Stock cost basis and gift tax exclusion ($12k a year) question

[raylopez99]

By golly, I do believe I am the first person to ever ask
this question on the internet. I kid you not.

What basis does the donor use when gifting stock that has
long-term capital gains? This is important because the
donor is trying to stay under the $12000 a year (adjusted
for inflation) gift tax return reporting requirement.

Don't tell me about the donee (the gift receipient)--the
internet is legion with answers to this question. I am
asking about the donor.

Concrete example:

Granma wants to gift a stock, Castro Boat Systems (CBS) (of
Miami, FL), she bought in 1959 for $1 a share.

As good luck would have it, the dang thing is actually worth
$10 a share today.

Granma is in the highest tax bracket and wants to gift the
stock to her deadbeat nephew Ray, who is in the lowest
bracket, so he may sell this stock in 2008. She wants to
stay under the $12000 a year ($24000 a year if spouse
included; indexed for inflation) ceiling so that she may
avoid having to file a gift tax return form (remember, she's
paranoid about reporting stuff with the government).

How many shares can Granma give Ray and stay under the
$12000 limit? Is it 12000 shares ($12000/$1), or 1200 shares
($12000/$10)? Assume Granma has a unlimited number of
shares to give, so it's feasible.

IRS publication 551, as typical for most IRS publications,
was full of introductory material and worthless (albeit only
12 pages long instead of the usual 100 pages of fluff).

RL

 

[Rich Carreiro]

What basis does the donor use when gifting stock that has
long-term capital gains?

Basis is irrelevant to the donor for gift tax.
Only the stock's FMV matters.

This is important because the
donor is trying to stay under the $12000 a year (adjusted
for inflation) gift tax return reporting requirement.

Why do you think the stock basis comes into play for that?

[snip]

Granma wants to gift a stock, Castro Boat Systems (CBS) (of
Miami, FL), she bought in 1959 for $1 a share.

As good luck would have it, the dang thing is actually worth
$10 a share today.
[snip]

Granma is in the highest tax bracket and wants to gift the
stock to her deadbeat nephew Ray, who is in the lowest
bracket, so he may sell this stock in 2008. She wants to
stay under the $12000 a year ($24000 a year if spouse
[snip]

How many shares can Granma give Ray and stay under the
$12000 limit? Is it 12000 shares ($12000/$1), or 1200 shares
($12000/$10)?

1200 shares, of course, because 1200 shares are worth
$12,000.

IRS publication 551, as typical for most IRS publications,
was full of introductory material and worthless

Well, given that 551 is about INCOME tax, not GIFT tax, I
don't see why on earth it should talk about this. Maybe you
should consider reading some publications about GIFT tax.

 

[Herb Smith]

By golly, I do believe I am the first person to ever ask
this question on the internet. I kid you not.

What basis does the donor use when gifting stock that has
long-term capital gains? This is important because the
donor is trying to stay under the $12000 a year (adjusted
for inflation) gift tax return reporting requirement.

Don't tell me about the donee (the gift receipient)--the
internet is legion with answers to this question. I am
asking about the donor.

Concrete example:

Granma wants to gift a stock, Castro Boat Systems (CBS) (of
Miami, FL), she bought in 1959 for $1 a share.

As good luck would have it, the dang thing is actually worth
$10 a share today.

Granma is in the highest tax bracket and wants to gift the
stock to her deadbeat nephew Ray, who is in the lowest
bracket, so he may sell this stock in 2008. She wants to
stay under the $12000 a year ($24000 a year if spouse
included; indexed for inflation) ceiling so that she may
avoid having to file a gift tax return form (remember, she's
paranoid about reporting stuff with the government).

How many shares can Granma give Ray and stay under the
$12000 limit? Is it 12000 shares ($12000/$1), or 1200 shares
($12000/$10)? Assume Granma has a unlimited number of
shares to give, so it's feasible.

IRS publication 551, as typical for most IRS publications,
was full of introductory material and worthless (albeit only
12 pages long instead of the usual 100 pages of fluff).

