Accepted Answer

Hi again

Yes, there are certain situations where the redemption of preferred stock is a non taxable event. See below:

The redemption premium is not a constructive distribution, and therefore is not taxable, in the following situations.

1. The stock was issued before October 10, 1990 (before December 20, 1995, if redeemable solely at the option of the issuer), and the redemption premium is “reasonable.” (For stock issued before October 10, 1990, only the part of the redemption premium that is not “reasonable” is a constructive distribution.) The redemption premium is reasonable if it is not more than 10% of the issue price on stock not redeemable for 5 years from the issue date or is in the nature of a penalty for making a premature redemption.

For the inherited stock, which has been held for more than 5 years, this rule might apply, but you will need to know what the stock was purchased for.

2.The stock was issued after October 9, 1990 (after December 19, 1995, if redeemable solely at the option of the issuer), and the redemption premium is “ de minimis.” The redemption premium is de minimis if it is less than one-fourth of 1% (.0025) of the redemption price multiplied by the number of full years from the date of issue to the date redeemable.

You will need to check with a broker or on a web site that can give you the history of the cost of the stock. This is possible, but people normally don't sell for so little gain or at a loss unless they need the money presently, or need the loss for a tax write off.

3.The stock was issued after October 9, 1990, and must be redeemed at a specified time or is redeemable at your option, but the redemption is unlikely because it is subject to a contingency outside your control (not including the possibility of default, insolvency, etc.).

Again, you will need to check with a broker to see under what terms the stock was purchased.

4. The stock was issued after December 19, 1995, and is redeemable solely at the option of the issuer, but the redemption premium is in the nature of a penalty for premature redemption or redemption is not more likely than not to occur. The redemption will be treated under a “safe harbor” as not more likely than not to occur if all of the following are true.

1. You and the issuer are not related under the rules discussed in chapter 4 under Losses on Sales or Trades of Property , substituting “20%” for “50%.”

2. There are no plans, arrangements, or agreements that effectively require or are intended to compel the issuer to redeem the stock.


3.The redemption would not reduce the stock's yield.


Please note that this last one, like the others, has a specific purchase date, in this case after Dec 19, 1995.

It is certainly possible that some or all of the stock your mother has will fit into one of the above categories, and maybe I just live in the wrong area, because I've never see one. Please check with a stock broker to be sure that your are within IRS regs listed above, because if you're not, then you will handle this as I stated above.

I hope this helps.


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Expert:	Anne
Pos. Feedback:	100.0 %
Accepts:
Answered:	7/17/2009

Master Tax Preparer

Enrolled Agent with 20 Years Experience specializing Individual and Small Businesses