Transcripts

"Kevin McCormally's Tax Tips"-Partial Shares of Stock

SUZANNE PRATT: Just over four weeks to go now until your Federal income tax return is due back in Uncle Sam's hands. So to help your filing efforts, every Monday night we're back with our annual tax tip series. Kevin McCormally, executive director of "Kiplinger's Personal Finance," is our tax expert. Tonight he looks at the pesky problem of partial shares of stock.

KEVIN MCCORMALLY, EDITORIAL DIR., "KIPLINGER'S PERSONAL FINANCE": One of the many niggling little tax hassles that drive investors crazy is how to deal with what's called "cash in lieu." That's what happens when a company you own is taken over and you get shares of a new firm plus a little check for "cash in lieu" of a partial share. Say that 100 shares of company A entitled you to 50.75 shares of new company B. Since it's tough to parcel out three-quarters of a share, you get 50 shares and a check. If company B is selling for $40 a share, for example, you'd get $30. Do you have to pay tax on it? Of course you do.

And here's the hassle. The IRS expects you to treat this as though you sold the fractional share in the open market. There are two ways to handle this. The hard way demands that you figure your basis in the partial share, based on what you paid for your old company stock. If your basis in the original 100 shares was $1,000 or $10 a share, your basis in the new stock is still $1,000, but now it's spread over just 50.75 shares for a basis of $19.70 a share. That means your three-quarters of a share has a basis of $14.78. Subtract that from your $30 cash in lieu and you know your taxable capital gain is. Whew.

The easy way: just report your basis as zero, and pay capital gains tax on the full $30. That'll cost you a whopping $4.50 -- a small price to pay to avoid the cash in lieu mess. And because you don't use that $15 of basis this year, you can use it when you ultimately sell the stock. That will cut the tax bill at that time by, you go it: $4.50. I'm Kevin McCormally.