Communications
club_cafe
HelpRegister
Individual Stock Investment Performance
good question.
I'll probably sell it this month

With such a volatile market, I haven't put trailing stop orders, though I did try that last year with some success.
This one got away before I began managing my stocks  better the past year.
etana

Etana Finkler
Please note NEW email address
 




On Dec 5, 2011, at 4:58 PM, John Rice wrote:


Etana,
 
Why are you holding onto a stock that has depreciated so much?  A stock that drops from $100/share to $50 a share for a 50% loss will have to double for you to make any gains?  What are the chances of a stock that has dropped that far will come back and double within a reasonable time.  There are too many good stocks out there to keep any big losers.  My club has a 25% trailing stop on all of our stocks.  I have even a smaller trailing stop threshhold in my personal account.  As a bonus, the loss can offset any capital gains from other stock sells and dividends.  As for our QPRR, we have been doing really well because we get rid of the big losers.
 
 
John Rice
ABODI Investment Club
 

On Mon, Dec 5, 2011 at 2:58 PM, John Rice wrote:
> Why are you holding onto a stock that has depreciated so much?
> A stock that drops from $100/share to $50 a share for a 50% loss
> will have to double for you to make any gains?

That's actually not true. Everyday is a new day. The $50 loss is called
a "sunk cost" and is irrelevant for future decisions:

http://en.wikipedia.org/wiki/Sunk_costs

The reason you invest in a stock is that you have a reasonable
expectation that it will increase in value from this date forward over
another stock which has a lower expectation.

Warren Buffet invested in GE at one of its lowest points, and got
a very sweet deal, because he had a very reasonable expectation
GE would increase in value.

A favorite saying of mine is "You can't drive a portfolio in a rear
view mirror". I believe that's what Laurie was saying in her post
recently, too.

Cheers,
Rob
Rob, from my view, you and John are both correct but for different reasons.  It is true that if your stock dropped 50%, you need a 100% gain to break even.  So, escaping with a minor loss seems most prudent.

For me, and I think what you might have been bringing, is: what is next; sell, hold, or buy more?  That is why the concept of "sunk cost" is important.  "OK, we have lost money, but what are its prospects going forward?  If its PAR looks good, let's keep it and consider the loss a 'sunk cost'."  Selling at that point merely "cleanses" the portfolio's spreadsheet; it doesn't irradicate the loss.  (Of course, selling for taxes and then buying it back 30+ days later might also be wise.)  

Roy Chastain


"Little by little, I am learning the art of being quite content with doing very little slowly."  

Lionel Hardcastle in "As Time Goes By"



--- On Mon, 12/5/11, Rob Nagler <nagler@bivio.biz> wrote:

On Mon, Dec 5, 2011 at 2:58 PM, John Rice wrote:
> Why are you holding onto a stock that has depreciated so much?
> A stock that drops from $100/share to $50 a share for a 50% loss
> will have to double for you to make any gains?

That's actually not true.  Everyday is a new day.  The $50 loss is called
a "sunk cost" and is irrelevant for future decisions:

http://en.wikipedia.org/wiki/Sunk_costs

The reason you invest in a stock is that you have a reasonable
expectation that it will increase in value from this date forward over
another stock which has a lower expectation.


Jim & Laurie, Thank you.  It is becoming clearer; accounting was never my strong suit.  I guess since the value of the growth is built into the Units, which we all share, thus we will have to pay the piper when we exit.  It just seems harsh for the first member.   Hopefully, I'll get it soon.

Do you know of any webinars or good books that discuss this in detail?

Roy Chastain


"Little by little, I am learning the art of being quite content with doing very little slowly."  

Lionel Hardcastle in "As Time Goes By"



--- On Mon, 12/5/11, Jim Thomas <jimt075@comcast.net> wrote:

From: Jim Thomas <jimt075@comcast.net>
Subject: Re: [club_cafe] Shares to a Resigning Partner
To: club_cafe@bivio.com
Date: Monday, December 5, 2011, 1:23 PM


Roy,
 
When a club transfers stock to a withdrawing member, there is no need for that member to tell the club anything when they sell the stock.
 
