Cost Basis

[Roberts]

I have a client who is going to start taking some liquidation from a mutual fund they have owned for over 20 years with dividends and capital gains reinvested. The mutual fund company can't come up with a cost basis because it is so old (they only go back 15 years). The broker doesn't have a record of it because they invested directly with the fund group and a copy of the check is lost.

How would you estimate a cost basis? It appears to me they have roughly doubled their money from their initial investment in unrealized capital gains but that is just a very rough guestimate. Any opinions?

Would a written estimate of gain by the brokerage firm based on all available information be considered good enough for the IRS without additional documentation?

[solomon]

Google

charts.As for regular stocks you can find historical data back that far - not sure about mutual funds charts.

[DaveO]

This problem comes up a few times every year.

I suppose they didn't keep historical statments or their bank records. Maybe they at least have their old tax returns so you can see how much the reinvested dividends and capital gains are. If they bought shares with one deposit you could back into the amount using the funds published total return numbers.

I really doubt you'll get any help from the fund group. The last thing they want to do is give tax advice. If all else fails have the client guess and make sure they understand what will happen upon audit.

[Roberts]

charts.As for regular stocks you can find historical data back that far - not sure about mutual funds charts.

Part of the problem is:
1) I'm not sure when they officially made the initial purchase. I know of reinvestments going back to 1992 when I have a price per share.

2) Price at that point doesn't mean everything because I'm not 100% sure of their number of shares at purchase.

So I basically know they owned $25k in funds in 1992 and today they are worth $180k. If I figure out the number of shares in 1992 and compare the cost then to now - roughly they have $22,000 in undistributed capital gains. I have no idea if the true number is $15k or $27k but it is roughly in that arena. If the fund makes a large distribution this winter their gain upon selling could be significantly less again.

[Greenbriar]

Inspector Clousseau

Peter Sellers made a very funny movie about 45 years ago. It was called "A Shot in the Dark".

[Bees Knees]

Taxpayer has the burden of proof as to what the cost basis is. If you can't prove your cost basis in an item, the IRS could rule it to be zero.

I would not make an educated guess for a client. I would make them do it, explaining that the IRS does not have to accept it. If you jump through all kinds of hoops trying to calculate basis, and you wind up fudging the numbers and backing into things, the client is going to take your calculation as accurate, and hold you liable when IRS accesses extra tax, penalties, and interest at audit. There is no reason for you to take on the risk of your client's poor recordkeeping skills.

[veritas]

Had a similar situation.

The broker had software that computed all the reinvested dividends from the date of original purchase. At least that's what he said. Pretty awesome if true.

We also have kept the records for tax clients forever and could pull the info from their files.

[Corduroy Frog]

What Paid?

DaveO, what did they actually PAY for the stocks 20 years ago? If the value has sevenfold exploded since 1992, they have probably made additional purchases. This is not necessarily true if the fund has been averaging over 14% annually, but that would have to include the loss years of 2001-2002, and that would not be very likely.

Dave, most of my customers are not aware that their basis increases every year they are taxed on dividends. They think if they pay $10K and leave it until it's worth $50K, they will have a $40K gain. If they have been taxed over the years for $30K, then their basis at the point of sale is $40K and they have only a $10K gain, and a capital gain at that.

I talked among cohorts once about this problem, because the mutual fund company is not going to provide any more data than they have to, especially if it involves dragging out old records. They find a point in history where they set the basis equal to valuation. That point might be 1992, and set the basis at $25K. If your client has records that go back that far, then add 1)dollar value of all purchases added to the fund and 2)all income shown on 1099-DIVs from the fund that they have sent to the taxpayer. And there would be a reduction if any money had ever been withdrawn, but if this happened there should have been capital gains reported that year.

The only fallacy in this approach is the assumption of a $25K basis in 1992. It is probable no one knows what the basis really was. You are susceptible to the whims of an IRS auditor as Bees Knees has suggested, but if an auditor wanted to assign a zero basis, I would certainly want to contact his supervisor.

Going forward, you said they will withdraw this over a period of years. Once you have your beginning basis in place, you will still receive dividends in years to come until liquidated. I would suggest using a "moving average" to keep the basis continually calculated over the years because it will change if you make allowances for more 1099-DIVs and reductions.

[Kram BergGold]

First thing to do

Have the mutual fund company give you the 15 years of records they have.
Then there are companies that will do a hypothetical to back track to the original investment. It would be helpful to know when they made the first purchase. Also if they have back returns from the period before 15 eyars ago this would show the reinvested dividends and cap gains.