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I have a question involving a purposed sale of stock held jointly with my sister and more precisely what my options are concerning the reporting of the capital gain.

In 1996 my sister and I were issued a paper stock certificate as Joint Tenants with Rights of Survivorship (JT TEN) while finalizing our parent's estate. From the beginning I feel this was a mistake and the shares should have been split up, two separate certificates issued and the last odd share distributed via cash payment to each of us. But that is not what happened.

Today, nine years later my sister has blown her inheritance and needs the cash. The problem I am facing is that my SS# is the only one on record so any sale of all or partial shares will fetch me a capital gain. I personally would like to transfer my half of the shares to my broker and sell hers.

E*trade's response to this question is:

“Our records show you are the primary holder in your joint account with your spouse. If you deposited the certificate in your joint account you would be liable for the capital gain.

If you and your sister opened a joint account with her as the primary and you as the co-holder and deposited and sold the stock your sister would be liable for the capital gains. If you do not want to open an account to match the registration of the certificate your sister can open an individual account in her name and when you send the stock certificate you need to include a notarized letter of authorization from you authorizing to relinquish the shares. Once she sells the stock she will be liable for any taxes regarding the shares.”


The first response seems the best for my situation considering my sister does not want to open an account. So should I just sell her half and withhold 5% for the expected long term capital gain I would have to pay next year?

Thanks for any help,
Kurt
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First, whatever else has happened, how it should have been done, etc. is water under the bridge.

However, currently, your sister wants to sell her shares. While it is proper for you to accommodate this, it should not cost you anything nor take extra effort on your part. Taking the tax hit for selling the shares is, I feel, extra effort. There is a good chance it could lead to difficulties in your relationship with your sister. And the IRS might consider it questionable. And depending on your gain on the stock and your current income, the sale could increase your taxes more than 5%: do you have state income tax? Will any of your Sch. A deductions or child tax credits be lost? Then there's the wonderful AMT stuff.

So either your sister opens the joint account and sells her shares and pays the taxes, or your sister consents to pay her half (quarter, whatever you're willing to allow) of a lawyer and split it properly--the way it should have been done initially. It's clean, it's legal, you have no more financial ties to her.

Just (29 June, 2005) got out from under a similar situation. Be gracious but firm with your sister. Ask a friend to listen to whatever complaining you need to do about her irresponsible behavior, etc. This is not your fault!

Good luck!
Kathleen
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E*trade's response to this question is:

“Our records show you are the primary holder in your joint account with your spouse. If you deposited the certificate in your joint account you would be liable for the capital gain.

If you and your sister opened a joint account with her as the primary and you as the co-holder and deposited and sold the stock your sister would be liable for the capital gains."
_________________________________________
That's not true. If you sell jointly owned stock, each of you is liable for reporting half the gain.

It does, however, fairly state their (E*Trade's) 1099 reporting requirements, which is all they care about. They have to report the gross proceeds on a 1099-B which includes the Social Security number on the account.

The way to deal this is to report the full transaction on your return, including the full amount of gross proceeds, followed by a transaction eliminating 1/2 the gain applicable to the co-owner.

I've done things like this many times. It works. Don't worry about it.

Bill
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I have a question involving a purposed sale of stock held jointly with my sister and more precisely what my options are concerning the reporting of the capital gain.

In 1996 my sister and I were issued a paper stock certificate as Joint Tenants with Rights of Survivorship (JT TEN) while finalizing our parent's estate. From the beginning I feel this was a mistake and the shares should have been split up, two separate certificates issued and the last odd share distributed via cash payment to each of us. But that is not what happened.

Today, nine years later my sister has blown her inheritance and needs the cash. The problem I am facing is that my SS# is the only one on record so any sale of all or partial shares will fetch me a capital gain. I personally would like to transfer my half of the shares to my broker and sell hers.

E*trade's response to this question is:

“Our records show you are the primary holder in your joint account with your spouse. If you deposited the certificate in your joint account you would be liable for the capital gain.

If you and your sister opened a joint account with her as the primary and you as the co-holder and deposited and sold the stock your sister would be liable for the capital gains. If you do not want to open an account to match the registration of the certificate your sister can open an individual account in her name and when you send the stock certificate you need to include a notarized letter of authorization from you authorizing to relinquish the shares. Once she sells the stock she will be liable for any taxes regarding the shares.”

The first response seems the best for my situation considering my sister does not want to open an account. So should I just sell her half and withhold 5% for the expected long term capital gain I would have to pay next year?


