Mutual Fund cost basis

[Roberts]

What do you suggest for tax clients that have absolutely zero chance of coming up with a cost basis?

I had an example this week. Client bought a mutual fund in the 1950's and there is zero record of those purchases (fund company and investment firm destroyed the data during computer conversions). In the 60's they know they bought and sold some shares but they don't have a clue and again, mutual fund company says they have no record of it. Dividends and capital gains were re-invested for 50 years and the fund doesn't even have a record of payouts for the first 10+ years.

Now they need the money and need to come up with a cost basis. What do you suggest for clients like that? The reality is that the taxable gain they'll realize is pretty minimal since they paid taxes all those years on the gains and dividends as realized.

Edit: I'm 99% sure they have a loss! Looking back at reinvestments for the last 9 years, it's virtually impossible that they could have a gain and I'm sure the fund sold most of their holdings and turned the portfolio over realizing all gains.

[Kram BergGold]

What I would do

I would work backwards. Get the cost basis on as many of the reinvested dividends as you can starting with 2009. Then when they are ready to sell have them instruct the fund company to sell the specific shares you have cost basis for. Once you only have shares for which you can't determine cost basis just go with zero as the basis. If the taxpayer is is in the 15% bracket in 2009 or 2010 sell some of these highly appreciated shares to get the advantage of the zero percent bracket. It is the taxpayer's responsibilty to keep basis records. Don't let their problem become yours.

[Snaggletooth]

Agree, except

I would use then-prevailing price as a basis after you've gone back as far as you can. I would not use zero. That's what the IRS does on their deficiency notices to maximize revenue, and there would be more factual support for the price than for zero.

You can find the "then-prevailing price" for any date using a number of different websites, such as BigMarkets.com.

[Roberts]

I would use then-prevailing price as a basis after you've gone back as far as you can. I would not use zero. That's what the IRS does on their deficiency notices to maximize revenue, and there would be more factual support for the price than for zero.

You can find the "then-prevailing price" for any date using a number of different websites, such as BigMarkets.com.

I think you mean BigCharts.com. I can see the pricing going back several years and the reinvestment pricing at each time via the fund site but that's not an exact answer. If I go back about 12 years and build it, it'll come up with a tax loss. I hate to report a tax loss if you can't prove it with fund statements. BUT, I'm pretty darn sure they've turned over the entire portfolio in that 12 year period so built in gains should have been realized.

The reality is, with a mutual fund, they pay the taxes all along so the gain in the best of times is often limited. If it's a bond fund I've never seen a long term investor who had an appreciable gain. If it were an individual stock, it would be a totally different situation.

They are selling it all at once to pay off all of their debts before going into a nursing home. Imagine being 85ish and having significant debts. Ouch.

[Lion]

Basis

I had to reconstruct the cost basis of a mutual fund my ex and I bought our son when he was born; then ex sold it kid's jr. year in HS just when it has to show on FAFSA forms! Of course, ex did not cooperate re basis. I had some tax returns and was able to get some statements from the company. I did learn that companies have to keep the record of your initial purchase, so I had a date, share number, and price at his first purchase. I calculated the missing years based on what reinvestments he had to have made to work his way up to the number of shares that was eventually documented on statements. BigCharts helped a lot with NAV for the typical dividend dates. It was a popular fund, so my current broker was able to find info from other clients to help fill in gaps. I felt pretty confident knowing the two ends of the picture.

[Davc]

Then when they are ready to sell have them instruct the fund company to sell the specific shares you have cost basis for.

The earlier sells were probably done average cost and if so, the can't use specific identification without emptying the account first.