Dear Laura,
There was a lot going on in the law for 2010 concerning the tax basis for asset valuation in an estate, so you need to talk to the estate's executor.
It should be as you stated: You own the shares at the prices established at the shareholder's death. But actions by the estate's executor could influence the stock's cost basis, or tax value. The executor can, for example, choose the alternate valuation date for estate assets, which would establish the cost basis six months after the person's death. For deaths in 2010, the executor also has the option of electing either 2010 law or 2011 law for the estate.
That said, you don't owe income tax on the sale of shares sold at a loss. If you sold the shares at a loss in 2011, there may be a tax benefit from pairing off the loss against any capital gains on other investments you sold.
If you don't have any capital gains or if your capital losses exceed your capital gains, you can deduct the net capital loss on your tax return. That way you could reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately.
If your total net capital loss is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year, and treat it as if you incurred it in that year.
So a little tax-loss harvesting from your inherited stock can generate a tax benefit or free up some funds, either for cash flow or for reinvestment in other investment vehicles.