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Author: earthelder Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121219  
Subject: Cost Basis Enigma (trying again) Date: 3/31/2006 3:31 PM
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Hope I'm not being impatient (or pesty!) but I really would appreciate some input on the issue I raised (#85591) re- cost basis for HSY.

Perhaps a simpler question is: say I use the date of 9/24/96 as the purchase date. The stock on that date is listed as $23.69 "split adjusted" and $47.38 "actual". Which of these prices do I use as the cost basis?

With thanks for any help here ~

earthelder
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Author: brndnsdad Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 85615 of 121219
Subject: Re: Cost Basis Enigma (trying again) Date: 3/31/2006 4:57 PM
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What is important in determining your cost basis is not the price of the stock per share, but the total transaction amount plus any commissions and fees. The share price can vary a great deal in any given day. If you were audited the IRS would want to see a statement showing the total cost of the transaction. I recommend you contact your broker and see if they have a record of your stock purchases. They may charge you a fee, but it will be the correct information.

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Author: cohiba123 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 85616 of 121219
Subject: Re: Cost Basis Enigma (trying again) Date: 3/31/2006 5:07 PM
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earthelder ,
The split adjusted price is to be used when calculated profit or loss on Schedule D Form 1040.
For example, if you brought 100 shares of HSY on 9/24/96 at $47.38/share,for a cost basis of $4,738.00, plus commission. Because of the stock split (2:1), you now have 200 shares of HSY, your cost basis is still $4,738.00, plus commissions. If you sold your 200 shares at today's closing price of $52.23, your proceeds would be $10,446.00, less commissions. Your profit would be proceeds minus cost basis, or ($10,446.00 less commissions) minus ($4,738.00 plus commissions).
Joe

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Author: lorenzo2 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 85621 of 121219
Subject: Re: Cost Basis Enigma (trying again) Date: 3/31/2006 7:46 PM
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Perhaps a simpler question is: say I use the date of 9/24/96 as the purchase date. The stock on that date is listed as $23.69 "split adjusted" and $47.38 "actual". Which of these prices do I use as the cost basis?

Since no one has yet directly answered your question, I'll try. If you bought 500 shares of HSY on 9/24/96, you would have paid $47.38 per share, or $23,690 (plus commission) as cohiba123 said. The "split-adjusted price" now shown for that day simply reflects that there has been a 2:1 split between then and now, so each 9/24/96 share is worth half of what it used to be - but no harm done, since you have twice as many. The split-adjusted price is just half of the actual price.

So, suppose you sell 1000 shares today. What's their basis? If you think of those 1000 shares as today's shares, you use the split-adjusted price on the purchase date. But if you say to yourself, "Hmmm. Where did those shares come from? Well, they started out as 500 shares purchased on 9/24/96..." - in that case, you use the actual price. You get the same answer both ways:

basis = 1000*(split-adjusted price) = 500*(actual price)

Which one to use depends on whether you consider what you're selling to be 1000 post-split shares or 500 pre-split shares.

Lorenzo

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Author: earthelder Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 85628 of 121219
Subject: Re: Cost Basis Enigma (trying again) Date: 3/31/2006 11:44 PM
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Thank you Lorenzo and Joe for your helpful replies.

Can you help me go one step further?

As explained in my original post (#85591 - 3/31/06), the stock was purchased years ago by my father in my name and SS#, but I have no record of the date of purchase, the price, the number of shares, the commission. My father, who managed the account and never told me about it, passed away in 2004 but I can't use the stepped up cost basis since the stock was already in my name when he died. The brokerage firm he dealt with for the original purchase is out of business.

The date of 9/24/96 comes from a note he scribbled on a brokerage statement when he sold 2500 shares of HSY in 2002. For that sale, he used a cost basis of $9.07, but I have no idea where he could have come up with that, based on the historic record for that date ($47.38/$23.69) He was very ill at the time and I think he may have made a mistake.

As you can imagine, to use that cost basis for the 5000 shares I sold this year, would be a big disadvantage tax-wise.

So, that leaves me with a few more questions:

1. will the IRS accept 9/24/96 as the purchase date?

2. there was a 2:1 split on 9/13/96 and another on 6/15/04 (which is how I wound up with 10,000 shares and then sold 5000 earlier this year).
Are these two splits reflected in the "split adjusted price" shown (on the HSY website) for 9/24/96?

3. how do I come up with an estimate of how many shares he originally bought?

What am I missing here, or am I making this more complicated than it needs to be?

Again, I will be most grateful for your support.

earthelder


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Author: brndnsdad Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 85634 of 121219
Subject: Re: Cost Basis Enigma (trying again) Date: 4/1/2006 7:17 AM
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earthelder,
If I understand correctly, your father transferred the stock to your name before he died? If that is the case, he should have paid a gift tax. While you are not liable for the gift tax if he did not pay it, it would mean that your cost basis for this stock is the lesser of your father's cost basis plus any gift tax he paid or the fair market value of the stock at the time of the transfer to you name. If it had been transferred to you as an inheritance the cost basis would have been the value of the stock at the time of his death. If you don't have the actual records, use the split adjusted price times the number of shares you sold. If you have any record of gift tax paid, add that to the cost basis.

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 85635 of 121219
Subject: Re: Cost Basis Enigma (trying again) Date: 4/1/2006 7:48 AM
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earthelder,
If I understand correctly, your father transferred the stock to your name before he died? If that is the case, he should have paid a gift tax. While you are not liable for the gift tax if he did not pay it, it would mean that your cost basis for this stock is the lesser of your father's cost basis plus any gift tax he paid or the fair market value of the stock at the time of the transfer to you name. If it had been transferred to you as an inheritance the cost basis would have been the value of the stock at the time of his death. If you don't have the actual records, use the split adjusted price times the number of shares you sold. If you have any record of gift tax paid, add that to the cost basis.