I see a problem here. You cannot deposit the shares into a joint account with your wife if the shares are held jointly with your sister. The only easy solution is to open a new account with your sister and deposit the shares into that account. Then you can split the account, your sister can sell her half, you can sell or transfer your half and you can close the account.

Let's assume for now that you sell all of the stock and your SSN is primary on the account. As Bill has commented in another reply, the broker will report 100% of the sale proceeds to the primary SSN on the account. You will report 100% of the sale on one line of Schedule D and on the next line will subtract out 50% of the gain. To complete the picture, you should issue a nominee Form 1099-B to your sister for her share of the sale. See the general instructions for the 1099 series for details. www.irs.gov/pub/irs-pdf/i1099.pdf.

Ira
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As others have pointed out, if your SSN is on the account, report the whole transaction, then back out your sister's portion (whether that's 1/2 or the whole thing if you only sell 1/2 the shares).

An alternative solution is to open a separate account at the broker with your sister. Put HER SSN on the account. Endorse the paper certificate as necessary and deposit the certificate in the account. Now instruct the broker to transfer 1/2 of the shares to YOUR account (or your joint account with your wife). Now your sister can sell the remaining shares (or not) and the reporting will go to her, leaving you out of the picture entirely.

If you REALLY wanted to go all out, open a third account at the brokerage in just your sister's name. Deposit the certificate into the joint account with your sister as before, then have the broker transfer 1/2 the shares to your account and 1/2 to hers. Now you've separated the shares as you wish you would have done back in the day. And each of you can do whatever you wish with your 1/2.

Another way to skin the cat is to use the company's transfer agent. Send them the paper certificate and ask them to split it into two certificates - one for each of you. The down side here is that would needlessly delay your ability to sell the shares.

--Peter <== thinking there's usually more than one option
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Thank you all for your responses.

Bill-
You make an excellent point that when selling jointly owned stock, each party is liable for reporting the gain and that Etrade is only fulfilling their reporting requirements for the sale on my 1099-B.
Your suggestion of reporting the full transaction on my return and then backing out my sister's portion sounds reasonable. I say her portion because I still haven't decided whether to sell any of my half just yet. Do I need to supply any documentation with my return to prove she got the money? I was planning to write her a check from my brokerage account after selling and make a notation that it was payment for her half of the stock.

Ira wrote-
You cannot deposit the shares into a joint account with your wife if the shares are held jointly with your sister.


The response from Etrade seemed to indicate we can, assuming the certificate is properly endorsed. I really would hate to go through the trouble of opening a new account only to make a couple transactions and then close it.

To complete the picture, you should issue a nominee Form 1099-B to your sister for her share of the sale.

Got it! And that answers my question on documenting the sale for both my sister and myself.

I plan to deposit the certificate into my existing account. If at that time Etrade decides they can't do that we will open a joint account and keep my SSN as the primary. That way I can be sure of how the transaction is handled. Besides, my sister doesn't have a computer and I will be the one to place the sell order.

Thanks again for all the insight and suggestions,
Kurt
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Thank you all for your responses.

Bill-
You make an excellent point that when selling jointly owned stock, each party is liable for reporting the gain and that Etrade is only fulfilling their reporting requirements for the sale on my 1099-B.
Your suggestion of reporting the full transaction on my return and then backing out my sister's portion sounds reasonable. I say her portion because I still haven't decided whether to sell any of my half just yet. Do I need to supply any documentation with my return to prove she got the money? I was planning to write her a check from my brokerage account after selling and make a notation that it was payment for her half of the stock.


That won't work. If you sell stock that is jointly owned, you each are selling a portion of what is sold. You can't sell just "her" portion, or "your" portion. In order to accomplish this, you must split the account first.

Ira wrote-
You cannot deposit the shares into a joint account with your wife if the shares are held jointly with your sister.


The response from Etrade seemed to indicate we can, assuming the certificate is properly endorsed. I really would hate to go through the trouble of opening a new account only to make a couple transactions and then close it.


The "properly endorsed" certificate is a gift of her portion of the stock to you, subject to all of the rules associated with gifts...that is, possible gift tax return filings, etc. At that point the entire holding is yours and you have no obligation to give anything back to your sister. Any sale will be taxable only to you (and your wife). Any money you return to your sister will constitute a gift from you to her, also subject to gift tax considerations.

To complete the picture, you should issue a nominee Form 1099-B to your sister for her share of the sale.

Got it! And that answers my question on documenting the sale for both my sister and myself.

