Sold common Stock S Corp How to figure cost basis

[GWHouston]

My parents started a grocery store business in 1978.  Many years later, it was converted to an S Corp.  Years later, my parents  gifted myself and two siblings 10% (100 shares) each.  That was increased to 13% (130 shares).  In 2009, the 130 shares were redeemed and replaced with 100 shares.  No money was issued or required for the transaction.  In November of 2024, the 100 shares were sold to the S Corp for a cash value.  My question is how do I determine my cost basis for shares given, shares retrieved and replaced, and eventually shares sold to the corporation?

[DianeW777]

It starts with your parents cost of the shares which would be on their balance sheet a the time shares were created. Once the shares are gifted to  you, the cost basis for you is the same as it was in their hand. Only they can give you the cost basis at that time, that basis carries to every stock exchange going forward until sold.

There are two options, one is to do the research and if they had a tax professional do their books and tax returns, they may have an answer. If not, the other option is to put zero in for the cost basis. You can arrive at a reasonable amount by using the capital contributed by your parents at the time the stock was created.

[GWHouston]

Thanks for responding Diane

Coming up with the basis will have to be done through the corporate CPA but my intended question to be answered here was the retraction of the 13% stock with the reissue of 10% stock.  In my thinking, the original 10% (which was upgraded to 13%) was retracted in 2008 by the corporation and since i didn't realize a gain it changes the basis of my stock sale to the year it was reissued, 2009.  Am I thinking correctly?

[Mike9241]

since no gain or loss was reported on the retraction(?), your basis is what you paid PLUS income reported on all the k-1s you got LESS losses, deductions and distributions on those same K-1s. However, it's unclear what you mean by retraction. so, your basis in 2009 is probably not correct for determining gain or loss. 

[GWHouston]

Thanks for responding Mike. Our parents gifted us 10% stock around 1998. We were gifted an additional 3% around 2005. In 2008, my father took back the 13% and sold some of the shares(I’m really not sure what he did). He then in 2009 gave us 10% again. We never received any compensation for the 13%. Likewise we never paid for the 10%. It was a gift. Does this clear things up?  
Greg

[Rick19744 · Accepted solution]

Here are my comments:

• When your parents gifted you the stock, their stock basis in those shares gifted carry over to you at that time.
• Not clear on how you went from 10% to 13%, but if that increase was the result of a gift, then once again you get a carry over basis.
• In the meantime, you should have been tracking your tax basis in your S corp stock; begins with the gift, is then adjusted annually for the applicable lines on the K-1, and adjusted once again for the 3% increase.
• Your parent's basis at the time of the gift(s) does not come from the balance sheet.  It comes from their tax basis schedule they should have been maintaining.
• The change from 130 shares to 100 shares sounds like a recapitalization, with only limited facts.  In this case, your basis in the 130 shares would carry over to the newly issued 100 shares.
• Going forward, you should have been updating your tax basis annually as noted above.  This figure is now your cost basis.
• I might recommend a tax professional help you in this instance, but that individual will need all the information noted above to provide guidance.
• And lastly, no facts on the eventual redemption of stock.  The rules of family attribution could very well come into play so you need to make sure this is discussed with the tax professional. 

[GWHouston]

Thank Rick. Yes the 10,13, and last 10 were all gifts. And you are prob right that the 13 going back to the corporation was a recapitalization with the managing partners. We do have a corporate accountant and he will eventually come up with our basis however my father, also an accountant, did things in his own interest so we don’t have a running cost basis for any stocks. We wait to see what the damages are. 

[Rick19744 · Accepted solution]

You shouldn't have "damage" if you actually get cash.  You'll certainly owe tax, but that's always a given....

The key here is having some records to determine the basis at each juncture and the intervening year K-1's.

The taxpayer always has the initial burden of proof, as if no proof, the IRS will claim zero basis.

[GWHouston]

Damage was a colloquial term. Sure I will have taxes and I expect to pay them but the convoluted process to attain basis in our case is monumental. We have k-1’s through the years but what was given out to us was the amount to pay our taxes only, while my father used his RE as a personal slush fund. At his death, he had negative equity. We however had a substantial RE balance and the only way we could get access to our RE was to sell out to the managing partners. It wasn’t my preference but the sisters wanted their $. The Corp had to borrow to pay us the RE and the buy out. We were always along for the ride w no say so in the business conduct.