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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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