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

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

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

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

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. -- Rich Carreiro snipped-for-privacy@animato.arlington.ma.us
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raylopez99 wrote:

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). << ======================================================= >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2006) - All rights reserved. >> << ======================================================= >>
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Just to clarify: This is correct for gifts to people.
Gifts to charities have other rules. Gifts from businesses have other rules. -- Art Kamlet ArtKamlet @ AOL.com Columbus OH K2PZH
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raylopez99 wrote:

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
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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. << ======================================================= >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2006) - All rights reserved. >> << ======================================================= >>
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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
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raylopez99 wrote:

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. << ======================================================= >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2006) - All rights reserved. >> << ======================================================= >>
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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
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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. << ======================================================= >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2006) - All rights reserved. >> << ======================================================= >>
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raylopez99 wrote:

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
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raylopez99 wrote:

Then you're looking at the wrong publication. For starters, look at publication 950. ChEAr$, Harlan Lunsford, EA n LA
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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). << ======================================================= >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2006) - All rights reserved. >> << ======================================================= >>
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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
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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.

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.

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

You don't get to deduct a gift from income for income tax purposes unless the gift is to a qualified charity. Stu
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That's right: the stepped up basis occurs only on inherited stuff.

Inherited, not gifted otherwise.

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
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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).
-- Rich Carreiro snipped-for-privacy@animato.arlington.ma.us
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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?
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On Wed, 24 Dec 2014 15:34:31 EST, snipped-for-privacy@gmail.com wrote:

She does not put anything on Schedule D. That is assuming that she actually transfers the stock in kind.
Bob Sandler
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snipped-for-privacy@gmail.com wrote: : 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?
When I did this dquite a few years ago(so my information may be dated) I was instructed to value the gift at the fair market value, but ot give the basis of the gift to the recipient(or parent if child is too young) so that when the stock is sold in the future my basis woudl b the basis the recipient will use. No capital gains tax is due until the stock is sold by the recipient.
Wendy Baker
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