Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, January 24, 1994 TAG: 9401220042
SECTION: MONEY PAGE: A-10 EDITION: METRO
SOURCE:
DATELINE: LENGTH: Long
I have three children, and I promised them that I would share the proceeds from the sale equally among them.
I expect to get about $100,000 for the house, which means each child will get about $33,000.
I know that I can give $10,000 to each child as a gift without federal taxes. Will they have to declare the extra $23,000 as income and pay taxes on that amount, or will it be tax free?
Two of the children are going to join forces and put the money into building a new house, and I will move in with them.
A: Because you did not state otherwise, I will assume that you are not married. If you are married, the answer will be essentially the same, except that the gift limits are higher and filing requirements may be different.
Assuming that you are single, the children will not have to reflect any of the $33,000 gift as income on their income tax returns, and they will not be subject to any type of tax on this money.
However, if you make a gift in excess of $10,000 per recipient in any one tax year, will be required to file a gift tax return, Form 709. You will probably not have to pay any gift taxes because the amounts over $10,000 per recipient in any one year will merely reduce your lifetime limit of $600,000.
An additional option is to give each child $10,000 per year over the next three years and $3,000 in the fourth year. This will keep you from being required to file any gift tax returns.
If you have made prior gifts and/or have substantial assets over and above the house, I would recommend that you talk to a certified public accountant or tax attorney as soon as possible to educate yourself so that you do not inadvertently create estate or tax problems.
Answered by J. Patrick Budd of Budd, Ammen & Company.
Exchanging debentures for warrants
Q: In May 1986, National Gypsum Co. merged with Aancor Acquiring Corp. Because of this, I had to surrender my 672 shares of stock. I received $44 per share of stock (a total of $29,568) and a $29,000 stated face amount of subordinated redeemable discount debentures due in 2004.
For the years 1986 through 1990, I received a form 1099-OID (for original issue discount) for various amounts, which I reported on Schedule B.
National Gypsum filed for bankruptcy protection Oct. 27, 1990, and there was nothing to report for the years 1991 and 1992.
The plan of reorganization was satisfied as of July 1, 1993, and I had to surrender my $29,000 bond in November when I received 114 shares of warrants. These warrants have an exercise price of $14.50 a share for the company's new stock.
This will cost me $1,653. I have reported on Schedule B a total amount of $13,031.95 on which I have paid taxes at 33 percent.
Can I reclaim any of these taxes that I have paid since I never received any interest at all? Also, please advise me the best way to handle the warrants. I have not done anything with them.
A: The Capital Changes Reporter, published by Commerce Clearing House, shows that on April 29, 1986, one share of National Gypsum stock was exchanged in a taxable transaction for $46 cash and $44 worth of an original issue discount debenture.
In 1986, the gain was to be computed by comparing the cash and the market value of the debenture received with the basis of the stock surrendered. The basis of the debenture received is to be fair market value which was, in counsel's opinion, 52.0625 percent of the face value. Therefore, the fair market value of the $29,000 debenture received was $15,098.
To determine the basis of the debenture as of July 1, 1993, the date the U.S. Bankruptcy Court accepted the company plan, you need only to add the original discount interest that you have paid tax on to the basis of the debenture received. Therefore, the basis of the debenture is $15,098 plus $13,031, the total OID interest received, for a total basis of $28,129.
The Reporter states that the company has received a ruling from the IRS that the exchange of the debenture for warrants is a taxable event, resulting in a gain or loss. Comparison of the market value of the warrants received with the basis of the debenture received will determine the gain or loss.
The Reporter said for each $1,000 of debenture, 3.941645 new warrants will be issued. Each warrant is exercisable for the purchase of one share of stock at $14.50. Therefore you received 114 warrants each valued at $14.50 for a total value of $1,653.
Comparison of the basis of the debenture, $28,129, to the value of the warrants received, $1,653, results in a long-term capital loss of $26,477. This loss may be used to offset other long-term capital gains incurred during 1993. Any loss not absorbed that exceeds the deductible limits of $3,000 ($1,500 for married couples filing separately) may be carried over to later years indefinitely until it is absorbed.
The basis of each warrant is the market value of $14.50.
Answered by Gary Duerk of Brown, Edwards & Co.
Tax-related questions from our readers are answered by members of the Roanoke chapter of the Virginia Society of Certified Public Accountants. This feature runs every Monday on the Money Page through mid-April. Please send your questions to Tax Questions, Roanoke Times & World-News, P.O. Box 2491, Roanoke 24010.
by CNB