Message Font: Serif | Sans-Serif
 
UnThreaded | Threaded | Whole Thread (14) | Ignore Thread Prev Thread | Next Thread
Author: dacpdc Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121105  
Subject: is this legal? Date: 1/21/2000 12:12 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
I have a relative who needs to sell some stock. Would it be legal for me to give her (less than $10K worth) my more tax friendly cost basis stock and then let her give me an equal amount of her stock since I have no intention of selling? Thanx
Print the post Back To Top
Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25658 of 121105
Subject: Re: is this legal? Date: 1/21/2000 12:49 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
dacpdc writes:

I have a relative who needs to sell some stock. Would it be legal for me to give her (less than $10K worth) my more tax friendly cost basis stock and then let her give me an equal amount of her stock since I have no intention of selling?

I reply:

Legal? Sure. But I doubt it will save anyone any taxes. Here's why. What you're describing isn't a gift, because you've agreed with your relative that you will receive stock in exchange for the stock you will convey. Rather, it seems to me to be a sale, triggering capital gains liability for both lots. In other words, your relative could obtain the same effect, without involving you at all, by simply lying about his/her basis, and my guess (as a lay person; tax matters are wholly outside my professional competence) is that each method would simply constitute tax evasion (illegal), rather than tax avoidance (legal). --Bob

Print the post Back To Top
Author: Taxslave One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25682 of 121105
Subject: Re: is this legal? Date: 1/21/2000 3:00 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
The transfer of the stock would be a taxable event triggering the recognition of the capital gain to you and your friend.

Print the post Back To Top
Author: BladeXrunners One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25786 of 121105
Subject: Re: is this legal? Date: 1/23/2000 2:05 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
I have a relative who needs to sell some stock. Would it be legal for me to give her (less than $10K worth) my more tax friendly cost basis stock and then let her give me an equal amount of her stock since I have no intention of selling? Thanx

I disagree with the other posts. What you're describing is "exchange of like-kind property", which will not trigger a taxable event (one exception: exchange between related party--children, grandchildren, parent, siblings, or non-resident alien spouse--will lose this tax-free treat if property is disposed of within 2 years.) It must be common stock for common stock or preferred for preferred. Common for preferred does not qualify.

Other had said this tax-free treatment only apply for the same stock, e.g. XYZ for XYZ. I totally disagree. The wording is "common stock for common stock", not "same stock for same stock"--why would anyone want to exchange the same stock? Yet other said "like-kind property" only apply to real estate property. Again, I totally disagree. "Property" does not equate to real estate, it encompass everything "which you have legal title to", and that include stock. Use Form 8824 to report an exchange of like-kind property.

After saying all of that, it won't do your relative any good because the basis is of the original stock. That is, when you exchange your "more tax friendly cost basis" stock with your relative, your relative basis will be of the original, not your. In other word, the basis stay with the original owner, not with the stock. So whether your relative sell her stock or whether your relative sell your exchanged stock, your relative gain/loss will be the same (as is whether it's long-term or short-term).

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25818 of 121105
Subject: Re: is this legal? Date: 1/23/2000 4:15 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
The original question was...

<<I have a relative who needs to sell some stock.
Would it be legal for me to give her (less than $10K worth) my more tax friendly cost basis stock and then let her give me an equal amount of her stock since I have no intention of selling? Thanx>>

And BladeXrunner replied...

<<I disagree with the other posts. What you're describing is "exchange of like-kind property", which will not trigger a taxable event (one exception: exchange between related party--children, grandchildren, parent, siblings, or non-resident alien spouse--will lose this tax-free treat if property is disposed of within 2 years.) It must be common stock for common stock or preferred for preferred. Common for preferred does not qualify.>>

Sorry, Blade...but I'll have to disagree with your assessment here. Common stock is specifically excluded from the tax deferred exchange rules. You can't "exchange" stock...under any circumstances. If you do, it's deemed a taxable sale...just like the other folks originally responded.

I think that you might have gotten tripped up on some of the wording where you were doing your research. In some cases, stock for stock exchanges are allowed and don't trigger a sale (like when Company A exchanges it's shares with Company B in a split off, spin off, or reorganization).

But one of the issues with respect to "like kind" exchanges is that the property MUST be business property or investment property...and not personal property. On first thought, it may seem that stock held for investment would constitute "investment" property, but not for the purposes of a "like kind" exchange.

Here are the rules for like kind exchanges in brief...directly from the IRS Publication 544. Pay particular attention to item #3 regarding what properties do not qualify for a like-kind exchange:

In a like-kind exchange, both the property you give up and the property you receive must be held by you for investment or for productive use in your trade or business. Machinery, buildings, land, trucks, and rental houses are examples of property that may qualify.

The rules for like-kind exchanges do not apply to exchanges of the following property.