The value of a gift is its FMV at the time of the gift. So,
if the stock is currently worth $10/share, she would be
limited to 1,200 shares before gift tax reporting is
required. Original cost is immaterial for this limit, but
transfers to the donee as his/her cost basis for future sale
of the stock (in most cases). He also gets her holding
period for short or long term capital gain consideration
(e.g. he could sell the stock immediately and get LTCG
treatment of the gain).

Maybe you haven't seen much about this on the Internet
because the value of a gift is a basic premise of gift
giving (i. e. FMV at time of gift).

 

[joetaxpayer]

By golly, I do believe I am the first person to ever ask
this question on the internet. I kid you not.

What basis does the donor use when gifting stock that has
long-term capital gains? This is important because the
donor is trying to stay under the $12000 a year (adjusted
for inflation) gift tax return reporting requirement.

Don't tell me about the donee (the gift receipient)--the
internet is legion with answers to this question. I am
asking about the donor.

For gifting purposes, the current value is the vaue of the
gift. The donor, in your case has a $10 stock, so she can
gift you 1200 shares with no further paperwork. (if you are
married, she can gift your wife as well.)

Of course, basis follows here, so the basis is $1200 (as you
stated, she paid $1/share).

JOE

 

[Shyster1040]

The fair market value of the stock at the time the gift
transfer is completed is the amount used to determine
whether there has been a taxable gift or not.

So, in your example, Granma could give 1,200 shares of stock
to each recipient as an excludable gift. Keep in mind,
however, that valuation is an art, not a science, so Granma
should leave some wiggle room in case the stock was
initially undervalued by mistake.

 

[Stuart A. Bronstein]

By golly, I do believe I am the first person to ever ask
this question on the internet. I kid you not.

What basis does the donor use when gifting stock that has
long-term capital gains? This is important because the
donor is trying to stay under the $12000 a year (adjusted
for inflation) gift tax return reporting requirement.

Basis? Do you mean what is the value for gift tax purposes?

IRC §2512(a) says, "If the gift is made in property, the
value thereof at the date of the gift shall be considered
the amount of the gift."

That is to say that for purposes of determining the amount
of stock you can give away and still be under the annual
exclusion amount, you have to look to the current market
value, not the donor's basis.

Stu

 

[A.G. Kalman]

By golly, I do believe I am the first person to ever ask
this question on the internet. I kid you not.

What basis does the donor use when gifting stock that has
long-term capital gains? This is important because the
donor is trying to stay under the $12000 a year (adjusted
for inflation) gift tax return reporting requirement.

Don't tell me about the donee (the gift receipient)--the
internet is legion with answers to this question. I am
asking about the donor.

Concrete example:

Granma wants to gift a stock, Castro Boat Systems (CBS) (of
Miami, FL), she bought in 1959 for $1 a share.

As good luck would have it, the dang thing is actually worth
$10 a share today.

Granma is in the highest tax bracket and wants to gift the
stock to her deadbeat nephew Ray, who is in the lowest
bracket, so he may sell this stock in 2008. She wants to
stay under the $12000 a year ($24000 a year if spouse
included; indexed for inflation) ceiling so that she may
avoid having to file a gift tax return form (remember, she's
paranoid about reporting stuff with the government).

How many shares can Granma give Ray and stay under the
$12000 limit? Is it 12000 shares ($12000/$1), or 1200 shares
($12000/$10)? Assume Granma has a unlimited number of
shares to give, so it's feasible.

IRS publication 551, as typical for most IRS publications,
was full of introductory material and worthless (albeit only
12 pages long instead of the usual 100 pages of fluff).

This question has been asked so many times that there are
thousands of hits on the internet. Your problem is you are
looking at cost basis when you should be looking at value or
worth, otherwise known as fair market value. Change your
search criteria to: gift tax annual exclusion. The first
hit from the IRS gives you your answer. In fact, when you
get to the IRS page there is a link to frequently asked
questions.

 

[Seth Breidbart]

What basis does the donor use when gifting stock that has
long-term capital gains? This is important because the
donor is trying to stay under the $12000 a year (adjusted
for inflation) gift tax return reporting requirement.

Concrete example:

Granma wants to gift a stock, Castro Boat Systems (CBS) (of
Miami, FL), she bought in 1959 for $1 a share.