I plan to deposit the certificate into my existing account. If at that time Etrade decides they can't do that we will open a joint account and keep my SSN as the primary. That way I can be sure of how the transaction is handled. Besides, my sister doesn't have a computer and I will be the one to place the sell order.


I would caution you NOT to deposit the certificate into your account and to open a joint account with your sister and divide the account appropriately.

Ira
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The "properly endorsed" certificate is a gift of her portion of the stock to you, subject to all of the rules associated with gifts...that is, possible gift tax return filings, etc. At that point the entire holding is yours and you have no obligation to give anything back to your sister. Any sale will be taxable only to you (and your wife). Any money you return to your sister will constitute a gift from you to her, also subject to gift tax considerations.

I'm going to have one of my very rare disagreements with Ira on this one.

We're constantly harping on the so-called gifts between people to circumvent various tax laws. The argument is that we look at the substance over the form of a transaction. I think that needs to apply to this case as well.

Any transfer of property with the expectation of something of comparable value in return is not a gift. We bring that up all the time here. I think this situation is no different. The sister is signing over her interest in the shares with the expetation that the brother will sell those shares and give her the proceeds. That doesn't sound like a gift to me. And if she's not making a gift, he's not receiving one. I think this would be the classic nominee situation, where the brother is holding the stock as a nominee for his sister.

I don't disagree that there is a risk the IRS would take the position you mention here, but I think that with the proper documentation it could be overcome. I also agree with your suggestion that it would be far safer to just open a second account to deal with the transaction. That, in effect, makes the necessary paper trail.

However, I would have no problem with depositing the certificate into the joint account with his wife, as long as any sale of the sister's share of the stock happened fairly promptly (like within a couple of weeks or so) and there was some written document explaning their intent. With that, I think it would be fine to deposit the shares in the brother's account, and for him to sell them and not recognize any gain or loss on her portion of the stock.

Ideally, he'd issue a 1099B to his sister as a nominee, and actually report the transaction on his return, but at no gain or loss.

--Peter
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The "properly endorsed" certificate is a gift of her portion of the stock to you, subject to all of the rules associated with gifts...that is, possible gift tax return filings, etc. At that point the entire holding is yours and you have no obligation to give anything back to your sister. Any sale will be taxable only to you (and your wife). Any money you return to your sister will constitute a gift from you to her, also subject to gift tax considerations.

I'm going to have one of my very rare disagreements with Ira on this one. [...]

However, I would have no problem with depositing the certificate into the joint account with his wife, as long as any sale of the sister's share of the stock happened fairly promptly (like within a couple of weeks or so)
and there was some written document explaning their intent. [emphasis added] With that, I think it would be fine to deposit the shares in the brother's account, and for him to sell them and not recognize any gain or loss on her portion of the stock.

I think the bolded phrase changes everything. With backup documentation, I would have no problems using the joint spousal account to process the trade. Without it I would be concerned. Unless the broker issues a detailed confirmation of the deposit of the certificate, none of the documentation generated by the broker will indicate that the shares had ever been jointly owned with the sister.
On the surface, it will look like a classic income shift to a lower tax rate taxpayer to avoid income tax. Plus, from the sister's perspective, there's always the slight chance [without the explanatory document] that the brother could claim that the shares were a gift from the sister and that he had no obligation to give her a share of the proceeds.

Ira
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Once again, thank you for your thoughts on this matter. Unfortunately, as all too often happens when dealing with issues like this I am overwhelmed by the feeling that this is needlessly overcomplicated. I am however looking at this matter from the perspective of someone who is actually trying to comply with the law, not fudge my way around it.
But I digress…

Ira wrote:
If you sell stock that is jointly owned, you each are selling a portion of what is sold. You can't sell just "her" portion, or "your" portion. In order to accomplish this, you must split the account first.


Well this changes things. I had entertained the notion of selling part of my shares and keeping part. It this point I am more inclined to sell all the shares at once even though I realize we can split the shares before selling.

Peter wrote:
I don't disagree that there is a risk the IRS would take the position you mention here, but I think that with the proper documentation it could be overcome. I also agree with your suggestion that it would be far safer to just open a second account to deal with the transaction. That, in effect, makes the necessary paper trail.


I don't want to have to try and explain my “intentions” to the IRS after the fact. It seems that the work I was trying to avoid, opening a joint account simply to sell the shares, may be the easiest way to handle this. The paper work will be handled by the broker and the transaction is simple. I also believe a letter explaining our intentions at the time we open the account and deposit the shares would be helpful.

Thanks again,
Kurt
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