Do shares of stock become taxable when converted from prefered to common shares?

Question

I am being taxed by the irs on prefered shares of stock and then taxed again on the same shares after they were converted to common shares. The common shares show no basis, so the irs wants to tax me on 100% of the share price when I've already paid income tax on the shares when they were prefered stock.

Answer 1

You can't have a gain or loss upon conversion of preferred to common. You can have a gain on the sale of the preferred and a purchase of common.
It sounds like your broker reported the conversion as a sale. Check you year end tax statement from the broker for the year in question. If they made a mistake you will need to get them to fix their reporting to the IRS.
The IRS bills for tax upon the sales proceeds that they had reported to them. They do not know how much the stock cost you. It is up to you to show the IRS the cost you incurred to buy the stock. Once you do that they will change the amount you owe or you will have to amend your return to take a loss.
If you are right about the conversion then your basis in the preferred becomes your basis in the common stock.

Answer 2

A few questions.

First, how did you acquire the preferred shares? What do you mean when you say you "paid income tax" on them?

Second, was the conversion into common shares of the same company? What do you mean when you say "the common shares show no basis"? Basis is a tax attribute that you are supposed to keep in your own records, not something that would be shown on the share certificates themselves.

Third, was the conversion made pursuant to the terms of the preferred stock -- i.e., were they convertible when issued -- or was there some kind of tender offer made?

Fourth, did you receive anything other than common stock in exchange for the preferred stock?

Finally, was this a public company, and did you receive a prospectus or other information from the company concerning the exchange, or the preferred or common stock?

These are all relevant facts and it would be jumping to conclusions to answer without knowing them.

Answer 3

Like "waggy" said... could be an error!

AND the IRS does make mistakes as well... I am proof but since my accountant is smarter then THEM he told them where the bear sh8ts in the woods so to speak and all is well.

Be sure you are paying for an EXCELLENT ACCOUNTANT ! If don't have on and you are doing this yourself then GET ONE!!!Always have people smarter than YOU working for you ! A Piece of advice that many would benefit from in the accounting department of their lives!!!