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How to Give a Departing Member a Fair Share

Rules Vary for Transferring the Cost Basis of Stock Withdrawals

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Previously I’ve written in general about cost-basis assignment to stocks when they’re transferred to a member in a withdrawal. Some treasurers have asked for details of the process. The rules can be a bit complex and differ for partial withdrawals and full withdrawals. The easiest case is a partial withdrawal. The club’s cost basis in the stocks is transferred to the member withdrawing.

Multiple factors come into play for a full withdrawal. The first item considered is whether the member’s cost basis in the club is less than or greater than the club cost basis in the stocks transferred. If the member’s adjusted cost basis in the club — after adjusting for current year earnings and cash re­ceived — is greater than the cost basis of the securities being transferred, the club’s cost basis will need to be adjusted up to get the basis for the withdrawing member. If the member’s adjusted basis is less than the cost basis of the transferred stock, the club’s basis in the stocks will be reduced.
How is the club’s basis adjusted to get the member’s basis in the stocks?
If the club’s basis needs to be higher, the increase is applied first only to transferred stocks that have an unrealized gain to the club. The amount each stock basis is increased is proportional to the gain on that stock to the total gain on all stocks with a gain to the club.
If the increased amount is greater than the total unrealized gain on transferred stock, the remaining increase is apportioned to all stocks in proportion to their fair market value at transferal. Notice that the increase isn’t proportional to the total gain on all stock transferred, but only to those that have a gain. Stocks with a loss wouldn’t be adjusted at all.

Stocks With Unrealized Gains

Similar rules apply for a reduction in stock basis, with only stocks with unrealized losses adjusted first. Stocks with unrealized gains wouldn’t be adjusted unless the total adjustment needed is greater than total unrealized losses of those stocks with losses.
Below is a detailed description of the steps involved in increasing the club’s cost basis to find the member’s cost basis in the transferred stocks.

Figuring It All Out

The situation: Withdrawing member’s cost basis in the club is greater than the club’s cost basis in the transferred stocks.

1.    Adjust only the cost basis of blocks that have a gain to the club. Any shares that would result in a loss to the club at transfer time don’t have their cost basis adjusted.

2.    To adjust the shares that have an (unrealized) gain, first calculate the individual gains from each block.

3.    Next add the individual gains from step 2 to find the total gains, but only from blocks that have gains. Don’t include any blocks that have a loss in this calculation.

4.    Calculate the ratio each block contributes to the total gain: block’s gain/total gain.

5.    Find the amount the member’s basis needs to be ad­justed. This will be: (member’s adjusted basis in the club) – (club’s cost basis in the transferred shares).

6.    Multiply the total adjustment needed (step 5 re­sults) by each block’s ratio of the total gain (step 4 re­sults) to calculate the adjustment needed for each block.

7.    Add the needed adjustment calculated in step 6 to the club’s cost basis in each block to find the member’s cost basis in that block of transferred stock.

Find Help Online

A spreadsheet of the process is being posted to the myiclub.com site so that anyone interested can play with these different scenarios.

Russell Malley is the Club Accounting Adviser for ICLUBcentral.

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