Club disbanding: understanding about transferring appreciated shares
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The Stockettes Club of Maryland is finally disbanding after 15 years. (With only 6 members, there were decision-making differences). One or 2 members might want to have appreciated stock transferred to us. The club and I still do not understand the tax implications of this. Especially with a disbanding club. For example, we own FDS and SYK and both of these positions could be transferred to me. If we sold all our stock, we would each be responsible for our individual unit share of 2011 profit from the sales. If say $5000 of a $25k club portfolio (for even numbers), were transferred to me in SYK and FDS. Then the club disbands. I hold the stock a year and sell. So ALL of the tax gain responsibility is mine. So say the gain is $3000 of the $5000. And the tax on that $3000 is $450 (15%). So I got $5000 - $450, or $4350 If we had sold (this is not taking into account more gains or losses the year/s I'm holding the stock in my individual account), then that $450 would have been divided by 6 members, so I would have paid $75 in tax, and received $4925 in cash. So I don't see how it is a benefit to me to take appreciated stock. thanks, Etana Dear Etana, We're sorry to hear your club is disbanding. Your tax basis in the shares you receive is not the same as the club tax basis in them. It is your basis in the partnership, minus any cash you receive in the withdrawal. This means you can defer recognizing your gain or loss on withdrawing from the partnership until you sell the stock. -- 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 Laurie, Thanks for the quick reply. However, I still do not understand. If I do sell in a year or 2 or 3, I have to pay the whole cap gain. However, if we sell on disbanding, the cap gain is divided proportionately. How do I benefit by having the stock transferred to me? It seems that the other members benefit more than I do, since they don't bear the cap gain on that appreciated stock. thanks, eTana You don't pay on the whole capital gain and the other members still pay on their share.
They pay because the unrealized gain (today) is reflected in the difference between their current value and their tax basis. If the club sells today, their tax basis increases by their share of the gain so they don't pay tax on the gain again.
If you get the shares transferred to you, your cost basis in the shares is not the club's cost basis. It is your tax basis in the club, adjusted for any cash you receive when you withdraw. If you withdraw and only receive cash, you still have a capital gain based on the difference between your value and your tax basis in the club. If you receive stock, you have the same value as your value in the club, and your tax basis in the club transfers to the stock you receive. You are in the same tax position as before.
Finally, you don't have to keep the shares for another year to get long term treatment. Your holding period includes the club's holding period.
Ira Smilovitz Join me at InvestEd 2011 In a message dated 03/27/11 21:21:50 Eastern Daylight Time, etanafinkler@verizon.net writes:
What if a partner were to get 2 stocks? When the partner decides to sell one stock, is the cost basis prorated based on the value of each stock on the transfer date? It's not quite that simple, but the software handles all the calculations and provides the adjusted cost basis as part of the withdrawal report.
Ira Smilovitz Join me at InvestEd 2011 In a message dated 03/27/11 21:48:58 Eastern Daylight Time, lindalee0@yahoo.com writes:
If one member takes more than 1 stock, does the software show the split in cost basis to apportion to each stock? Not only to each stock, but to each block of stock.
Ira Smilovitz Join me at InvestEd 2011 In a message dated 03/27/11 22:44:22 Eastern Daylight Time, lindalee0@yahoo.com writes:
> How do I benefit by having the stock transferred to me?
At the time of your withdrawal, your capital gain
upon leaving the club is the same whether you are paid in stock or cash.
If you are paid in cash, your gain upon leaving
the club is taxable in the year you withdraw. The benefit to you of being paid with transferred stock is
your ability to defer your gain upon leaving the club until you sell the
transferred stock.
> It seems that the other members
benefit more than I do,
> since they don't bear the cap gain on that appreciated stock.
The remaining members do bear their
share of the capital gain on the appreciated stock transferred to you (as Ira
explained). However, they don't realize that gain until they withdraw from
the club, at which time they will have a lower cost basis in the club
(i.e., higher gain upon withdrawal) than they would have had if the stock
transferred to you had been sold by the club.
This deferal of capital gain on the
transferred stock (for all members) is the whole point of transferring
appreciated stock rather than paying a full withdrawal in cash. The
withdrawing member gets to defer their gain upon leaving the club
(which includes their share of the gain on the transferred stock) until they
sell the transferred stock. The remaining members get to defer their share
of the gain on the transferred stock until they each withdraw, at which time it
will be included in their gain upon leaving the club.