Perhaps this example will help?
  1. Club buys $1,000 worth of stock X.
  2. Stock X appreciates to $3,000.
  3. Member A withdraws.  Their club units are worth $3,000 and their personal cost basis in the club is $1,500.
  4. Club pays member A by transferring stock X worth $3,000.  The member's tax basis in stock X is set at $1,500, the same as their personal tax basis in the club at the time of their withdrawal.
  5. Member A gets a Withdrawal Report (in addition to a K-1) showing an *unrealized* gain due to their withdrawal (and showing their $1,500 tax basis in stock X).
  6. Stock A declines in value to $2,000.  (Of course, stock A might appreciate instead.)
  7. Former member A sells stock X.  On their personal tax return they report a $500 realized gain from selling stock X ($2,000 market value at the time of sale minus $1,500 tax basis).
You're probably wondering what happened to the club's $2,000 *unrealized* gain on stock X (between step 1 and step 2).
 
Imagine what would have happened if step 3 were "Club sells stock X for $3,000".  The club would then have a $2,000 *realized* gain on stock X, which would be allocated among all the members and appear on the K-1's for that year.  Each member's tax basis in the club would increase by their share of that $2,000 gain (reducing the amount of capital gain they'll eventually have when they fully withdraw).  Let's say member B was allocated $200 of that gain (because they owned 10% of the club when the club sold stock X).
 
Now, back to the original steps above.  All the others members will eventually make a full withdrawal from the club.  As they withdraw, each will have a capital gain (or loss) due to their membership in the club (just like member A did).  Because stock X was transferred out of the club, when member B fully withdraws they will have a $200 larger capital gain (or smaller loss) than they would have if the club had sold stock X in step 3.  Why?  Because the $200 basis increase for member B (that would have been made if the club had sold the stock) didn't happen.  Once the rest of the members have each withdrawn, the sum of their capital gains upon withdrawal will be $2,000 larger (because stock X was transferred) vs. the case where the club sold stock X.  The "missing" $2,000 unrealized gain is accounted for in the tax basis of all the club members at the time stock X is transferred and it will eventually surface, member by member, as each one withdraws.
 
-Jim Thomas
 

It just seems harsh for the first member. <
 
I don't understand your concern, Roy.  Can you be more specific?
 
Every member is allocated exactly those gains/losses which appropriately belong to them.  I don't see anything harsh about it.
 
-Jim Thomas
----- Original Message -----
Sent: Monday, December 05, 2011 3:28 PM
Subject: Re: [club_cafe] Shares to a Resigning Partner

Jim & Laurie, Thank you.  It is becoming clearer; accounting was never my strong suit.  I guess since the value of the growth is built into the Units, which we all share, thus we will have to pay the piper when we exit.  It just seems harsh for the first member.   Hopefully, I'll get it soon.

Do you know of any webinars or good books that discuss this in detail?

Roy Chastain


"Little by little, I am learning the art of being quite content with doing very little slowly."  

Lionel Hardcastle in "As Time Goes By"


Do you know of any webinars or good books that discuss this in detail?

Hi Roy,

You seem like a nice person and it is the holiday season. Are you sure this is how you want to spend it?

It's not just you that has a hard time understanding all of this. It's not material that is intuitively obvious. It takes a lot of study to understand and a lot of time to explain how and why the rules work the way they do. If you want to understand what you are getting into when you ask for reference material, ask any CPA what they would charge you to do the accounting and tax prep for an investment partnership like a club. They had to go through a lot to learn how and what to do.

We say what we say and recommend what we recommend because we have invested the same time and energy into learning and understanding it all.


If you really want some reading material, here you go. (But don't say I didn't warn you!)

You can find the IRS version of what the tax code says in publication 541.

http://www.irs.gov/pub/irs-pdf/p541.pdf

If you want to look at a the discussion in a text that an accounting student would learn from, here's such a text:

http://www.amazon.com/McGraw-Hills-Taxation-Individuals-Business-Entities/dp/0078111064

And, if you really want to get into partnership taxation, here's a book I really like:

http://www.amazon.com/Partnership-Taxation-Application-Joni-Larson/dp/1594605114


I'm also going to try and work up another example tomorrow to have as reference on our site.


--
Laurie Frederiksen
Invest with your friends!
www.bivio.com

Become our Facebook friend! www.facebook.com/bivio
Follow us on twitter! www.twitter.com/bivio
Maybe the explanation for this example will help me "get" it.  Using your example, assume a 10-member club decides to pay off a withdrawing member in stock worth $3000.  The cost basis is $1000; thus the profit is $2000.  For the sake of this example, assume everybody has the same number of units at the time of withdrawal.

