Getting ready for Schedule D reporting

[FEDUKE404]

Since we are mainly in the dark for what might be coming regarding receipt/reporting of stock sales, here is a "what if" scenario to challenge your mind.

This is the underlying question: How many Forms 1099-B will be received, and how many Forms 8949 will be received for the following scenario?

(It is assumed all....or most of us....already know how to calculate the appropriate gain/loss. The question is what documents we will first be looking at.)

Here is the scenario for the mutual fund involved:

--- Original shares were inherited, and soon thereafter certificated.
--- Dividends (monthly and year-end) were reinvested. ALL shares owned by the individual earned dividends for more than a decade.
--- At some point, for simplicity/safekeeping reasons, the certificated shares were sent to the investment company.
--- In mid-2011, all shares were sold in two separate transactions (small sale first and clear-the-account sale later).
--- There were some DRIP purchases in early 2011.

The inherited shares will have assigned value at time of death, the DRIP shares will be tabulated, and FIFO rules will apply. (In this situation, sale #1 will be all LT and sale #2 will be LT and ST.)

Again, this is not a "What is the basis?" question but rather a "What pieces of paper for how many sales will be coming down the pipeline?" question. Of course, the follow-up question is what will be involved to make the paperwork match the fairly easily determined gain/loss.

All thoughts and insight will be welcomed.

Schedule D transactions could turn into a real challenge this year.....

Thanks!

FE

[Kram BergGold]

You need a hobby

No offense, but how long did you spend dreaming the scenario up. If I get one like this I will retire!

[FEDUKE404]

It's here....it's real!!

No offense, but how long did you spend dreaming the scenario up. If I get one like this I will retire!

It's no dream (actually I have to deal with stuff like this all the time).

I already have the client tax information/historical records, and with the help of a computer/spread sheet and a nice cup of coffee I could likely get to the "bottom line" fairly quickly. Two 2011 sales, likely resulting in two LTCG and one STCG transactions.

"Upon further review," maybe a couple of fingers of Black Jack would be suitable then??

The 800 lb gorilla in the room is having to mesh "the facts" with the new reporting rules and associated documentation related to Schedule D.

Hence my post!

FE

[appelman]

Sufficient unto the day is the evil thereof!

When it comes, I guess we'll cope!

[taxxcpa]

DRIP plans

In a few rare instances in the paat, a custodian for stocks in a DRIP, would furnish a detailed statement showing cost of every full and fractional share purchase. With the new reporting requirement, this could be required in all cases in the future.

[Lion]

Codes

Just take a look at the codes for transactions that do have basis reported to the IRS -- not many reported for 2011 -- that are posted in the instructions on IRS.gov and you should have what you need to know to correct basis reported when it's not correct. SInce brokers are reporting to the IRS basis for only stocks purchased and sold after 1/1/11 and not mutual funds yet, you won't have a lot of basis corrections to list in the last column. All the rest of the basis -- including the gratuitus reporting to the client -- you'll be typing in correctly or importing in correctly anyway.

I'm definitely increasing my prices this year for Schedule D and the under lying forms and schedules!

[Lion]

Also,...

Also, ask the brokerage houses how many Forms 1099-B they'll send. Probably one consolidated 1099.

You will prepare at least one Form 8949 with two pages (long-term and short-term, whether you have entries on both or just one, it's a two-page form). Two Forms 8949 if you have both basis reported to the IRS and basis not reported to the IRS, again two pages per form. And, if your client has capital transactions without Forms 1099, such as sale of a house or options or..., you'll prepare three Forms 8949, so a minimum of six pages. Then you'll summarize all that on one Schedule D that's back to two pages instead of the recent three. No more D-1s, though!

[gboykin]

And each page references the paperwork reduction act at the bottom of the form.

[Lion]

Reduction

I'm worried about brain cell reduction!

[Jiggers]

I thank the IRS in advance for the significant increase in fees for Schedule D starting on 2011 returns.

I am letting my clients know in my year-end letter that there is a significant change on the Schedule D and reporting of capital gains and losses. And that they should expect a significant increase in their fee for this portion of the return.

[Gary2]

Here is the scenario for the mutual fund involved:

--- Original shares were inherited, and soon thereafter certificated.

I've never heard of an open-ended mutual fund that issued certificates, ever - which is not to say it's not possible.

Mutual funds have the advantage of being able to do average cost basis, and I vaguely recall seeing that they will have to give their shareholders an option for doing it this way. This, too, confounds the question.

