Don't Get Hammered On Stanley Gains - reprint
May 5, 2002

Attention, Stanley Works shareholders!

You could be entering the capital gains zone later this week.

The capital gain would result from Stanley's move to reincorporate in Bermuda. And this change of address would take effect soon after Thursday if, as expected, two-thirds of Stanley's total shares vote in favor of the move.

Under the reincorporation, shareholders would technically cash out their existing stock and be issued new shares in the new company. Aetna Inc. shareholders faced a similar conversion to new shares in December 2000.

So Stanley shareholders have four days to answer the following questions:

How much did you pay for each share of Stanley stock?

How large a capital gain will result from the forced sale of those shares?

How much federal and state tax might you have to pay on that capital gain?

Might it be worth your while to donate some of your appreciated Stanley stock to a charity before the shareholders meet on Thursday?

These are big questions to answer in a small amount of time. But let's play the hand we've been dealt. And let's make do with the little time we have.

Costs per share. Time tends to muddy up the water when you have to figure out how much you paid for each one of your Stanley shares.

Here's why.

Stanley declared a 2.5-for-1 stock split in December 1959. The stock pulled another 2-for-1 split in June 1971. A 3 percent stock dividend was granted in September 1972. The shares split 3-for-2 in September 1978, and 2-for-1 in May 1980. Thereafter, Stanley shares split on two more occasions: a 3-for-2 split in September 1986 and a 2-for-1 split in May 1996.

Those splits add up. Had you purchased just 100 shares in November 1959, you'd be holding 4,635 Stanley shares today (without reinvesting dividends). The www.stanleyworks.com website might clear up some confusion for those who hold 4,635 shares - when they only remember buying 100 shares back in the late 1950s.

At stanleyworks.com, click on a link marked "press/news." Then, near the center of your screen, click on the link tagged "stock chart." At the stock chart link, try fiddling with the "investment calculator" or "historical price lookup" links.

One of these Internet links should help you figure out how 200 shares can morph into, say, 3,708 shares. And once you know how 200 shares grew into 3,708 shares, you will learn that your original purchase price or basis - let's say it was $2,000 - remains constant. But your per-share costs might have been altered by all the splits that have taken place over the last 10, 20 or 30 years.

The gain. If you joined the Stanley Works shareholder family after June 1996, your work should be pretty easy. Subtract your purchase price (including commissions and other fees) from Thursday's projected sales price and that would provide a solid estimate of your capital gain.

Example: In March 2000, you bought 100 shares of Stanley, paying a total of $2,400. You estimate Stanley will close Thursday at $47 a share, so your 100 shares would be worth $4,700. Subtract the $2,400 purchase price from the $4,700 Thursday value, and you've got a $2,300 capital gain.

Longtime Stanley shareholders - especially if they took part in Stanley's dividend reinvestment plan - have a more time-consuming job ahead.

Why?

Dividends reinvested have already been taxed as regular income. So reinvested dividends also constitute part of the "basis" (accountant-speak for purchase price, including costs of ownership) for those shares. If you've kept old tax returns - or have an accountant who's filed them - you might want to look them over.

On Part II of Schedule B - the bottom half of the page marked "ordinary dividends" - you should be able to find out how much you received in Stanley dividends each year.

Add up the dividends, making sure to include total dividends reinvested for each year you held your Stanley stock. If you reinvested dividends, the dividends on which you were already taxed would raise your basis and lower your capital gain, said Adam Cohen, a certified public accountant based in West Hartford.

If you cannot find your old tax returns, contact EquiServe - Stanley's agent for handling the paperwork of dividend reinvestment accounts. Visit the www.equiserve.com website or call 800-543-6757 (The special toll-free number for Stanley shareholders).

Don't expect to receive a complete dividend reinvestment statement in one day. But EquiServe can provide it for about $30.

Gifts. When you compare what you paid for your Stanley shares to Thursday's projected value, you might discover you're in for a whopping capital gain. Although it depends on many variables, a large gain could put you in line to pay estimated quarterly taxes. It could subject you to the alternative minimum tax. If you receive Social Security benefits, a large gain could change the way those benefits are taxed, Cohen said.

There's one way to soften this tax blow: Give some or all of your appreciated Stanley shares to charity. A gift of appreciated Stanley stock to a charity would help you avoid realizing the capital gain - and consequently avoid paying the tax on that gain.

Now, of course, by giving away just 400 Stanley shares, you'd be surrendering about $18,000. "You should see this as a gift first. The tax-planning part is secondary," said Susan Rathgeber, director of development with the New Britain Foundation for Public Giving. The foundation, by Rathgeber's count, has already received about $1 million in appreciated Stanley stock. Other area charities also say they have received Stanley stock as a gift.

But, if your heart and wallet have the capacity to surrender a large gift, you'll probably save money on your 2002 tax bill.

Example: You're married. Your annual adjusted gross income is $50,000. You have held your Stanley shares for more than five years. You file a joint return, and you have no other capital gains or losses.

If you sell 1,000 Stanley shares and rack up a $30,000 capital gain - bringing your income up to $80,000 - you could be on the hook for $4,500 in additional federal and state taxes, Cohen said.

By donating 400 of those 1,000 Stanley shares to a charity, you could lower your total tax bill by about $4,250, Cohen said.

In most cases, donations of appreciated stock are fully deductible - as long as the deduction does not exceed 30 percent of your adjusted gross income. In cases where the IRS deems your deduction too excessive for one year, you can carry your 2002 deduction into future years (up to five years), according to the IRS.

But if you wish to donate appreciated Stanley shares to a charity, you have to act fast. The opportunity is likely to disappear on Thursday. That is the so-called "ripening date" for donating appreciated Stanley stock. (Accountants and lawyers should see Ferguson vs. Commissioner of Internal Revenue, Ninth Circuit Court of Appeals, tax court docket Nos. 21808-93 and 18250-94, Cohen said.)

If you have a Stanley stock certificate in your house or safe deposit box, you can transfer ownership of that certificate by signing it over to the charity of your choice. If your stock is held in "street name" at your broker, an electronic transfer to a charity can be completed in a day. You can help your cause by finding out the following: the broker your charity uses, the charity's brokerage account number, and the broker's DTC number. (DTC stands for Depository Trust Co. number. It is similar to a bank routing number). You should also draft a "letter of authorization" for your broker - a letter that says you want to give the gift that you're about to give.

"Well-prepared clients can complete a charitable transfer in 24 hours," said Scott Merrell, a vice president of investments at Advest Group in Hartford.

If your Stanley stock is held at EquiServe in a dividend reinvestment plan, well, it's probably too late to make a gift. Maybe, on another occasion, with another dividend reinvestment plan, you can give away shares, cut your tax bill, and feel good about helping your favorite charity, Rathgeber said.



Readers with questions about personal finances can write to "Matt's Money Talk," The Hartford Courant, 285 Broad St., Hartford, CT 06115. They can also send e-mail to lubanko@courant.com or call 860-241-3726. In letters, e-mails or phone calls, please mention your name, age and a rough guess of how much you have to invest or have invested. Details bring more life to questions and make for better answers. Confidentiality will be assured, and only your initials will be used.