As good luck would have it, the dang thing is actually worth
$10 a share today.

How many shares can Granma give Ray and stay under the
$12000 limit?

The amount of the gift is fair market value on the date of
the gift; so, 1200 shares.

If it were based on the donor's basis, Bill Gates could give
his children a few billion $ in Microsoft stock without gift
or inheritance taxes, because his basis is $0.

Seth

 

[kastnna]

How many shares can Granma give Ray and stay under the

$12000 limit? Is it 12000 shares ($12000/$1), or 1200 shares
($12000/$10)? Assume Granma has a unlimited number of
shares to give, so it's feasible.

It is my understanding that grandma can gift 1200 shares
($1200 absis and $12,000 FMV) and the deadbeats basis is
also $1200. It is not adjusted up for him and if he were to
sell immediately he would realize a gain of $9 a share.

If G-ma were to gift 12000 shares the gift amount would be
$120,000 (12k x $10). $12k would be excluded as annual gift
and $108k would be deducted from her lifetime exclusion
limit of $1M. She'd still pay no taxes, but have to file
with the IRS.

 

[Mark Bole]

By golly, I do believe I am the first person to ever ask
this question on the internet. I kid you not.

What basis does the donor use when gifting stock that has
long-term capital gains?[...]
How many shares can Granma give Ray and stay under the
$12000 limit? Is it 12000 shares ($12000/$1), or 1200 shares
($12000/$10)?

The instructions for Form 709 address this, the value of the
gift is the FMV at the time of the gift, so your answer is
1,200 shares. The form, if required to be filed, also asks
for the donor's basis.

On a side note, I also found in these same instructions a
slightly more concrete approach for determing FMV of
inherited/donated real estate in these instructions. It
states: "Generally, the best indication of the value of real
property is the price paid for the property in an
arm's-length transaction on or before the valuation date. If
there has been no such transaction, use the comparable sales
method. In comparing similar properties, consider
differences in the date of the sale, and the size,
condition, and location of the properties, and make all
appropriate adjustments." So I guess the donor or
deceased's basis could be used, as long as it was determined
by an arm's-length transaction, which would still be better
than zero.

-Mark Bole

 

[Harlan Lunsford]

By golly, I do believe I am the first person to ever ask
this question on the internet. I kid you not.

What basis does the donor use when gifting stock that has
long-term capital gains? This is important because the
donor is trying to stay under the $12000 a year (adjusted
for inflation) gift tax return reporting requirement.

Don't tell me about the donee (the gift receipient)--the
internet is legion with answers to this question. I am
asking about the donor.

Concrete example:

Granma wants to gift a stock, Castro Boat Systems (CBS) (of
Miami, FL), she bought in 1959 for $1 a share.

As good luck would have it, the dang thing is actually worth
$10 a share today.

Granma is in the highest tax bracket and wants to gift the
stock to her deadbeat nephew Ray, who is in the lowest
bracket, so he may sell this stock in 2008. She wants to
stay under the $12000 a year ($24000 a year if spouse
included; indexed for inflation) ceiling so that she may
avoid having to file a gift tax return form (remember, she's
paranoid about reporting stuff with the government).

How many shares can Granma give Ray and stay under the
$12000 limit? Is it 12000 shares ($12000/$1), or 1200 shares
($12000/$10)? Assume Granma has a unlimited number of
shares to give, so it's feasible.

IRS publication 551, as typical for most IRS publications,
was full of introductory material and worthless (albeit only
12 pages long instead of the usual 100 pages of fluff).

Then you're looking at the wrong publication. For starters,
look at publication 950.

ChEAr$,
Harlan Lunsford, EA n LA

 

[San Diego CPA]

By golly, I do believe I am the first person to ever ask
this question on the internet. I kid you not.

What basis does the donor use when gifting stock that has
long-term capital gains? This is important because the
donor is trying to stay under the $12000 a year (adjusted
for inflation) gift tax return reporting requirement.

Don't tell me about the donee (the gift receipient)--the
internet is legion with answers to this question. I am
asking about the donor.

Concrete example:

Granma wants to gift a stock, Castro Boat Systems (CBS) (of
Miami, FL), she bought in 1959 for $1 a share.

