It is one of the most fundamental, and well established, principles in tax law: Gain equals amount realized less adjusted basis. Out of such seeming simplicity, however, substantial complexity can, and often does, grow. While determining a taxpayer’s amount realized and adjusted basis can often be relatively straightforward, there are also many instances in which it is significantly more complex. This is particularly true with respect to determining a taxpayer’s basis in stock. New broker basis reporting requirements, in addition to other recent developments, make computing basis, and knowing certain choices within that computation, especially important for 2011.
Like other asset types, a taxpayer’s original basis in stock will depend upon how that stock was acquired. Under Code Sec. 1012, the basis of any property, including stock, is its cost. Thus, in the straightforward case of a market purchase of the stock of a C corporation, for instance, the purchaser’s original basis will, simply, be her cost, plus any commissions paid. Similarly, under the Court of Claims’ seminal ruling in Philadelphia Park Amusement Co., 126 F.Supp. 184 (1954), the cost basis of any stock received in a taxable exchange will, in the first instance, be the fair market value of that stock.
In cases in which the stock is acquired from a decedent, on the other hand, an inheriting taxpayer’s original basis will generally be the stock’s fair market value on the date of the decedent’s death (or nine months thereafter). In such cases, the recipient is said to take a stepped-up (or down) basis.
Contact your HLB Gross Collins, P.C. representative for more information.