OT Turbo Tax help

for #1. 3, and 4: Selling partial shares that are generated by a split means that the split occurred and then you sold the partial afterwards. You must establish the cost of the entire lot of after-split shares first and then sell the partial at that cost per share.

For #2, I think that you were talking about "Return of Capital". I've run into the odd financial institution that does this.

Suppose that you give somebody a loan. (Or you give somebody money who then uses it to give somebody a loan, like, say, a mortgage.) You give them $10,000; they give you back, eventually, the $10,000 plus interest.

The interest paid to you is income, no kidding, and is reported as such to the Feds. However, the $10,000 you got back is the money you put in and you >don't< pay taxes on that. That's the "return of capital". It's not taxable and the Feds don't care.

Ken Becker

And, just to expand on Zaidy's comment above: You had >better< be keeping track of your cost bases in any and all stock or mutual funds you own!

Let's take #3, for example. On the date of the reverse split you had $YEA many shares of Citigroup, and had paid $THAT_MUCH for all those shares. If you had been doing dividend reinvestments over the years that you had shares in Citigroup, $THAT_MUCH includes all the dividend dollar amounts paid to you, never mind that they were instantly moved into more shares of Citigroup.

On the day of the reverse split, you had $YEA $ORIG_SHARES/$REVERSE_SPLIT_RATIO number of shares in an amount that looks like YYY.XXX shares. Your cost basis, per share, looks like $THAT_MUCH/YYY.XXX = $COST_BASIS/share.

Then, the cost basis of the fractional shares looks like $COST_BASIS/share * 0.XXX, and there you are.

Now, if the last time you bought shares was a couple of years ago you can just stuff in VARIOUS in the "dates acquired" and mark it all as long-term capital gains. I forget, offhand, the break point between short term and long term gains; if you had dividend reinvestments or bought shares in Citigroup within that short-term time, then I'd suggest figuring out the proportion of the total shares at the reverse split date that were long term vs. short term (do more ratios), and put it into Turbotax that way.

Most of the above is assuming that you're doing this by cost basis averaging. If you're doing LIFO or FIFO (last in, first out or first in, first out) accounting, it gets more complicated.

I hate to sound like an advertisement, but for reasons precisely like this I ended up one year entering my parents' stock transactions of every conceivable type, going back to the 1950's, into a copy of Quicken. Stock splits, mergers, you name it. At the end of all the fun I had Quicken's idea of the cost basis of all the stuff they had and, believe me, it would have taken a lot longer to work it out by hand.

Ken Becker

Sorry to keep on going like this.

Now, suppose that this investment that was giving you the return of capital was traded on the open market. You give them $10,000, they send you dividends from time to time. The dividends are income. That doesn't matter.

Now you get a Return of Capital. Cute. No taxes, as I mentioned before. Suppose you get $1000.

The next year you sell the investment, say, for $12,000. So, what's your capital gains on the transaction?

You might think that it's $12,000 - $10,000, where the $10,000 is your cost basis, but it's not. That Return of Capital reduced your cost, so the actual capital gains would be $12,000 - ($10,000 - $1000) = $3000. So watch it.

Ken Becker

Hi, Jeff.

Inline...

Yes, we deal in TurboTax questions here, Jeff. The newsgroup name says "Quicken", but it doesn't seem necessary to set up a whole new newsgroup just for TT. It probably wouldn't get much traffic for most of the year, and many of the problems will deal with the numbers behind the tax return - which often come from Quicken - rather than with the return itself. Like your current questions.

And those missing items are very important. Sometimes minor amounts can create big tax problems if not dealt with properly when they are small.

"How do I ..."? The long way! Luckily, Quicken can help with this, but you must do it a step at a time.

Were all these fractional shares in the same company, the same stock? Is the name (or names) secret, or can you tell us? You need to go back to the dates of acquisition and record each of those acquisitions separately. "Acquisition" is typically by cash purchase, but stock can be acquired in many other ways, such as by merger or stock split or other. There are RULES for how each of these transactions must be reported and accounted for; we can't just ignore them or make up our own methods of reporting them.

To properly report corporate mergers, splits, stock dividends and other such transactions, we must know the date of the transaction and the terms of the deal. The corporation management is required to notify all the stockholders - usually in advance and again after the transaction - of what happened to the corporation's shares.

If the company paid a 5% stock dividend - 5 new shares for every 100 shares owned - and you owned 45 shares, you would be entitled to 2 1/4 new shares; the company probably would send you the two whole shares plus a check for the value of the 1/4 share. You would divide your original basis by the

47.25 shares you owned immediately after the transaction's effective date to determine your new basis PER SHARE, then report the sale on that dividend date of your .25 share at that new per-share basis. Your 47 remaining whole shares would continue with their new slightly-reduced basis and their original acquisition date. You would report the small capital gain or loss on that 1/4 share on your return for the year of the stock dividend.

In a merger or corporate acquisition of one company by another, there are often fractional shares involved, too. In addition to the pile of fine-print documents that is usually sent to each shareholder, nowadays the details are usually available online at the company's website, usually on a page titled something like "Investor Relations". Often this page includes fully worked-out examples that shareholders can use to computer their own gains and bases.

As Ken said, this probably is a "return of capital". You don't need to report this NOW, but you need to record it - in Quicken or elsewhere - by reducing your basis in that stock. When you eventually sell that stock, your gain will be greater (or your loss smaller) by that amount.

