Stocks

<div class="Section1">A stock split is treated in the same manner as a stock dividend.<a href="#_ftn1" name="_ftnref1">¹</a> Therefore, a stock split is generally a nontaxable event for the shareholder (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7509">7509</a>). The tax basis and holding period of the &ldquo;new&rdquo; stock received in a stock split is determined as discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7510">7510</a>.<div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC &sect; 305(a).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> If a taxpayer enters into a short sale of property and the property becomes substantially worthless, a special rule requires that the taxpayer recognize gain in the same manner as if the short sale were closed when the property became substantially worthless.<a href="#_ftn1" name="_ftnref1">¹</a> (To the extent expected to be provided in future regulations, this rule will also apply with respect to options and offsetting notional principal contracts with respect to property, any future or forward contract to deliver property, and any similar transaction.)<br /> <br /> Special rules are provided regarding the statute of limitations for assessing a deficiency if property becomes substantially worthless during a taxable year and any short sale of property remains open at the time the property becomes substantially worthless.<a href="#_ftn2" name="_ftnref2">²</a> For an explanation of the taxation of stock or other securities that become worthless, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7540">7540</a>.<br /> <br /> The definition of &ldquo;substantially identical stock or securities&rdquo; for purposes of the short sale rules is the same as that used for purposes of the wash sale rule, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7528">7528</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7539">7539</a>. It would appear that the same definition would be used for purposes of constructive sales of appreciated financial positions, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7617">7617</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7621">7621</a>.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC &sect; 1233(h)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. IRC &sect; 1233(h)(2).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> &ldquo;Arbitrage operations&rdquo; are transactions involving the purchase and sale of stock or securities (or the right to acquire stock or securities) entered into for the purpose of profiting from a current difference between the price of the property purchased and the price of the property sold. The property purchased must either be identical to the property sold (e.g., stock X trading for different prices on different exchanges) or must entitle the owner to acquire property that is identical to the property sold (e.g., bonds convertible into stock X). To qualify as an arbitrage operation for purposes of the short sale rules, the taxpayer <em>must</em> properly identify the transaction as an arbitrage operation on the taxpayer&rsquo;s records as soon as the taxpayer is able to do so; ordinarily, this must be done on the day of the transaction. Only property properly identified as such will be treated as property acquired for arbitrage operations.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> Property that has been properly identified as acquired for arbitrage operations will continue to be treated as such even though, because of subsequent events, the taxpayer sells the property outright rather than using it to complete the arbitrage operation.<a href="#_ftn2" name="_ftnref2">²</a> See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7534">7534</a> as to the effects of disposing of such property without closing a short sale that was entered into as part of the arbitrage operation.<br /> <br /> It is unclear whether an arbitrage operation may be subject to treatment as a conversion transaction (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7615">7615</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7616">7616</a>) or whether it may constitute a constructive sale of an appreciated financial position (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7617">7617</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7621">7621</a>).<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC &sect; 1233(f); Treas. Reg. &sect; 1.1233-1(f)(3).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. Treas. Reg. &sect; 1.1233-1(f)(3).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> No special tax rules apply if an investor realizes a <em>gain</em> in a wash sale of stock or other securities; rather, the sale will be taxed under the rules peculiar to both the type of disposition and to the particular stock or security sold. For the taxation of gain on treasury bills, bonds and notes, and municipal bonds, see respectively Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7626">7626</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7632">7632</a>, and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7663">7663</a>. For taxation of gain on corporate obligations, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7628">7628</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7635">7635</a>. For taxation of stock, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7517">7517</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7522">7522</a>.<br /> <br /> On the other hand, to the extent that shares of stock or securities sold are replaced in a wash sale (as defined in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7536">7536</a>), any <em>loss</em> realized on the stock or securities sold may <em>not</em> be recognized for income tax purposes and, therefore, may not be used to offset capital gains or otherwise deducted. However, if the quantity of the stock or securities sold at a loss exceeds the quantity replaced, the loss realized on the excess shares or securities may be recognized as a capital loss for income tax purposes.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC &sect; 1091(b); Treas. Reg. &sect; 1.1091-1(c); Rev. Rul. 7031, 1970-1 CB 171.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> No. Without the transfer of the underlying stock, a gift or gratuitous assignment of future dividends will not shift the taxability of the dividends away from the owner of the stock.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> The bona fide sale of future dividends for good and sufficient consideration will result in the dividends being taxed to the purchaser and not the shareholder; but this will accelerate rather than reduce the shareholder&rsquo;s tax since the net sales proceeds must be reported by the shareholder-seller as ordinary income in the year of the sale.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. See <em>Van Brunt v. Comm.</em>, 11 BTA 406 (1928); <em>Lucas v. Earl</em>, 281 U.S. 111 (1930).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.<em> Estate of Stranahan v. Comm.</em>, 472 F.2d 867 (6th Cir. 1973).<br /> <br /> </div></div><br />

