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Author: imuafool Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121572  
Subject: Stock cost basis for ESOP & DRIP Date: 10/25/2012 4:48 PM
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My wife and I have been retired for two years and are in the 15% tax bracket. Checking things to do for income tax year 2012, we almost forgot that this is the last year that the tax rate on qualified dividends and long term capital gains is 0% for those in the 10% and 15% tax brackets. In 2013, the long-term capital gains tax rate will increase to 10% for our tax bracket.

In our taxable accounts, we are almost all in cash except for stocks in one company that I have held since 1985. In 1980, I became an eligible participant in my company’s ESOP (Employee Stock Ownership Plan) in which company stock was purchased each year for credit to my account AT NO COST TO ME. Due to changes in the Federal tax regulations, company contributions to the ESOP were discontinued at the end of 1982. After I left my company in 1984, my company closed my ESOP account and distributed to me 59 shares, which I parked away for the the long term. Well, some 27 years later those 59 shares grew to over 3,000 shares via numerous stock splits and DRIP. Over that period, I have neither bought (out-of-pocket) nor sold any stocks in this holding.

Since we want to take advantage of the 0% long-term capital gains tax rate for our 15% tax bracket and the company stock is currently hovering at an all-time high of $52/share, we want to sell all 3,000 plus shares by year end.

However, I have several questions about determining the cost basis:

(a) Can I assume a zero cost basis since the ESOP provided the original 59 shares at no cost to me?

(b) Or, in calculating the cost basis, must I account for stock purchases from dividends paid in the DRIP? The company’s dividends are qualified dividends. If yes, do subsequent stock splits in the DRIP account affect the calculation of the cost basis?

Regards,
Ray
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