Revenue Ruling 59-26: Replacing a Lost Stock Certificate

Revenue Ruling 59-26 establishes that when a stock certificate is lost, stolen, or destroyed, issuing a replacement to the same shareholder does not constitute an “original issuance” of stock. This distinction was originally for a federal stamp tax that has since been repealed.

Despite the tax’s repeal, the ruling’s concept remains relevant for modern corporate governance and tax record-keeping. Replacing a certificate is an administrative action that restores the physical evidence of pre-existing ownership. It does not create new shares or alter the corporation’s ownership structure, and this principle guides the procedures for both shareholders and corporations.

Shareholder Requirements for Certificate Replacement

When a stock certificate is lost, the shareholder must initiate the replacement process by providing the corporation with an Affidavit of Lost Stock Certificate. This is a sworn legal statement, signed before a notary public, that attests to the facts surrounding the missing certificate.

The shareholder must provide their full legal name, current address, and a declaration that they are the rightful owner of the shares. The affidavit must contain details about the lost security, including the number of shares owned and, if available, the original certificate number. A credible explanation of the circumstances of the loss is also necessary, as this account provides a formal record justifying the cancellation.

In addition to the affidavit, the shareholder must secure an indemnity bond. This bond is an insurance policy that protects the issuing corporation and its transfer agent from financial harm. If the original certificate reappears and is sold to an innocent third party, the surety company that issued the bond covers any resulting losses, removing the risk for the corporation.

The cost of the bond is a direct expense for the shareholder, calculated as a percentage of the current market value of the shares being replaced. This premium, often ranging from 2% to 3% of the shares’ value, is a non-refundable payment for the protection the bond provides to the corporation.

Corporate Procedure for Reissuing Stock

Once the corporation receives the shareholder’s affidavit and proof of an indemnity bond, it begins its reissuance process. The first action is to verify the submitted documents, confirming the affidavit is complete and the bond provides adequate coverage based on the shares’ current value.

Following verification, the matter is presented to the corporation’s Board of Directors. The board must pass a formal resolution authorizing the cancellation of the lost certificate number in company records and the issuance of a new, replacement certificate. This step ensures the action is properly documented in the corporate minutes.

With board authorization, the corporation’s stock ledger is updated. The entry for the original certificate is marked as “canceled,” and a new entry is created for the replacement. The new certificate will have a new number but will reference the original date of issuance to preserve the shareholder’s holding period.

The final step is the creation and delivery of the new stock certificate. This replacement should be clearly identified as such, often with a legend like “Replacement for Certificate No. [Old Number].” After being signed by corporate officers, the new certificate is delivered to the shareholder, completing the process.

Tax and Record-Keeping Implications

For the shareholder, receiving a replacement stock certificate is a non-taxable event. Because the transaction is not a sale or exchange of the shares, it does not trigger any capital gains or losses, and the shareholder’s ownership interest remains unchanged.

This administrative action has no impact on the shareholder’s tax basis in the stock. The cost basis remains the same, and the holding period for the stock continues uninterrupted from the original acquisition date.

From the corporation’s perspective, reissuing a stock certificate is an administrative function with no direct tax consequences. The transaction does not generate income or create a deductible expense, as it is only a change in the documentation of ownership.

The corporation’s financial statements are unaffected by this event. The amounts recorded in the Common Stock and Additional Paid-in Capital accounts do not change, as no new capital has been raised. The only corporate record altered is the stock ledger, which tracks shareholder certificate numbers.

While these procedures apply to shareholders holding physical stock certificates, this practice is no longer common for publicly traded companies. Most shares are held electronically, either in “book-entry” form by a transfer agent or in a “street name” account where a broker holds shares for the investor. As a result, replacing a lost physical certificate is an infrequent issue for most of today’s investors.