(No; cash was PAID to you, but it was not GIVEN to you; the Gift Tax is different from the Income Tax. )

A reverse split is handled just like an ordinary split, but the results will be different, of course - and Quicken can handle it. Just like the stock dividend I described above, your original basis will now be allocated to a smaller number of shares, but the total basis will remain the same - and so will your acquisition date(s). Each lot of your shares must be tracked separately so that you can properly report your gain or loss on each batch. You must calculate the basis for each share - including each fraction of a share - and report the sale of that fraction for the amount of cash you received for it. Again, Citi's management probably posted a full description of the transaction. (Let's Bingle for it: Oh, yes, for "citigroup reverse split", Bing gets over a half-million hits! The first one takes me to where I find this:

) There I see that it was a 1-for-10 split on May 9, 2011. So, just multiply your original basis per share FOR EACH LOT by 10 and apply that to report the gain/loss on your sale - on May 29, 2011 - of each fractional share. You'll need to report 3 small sales, with a different acquisition date and basis for each lot but the same sale date for all. Lots of little numbers, but neither Quicken nor TurboTax will mind. ;^}

Not quite the same rules as discussed above. MOST spin-offs are structured by the companies to qualify under the tax code as a "non-taxable" transaction. Usually, NO cash is involved in the spin-off itself, but you might receive a fractional share, which the company might arrange to sell immediately for you and send you the cash. You would need to follow the rules for allocating your original basis for shares in the whole company between your original shares in that shrunken "parent" company and your new shares in the new company that holds the spun-off assets. And then report the sale of your partial share, as usual.

Rules are rules - even when the amounts are small. And Quicken and TurboTax usually make the reporting easier than having to do all the calculations with pencil and paper. ; Thanks, Jeff

You're welcome - but remember, I've been retired for over 20 years and tax rules change on a daily basis, so be sure to check with your own CPA to be sure that my comments are still valid.

RC

-- R. C. White, CPA San Marcos, TX (Retired. No longer licensed to practice public accounting.) snipped-for-privacy@grandecom.net Microsoft Windows MVP (2002-2010) (Using Quicken 2012 Deluxe R 5 and Windows Live Mail in Win7 x64)

Hi, Jo.

Well, I did leave out a sometimes-significant part of that "return of capital" discussion.

If you paid $100 for your stock and then get an $80 ROC from it, there is no need to report that because there is no "taxable event". But, if you get ANOTHER $50 ROC from that stock next year, then you DO have a reportable event. Only the first $20 of that $50 is actually ROC; after the first $20 reduces your basis to zero, any further ROC that you receive is taxable - probably as a capital gain. And even a small ROC distribution on that stock in later years would be taxable. The same rule would apply to any ROC distribution on any stock that has a zero basis to you.

I should have made that clear earlier, but the OP said all the amounts involved were very small, so they probably did not need to be reported currently.

Thanks for the reminder, Jo. ; Hi, Jeff.

RC- If the government doesn't care about those ROP transactions, why are they downloaded from the brokerage houses into TT for Schedule D use? On my printed 1099, that section says that the information *is* being furnished to the IRS.... I understand how to treat it.. it nets out to 0 on Schedule D (after I fix the purchase date and cost basis that TT doesn't supply, at least this and previous years) and reduces my cost basis when I eventually sell the entity.. but I'd have to do a lot of deleting of the imported information to get rid of all the ROP items (I have a lot). I've always assumed (or read somewhere long ago) that the IRS used the Gross proceeds totals that you give to compare against the ones that brokerage house supplies them and they would question a discrepancy. Am I overthinking (and overworking)? jo

Thanks for replying. I know it is return of principle but it came down as part of the G/L download from the broker. So I was not sure how to enter it in TT. Since it downloaded I assume it also went to the IRS. So to avoid problems maybe I should just put the cost equal to the sale price resulting in no gain or loss to calculate.

Thank you again. I actually have it all in Quicken which I have been using for a long time. So I will work on it. Shame to put all this effort into less than $100.

Fortunately I have full records in Quicken and just need to calculate everything. I also asked my broker and he gave me all the relevant details (but not how to enter them in TT.......)

Jeff

this:

There I see that it was a>> 1-for-10 split on May 9, 2011. So, just multiply your original basis per>> share FOR EACH LOT by 10 and apply that to report the gain/loss on your>> sale - on May 29, 2011 - of each fractional share. You'll need to report 3>> small sales, with a different acquisition date and basis for each lot but>> the same sale date for all. Lots of little numbers, but neither Quicken nor>> TurboTax will mind. ;^}>>

That is precisely why I asked the question. This data downloaded from my broker and obviously also sent to the IRS so I need to deal with it in a way does not trigger problems.

Hi, Jo.

If you loan me $100 and I pay you back, would you report the loan? Would you report the payback?

That is essentially what happens when you buy a bond and receive the redemption proceeds. Good accounting requires you to RECORD both ends of the transaction. But, since no income is derived from either the loan or the payback, no TAX REPORTING is necessary.

While reporting all these zero-gain partial and full redemptions does no harm, it is not required. Only GAINS are included in the definition of "gross income". (Last time I looked, which was some years ago.)

RC

-- R. C. White, CPA San Marcos, TX (Retired. No longer licensed to practice public accounting.) snipped-for-privacy@grandecom.net Microsoft Windows MVP (2002-2010) (Using Quicken 2012 Deluxe R 5 and Windows Live Mail in Win7 x64)