* Property you use for personal purposes, such as your home and your family car.

* Stock in trade or other property held primarily for sale, such as inventories, raw materials, and real estate held by dealers.

* Stocks, bonds, notes, or other securities or evidences of indebtedness, such as accounts receivable.

* Partnership interests.

* Certificates of trust or beneficial interest.

* Choses in action.

Hope this helps. If you would like additional reference material or citations, just let me know. I'll be happy to give 'em to you.

TMF Taxes
Roy





Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: BladeXrunners One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25856 of 121105
Subject: Re: is this legal? Date: 1/24/2000 1:24 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Hi Roy,

From J. K. Lasser's Your Income Tax 1999, pg. 130 "Gain on the exchange of common stock for other common stock (or preferred for other preferred) is not taxable. Similarly, loss realized on such an exchange is not deductible. The exchange may take place between the stockholder and the company or between two stockholders." (boldface mine)

In reading IRS pub 544, I concur with you that exchange between individual doesn't sound like it will get the tax-free treatment. OTOH, J. K. Lasser's is a pretty reliable guide, so I don't know which is correct.

Let me throw a curve in. Let say I'm the second coming of Warren Buffett and started a limited partnership whose business it is to trade securities ala mutual fund. I presume if this limited partnership exchange securities with other partnership or with other company, it would get the tax-free treatment because the exchange is for business purpose--trading securities. Yes???

If yes, now what would happen if my limited partnership exchange stock with an individual investor? Would this still get the tax-free treatment? How about the individual?





Print the post Back To Top
Author: elibortPrairiela One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25954 of 121105
Subject: Re: is this legal? Date: 1/25/2000 8:48 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0


From J. K. Lasser's Your Income Tax 1999, pg. 130 "Gain on the exchange of common stock for other common stock (or preferred for other preferred) is not taxable. Similarly, loss realized on such an exchange is not deductible. The exchange may take place between the stockholder and the company or between two stockholders." (boldface mine)

In reading IRS pub 544, I concur with you that exchange between individual doesn't sound like it will get the tax-free treatment. OTOH, J. K. Lasser's is a pretty reliable guide, so I don't know which is correct.


This is pretty dangerous. I think you are reading (or quoting) something out of context. I don't have Lasser's book, but I'd bet (if I were a betting man) that the context there is mergers and other tax-free reorgs.

Your earlier post ignored the statutory exception to the like kind exchange rules (which Roy quoted). I think that, since the Internal Revenue Code is available on line, people should give the citations and let other readers see for themselves.

Print the post Back To Top
Author: BladeXrunners One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25980 of 121105
Subject: Re: is this legal? Date: 1/25/2000 12:36 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
BladerXrunners said,

From J. K. Lasser's Your Income Tax 1999, pg. 130 "Gain on the exchange of common stock for other common stock (or preferred for other preferred) is not taxable. Similarly, loss realized on such an exchange is not deductible. The exchange may take place between the stockholder and the company or between two stockholders." (boldface mine)

In reading IRS pub 544, I concur with you that exchange between individual doesn't sound like it will get the tax-free treatment. OTOH, J. K. Lasser's is a pretty reliable guide, so I don't know which is correct.


elibortPrairiela said,

This is pretty dangerous. I think you are reading (or quoting) something out of context. I don't have Lasser's book, but I'd bet (if I were a betting man) that the context there is mergers and other tax-free reorgs.

Your earlier post ignored the statutory exception to the like kind exchange rules (which Roy quoted). I think that, since the Internal Revenue Code is available on line, people should give the citations and let other readers see for themselves.


To say I'm confused is to understate the obvious.

(There's a book "How to Pay Zero Taxes" by a tax professor who advocate "paying" for stock option with stock you already owned on the premise that "exchange of like-kind property" would defer the capital gain on the stock you owned--guess that's wrong too).

So I'm posting these questions so someone can un-confuse me.

Okay, let's state what we all agree on.

1) When you "dispose" of a property, you may have a taxable event.

2) Disposing a property include exchanging of property.

3) Certain exchange of property are not taxable.

4) This nontaxable exchange must be both of "qualifying property" & of "like property"

4a) "Qualifying property" must be held for investment or for productive use in trade/business.

* Stocks, bonds, notes, or other securities or evidences of indebtedness, such as accounts receivable do not qualify as a "qualifying property."

Conclusion: exchange of stocks does not qualify for "exchange of like-kind property".

Corollary 1: J K Lasser is wrong. There's not much context needed for The exchange (of common stock for other common stock) may take place . . . between two stockholders. Can't have a merger/tax-free re-org between 2 stockholders . . .
P.S. The chapter was on exchange of like-kind property. And this section only include the above quote and one other paragraph about convertible securities, so I don't believe I quoted it out of context.