-Jim Thomas I'll probably mess this up but.. <G>
The one thing that trips up people in Etana's position is the fact that they think the current cost basis of the stock is being transferred to them.
So a $50 stock with a $10 cost basis has $40 worth of appreciation. They think they are getting that $40 gain handed over to them. Even with all the previous explantions, it's not clear to the average member that the cost basis of the stocks in your portfolio don't matter.At least not in the context of explaining withdrawal.
Let's say your club is worth $10,000 and your portion of that value is $1,000.
Your cost basis per the member status report says your cost basis is $500.
The difference is a $500 capital gain..
Now, the club wants to transfer 20 shares of the above stock, totaling a value of $1,000.
The club's cost basis in that stock is 20 shares @ $10, or $200.
That changes when those shares are handed over to you.
YOUR cost basis in those same shares is $500 (your capital gain) div by 20, or $25/share.
You can sell them right away and pay the tax on the $500 gain, or you can sell them off in smaller increments, as needed, or you can hold them forever - whatever. When you go to sell them, that $25 is the cost basis you will put on your Schedule D.
Your cost basis in whatever combination of shares you take away from the club WILL NOT exceed your current cost basis in the club, It's simply redistributed in the shares you take with you - and the bivio software does it for you.
Now Etana, I know you are the treasurer of your club (at least you were when we last visited). I suggest you do a withdrawal taking it all in stocks, run a withdrawal report, then delete the withdrawal, just so you can study the report and feel comfortable that you are not getting more than your fair share of the gains. You'll see! It's works out.
I'm SURE someone will correct me if I'm wrong here. This is how I explain it to my departing members.
Lynn O. Dear Lynn, Your writeup is a good explanation. The only thing I would change is to remove (your capital gain) in the sentence below. You are correct that the $500 is the new cost basis in the shares received. While it is also the gain on withdrawal from the partnership on the day the withdrawal is valued, the actual capital gain the member will recognize will be determined by the value of the shares when they decide to sell them. The club's cost basis in that stock is 20 shares @ $10, or $200.
-- 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 While your cost basis in the transferred shares is $500, it isn't your capital gain, but your cost basis in the club that becomes your cost basis in the stock.
If, instead of her cost basis in the club being $500, it was $600 (with a $400 capital gain), her cost basis in the transferred shares would be $600, or $30/share.
Ira Smilovitz Join me at InvestEd 2011 In a message dated 03/28/11 09:13:03 Eastern Daylight Time, garbagecop@gmail.com writes:
I was wondering, with the new brokerage reporting requirements, does the withdrawing member send the paperwork which shows the cost basis to his broker so that the broker can keep track of the cost basis for tax reporting or are we still on the honor system where the investor just types in the cost basis. Also, what is the name of the document that the withdrawing member gets that lists the cost basis of each block of stocks? When the stocks are eventually sold, are the original purchase dates used on Schedule D? Linda, the broker doesn't care what cost basis you use in your account with them. They are not the ones that have to prove it, in the event you are audited. I use Firstrade.com. When I've transferred stocks from various accounts, in the past, I just wrote to them with the cost basis I wanted them to use. Obviously, when you buy initial and subsequent shares through them, the cost basis will be right (and that can be proven with the broker buy/sell confirmation document. The withdrawal statement is the document you will get from the club. It has everything you need to prove your cost basis, although you would still receive a K-1 from the partners at the end of the year.
Lynn O.
Dear Linda, Good questions. I was wondering, with the new brokerage reporting It is ultimately your responsibility as the taxpayer to make sure that cost basis is reported correctly on your taxes. Without you informing the broker, they will have no way to know what the correct basis should be for distributed shares. I would recommend that you contact them to supply the correct basis amounts. Also, what is the name of the document that The report is called a withdrawal report. You can access it on the Accounting>Reports page. The withdrawing member should also be given a copy of the report when then withdraw and at tax time. When the stocks are eventually sold, The distribution takes on the holding period of the members time in the partnership. You can use the date of their initial contribution to determine whether their gains will be long or short term. -- 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 |
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