I am presenting this as a hypothetical case, but it is very close to my actual situation.

A relative died intestate in September 2014. As an heir, I was to receive all the decedent's shares in ABC Corp, which as of date of death was 1,000 shares, valued at $10 per share. Because of a long probate case, the shares were held in an estate account for just over one year before I took possession of them. During that period, ABC Corp paid out quarterly dividends, which were reinvested. Consequently, by the time I received the shares, there were 1,100 shares, now valued at $15 per share.

My understanding is that inherited shares are all treated as long term, and that clearly should apply to the original 1,000 shares. But what about the additional 100 shares acquired via reinvested dividends over the 12 months following the date of death? Are they long term or short term?

I have searched the web in vain trying to find an answer to this question, so I would appreciate any help.

My understanding is that inherited shares are all treated as long term,==>Correct; inherited stock MAy seem to pose a problem because the deceased owner made the investment on one date and you inherited the stock on another date;the IRS treats any capital gain or loss that is the result of selling inherited stock is always LTCG.

and that clearly should apply to the original 1,000 shares. But what about the additional 100 shares acquired via reinvested dividends over the 12 months following the date of death? Are they long term or short term?======>long term; Figuring out the value of inherited stock is necessary for tax purposes. As the value has increased, this is referred to as stepping up the cost basis. The tax rate on the reinvested dividends and other cash dividends depends on whether the dividend is considered ordinary or qualified. Qualified dividends are those paid where you meet a minimum holding period requirement; you must hold a stock for 60 days during the 121-day period that begins 60 days before the ex-dividend date to meet the requirement. The ex-dividend date is the first day new shareholders aren't entitled to receive the next dividend payment. Qualified dividends are taxed at a maximum rate of 0% , 15 %. Ordinary dividends are those that don’t count as qualified and are taxed at your normal income tax rate.

NOTE;. Let’s say you buy $2K worth of stock, and each year for 3 years you reinvest $100 in dividends. Then you sell your entire position for $2.5K. At tax time, you’ll be asked to subtract your tax basis from the $2.5K in proceeds to figure your taxable gain. If you simply report the original $2K investment, you’ll be taxed on a gain of $500; $2.5K-$2K But your real basis is $2.3K;$2K+$300(100*3) So, you get credit for the $300 in reinvested dividends because you paid tax on each year’s payout, even though the money was automatically reinvested. Failing to include the dividends in your basis would mean paying tax on that $300 twice.