As you stated, if the club sold the stock, everybody would have a tax liability for their share of the profits (in my hypothetical, $200).  But, if the withdrawing partner gets the stock and sells it the next day, isn't that person responsible for the $2000 profit?  (Don't the taxing authorities want the revenue now [meaning the next time taxes are due]?)

If the withdrawing member is not responsible for the entire capital gains, what accounting magic holds the remaining members liable?  How is that tax basis attributed to the remainders?  

You say it is accounted for when the stock is transferred.  But, how?  I see entries for the stocks we own, including cost basis and present value.  I don't see where the tax basis (liability) will be shown on a stock that the club no longer owns (or owns less than it did).

I would think the selling of the stock creates a taxable event, but all the advice indicates it is the various withdrawals that trigger individual events.  If the withdrawing member (Member A) continues to hold the stock, but a remaining member (Member B) withdraws 6 months later, is Member B liable for his/her share upon the withdrawal or Member A's selling years later?

Sorry to seem so obtuse, but I find this overly complicated.  (Easy to administer, but difficult to understand and explain to others.)

Roy Chastain


"Little by little, I am learning the art of being quite content with doing very little slowly."  

Lionel Hardcastle in "As Time Goes By"



--- On Mon, 12/5/11, Jim Thomas <jimt075@comcast.net> wrote:

It just seems harsh for the first member. <
 
I don't understand your concern, Roy.  Can you be more specific?
 
Every member is allocated exactly those gains/losses which appropriately belong to them.  I don't see anything harsh about it.
 
-Jim Thomas

Thank you.  Regardless of my wishes, this has come up very recently in a couple of clubs and it is difficult to explain other than to say: "We are told to do it this way."  I find that to be an unsatisfactory response, so I try to understand the problem and solution so I can explain it better.

Roy Chastain


"Little by little, I am learning the art of being quite content with doing very little slowly."  

Lionel Hardcastle in "As Time Goes By"



--- On Mon, 12/5/11, Laurie Frederiksen <laurie@bivio.biz> wrote:

From: Laurie Frederiksen <laurie@bivio.biz>
Subject: Re: [club_cafe] Shares to a Resigning Partner
To: club_cafe@bivio.com
Date: Monday, December 5, 2011, 5:29 PM


Do you know of any webinars or good books that discuss this in detail?

Hi Roy,

You seem like  a nice person and it is the holiday season.  Are you sure this is how you want to spend it?

It's not just you that has a hard time understanding all of this.  It's not material that is intuitively obvious.   It takes a lot of study to understand and a lot of time to explain how and why the rules work the way they do.   If you want to understand what you are getting into when you ask for reference material,  ask any CPA what they would charge you to do the accounting and tax prep for an investment partnership like a club.   They had to go through a lot to learn how and what to do.

We say what we say and recommend what we recommend because we have invested the same time and energy into learning and understanding it all.


If you really want some reading material,  here you go.  (But don't say I didn't warn you!)

You can find the IRS version of what the tax code says in publication 541.

http://www.irs.gov/pub/irs-pdf/p541.pdf

If you want to look at a the discussion in a text that an accounting student would learn from,  here's such a text:

http://www.amazon.com/McGraw-Hills-Taxation-Individuals-Business-Entities/dp/0078111064

And,  if you really want to get into partnership taxation,   here's a book I really like:

http://www.amazon.com/Partnership-Taxation-Application-Joni-Larson/dp/1594605114


I'm also going to try and work up another example tomorrow to have as reference on our site.


Feel free to refer them to us also. Sometimes it is easier to explain when we can talk directly to them about their specific situation.

I don't think anyone should feel frustrated at not being a partnership accountant :)



On Mon, Dec 5, 2011 at 8:58 PM, Roy Chastain <e4roy@yahoo.com> wrote:
Thank you. Regardless of my wishes, this has come up very recently in a couple of clubs and it is difficult to explain other than to say: "We are told to do it this way." I find that to be an unsatisfactory response, so I try to understand the problem and solution so I can explain it better.


--
Laurie Frederiksen
Invest with your friends!
www.bivio.com

Become our Facebook friend! www.facebook.com/bivio
Follow us on twitter! www.twitter.com/bivio
But, if the withdrawing partner gets the stock and sells it the next day, isn't that person responsible for the $2000 profit? (Don't the taxing authorities want the revenue now [meaning the next time taxes are due]?)

