Back in the 1980's my company would annually set aside a small number
of shares of stock for its employees based on a predefined formula. In
1987, the company ended this program and distributed the shares. At
that time I received 2 shares in the form of stock certificates that
eventually turned into 18 shares due to splits. I now want to sell the
18 shares and would like to know how this should be reported on my
income tax since the original distribution (2 shares) was essentially
a gift from the company. Thanks.

Howdy eaglesfan-ga,

A reminder of the "Important Disclaimer: Answers and comments provided on
Google Answers are general information, and are not intended to substitute
for informed professional medical, psychiatric, psychological, tax, legal,
investment, accounting, or other professional advice."

This Internal Revenue Service (IRS) FAQ (Frequently Asked Questions)
addresses this issue.
http://faqs.irs.gov/cgi-bin/irsfaqs.cfg/php/enduser/std_adp.php?p_faqid=163

"What is the basis of property received as a gift?

To figure the basis of property you get as a gift, you must know its
adjusted basis to the donor just before it was given to you. You also
must know its fair market value (FMV) at the time it was given to you.
If the FMV of the property at the time of the gift is less than the
donor's adjusted basis, your basis depends on whether you have a gain
or loss when you dispose of the property. Your basis for figuring gain
is the same as the donor's adjusted basis, plus or minus any required
adjustments to basis while you held the property. Your basis for
figuring a loss is the FMV of the property when you received the gift,
plus or minus any required adjustments to basis while you held the
property."

In English, the above means that when you sell the shares, you will
pay capital gains (long-term, in your case, since you have held the
stocks for more than one year) on the difference between the basis
of the stock and the price you received when you sell the stock.

As the basis, or the cost of the stock to the donor (your employer)
was probably nothing, then you will owe capital gains tax on the
total amount received at the time you sell the stock.

You should ask your company if there is an adjusted basis other than
nothing on the stocks that were given to you, and if there is, then
you would owe capital gains on the difference between that adjusted
basis and the amount you receive at the time of sale.

If you need any clarification, please feel free to ask.


Search strategy:

Checked the IRS FAQs section.
http://www.irs.gov/faqs/index.html

Looking Forward, denco-ga - Google Answers Researcher

---

Clarification of Answer by denco-ga on 04 Sep 2005 15:00 PDT

A little bit more information on tax rates on the stocks when they are sold.
This is from the GainsKeeper web site.
http://www.gainskeeper.com/glossary_CapitalGainsTax.html

"As of May 6, 2003 (through 2008), the long-term capital gains rate has been
reduced to 15 percent for taxpayers in the 25 percent and higher income tax
brackets and to 5 percent for those in the 10 and 15 percent income tax
brackets."

Looking Forward, denco-ga - Google Answers Researcher