So let me assume it's stock and not a mutual fund. I'll also ignore the fact that the reporting requirements only apply to shares purchased after 2010.

Shares can be divided into two groups: Those with (probable) basis known to the broker, and those where it's unknown. If the unknown shares are all sold in the first sale, that's one 1099-B. If any know basis shares were sold in the first sale, that's a second 1099-B. The second sale would have two 1099-Bs (one long term, one short term), for a total of either three or four.

If there were unknown basis shares left over after the first sale, then the first sale is just one 1099-B. (As I read the problem, the shares with unknown basis are all older than any shares with known basis, and thus will be sold first.). The second sale would be three 1099-Bs, one for the remaining non-covered shares, one for the covered long term shares, and one for the covered short term shares.

So any way I look at it, it's either 3 or 4 1099-Bs.

A simpler, more general approach is that any single sale can generate at most 3: covered long term, covered short term, and non-covered. So without knowing anything but the fact that there were two sales, and one was long-term only, I can conclude that there are between two and five 1099-Bs.

[FEDUKE404]

Issue is not historical, but reporting information

I've never heard of an open-ended mutual fund that issued certificates, ever - which is not to say it's not possible.

Mutual funds have the advantage of being able to do average cost basis, and I vaguely recall seeing that they will have to give their shareholders an option for doing it this way. This, too, confounds the question.

So let me assume it's stock and not a mutual fund. I'll also ignore the fact that the reporting requirements only apply to shares purchased after 2010.

Shares can be divided into two groups: Those with (probable) basis known to the broker, and those where it's unknown. If the unknown shares are all sold in the first sale, that's one 1099-B. If any know basis shares were sold in the first sale, that's a second 1099-B. The second sale would have two 1099-Bs (one long term, one short term), for a total of either three or four.

If there were unknown basis shares left over after the first sale, then the first sale is just one 1099-B. (As I read the problem, the shares with unknown basis are all older than any shares with known basis, and thus will be sold first.). The second sale would be three 1099-Bs, one for the remaining non-covered shares, one for the covered long term shares, and one for the covered short term shares.

So any way I look at it, it's either 3 or 4 1099-Bs.

A simpler, more general approach is that any single sale can generate at most 3: covered long term, covered short term, and non-covered. So without knowing anything but the fact that there were two sales, and one was long-term only, I can conclude that there are between two and five 1099-Bs.

ADDITIONAL INFORMATION:

The entity involved is a Lord Abbett bond fund. A certificate for the original shares was indeed issued, originally to the owner and later to the new owner who inherited those shares.

The cost basis of ALL shares is known at this time. Whether or not the company has the complete cost information is unknown. The owner's account shows the starting entry as the (replacement) certificated shares, with monthly income/purchases thereafter.

There were two distinct sales per the owners request. The first sale was "small" and would have easily used the original shares and some of the DRIP shares. The second sale cleaned out everything: that would include "newer" DRIP, some STCG shares purchased prior to start of 2011, and a few STCG shares purchased after the start of 2011.

Whether the fund will calculate any gain is not currently known. As I mentioned in the OP, I could have the "correct" tax numbers with a couple of hours work maximum. How those numbers correspond to the forthcoming paperwork is at this time the unknown aspect.

FE

[Snaggletooth]

Amalgamated Basis

[QUOTE=Gary2;128157]So any way I look at it, it's either 3 or 4 1099-Bs.
QUOTE]

No, I'm not trying to create another valuation technique, but I believe the issuer could combine as many tiers of basis as exist into one single amalgamated number and get away with issuing a single 1099-B.

None of this, of course, simplifies our reporting into a single line item, but it does simplify things for the issuer...

[Gary2]

So any way I look at it, it's either 3 or 4 1099-Bs.

No, I'm not trying to create another valuation technique, but I believe the issuer could combine as many tiers of basis as exist into one single amalgamated number and get away with issuing a single 1099-B.

None of this, of course, simplifies our reporting into a single line item, but it does simplify things for the issuer...

I was working right off the new 1099-B instructions. A single transaction can require up to three 1099-Bs. Long term, short-term, and non-covered items have to be on separate 1099Bs. Note that when I say "separate 1099-B", I mean in the sense of separate reporting items, not necessarily separate pieces of paper. A small consolidated brokerage statement, though maybe 5-10 pages, could be hundreds of reporting items (and hence hundreds of 1099-Bs in this sense).

[dtlee]

I don't think things will be easy....

However, it looks like the match to Gross Proceeds is no longer a part of the process (or at least I can't find it anywhere). Is that no longer required with the new reporting?