As good luck would have it, the dang thing is actually worth
$10 a share today.

Granma is in the highest tax bracket and wants to gift the
stock to her deadbeat nephew Ray, who is in the lowest
bracket, so he may sell this stock in 2008. She wants to
stay under the $12000 a year ($24000 a year if spouse
included; indexed for inflation) ceiling so that she may
avoid having to file a gift tax return form (remember, she's
paranoid about reporting stuff with the government).

How many shares can Granma give Ray and stay under the
$12000 limit? Is it 12000 shares ($12000/$1), or 1200 shares
($12000/$10)? Assume Granma has a unlimited number of
shares to give, so it's feasible.

Gift is computed based on current FMV of the property given
(i.e., $10/sh) but basis in the shares carries over to
recipient. Therefore, granny can give 1,200 shares. Ray
will have a basis of $1 per share in the stock so if he
sells the stock for $12,000, he'll have a gain of $10,800
which will be taxed as long-term capital gain (even if he
holds it less than a year).

 

[Arthur Kamlet]

Maybe you haven't seen much about this on the Internet

because the value of a gift is a basic premise of gift
giving (i. e. FMV at time of gift).

Just to clarify: This is correct for gifts to people.

Gifts to charities have other rules. Gifts from businesses
have other rules.

 

[raylopez99]

Thanks to all that replied. I figured that what I called
the 'basis' for the donor was the Fair Market Value, under
the principal that the IRS always tries to maximize tax
receipts, but wanted a more definite opinion.

This question was not asked, but I think one mistake was
made by the poster who said that Deadbeat Ray would inhereit
Granma's basis ($1 a share) rather than the FMV ($10 a
share) at the time of the gift. I think this is wrong, as I
recall the donee gets a 'stepped up basis' (perhaps upon
Granma's death--so only if the gift passed when Granma
passes), meaning if the stock was sold by Ray the same day
as when it was gifted, the gain would be zero.

This is neither here nor there, but given the above, it
seems like gift giving is only a viable tax
reduction/avoidance strategy (aside from giving $12/$24k
every year over a large number of years, to reduce the
taxable estate) when there is ambiguity in the FMV of the
gift (I'm thinking of art, where the value seems to be in
the eye of the beholder). So Ray (if it was an estate tax
situation, Ray had inherieted, and Ray was looking to sell
the gift) would claim the CBS stock is not that valuable
(assuming it's a close corporation not traded on a public
exchange, so the value of CBS stock is hard to determine),
and would have an expert appraiser testify to this effect,
while Granma, if she was deducting the gift from her income
to pay income taxes (i.e., itemizing) would claim the CBS
stock is worth a lot of money. The rich have done this with
art I believe.

Anyway, thanks for the advice.

RL

 

[Stuart A. Bronstein]

This question was not asked, but I think one mistake was
made by the poster who said that Deadbeat Ray would inhereit
Granma's basis ($1 a share) rather than the FMV ($10 a
share) at the time of the gift. I think this is wrong, as I
recall the donee gets a 'stepped up basis' (perhaps upon
Granma's death--so only if the gift passed when Granma
passes), meaning if the stock was sold by Ray the same day
as when it was gifted, the gain would be zero.

Even though the amount of the gift for gift tax purposes is
the present market value, the donee gets the donor's basis
unless the transfer is as a result of the death of the
donor. In that case the basis is the current market value.

This is neither here nor there, but given the above, it
seems like gift giving is only a viable tax
reduction/avoidance strategy (aside from giving $12/$24k
every year over a large number of years, to reduce the
taxable estate) when there is ambiguity in the FMV of the
gift (I'm thinking of art, where the value seems to be in
the eye of the beholder).

Sorry, but gift giving in excess of the annual exclusion
does not save a thing. Gift tax is incurred. If under the
lifetime exemption amount it gets added back to the estate
for estate tax purposes.

So Ray (if it was an estate tax
situation, Ray had inherieted, and Ray was looking to sell
the gift) would claim the CBS stock is not that valuable
(assuming it's a close corporation not traded on a public
exchange, so the value of CBS stock is hard to determine),

The IRS has experts who routinely value closely held stock -
it's really not difficult.

and would have an expert appraiser testify to this effect,
while Granma, if she was deducting the gift from her income
to pay income taxes (i.e., itemizing) would claim the CBS
stock is worth a lot of money. The rich have done this with
art I believe.