<div class="Section1">A dividend paid in bonds, notes, or other obligations of the distributing corporation is treated as a dividend &ldquo;in kind&rdquo; and the obligations are treated as property received in a dividend distribution.<a href="#_ftn1" name="_ftnref1">¹</a> See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7503">7503</a> for the taxation of dividends &ldquo;in kind.&rdquo;<div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. See IRC &sect; 317(a); Treas. Reg. &sect; 1.317-1.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> A <em>stock dividend</em> is a dividend paid in shares of stock of the distributing corporation to its shareholders with respect to its outstanding stock. A distribution of stock to compensate the recipient for services rendered, for goods provided, or in payment of a debt is not made with respect to the distributing corporation&rsquo;s outstanding stock and, therefore, is not a stock dividend.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> A distribution of stock warrants (or other rights to acquire stock of the distributing corporation) is treated in the same manner as a stock dividend so long as the distribution of such warrants is made with respect to the corporation&rsquo;s outstanding stock (and not as compensation for services, etc.).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> A distribution of stock of the distributing corporation made with respect to outstanding stock rights or convertible securities of that corporation to the owners thereof will also qualify as a stock dividend.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC &sect; 305(a); Treas. Reg. &sect; 1.305-1.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. See IRC &sect; 305(d); Treas. Reg. &sect; 1.305-1(d).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. IRC &sect; 305(d).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> If a warrant to acquire stock in the distributing corporation is acquired in a dividend distribution, taxation to the recipient-shareholder depends on whether the dividend is taxable or not (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7509">7509</a>). If it is a nontaxable stock dividend, there is no immediate income taxation. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7511">7511</a> to determine the tax basis of a warrant acquired in a nontaxable stock dividend. If the dividend is taxable, it is treated as a dividend &ldquo;in kind,&rdquo; so that the amount that generally must be included in the recipient-shareholder&rsquo;s income is the fair market value of the warrant on the date of distribution.<a href="#_ftn1" name="_ftnref1">¹</a> This is also the warrant&rsquo;s tax basis (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7503">7503</a>).<br /> <br /> If a corporation distributes a warrant to acquire stock in another corporation, it is also taxed as a dividend in kind. The basis of the warrant to an individual shareholder is its fair market value, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7503">7503</a>.<br /> <br /> If a warrant is acquired through purchase, gift, or inheritance, there are no immediate income tax consequences. The tax basis of a warrant acquired in this manner is determined under general rules discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="692">692</a>.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. Treas. Reg. &sect; 1.305-1(b).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> The term &ldquo;wages&rdquo; excludes remuneration received on account of the following: (1) a transfer of a share of stock to any individual pursuant to an exercise of an incentive stock option; or (2) any disposition by the individual of such stock. The exclusion applies to stock acquired pursuant to options exercised after October 22, 2004.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> Proposed regulations had provided that an individual exercising an incentive stock option would receive wages for FICA and FUTA purposes. However, in 2002, the IRS announced that until further guidance was issued, the Service would not assess the FICA or FUTA tax, or apply federal income tax withholding obligations, upon the exercise of the option or upon the disposition of the stock acquired by an employee pursuant to the exercise of an option.<a href="#_ftn2" name="_ftnref2">²</a> In AJCA 2004, Congress codified the exclusionary rule, above.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC &sect; 3121(a)(22); Act &sect; 251(d), AJCA 2004.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. REG-142686-01, 66 Fed. Reg. 57023 (11-14001); Notice 2002-47, 2002 CB 97. See also Notice 2001-72, 2001 CB 548, Notice 2001-73, 2001 CB 549.<br /> <br /> </div></div><br />

<div class="Section1">If the transfer of stock to an individual upon exercise of an incentive stock option was a <em>qualifying transfer</em> (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7546">7546</a>), then no taxable event occurs until the stock is disposed of.<a href="#_ftn1" name="_ftnref1">¹</a> At the time of disposition, the general rules for treatment of a sale of stock will apply; thus, the taxpayer will recognize capital gain or loss to the extent of the difference between the sale price of the stock and its adjusted basis. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7517">7517</a> regarding the sale of stock, and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="702">702</a> for an explanation of the treatment of capital gains and losses.<div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC &sect; 421(a).<br /> <br /> </div></div><br />