23 Dec Investing After Selling Losers, Investors Also Must Face Tax Nightmare
By LYNN ASINOF
Staff Reporter of THE WALL STREET JOURNAL
September 26, 2002 – As he watched the stock market plummet in mid-July, Jack Collins lost heart. On the day the stock market hit a four-year low, the retired Pfafftown, N.C., investor sold Lucent and AT&T Wireless shares spun off from the AT&T stock that he’d purchased years ago.
But he and other long-term investors who took part in this year’s sell-off have to deal with more than seller’s remorse. They’ve created a giant tax headache.
To protect their savings, many people dumped investments — or spin offs from investments — that they bought and then held for decades. In some cases, there are huge gains, but many have no idea what they paid for the stock they’ve sold. In order to calculate their taxes, they must now unravel the convoluted history of the stocks, many of which have had mergers, stock splits and spin offs over the years.
These corporate changes — which generated huge stock movements throughout the ’90s — have made it incredibly complicated to figure out what a share of stock was originally worth. Folks who bought Manufacturers Hanover stock in the 1980s now — after three mergers and two stock splits — own shares of J.P. Morgan Chase. Those who bought Time Inc. two decades ago have seen their shares become Time Warner and most recently AOL Time Warner.
And consider this: Someone who bought American can stock back in the 1970s would end up today with shares of both Citigroup and the insurance company Travelers Property Casualty. If he or she sells the Travelers, a portion of the original American Can investment is treated as the purchase price of those shares. But how much? Among other things, it depends on the fair market value of the stocks on the day of spin-off.
“It will be ugly,” says Norman P. Posner, an accountant with Samet & Co., Chestnut Hill, Mass., who is already girding for an onslaught of clients who need to reconstruct these records before filing their 2002 tax returns. People selling stock held more than a year must pay capital-gains taxes, typically 20%, on any profit over the original purchase price
No one knows exactly how many investors are affected. But John Markese, president of the American Association of Individual Investors in Chicago, says a huge wave of long-term investors sold into the nose-diving market. “I got far more calls in late July than I ever did in any other market downturn, including 1987,” he says.
The 3.7 million AT&T shareowners are the poster children for the tax-basis problem. In addition to adjusting for stock splits over the years, they also must deal with a litany of stock spin-offs and mergers that could leave a shareholder tracing as many as 19 different companies if they bought before the 1983 breakup.
“Please, please, on bended knee, don’t even think of selling,” AT&T shareholder Frances Corneaby of Robbinsdale, Minn., says her accountant told her. She knows she first bought shares of the old AT&T for about $300 in 1955, but can’t find the records. Now her investment has grown into a multi-stock portfolio valued in the mid-six figures. “I think it totally unreasonable of the IRS to expect us to have records 47 years old,” she says.
To make things worse, the IRS has a new compliance weapon that could make this year’s calculations particularly painful. In the past, investors who couldn’t come up with a cost have often guessed, and the IRS probably couldn’t figure it out any better. Now new software promises to help the IRS track trades back as far as 1962, making it much easier for them to spot mistakes. The software will debut as part of the IRS’s National Research Project, a spot-audit of 50,000 random taxpayers scheduled to launch this fall.
According to IRS rules, those who can’t come up with a proper cost basis have to calculate capital-gains tax as if the investment cost is zero and pay taxes on the entire proceeds of the sale.
People who don’t want to do that should start by contacting the company itself, since it may have detailed shareholder records. AT&T, for example, says its stock-transfer agent EquiServe can track information back to 1984 through a Social Security number or certificate number.
For those who want to do the work themselves, the AT&T Web site at http://www.att.com/ offers a detailed breakdown of corporate changes, complete with worksheets. A workbook titled “AT&T Tax Wizard,” currently available in paper form, provides an off-line tutorial for doing the calculations. Shareholders can get more information on the workbook at http://www.atttaxwizard.com/.
There are resources for shareholders of other companies as well. Glen Feeney of Maryland Heights, Mo., owns 216 shares of Emerson Electric as a result of an employee stock-plan purchase in January 1970, but no longer has the records. For the past three months, he has been trying to reconstruct his stock purchase and the history of company stock splits.
By using tools available on market-data Web sites, such as the Java charts at the brand-new http://www.prophet.net/, or the historical data at http://www.bigcharts.com/, it was relatively simple to find a split-adjusted Emerson stock price of $4.91 on Jan. 13, 1970.
In cases where there is no online information, people can revert to the public library, getting stock prices from old newspapers and then checking out stock splits and other changes in the CCH Capital Changes Reporter, which tracks all corporate changes back over 100 years.
That’s where Stanley Stein of Lauderdale Lakes, Fla., may end up as he tries to reconstruct the basis of his mother-in-law’s portfolio inherited from her husband in 1966. Mr. Stein has to tap her portfolio to pay for her care, so he sold 100 shares of AT&T in July. But there’s no supporting paperwork to establish basis. “She threw everything out,” he says.
There are, however, a couple of ways to get rid of stock without any such headaches. People who give appreciated stock to charity can get a tax deduction for the full market value of the stock.
Or they can take Mrs. Corneaby’s approach. Stocks get a new tax basis pegged to the date of death when the owner dies, and she plans to keep holding it. “Let my heirs figure it out,” she says.
Write to Lynn Asinof at email@example.com