Two years ago I transfered shares of stock to a friend in exchange for a personal loan. At the time I had a substantial paper loss on these shares but did declare it since my friend agreed to return them when I repaid the loan. I repaid the loan and now the brokerage house states they cannot return the shares in my name. The stock has risen and I want the shares sold. If my friend sells them he has a taxable event. How might I best work this situation out.
in article snipped-for-privacy@b38g2000prf.googlegroups.com, researcher at snipped-for-privacy@gmail.com wrote on 3/12/09 9:28 PM:
What do you mean you declared the loss when you transferred the shares. If they were not sold, there is no loss. Did you sell them or give them away?
The donor basis and holding period of the shares becomes the recipient's basis. If you had a formalized loan in which the shares were pledged as security, the title to the shares would not have changed. Since it did, you essentially gifted the shares to him. If it was more than the exemption, a gift tax return might have even been appropriate.
To get the shares back, he has to initiate the transfer because they are his shares. If he is unwilling to do that, you are up the creek. There should be no reason why your friend cannot give the shares back to you. If he does, they will have the same basis they had when you gave them to him.
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You should have had a brief talk with a lawyer and done this transaction properly in the first place. That would have been to give your friend a security interest in the stock, not current ownership. That would have allowed him to use the stock to pay himself back if you defaulted. But the stock would stay in your name if you paid him back as you should have.
Since you didn't do that, I'd treat it as if you had done that. For that, your friend should have the stock transferred back to you, and then treat it as if it was always in your name. If the IRS ever comes knocking, tell them that the stock was being held by him, in trust for you, as security for a loan, and that it was transferred back to you when the loan was paid off. That would be proper and legal justification, though whether the IRS would buy it is another story.
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