Tracking Down an Old Stock Investment
QUESTION: I bought 50 shares of General Electric stock through a company payroll savings plan in the 1960s. I have absolutely no record of what these shares cost. Since then, the stock split three times and those initial shares grew to a total of 400. In addition, I purchased 100 more shares through General Electric’s dividend reinvestment program. I have no record of what these shares cost. I sold the 500 shares a few months ago and received $27,000. How do I figure my taxable gain? --W. P. H.
ANSWER: Our tax adviser, Margaret Bumcrot, a certified public accountant in Downey, could only shake her head when she heard of your predicament and offer a bit of rueful, but nevertheless after-the-fact, counseling.
Bumcrot believes that you could have easily avoided your problems, which, by the way, are all too common among taxpayers, with a simple bit of financial record-keeping. But all the lectures in the world about your past sins won’t help you now, although this explanation should help other readers who are flirting with similar woes by failing to record stock purchases and dividend reinvestments.
What can you do? For starters, Bumcrot recommends that you check with your company’s payroll office to see if any records of your stock purchases still exist. If they do, you would then have to research the stock splits, which are chronicled in records kept by brokerage houses and, of course, General Electric. (Any correspondence with General Electric should be directed to its investor relations office.)
If your company has no record of your stock purchases, you are just going to have to make some educated guesses as to when you purchased the stock and then determine the per-share price at that time through research materials at a brokerage house or through General Electric.
If all this sounds like a lot of work, you’re right. But there’s no escaping it. Your broker is going to report the sale of your 500 shares to the Internal Revenue Service, and the IRS is going to expect you to report your $27,000 proceeds on your tax return. If you can’t determine your taxable gain, the IRS can demand taxes on the entire $27,000. So it behooves you to determine your initial investment in these shares and your true gain.
If your broker can’t--or won’t--help you, and you need professional assistance, you can retain a stock-research firm. These companies offer a variety of research services involving public companies and their stock. For example, they would be able to give you the stock split dates and the market value of your stock on any given day in history. Of course, there is a fee.
(These companies will also research whether a company is still in business and can provide the forms stating that a particular company has folded. These certificates are required by the IRS when taxpayers claim capital stock losses when a company goes out of business.)
There are several stock research companies across the nation, but according to a recent survey, some of the lowest fees are charged by Prudential-American Securities Inc. The company’s address is 921 East Green St., Pasadena, Calif. 91106. By the way, if you choose to use a research service, never send them your original stock certificate. A photocopy is sufficient.
Figuring Out the Gain on Selling Gift Stock
Q: I need some further clarification on giving stock as a gift to a minor. In 1961, I gave my daughter some shares of stock that I had originally purchased in 1956. Because the value of the shares exceeded the limit for a tax-free gift, we paid a gift tax. My daughter is no longer a minor, and this year she sold the shares because the company was acquired. What original value should my daughter use when computing her taxable gain--the original cost of the shares in 1956, or their value in 1961 when she received them as a gift? --K. P. M.
A: Although there are several interesting “twists” to your story, they are extraneous to the essential matter: The shares you gave your daughter were a gift, and their original tax basis is what you paid for them in 1956. This cost was passed on to your daughter as the taxable basis of the shares and should be deducted from whatever proceeds she received when she sold the shares. The gift tax you paid in 1961, and the fact that the shares were given to a minor, do not affect the nature of the transaction or its tax implications.
Better Way to Pass Property to a Child
Q: Is there a way that my wife and I can give a piece of property to our daughter over a number of years without exceeding the gift tax limitation? I thought I heard that you could set up a partnership between the parents and child, establish an agreed-upon value of the property (say $300,000), and then pass a portion of the total--worth no more than the $20,000 we are allowed to give her tax-free each year--to her every year. What can you tell me about this? --W. K. F.
A: What you’ve heard is essentially correct, according to our experts. But you should understand that this procedure--using the values you have given us--would take 15 years to complete and is quite complicated.
Further, while the gifts would be tax-free each year to your daughter, in the end, she will have received a gift whose tax basis is the price you paid for it plus any improvements. So when she goes to sell the property, there could be a mighty big capital gain staring her in the face.
Finally, our experts say, your plan requires the assistance of an attorney to draw up what is known as a “family partnership.” You may also need the services of an accountant to keep track of the increments changing hands each year.
Perhaps a better alternative, say our experts, is an installment sale between you and your daughter. She can make a down payment and repay you incrementally over the years using the money--up to $20,000 a year--that you give to her tax free every year. In any event, no matter which course of action you choose, you would be wise to consult an attorney, accountant or trusted financial planner before taking any action.
Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.
