Expert: Don Sadler - 7/18/2006

Question
Hi,  My domestic partner became psychologically disabled in 2001 (he's been on social security disability since 2003).  Because of his gradually deteriorating condition he hadn't filed taxes since 1997 so IRS is about to levy his disability benefits.  Therefore, I'm doing his taxes for him for all those years.  He sold some stock here and there over the years and we have the information for that.  The information regarding how much he bought it for is lost however.  He worked at Intel so this was employee-owned stock for the most part.  Intel doesn't have the info because they contracted this part of their bookkeeping out.  The independent contractor lost it or can't find the information either.  His broker has no records that old as well.  Therefore, IRS is threatening to treat all those sales as capital gains unless we can provide this information.  Without it makes it appear that he owes more tax than he really does. We are going to try to negotiate a smaller tax amount and payment schedule with IRS but they still want to see the returns and we would at least like them to be accurate and based on our numbers -- not their's.  To require him to sign an inaccurate tax return does not seem right.  Is there a way that we can try to estimate this information -- for instance find out the average selling price for the stock during the years in which he bought it?  If so, do you know where we could find that information or how we could back it up? Or do you know if there anything in the code that advises what to do in a situation such as this?  Thanks in advance for your time and consideration.
Judy Kennedy


Answer
First, I am not a tax specialist at all so take my advice with a grain of salt.  My advice comes from practical experience as I have faced similar issues.

Second, relax… this is not as bad as it seems.  The IRS will tax the capital gain to be sure and the challenge is to determine what the capital gain is.  In the absence of a “buy” price, the IRS assumes it was free; hence the sell price represents 100% capital gain.  This is analogous to losing your ticket in a parking garage and having to pay the maximum hourly amount.

Now, with respect to determining the capital gain you actually have that is taxable.  You need to find out the following:

1) Was the stock actually free? For example, a signing bonus, profit sharing, annual bonus.

2) Was it purchased as part of an employee stock purchase plan? (HR should have that kind of benefit information even if they don’t have the prices of the stock).  If so, was it at the market rate or discounted and was there a commission (again, HR should have this information)?  Often a company will let employees invest $X monthly to buy stock at the market price without any broker commission.  Sometimes the company will sell stock to employees at market - X% either with or without a commission.  In any case, this is info the HR dept should be able to tell you.

Now, once you have established the actual buy price, you need to adjust it for splits, and so on… for example, if stock was purchased in 1975 for $90/ share and it has spit 2:1 once and 3:1 another time, the actual buy price (known as the “cost basis”) becomes $90/2 = $45 then $45/3 = $15.  Now you know the cost basis is $15/share and if the stock was sold for $50 then $50-$15 = $35 capital gain.

You can find the historical Intel prices at the link below and this should get you on your way.  

http://finance.yahoo.com/q/hp?s=INTC

You might also consider looking into the services of a tax resolution specialist.  They are “bounty hunters” in the sense that they normally charge X% or whatever they save you by interceding with the IRS on your behalf.  Sometimes the savings can be substantial and it is free to inquire of them about whether or not they can help you.  Here is a Google link where you can start looking:

http://www.google.com/search?num=100&hl=en&lr=lang_en&as_qdr=all&q=+%22tax+dispu...

I hope this is helpful to to you and I would appreciate any feedback you have to offer regarding my advice.

Good luck to you and your partner.