02 Oct Cost basis for dividend reinvestments

Q. When Prudential Insurance Company went through demutualization, I received shares of stock. The shares were held by Compushare and I was receiving dividends as there was no dividend reinvestment program. I later moved the shares to a brokerage account and dividends are reinvested, but my brokerage statements show no cost basis. I originally had 116 shares and now it’s about 124 with a fractional amount. Was there any tax liability on original shares? And what about on the new shares purchased through dividend reinvestment?
— Investor

A. Here’s some information to help you get this figured out.

For starters, the Prudential demutualization occurred during 2001.

The basis in the stock will depend on the tax treatment of the receipts of the shares, said Lauren Mazzella Landolfi, a certified public accountant with Wilkin & Guttenplan in East Brunswick.

“The demutualization of an insurance company is typically treated as tax free reorganizations,” she said. “If you did not pay any tax on the receipt of the shares, the IRS takes the position your cost basis in the initial shares is zero.”

If you did, however, report income on receipt of the initial shares, your cost basis would be equal to the resulting income you reported on your 2001 tax return, Landolfi said.

As for the reinvested dividends, they will have a cost basis equal to the value on the date of receipt, which is also equal to the dividend income you would have reported, she said.

Your monthly brokerage statements should provide the details as to the cost basis of the reinvested dividends. If not, it’s time to call the brokerage house and start asking questions.

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This post was first published in October 2017.