Good Grief

[Christian]

A client informed me that some of her stocks had been claimed by the State of Virginia due to a foul up on her part in the securities registration. I told her to immediately contact the relevant state agency and have it resolved asap. It never occurred to me she and her daughter would dilly dally over something like this. Two months ago I was told the matter was resolved after the mother was able to demonstrate ownership of the stocks. Unfortunately so much time had elapsed Virginia had sold the stock and instead of returning the stock sent the mother a check in the amount of $115,000 ! This is something I have never encountered. I am just wondering what kind of reporting form Virginia will send them. My suggestion to them was to ask for the brokerage statement from the state in order to determine capital gain just as if the mother had sold the stock herself. On the other hand Virginia may just send them a Form 1099-Misc which is not a great outcome. The daughter opined that since Virginia had sold the stock no tax was due. I have a sinking feeling that ain't going to cut it. Any comment will be appreciated. Since they received the funds this year this will be reported on their 2018 return.

[jklcpa]

With a quick search of the web I found what might be some useful info for you, especially in the second link, a PLR that has relevant code sections, that would be a place for you to start for further research:

some general information from SEC on how long the states hold securities, in general: https://www.sec.gov/fast-answers/answersescheathtm.html

and this 2009 PLR where the IRS ruled that the taxpayer was allowed to defer gain or income recognition by purchasing replacement securities using the escheat funds (proceeds) received from the state.  https://www.irs.gov/pub/irs-wd/0946006.pdf 

Hope this helps you some.

[Christian]

I have reviewed the material and find it answers my concerns. Many thanks to Judy for her kind assistance to an aged taxman. 

[jklcpa]

You all probably already know that a PLR is intended to be relied on for only the taxpayer that requested the ruling based on an exact fact pattern, and I posted it more for the code section references it contains in this one particular case so that those could be used as a basis for further research. 

I do think it's an interesting ruling with the IRS allowing the deferral.