Q & A

[JG EA]

Q: I have a client that inherited mutual funds years ago. Each year she "sells" so much a month to have money to live on. It has been a typing exercise. I do all the sales with the inherited value as the starting point in Excel and transfer the cost to Sch D. Easy.

Now there is a twist and I am so mind melted that I can't think it through. The funds she inherited have all been converted to different funds. The dollar amount (the current value) has been put into a fresh fund. Do I keep the cost basis I have and ignore the dollar amount? Reason would indicate I should, but then I got to thinking how much easier it would be to show it as a sale.

The 1099 B does not show these converted funds as a sale.

A: ?

[Snaggletooth]

Flat across the Board

JG, the "old" basis just transfers to the new fund. This happens in the mutual fund industry for any number of reasons, probably the biggest is a decision to shut down a fund.

You are tracking the basis on an excel sheet independent of the market value, I trust, with the typical formula of increasing the basis by the amount of taxable dividends each year. Let's just assume an example: Templeton has a "Pacific Rim Development" Fund, and they decide there is not enough market among their customer base to support the administrative cost. So the Fund is closed down, and the customers are given instead equivalent shares in the "Templeton World Development" Fund.

This is NOT a reportable exchange, but it should be entered on your excel sheets as if it were disposed and an equal amount of basis added to the new fund. If the customer already has a basis in the new fund, then the basis of the the closed fund is simply added to the basis of the new fund. If the taxpayer is calculating "moving average" basis, then the addition of this new amount simply gets averaged into the existing pool. If the taxpayer is reporting sales on FIFO then the new amount simply gets kept until such time as the layer is sold out.

Good luck!

[Black Bart]

Snag,

You just keep surprising me with how much "tax stuff" you know. Very much more of this sophisticated info and ah'm gonna have to revoke your membership in the "just an ol' country boy" club.

Congratulations on your EA card.

[JG EA]

Thanks Snag E.A.

Thanks so much, this is very helpful and now I can complete this return.

I also appreciate the extra information.

Yes, my worksheet adds the reivestments. I worked out the formula from a NATP worksheet.

JG

[S T]

fyi

CFS Tax Tools also has a basis worksheet for mutual funds. I also use it for stocks where dividends are reinvested.

Sandy