No. He's only responsible for his share of the profit which will be part of his gain or loss on his distribution from the club.

If the withdrawing member is not responsible for the entire capital gains, what accounting magic holds the remaining members liable? How is that tax basis attributed to the remainders?

The remaining members also still have the gain on the increase in value of the stock as part of their current gain in value of their share of the club. It's just not taxable to them at that point.

You say it is accounted for when the stock is transferred. But, how? I see entries for the stocks we own, including cost basis and present value. I don't see where the tax basis (liability) will be shown on a stock that the club no longer owns (or owns less than it did).

You are confusing cost basis of a club asset with the members cost basis in the club. They are two separate things. Each members tax basis in the club will be different than the clubs basis in each of the stocks. When assets are transferred to pay a complete withdrawal, the members basis in the club becomes his basis in the assets he receives. For any cash, received, he needs to recognize (pay taxes on) his taxable gain or loss on his investment in the club.

I would think the selling of the stock creates a taxable event, but all the advice indicates it is the various withdrawals that trigger individual events.

Selling of stock by the club does create a gain or loss that the members have to recognize at the time. When they recognize it, their tax basis in the club changes.

If the withdrawing member (Member A) continues to hold the stock, but a remaining member (Member B) withdraws 6 months later, is Member B liable for his/her share upon the withdrawal or Member A's selling years later?

No.

Sorry to seem so obtuse, but I find this overly complicated. (Easy to administer, but difficult to understand and explain to others.)

There is a lot to it. But, as the IRS says, If you find the rules too complicated to understand, contact your Congressman and ask him to make them simpler.

:)



--
Laurie Frederiksen
Invest with your friends!
www.bivio.com

Become our Facebook friend! www.facebook.com/bivio
Follow us on twitter! www.twitter.com/bivio
Thank you.  I am starting to see it (or at least a glimmer).  But, the one thing I still would like a deeper explanation, if you don't mind, involves the "basis in the club."


You say it is accounted for when the stock is transferred.  But, how?  I see entries for the stocks we own, including cost basis and present value.  I don't see where the tax basis (liability) will be shown on a stock that the club no longer owns (or owns less than it did).

You are confusing cost basis of a club asset with the members cost basis in the club.  They are two separate things.  Each members tax basis in the club will be different than the clubs basis in each of the stocks.   When assets are transferred to pay a complete withdrawal,  the members basis in the club becomes his basis in the assets he receives.  For any cash,  received,  he needs to recognize (pay taxes on) his taxable gain or loss on his investment in the club.


OK, how is this "cost basis in the club" shown?  For example, I have a 10% share (X number of Units) in Club A, and about 2% (Y number of Units) in Club B.  Are these affected by the transfer, and this discussion?  Thanks.
When you put money into a club, you are making a capital investment in a business. You have a basis for that investment. That is your basis in the club. It will be adjusted as taxable income is allocated to you each year. You will have capital gains and losses when you withdraw your assets from the club. They will be the difference between your tax basis in the club and the value of the amount you take out.

If you withdraw completely and are paid out with stocks, your basis in the club is transferred to the assets you receive.


Laurie



On Mon, Dec 5, 2011 at 9:25 PM, Roy Chastain <e4roy@yahoo.com> wrote:
Thank you. I am starting to see it (or at least a glimmer). But, the one thing I still would like a deeper explanation, if you don't mind, involves the "basis in the club."


You say it is accounted for when the stock is transferred. But, how? I see entries for the stocks we own, including cost basis and present value. I don't see where the tax basis (liability) will be shown on a stock that the club no longer owns (or owns less than it did).

You are confusing cost basis of a club asset with the members cost basis in the club. They are two separate things. Each members tax basis in the club will be different than the clubs basis in each of the stocks. When assets are transferred to pay a complete withdrawal, the members basis in the club becomes his basis in the assets he receives. For any cash, received, he needs to recognize (pay taxes on) his taxable gain or loss on his investment in the club.


OK, how is this "cost basis in the club" shown? For example, I have a 10% share (X number of Units) in Club A, and about 2% (Y number of Units) in Club B. Are these affected by the transfer, and this discussion? Thanks.