Corollary 2: That tax professor who wrote "How to Pay Zero Taxes" is also wrong when saying you don't realize a gain when exercising a stock option with already own stocks.

From reading the IRS pub, I believe the above is true. From reading this 2 tax "guides", I'm confused. If someone had access to either of these 2 books, can you help un-confuse me via pointing out context I missed?

Devil advocate: "exchange of like-kind property" is not the only nontaxable exchange. Perhap there a special situation where these books are correct. Would anyone happen to know if there are such a special situation?

Thanks much for helping out a Fool.

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: criser Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25984 of 121105
Subject: Re: is this legal? Date: 1/25/2000 1:16 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
Stocks, bonds, notes, other securities or evidences of indebtedness or interest, and certificates of trust or beneficial interests are not qualifying property under the like-kind exchange rules. IRC Sections 1031(a)(2)(B), §1031(a)(2)(C) and §1031(a)(2)(E).

Stock can be exchanged tax-free within the context of a corporate reorganization. IRC Section 355. In addition, taxpayers generally do not recognize gain or loss on the exchange of common stock solely for common stock in the same corporation, or for preferred stock solely for preferred stock in the same corporation. §1036(a). The latter two situations - corporate reorg and exchange of stock in the same corporation - are what J.K. Lasser's is talking about.

Chris Riser
criser

Print the post Back To Top
Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 25985 of 121105
Subject: Re: is this legal? Date: 1/25/2000 2:10 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
<<Stock can be exchanged tax-free within the context of a corporate reorganization. IRC Section 355. In addition, taxpayers generally do not recognize gain or loss on the exchange of common stock solely for common stock in the same corporation, or for preferred stock solely for preferred stock in the same corporation. §1036(a). The latter two situations - corporate reorg and exchange of stock in the same corporation - are what J.K. Lasser's is talking about.>>

Thanks, Chris.

Couldn't have said it better myself. From the looks of Chris' prior posts, it appears that we have another highly qualified tax pro in the folder...and that's wonderful.

Thanks, Chris, for taking the time to spread some of your knowledge around.

TMF Taxes
Roy



Print the post Back To Top
Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26004 of 121105
Subject: Re: is this legal? Date: 1/25/2000 4:54 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
criser writes (in part):

In addition, taxpayers generally do not recognize gain or loss on the exchange of common stock solely for common stock in the same corporation, or for preferred stock solely for preferred stock in the same corporation. §1036(a).

I reply:

This makes sense to me from a logical standpoint, assuming that the amount of stock exchanged is economically equivalent. Thus, if I owned 30 shares of class B Bershire Hathaway, I might be able to exchange them for 1 share of class A stock without triggering taxes. I assume that such a tax-free exchange does not change the basis of either taxpayer. Can you confirm that my assumption is correct? --Bob

Print the post Back To Top
Author: criser Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26042 of 121105
Subject: Re: is this legal? Date: 1/26/2000 12:34 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Bob78614 writes: I assume that such a tax-free exchange does not change the basis of either taxpayer. Can you confirm that my assumption is correct? --Bob

That's right. Basis will be increased only if gain is recognized, either fully because the exchange does not qualify for tax-free treatment or partially because "boot" (nonqualifying property, such as cash) is received, in which case basis would be increased to the extent the taxpayer received boot.

criser

Print the post Back To Top
Author: BladeXrunners One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26075 of 121105
Subject: Re: is this legal? Date: 1/26/2000 3:06 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Thanks for the clarification!!!

Follow up question:

Does "paying" for Nonqualified Stock Option with stocks in the same company get this tax-free treatment?

How about paying for Nonqualified Stock Option with stocks in the same company acquired through Employee Stock Purchase Plan?

Same question for ISO.

If yes, how is the qualifying period calculated?

Thank ya much for un-confusing me.

Print the post Back To Top
Author: dhock Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26215 of 121105
Subject: Re: is this legal? Date: 1/28/2000 2:00 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
<<Stock can be exchanged tax-free within the context of a corporate reorganization. IRC Section 355. In addition, taxpayers generally do not recognize gain or loss on the exchange of common stock solely for common stock in the same corporation, or for preferred stock solely for preferred stock in the same corporation. §1036(a). The latter two situations - corporate reorg and exchange of stock in the same corporation - are what J.K. Lasser's is talking about.>>


I have read several places that stock-for-stock exchanges within the same corporation incurs no taxable event (referencing §1036(a).). What I am unclear on is the AMT impact. For example, if you exchange shares in hand (12 months +) for ISO or NQ options, based on §1036(a), this incurs no capital gains events. But, does the street value of this transaction get included in the AMT calculation in the tax year that the eschange takes place?

Print the post Back To Top
UnThreaded | Threaded | Whole Thread (14) | Ignore Thread Prev Thread | Next Thread
Advertisement