Capital Gains Tax Question - Inheritance

[Engineer93]

Hello All,

I received a letter from the IRS last week stating that my 2016 taxes do not match their records. I'm most likely going to meet with a CPA but wanted to ask my question here first.

In August of 2012 I received stock from a relative put into my name through a generic trust company.  I had no clue about this stock until summer 2016.  Once I had full control I transferred said stock to Vanguard and proceeded to sell it all and re-invest in Vanguard index funds.  In August of 2012 the stock was worth ~$175,000 and in September 2016 when I sold it all it was worth ~$300,000.  On my 2016 tax reports I reported a gain of ~$125,000 to the IRS.  Now I have a CP2501 Notice from the IRS stating that Vanguard shows I have a gain of ~$300,000 and owe taxes on all of it. 

Do I just need to send something in with the date of August 2012 or is this way more complicated than that?

Thanks in advance!

[MDM]

Sorry to hear of the circumstances.

Start with Understanding your CP2501 Notice | Internal Revenue Service.

Some questions:
- Could you list all the information on the 1099-B you received from Vanguard regarding this sale?
- Please elaborate on "received stock from a relative put into my name through a generic trust company."  E.g., was the stock solely in the relative's name prior to death?  Did you receive a notice from the estate listing the value of the stock at the time of death?

[SeattleCPA]

Your basis probably wasn't the FMV on date you received but the donor's basis.

The FMV at date of receipt is only the basis when you sell at a loss and when the FMV when received is less than donors basis.

[Sibley]

When you say inheritance, did the person die, and then you got the stock? The way you phrased it, it doesn't sound like that was the case.

[SeattleCPA]

When you say inheritance, did the person die, and then you got the stock? The way you phrased it, it doesn't sound like that was the case.

Sibley's understanding or reading mirrors mine. I.e., no Sec. 1014 step-up in basis because stock was gifted.

[Engineer93]

When you say inheritance, did the person die, and then you got the stock? The way you phrased it, it doesn't sound like that was the case.

I believe some is an inheritance and some was given to me before their death.  I think I actually got the stock before 2012 but that's the earliest date I can find.  No records of when or where it came from and I have no one to ask because they have all passed away now.. 

[Sibley]

Well, then it's two different things.

1. Inheritance - whatever you received upon the person's death will have been stepped up in basis to FMV as of the date of death. (check that...I'm rusty)

2. Gift - you have the giftor's basis. So if they bought it for $10, and it's now worth $100, you'll pay taxes on $90 of gain.

You want to do your best to separate these things and determine cost basis on whatever was gifted.

[MustacheAndaHalf]

I'm not a CPA or tax lawyer, just an avid reader when it comes to the IRS.  I doubt you need a tax lawyer to fix an incorrect 1099-B, so consider looking up a CPA or enrolled agent instead.

It sounds like Vanguard can't possibly know the cost basis, yet both Vanguard and the IRS are claiming a $0 cost basis.  I think you should look for "cost basis" in 2 places:

First, in your Vanguard account.  Visit the "cost basis" area, and "realized gains", selecting the year you sold.  That should show you Vanguard's best information.

Second, the 1099-B.  I seem to recall a "taxable amount not determined" checkbox that I think should be checked in this case.  It may say $0 for cost basis, but Vanguard can't stand behind that answer.  You might get some mileage out of having Vanguard correct their 1099-B form, which in turn would update the IRS information on the matter.

I suggest those because those are easy steps with information you probably already have.  You also need to track the money back from Vanguard to the prior company, where you received the shares.  Ideally, you would ask them for "cost basis" information on the shares you transferred to Vanguard (ideally, Vanguard would have this information already).  Failing that, maybe you can get annual account statements for 2012, 2011, ...  as far back as you think useful.

There will probably be costs involved to get that prior company to reproduce old records - but it's worth it compared to what the IRS wants to extract from you.  I think consulting with someone will be much more productive if you've managed to get some of the records in advance, so give that a try.

[Sibley]

Again, I'm rusty, but I do remember inputting cost basis information from a separate source other than the 1099 when it wasn't on the 1099. That was at a CPA firm, in the tax department, at the direction of the manager of what to do. So as long as you have the documentation of cost basis, you should be able to just input it, and if the IRS questions the discrepancy from the 1099 just provide the additional documentation.