You don't get to deduct a gift from income for income tax
purposes unless the gift is to a qualified charity.

Stu

 

[Seth Breidbart]

This question was not asked, but I think one mistake was
made by the poster who said that Deadbeat Ray would inhereit
Granma's basis ($1 a share) rather than the FMV ($10 a
share) at the time of the gift. I think this is wrong, as I
recall the donee gets a 'stepped up basis' (perhaps upon
Granma's death--so only if the gift passed when Granma
passes),

That's right: the stepped up basis occurs only on inherited
stuff.

meaning if the stock was sold by Ray the same day
as when it was gifted, the gain would be zero.

Inherited, not gifted otherwise.

This is neither here nor there, but given the above, it
seems like gift giving is only a viable tax
reduction/avoidance strategy (aside from giving $12/$24k
every year over a large number of years, to reduce the
taxable estate) when there is ambiguity in the FMV of the
gift (I'm thinking of art, where the value seems to be in
the eye of the beholder). So Ray (if it was an estate tax
situation, Ray had inherieted, and Ray was looking to sell
the gift) would claim the CBS stock is not that valuable
(assuming it's a close corporation not traded on a public
exchange, so the value of CBS stock is hard to determine),
and would have an expert appraiser testify to this effect,
while Granma, if she was deducting the gift from her income
to pay income taxes (i.e., itemizing) would claim the CBS
stock is worth a lot of money. The rich have done this with
art I believe.

Granma doesn't get to deduct anything for a gift to Ray,
only for a gift to charity, in which case the value doesn't
matter to Ray.

Seth

 

[kastnna]

This question was not asked, but I think one mistake was
made by the poster who said that Deadbeat Ray would inhereit
Granma's basis ($1 a share) rather than the FMV ($10 a
share) at the time of the gift. I think this is wrong, as I
recall the donee gets a 'stepped up basis' (perhaps upon
Granma's death--so only if the gift passed when Granma
passes), meaning if the stock was sold by Ray the same day
as when it was gifted, the gain would be zero.

From http://www.fairmark.com/capgain/basis/gift.htm

"If the fair market value of the stock at the time of the
gift is greater than or equal to the donor's basis, then
your initial basis is the same as the donor's basis, with a
possible increase for a portion of the gift tax that was
paid."

Donor's basis is $1200, Ray's basis is $1200.

 

[Rich Carreiro]

This question was not asked, but I think one mistake was
made by the poster who said that Deadbeat Ray would inhereit
Granma's basis ($1 a share) rather than the FMV ($10 a
share) at the time of the gift. I think this is wrong, as I
recall the donee gets a 'stepped up basis'

Nope. The basis reset to FMV only happens for inherited
(i.e. the owner has to die) assets.

If an asset is gifted during life, the recipient
takes on the giver's basis (with an added twist if
the asset is held at a loss at the time of gift).

 

[michfr]

When grandma gifts the stock, does she need to put something in Schedule D, because it's the disposition of an asset? What should she put as the sales price? If she puts in the FMV, then that makes it look like she owes capital gains tax. But she doesn't owe capital gains tax. It's the grandchild that will owe. So does she just set the "sales price" to her basis, so it comes out as no captal gain for her? Or does she put $0, because she did not re eive any compensation. Or does she indicate it as a gift in some way on Schecule D, or leave it off Schedule D altogether?

 

[Bob Sandler]

When grandma gifts the stock, does she need to put something in Schedule D, because it's the disposition of an asset? What should she put as the sales price? If she puts in the FMV, then that makes it look like she owes capital gains tax. But she doesn't owe capital gains tax. It's the grandchild that will owe. So does she just set the "sales price" to her basis, so it comes out as no captal gain for her? Or does she put $0, because she did not re eive any compensation. Or does she indicate it as a gift in some way on Schecule D, or leave it off Schedule D altogether?

She does not put anything on Schedule D. That is assuming
that she actually transfers the stock in kind.

Bob Sandler