This isn't necessarily correct. First, we don't know if the original purchase was under the gift tax limit at that time. Even if the purchase/transfer were in excess of the annual exclusion, it's highly unlikely that any gift tax would have been paid as you don't pay any gift tax until the cumulative tax exceeds your lifetime credit (used to be the unified credit, but now gifts and estate limits are decoupled).

Ira


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Author: lorenzo2 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 85636 of 121219
Subject: Re: Cost Basis Enigma (trying again) Date: 4/1/2006 9:35 AM
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am I making this more complicated than it needs to be?

No, it is complicated. Unfortunately, there's not a whole lot to go on.

- I don't know how to reconcile the basis your father used ($9.07) with the date he used (9/24/96). Any chance you can lay your hands on your father's 2002 tax return? I would be more willing to accept a purchase date from that year's Schedule D than a scribbled note on a scrap of paper...

- You're confused about split-adjusted price. The number shown on the HSY website reflects splits between that date and today. Your father sold in 2002, which was before the 2:1 split in 2004. More to the point, there was a 2:1 split just before your father sold (9/13/96), and a 3:1 split ten years earlier, on 9/15/86.

- I'm thinking that he may have bought the stock before 1986, in which case there would have been a 6:1 price adjustment from his purchase date to the sale in 2002. (That fits nicely with the $9.07 price.)

- As for how many shares he bought, hard to tell. The splits complicate things just a bit!

For example: how good is your father's handwriting? Is there any way that you can read 9/24/96 as 2/24/86? Because, for example, he could have purchased 1250 shares on 2/24/86 at $54.42/share (which was between that day's low and high). Those 1250 shares would have become 3750 shares with the 9/15/86 3:1 split, and then 7500 shares after the 9/13/96 split. And then in 2002, the split-adjusted basis would have been (ta-da!) $9.07 ($54.42 divided by 6). Your dad sells 2500, and 5000 shares remain. Those 5000 shares then become 10,000 with the 6/15/04 split.

And in case you missed it, if your father's split-adjusted basis of $9.07 is correct, then your split-adjusted basis is $4.54, because there's been a subsequent 2:1 split. Of course that assumes the your father bought a single lot of shares at some time in the past, and your shares, as well as the ones he sold in 2002, all came from that lot originally.

---

I wouldn't act on any of the above if I were you - I'm just noodling around with numbers. As I said at first, we need a bit more information to pin this down.

Lorenzo

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Author: lorenzo2 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 85637 of 121219
Subject: Re: Cost Basis Enigma (trying again) Date: 4/1/2006 11:24 AM
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Ok, one last remark, then I have to get to work doing other stuff...

As noted earlier, there are some inconsistencies - 9/24/96 and $9.07 don't go together, however you look at it.

If I were in your position, I would make the following two assumptions:

1. The $9.07/share basis your father used was correct.

2. The 2500 shares that he sold, the 5000 shares that you just sold, and the 5000 shares that you still have all go back to a single purchase on some (unknown) date in the past - prior to the 1986 3:1 split.

In that case, *your* split-adjusted basis is $4.455 - half of $9.07 - because there's been another 2:1 split since your father's 2002 sale.

Is that true? Dunno. Can you prove it? No. But given the scant information you have, I think these are reasonable assumptions to make, and in the (unlikely) event of an audit, I think you could make a reasonable defense of these numbers.

(I know you don't want a lower basis, you want a higher basis. After all, you will have received some $250K from the sale of your 5000 shares, so you're talking about capital gains tax of over $30K. But you shouldn't be focusing on the tax you have to pay - instead, focus on the
$220K that remains...)

One last thing you might consider - if you can lay your hands on your father's old tax returns, you ought to see HSY dividends reported on his Schedule B. If you can trace back to where those dividends no longer appear, that gets you at least to the right year of purchase. And you ought to be able to work out from the amount of the dividends how many shares he would have had. Of course, if the stock was held in street name at a broker, the dividends would possibly have been reported as coming from Broker X and not from Hershey, and that wouldn't help.

The one thing that I don't quite get is the ownership of the shares. You said that he purchased them in your name, using your SSN. How then was the sale reported in 2002? On your return? Was this in some kind of a custodial account?

Enough of the speculation.

Lorenzo

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Author: twputnam One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 85638 of 121219
Subject: Re: Cost Basis Enigma (trying again) Date: 4/1/2006 12:29 PM
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Everyone else on this thread has concentrated on the split adjusted vs actual cost on some date in 1996. Is it possible that you have access to your father's bank/credit union/? records? I know many people keep cancelled checks for years. Can you find out how much your father paid into the defunct brokerage firm and when? This may give you a clue as to the cost and when the stock was purchased.

Also, did an existing brokerage buy the defunct brokerage? Can they research the old records?

It also seems quite possible to me that the cost basis that your father wrote back in 1996 had nothing to do with the date 9/24/96. That cost number is associated with the purchase date, which you don't know, but, it is before 9/24/96.

Good Luck

Terry

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Author: earthelder Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 85684 of 121219
Subject: Re: Cost Basis Enigma (trying again) Date: 4/3/2006 3:26 PM
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Thanks to you, Lorenzo, I feel I have gained a sense of direction here.
Also to everyone who has tried to help shed some light on this tax enigma...much appreciation. This TMF board is an incredible asset!

earthelder

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