Q: Three years ago my wife and I invested $5,000 in a common stock, and the company is now in Chapter 11. In October, the bankruptcy court gave the company a six-month extension to come up with a reorganization plan. Our broker has given us a letter saying there is no market for the stock; he says we can count it as a loss in either 1985 or 1986, assuming of course there is still no market in 1986. Can we count this as a complete loss on Schedule D of our tax return?
A: Under these circumstances, you do have a capital loss (but it will be long term, so actually you end up deducting only 50 percent of the loss on your tax return). Your broker is right -- because of the court extension, you can claim the loss either for 1985 or 1986.
The reasoning works like this. If you (and your broker) believe the company will not be successful in refinancing and was, in effect, down the tubes when it filed Chapter 11, your loss is taken on Schedule D as if you had sold the shares for a zero price on Dec. 31, 1985. (If you should get some kind of payoff later, report it as income -- to the extent of the loss claimed -- in the year received.)
If, on the other hand, you have some faith in a successful reorganization, then you can skip any claim in 1985 and wait to see what happens. If the reorganization attempt fails and the shares are still worthless next spring, then you have a long-term loss as of Dec. 31, 1986.
Considering the Chapter 11 filing and the broker's letter, I would be inclined to take the loss in 1985 on the theory that whether or not new tax legislation is passed, tax rates will be lower in 1986 than 1985, so a loss is worth more. In addition, you get the tax reduction -- and use of the money -- a year earlier.
Q: My parents owned land in New York state since the 1950s. Last year, they transferred title to their three children (and spouses) as a gift; there were no tax consequences at the time to any of us. Recently the land has been sold, and the proceeds will be distributed to the joint owners shortly. What is the cost basis of the property for the purpose of calculating capital gain?
A: Your basis in the property for figuring capital gain is the donor's adjusted basis at the time of the gift (split into fractional shares, of course, for each of the donees). If gift tax had been paid, then your basis would be the donor's adjusted basis increased by the part of the gift tax attributable to the appreciation in value since the donor's acquisition of the property (because gift tax would have been based on current fair market value rather than basis).
As with so many tax rules, there is an exception. If the fair market value on the date of the gift was less than the donor's basis (probably not true in your case), you still would use the donor's basis to figure a capital gain, but you would use the fair market value on the gift date as your basis if there had been a loss on the subsequent sale.
Q: I operate as a sole proprietorship with a Keogh plan that I established 11 years ago. I was 70 1/2 in August 1984 and received my first distribution from the Keogh plan last year. Recently, I attended a conference at which I learned that Keogh distributions had to begin by April 1 of the year following the year the participant reaches 70 1/2 or retires -- whichever is later. An IRS representative at the conference was of the opinion that I would not have to take a distribution for 1985, but wasn't certain of her position. The sponsor of my plan (a local S&L) says I must continue taking the annual distribution because I am more than a 5 percent owner. Which is the correct answer?
A: The people at the S&L have it right. A 5 percent or more owner does not have the option of waiting until retirement to begin distributions from a Keogh plan, but must start by April 1 of the year following the year in which he reaches 70 1/2. Of course, as a sole proprietor, you are more than a 5 percent owner and therefore must continue with the annual distributions you started last year.