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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4532
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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My stock broker would not execute a purchase of a penny stock

Customer Question

My stock broker would not execute a purchase of a penny stock the second time I tried to buy. So I asked my adult son to open an account with the same broker and purchase the penny stock for me. I gave him $25,000 to buy the stock and he did so under his name and SSN. Now the stock is worth $250,000 and I need to know if I am responsible for the tax leagally or is he? And should I ask the IRS for their opinion?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Lane :

Hi again ...

Lane :

The way the IRS will see this is that you gifted your son 25,000 (which, as I said before, WILL require that you file a gift tax return, because the amount is over the $14,000 annual exclusion on gift taxes) BUT it's nowhere near the five million, plus, lifetime exclusion

Lane :

If he opened the account in his name and social security number, the brokerage frim will publish a 1099 for any dividends or interest ... and if there's been no sale yet that's it ... but any 1099 upon sale or dividends or interest will be sent to your sone (along with the copy to IRS)

Lane :

So, again, if he has not yet SOLD the stock and if there have been no dividends or interest .... his 1099 for the account will show nothing

Lane :

Now, if the EXPECTATION was that you expected that he give you the account then what you have here, once the account is transferred back to you is a capital gain (on your part) But until you take some action here (Again IRS will determine how it is treated based on the facts and circumstances, i.e., you expected to receive the stock back from your so, which would be a capital gain for you)

Lane :

No taxable event has happened .. (to finish that thought) Your son simply has an account with 250,000 of stock ... once money changes hands (he sells it and keeps it ... or he gives it back to you because that was the expectation - thereby making this a transaction, an exchange, rather than a gift)) THEN there will be a taxable event ... in these two scenarios a gapital gains for him (if he sells) ... or a capital gains for you ( if her returns it because that was the expectation)

Lane :

If you do nothing, and do not want the money back, and are willing to characterize this as a gift you essentially have a non-event (other than technically needing to completel a gift tax form, IRS form 709, documenting the gift

Lane :

Questions?

Lane :

Still with me?

Lane :

What Does the IRS Consider Reasonable Cause?


The IRS gives a long list of events that will be considered for reasonable cause. They are:



  • Ignorance of the Law (you must demonstrate you made a reasonable effort to learn the law though)

  • Error or Mistake was Made, but you must still show "due diligence, ordinary business care and prudence" have been exercised.

  • Forgetfulness, but you must still show "ordinary business care and prudence"

  • Serious Illness, Death, or Unavoidable Absence

  • Unable to Obtain Records

  • Incorrect Advice from a competent tax professional

  • Incorrect advice directly from the IRS, written or oral.

  • Fire, Casualty, Natural Disaster, Other Disturbance

  • Acts of God


The Internal Revenue Manual goes on to say that any reason will be accepted as reasonable cause if it can be shown that the taxpayer exercised ordinary business care and prudence and, despite that, was still not able to comply with their tax obligations.

Lane :

Sorry, that was on my clipboard from pasting it in for another client ,,, But it COULD apply here

Lane :

WHat needs to happen HERE is that you need to determine what you intent was ... if it was to give the money with no expectation of anything it was a gift

Lane :

IF it was done so that your son could BUY the stock FOR YOU, then you need to have the account put back in your name

Lane :

Because once the stock is sold you WILL have a taxable event

Lane :

I still don't see you coming into the chat session, so I'll move us to the "Q&A" mode. … Maybe that will help … (We can still continue a dialogue there, just not in real-time chat, as we can here)

Lane :

PLease, again, if you'd like to provide more detail or drill down on this some more, or ask additional questions let me knowlet me know

Lane :

Lane

Expert:  Lane replied 1 year ago.

Hi Fred,

 

Just checking back in HERE, as I never saw you come back into the chat

 

Our chat has ended, but you can still continue to ask me questions here until you are satisfied with your answer. Come back to this page to view our conversation and any other new information.

What happens now?

If you haven’t already done so, please rate your answer above. Or, you can reply to me using the box below.

 

But again, let me know if you have more questions

 

Lane

 

Expert:  Lane replied 1 year ago.
Hi Fred,

Again, let me know if you want to dig into this.

And to answer one of your other questions, you could always ask the IRS about this ... but in my experience, when you talk to the front lines, you get varied answers, especially on an issue like this.

You can ask for a private letter ruling, but that gets VERY expensive.

BotXXXXX XXXXXne here .. it's either a gift or an exchange ... and the gain will manifest when the stock is sold.

let me know...'

Lane

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Lane
Lane
JD, MBA, CFP, CRPS
3661 Satisfied Customers
Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986