Maybe I can help with the explanation.  Look at the members tax basis in the club.  Let's say his tax base is $1,500 and his valuation is $2,000.  His tax basis does not change whether you give him all cash, a mix of cash & stock, one stock or multiple stocks.  What he does after he recieves the stock has no effect on the club.  If he receives cash he will be paying the tax this tax year.  If he receives stocks then he will pay the year that he sells it.  The club tax base doesn't change either.  So a partner's tax base has nothing to do with an individual stock's capital gain or loss.
Hope this helps you.
 
John Rice
ABODI Investment Club

From: Laurie Frederiksen <laurie@bivio.biz>
To: club_cafe@bivio.com
Sent: Mon, December 5, 2011 6:39:10 PM
Subject: Re: [club_cafe] Shares to a Resigning Partner

When you put money into a club, you are making a capital investment in a business.  You have a basis for that investment.  That is your basis in the club.  It will be adjusted as taxable income is allocated to you each year.   You will have capital gains and losses when you withdraw your assets from the club.  They will be the difference between your tax basis in the club and the value of the amount you take out. 

If you withdraw completely and are paid out with stocks, your basis in the club is transferred to the assets you receive.


           Laurie



On Mon, Dec 5, 2011 at 9:25 PM, Roy Chastain <e4roy@yahoo.com> wrote:
Thank you.  I am starting to see it (or at least a glimmer).  But, the one thing I still would like a deeper explanation, if you don't mind, involves the "basis in the club."


You say it is accounted for when the stock is transferred.  But, how?  I see entries for the stocks we own, including cost basis and present value.  I don't see where the tax basis (liability) will be shown on a stock that the club no longer owns (or owns less than it did).

You are confusing cost basis of a club asset with the members cost basis in the club.  They are two separate things.  Each members tax basis in the club will be different than the clubs basis in each of the stocks.   When assets are transferred to pay a complete withdrawal,  the members basis in the club becomes his basis in the assets he receives.  For any cash,  received,  he needs to recognize (pay taxes on) his taxable gain or loss on his investment in the club.


OK, how is this "cost basis in the club" shown?  For example, I have a 10% share (X number of Units) in Club A, and about 2% (Y number of Units) in Club B.  Are these affected by the transfer, and this discussion?  Thanks.



Roy,
 
> As you stated, if the club sold the stock, everybody would have a tax liability for their share of the profits (in my hypothetical, $200). <
 
If the club sells the stock, every member at that time will get two things: 
(1) a realized capital gain of $200; 
(2) a $200 increase in their tax basis in the club.
 
If the club transfers the stock, neither (1) nor (2) happens.
 
 
> If the withdrawing member is not responsible for the entire capital gains, <
 
... and they are not ...
 
> what accounting magic holds the remaining members liable?  How is that tax basis attributed to the remainders? <
 
That's what the rest of my post tried to explain.  Maybe I can do better.  Using your hypothetical (everyone has 10% ownership and, so, is allocated a $200 realized gain if the club sells the stock at a profit of $2,000) ...
 
The $200 increase in tax basis [item (2) above] that would happen if the club sold the stock doesn't happen when the club transfers the stock.  Thus, because the stock was transferred, every member at the time the stock was transferred will have a $200 larger capital gain upon withdrawal (larger than they would have if the club had sold the stock).  Their tax basis is $200 smaller so their capital gain is $200 bigger.  This means every member's individual $200 share of the $2,000 unrealized gain in the transferred stock is deferred until they each eventually withdraw.
 
 
But, if the withdrawing partner gets the stock and sells it the next day, isn't that person responsible for the $2000 profit? <
 
No.  That partner is only responsible for their $200 share.
 
If a withdrawing partner immediately sells transferred stock (i.e., assuming no change in stock price), their realized capital gain from selling the stock will be the same as their realized gain upon withdrawal would be if they were paid in cash.  Regardless of whether they are paid with stock or cash, they are responsible only for their $200 share of the club's $2000 gain in the stock.
 
Said another way ...
 
If a fully withdrawing member is paid in cash, their realized capital gain upon withdrawal is the market value of their units minus their tax basis in the club.  (Of course, the market value of their units includes their $200 share of the club's $2000 gain in the stock.)
 
If a fully withdrawing member is paid 100% with transferred stock, that member has no realized gain upon withdrawal.  Their basis in the club becomes their basis in the transferred stock.  If they sell the stock immediately (price unchanged since the transfer), their realized capital gain is the market value of the stock when sold (same as the market value of their units) minus their tax basis in the stock (same as their tax basis in the club).  In short, their realized capital gain is the same as if they were paid in cash.
 
-Jim Thomas