Tax Prophet: FAQ November 3, 1996


Frequently Asked Tax Questions - November 3, 1996

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, Sunday November 3, 1996



Sale of stock with unknown basis; gift of stock; tax planning for Lotto winners

ROBERT L. SOMMERS

Note: This exercise is for educational purposes only and is not intended to be legal or tax advice. Your particular facts and circumstances must be considered when applying the U.S. tax law. You should always consult with a competent tax professional with respect to your particular situation.

This World Wide Web Server is the creation and property of Robert L. Sommers , attorney-at-law. Copyright 1995-7 Robert L. Sommers, all rights reserved.


Questions

  1. Question: I sold 200 shares of IBM stock for $150 but have records for only 75 shares, purchased at $110 a share. How do I account for the remaining shares?

    [Answer]

  2. Question: I have General Electric stock certificates in my name, purchased years ago for $15/share. What are my tax consequences if I gift them to my son and what value will my son use when he sells them?

    [Answer]

  3. Question: Some day, I hope to win the Lotto. Any tax planning suggestions?

    [Answer]



  1. Answer to Question #1:

    You always have the burden of establishing your tax basis (generally, the purchase price of your stock). If you cannot, the IRS may value those remaining shares with a zero basis and tax your gain at $150 per share.

    There are practical measures you can take. First, contact the company. If it has been paying you dividends, it should have records reflecting your stock purchases. If this fails, find the lowest value at which the stock ever traded between the first date you remember purchasing it through the selling date, and use that as your basis. The company or your broker can assist you in determining this value.

    Also, you might have records, (bank statements or cancelled checks) indicating when you purchased the stock. You might have indirect evidence, such as the sale of another asset, receipt of funds from a bonus, gift or inheritance, that could fix the approximate fair market value of the stock.

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  2. Answer to Question #2:

    Answer: You may gift up to $10,000 per year in cash or property to your son without imposition of a gift tax. The gift is valued at the stock's current fair market value. Your son will have a "carryover basis" of $15/share.

    There is an annual gift tax exclusion for present gifts of property worth $10,000 or less, per donee (recipient). Married couples may together make gifts worth $20,000 per year per donee. Therefore, a husband and wife may gift their 3 children $20,000 per child per year ($60,000 total). If your gift exceeds these limitations, you may either pay the gift tax or apply part of your unified estate and gift tax credit ("unified credit") to the portion of the gift exceeding the annual exclusion. Your credit will then be reduced by this amount. For example, if you and your spouse make a gift to one child of $60,000, the annual exclusion will apply to $20,000. You may either pay a gift tax on the remaining $40,000 (the tax is $8,200) or apply your unified credit, which will reduce the credit's value accordingly. Note: each spouse has a separate unified credit worth $600,000 ($1.2 million in total) which can be used to offset the gift tax liability.

    The donee receives a carryover basis, which is the same basis which the donor had in the stock.


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  3. Answer to Question #3:

    Yes. If you purchase Lotto tickets as a family or go in with a group, have a simple written agreement regarding the division of winnings. If you do not have a written agreement, then decide how to divide the winnings, prior to taking title (claiming ownership) with the Lottery Commission.

    You'll all pay federal, but not California, income taxes on your portion of the winnings. The Lottery Commission will withhold federal taxes.

    Also, the "present value" (the value in today's money) of your winnings will become part of your estate. However, the present value for $1 million in Lotto winnings ($50,000 per year paid over 20 years without interest) might be only $600,000. This amount will become part of your estate and there could be estate taxes owing upon your death, even though you haven't received all the money.

    Also, gambling winnings, including the Lotto, will be ordinary income to your beneficiary which means that he will pay income taxes on those winnings, but will probably get an income tax deduction for previously paid estate taxes.

    To minimize the tax and probate impact to your estate, I have four suggestions:

    (1) Form a revocable living trust and assign all your Lotto winnings to the trust. This will avoid the cost and delay of a court-supervised probate.

    (2) Purchase life insurance (usually through an "irrevocable life insurance trust") to cover the taxes owing on your Lotto winnings. A properly structured irrevocable life insurance trust will not pay income or estate taxes on the insurance proceeds used to pay your estate taxes.

    (3) Take advantage of the $10,000 annual gift tax exclusion (discussed in the prior question) to reduce the size of your estate.

    (4) Consider whether your winnings are community property. If so, only 50% of the Lotto's value become part of your estate.

    Remember, if your estate owes taxes, your executor could enter into an installment payment arrangement with the IRS. The IRS will charge interest on the unpaid taxes, but the rate is usually less than what a commercial lender charges, and without the lender's usual application fees and points.

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