know where you are coming from. They may have their tax returns back to 1995 never can tell.

Koss I see what you mean. That is exactly what I need to figure out is a formula to get to a cost for those 6 years. Like I said I have statements showing dividend reinvestment from 2001 to 2007. If I sat for awhile I could probably figure it out... but I am wondering if it is worth it. As of now the way it is working out the 263 shares are a loss while the 218 are a gain. So it is basically a wash. Retired couple so they owe no tax. I may just leave it as it is and not try to recreate from 1995 to 2001.

[Koss]

Spreadsheet

Koss I see what you mean. That is exactly what I need to figure out is a formula to get to a cost for those 6 years. Like I said I have statements showing dividend reinvestment from 2001 to 2007. If I sat for awhile I could probably figure it out... but I am wondering if it is worth it. As of now the way it is working out the 263 shares are a loss while the 218 are a gain. So it is basically a wash. Retired couple so they owe no tax. I may just leave it as it is and not try to recreate from 1995 to 2001.

I actually figured out how to do this, in Excel, 'cause I kind of took it as a challenge. I've done a lot of work with securities, so I knew what the correct formula was intuitively. I just didn't know how to implement it in Excel, and I didn't articulate it very well in my original post. It took me about ten minutes of playing with Excel to create a functional spreadsheet.

I can e-mail it to you if you'd like to try it. You'll still have to enter about 100 data values. In other words, for each date on which a dividend was paid, you'll need to enter two figures: the dividend per share that the company paid, and the price per share that was used on that dividend payment date. But that is exactly the data the client has given you.

It may only take you fifteen minutes to a half hour to input the whole 13 years, and that way you can confirm that you're using the correct basis for '01 to '07.

Burton

koss@usakoss.net

____________________________________________
The map is not the territory...
and the instruction book is not the process.

[LMathey]

Not a story....all true

No, but his original shares were inherited and he does not know the basis of them. In that case I would again do what I did before and use the avg. price for the year he inherited them.

As far as a good story how about one of my tax preparers (city boy) working on return for a horse farm and used to depreciating the horses and other animals we purchased. One day he came to me with a puzzled look on his face and said "I have looked thru all the literature and cannot find how long the depreciation should be on this animal." I asked what the animal was. He said "it is a brush hog." He did not know that was a piece of equipment for a tractor.

[LMathey]

I would like a copy

Every so often I have the same situation. Would you email me the spreadsheet? My email is lma6564@att.net. If not, I understand.

[LawrenceGR]

An Idea

Geeky if the person hasn't sold any shares since the time he inherited the stock you could: Take the begining cost or estimated cost add up all the dividends, add that number to the original figure and it should work. This is based on the fact that NO shares were sold and there were NO splits. I did one just a couple weeks ago where the guy bought the stock 30+ years ago with no history. I called the investor services who had records back to the begining. Good luck to you and don't forget to charge for your time.

[Koss]

Spreadsheet ATTACHED

I have attached the Excel sheet as a ZIP file. The board does not allow attachments with the .xcl extension. You'll have to unzip it.

It's very crude, but it works...

The "division by zero" errors will disappear on their own as you enter additional data.

When you reach the end of your data entry, you'll need to manually enter a couple formulas to get some totals from the columns.

Burton

[Lion]

Thanx!

Thank you very much!

[Kram BergGold]

Check Back Tax Returns

For basis of reinvested dividends check back tax returns. Whatever was reported as dividends is the basis for that year's reinvested dividends. Add em up and you are done. Remember client had to report the dividends to count them as basis.

[FEDUKE404]

Get a DRIP history?

Geeky if the person hasn't sold any shares since the time he inherited the stock you could: Take the begining cost or estimated cost add up all the dividends, add that number to the original figure and it should work. This is based on the fact that NO shares were sold and there were NO splits. I did one just a couple weeks ago where the guy bought the stock 30+ years ago with no history. I called the investor services who had records back to the begining. Good luck to you and don't forget to charge for your time.

This is certainly the simplest way if the situation merits it. The purchase prices of the inherited shares is, of course, totally irrelevant. (Received x shares at $y/share value on date of death.) If you can track the total dividends received over the years (and don't forget possible return of capital and/or capital gain distributions) then you have the total cost basis for the DRIP shares, regardless of how much was bought for what price when. The problem, of course, is what happens if additional shares were purchased and/or shares were sold.

FWIW - Many companies now can easily provide, although frequently for a price, the DRIP statements. I would definitely make that my first request!

If that fails, for quarterly dividends with minimal effort you should be able to get close with some hand calculations. I just got through with DRIP issues for a 17-year history. The mutual fund paid monthly, plus year-end stuff, so there were around 15 separate "purchases" each year to track. I did not charge the client nearly enough......

FE

[LMathey]

Thanks!

Thanks for posting this