Churning

[dyne]

I see a number of clients who have investments with brokers or investment companies
who report many stocks sales each year on form 1099-B usually reporting losses.
Are they CHURNING or buying and selling primarily to charge a fee for so doing or
is there any justification for so many stock sales? Many clients have losses of $20,000
or more every year. Since they can only claim a loss of $3,000 per year, they may not
live long enough to deduct these losses. I understand those who need a determined
amount of cash each year and stock is sold for this reason. Are these investment brokers
or companies simply gouging these clients or are they somehow earning profits on the
stocks not sold? If they are good at their job, why did they buy these stocks which
were later sold at a loss? Am I missing something? Comments?

[DaveO]

Buying and selling to generate commissions

Is pretty much the definition of "Churning" I cringe when my clients with "SB" discretionary accounts come in because I know I've got 4 or 5 pages of buys and sells to sort out. Some of these accounts are so called "tracking accounts". The brokers buys 20 or 30 shares 5 or 10 at a time and sells them the same way. "WR" does the same thing with mutual funds "balancing" a portfolio by transfering $100 per month from one fund to another. I too, have a number of clients who will not live long enough to use up their losses.

[Roberts]

depends

Most likely it isn't churning but it depends. Churning amounts to buying and selling excessive amounts and doesn't have anything to do with whether a profit or loss is taken. Most brokers / planners look at a portfolio in December and decide to sell losers (realizing a capital loss) and moving the money into more attractive investments and to offset other gains.

If I were the tax professional on something like this I would explain to them or ask if there are capital gains they aren't recognizing and maybe they could be used to offset the losses? Look at their investments a little and ask why they are recognizing all these losses if they don't have gains. It is very possible that the broker thinks they are doing the client a favor by recognizing all these losses and the client doesn't realize it isn't helping.

Is the client in a fee based account? In a scenario like that it is virtually impossible to argue churning since the broker doesn't have an incentive economically to churn.