Transferring appreciated stock owned by a club to fund a full withdrawal of a club member gives tax benefits to the club and to the withdrawing member. However, the rules for assigning cost basis to transferred property are different for partial withdrawals. Clubs should be careful when considering using stock to help fund a partial withdrawal. For partial withdrawals the cost basis of the transferred securities to the withdrawing member is the club’s cost basis. If the member taking the partial withdrawal sells the securities soon after receiving them it is possible this member will have a taxable gain on a withdrawal funded by securities when they would have no taxable gain if the withdrawal had been taken completely in cash. Here is an example of how this can happen.
A club member has a value of $20,000 and a cost basis of $10,000 for their club investment. The member takes a partial withdrawal of $5,000. If taken entirely in cash, the member has no taxable gain as the cash received, $5,000, was less than their cost basis in the club, $10,000.
Now take the case of the same member but whose partial withdrawal is paid with a transfer of $5,000 worth of appreciated securities. The club’s cost basis in the transferred securities is $2,000. For a partial withdrawal the member will take on the club’s cost basis in the transferred securities. When the member sells the securities they will have a taxable gain of $3,000. By funding this withdrawal with appreciated stock the withdrawing member has a taxable gain that could have been avoided.
This is one reason transferring stock for a partial withdrawal is not recommended. The page for recording a withdrawal in myiclub.com includes a link to a club member withdrawal calculator. Clicking on that link will give a treasurer and club members guidance on the more advantageous ways to fund a withdrawal.

Russell Malley
StockCentral Community Leader

Edited by user Tuesday, January 5, 2016 7:06:21 PM(UTC)  | Reason: Not specified