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I work for a private company which is owned by my boss’ family. During the firm’s reorganization on 1/1/2005, my boss’ wife acquired 20% of the company’s ownership and gave 4% to me as a gife at the same time. The gift stock she gave me cost her $26,000, with a $27,000 fair value on 1/1/2005.

Now, the fair value of my stock increases to $38000. I plan to cash out 25% of it (worth $9500).
Questions:
1. What would be my tax consequence and cost basis? Should I pay estimate tax before liquidating the stock?
FYI, my annual gross income is $40,000 (Salary).

2. What would be the tax consequence for my employer (the firm)? How should the firm report such liquidating transaction? On 1099DIV for $27000, $26000, $95,00, or what?

Thanks in advance for your kindly assistance.
Thank you for all the answers. They are very helpful. Here is the extra detail as to why the stock was given.
Question: How should I report the income?

1. At the time the stock was given to me, my boss said his wife paid for it and it was a gift. Not much was said. No W-2 or 1099 was reported.

2. I supposed that my boss’ wife gave me the stock for three (unspoken) reasons:

(a). The firm hires only two employee. Right before the stock was given to me, the only other employee had a big fight with my boss, who might therefore try to use the stock to hold me (not to quit).

(b) My company had applied for a project from State Government but was rejected for the reason that most of the firm’s shareholders are not resident of our State. Including me as a shareholder may change the ownership status and therefore qualify the firm to get the State contract.

(c) I have been worked for the firm for 13 years.

Thank you for the kindly help.

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