Mutual Fund Cost Basis

[Roberts]

Realistically, what do you do to come up with the cost basis of a mutual fund that has been held for 40+ years, dividends and interest reinvested every year? I called the mutual fund company and they can't come up with a cost basis because it is held far longer than their records go back (old data wasn't entered into the computer system). All distributions have been taxed over the years so we aren't talking a MASSIVE capital gain figure.

Hypothetically speaking, the shares were valued at:

$90,000 on 12/31/2006
They sold for $75,000 in November of 2007

Anything we come up with is an estimate. If the brokerage firm wrote a letter with a best estimate guess of what their cost basis should be, would that be sufficient? There is unrealized capital gains in any fund and that's the part we are trying to figure out I guess.

[travis bickle]

Realistically?

Realistically, what do you do to come up with the cost basis of a mutual fund that has been held for 40+ years, dividends and interest reinvested every year? I called the mutual fund company and they can't come up with a cost basis because it is held far longer than their records go back . . . .

Well, I'll go out on a limb here.

What records ARE available to you? How far back? Use what you have -- you can't use what you don't have.

In a situation such as this if you have gone as far back as you can, you are not at fault. As you said, you are not talking of MASSIVE capital gains.

And, I am sure you are already here, I would document something in your office/client file explaining to the client how the basis was determined, their responsibility if the IRS decides to ask questions, etc.

And, I presume you have had a good heart-to-heart talk with your client about keeping annual records?

[Roberts]

I've gone back as far as I can. That will just have to do. )

[Kram BergGold]

Whoa!

The value on 12/31/06 has nothing to do with the basis. I would get out all the old tax returns and begiin adding up the reinvested dividends and capital gains. This is the basis. There is some possiblity that these people did not even report the dividends 40 years ago. In this case you can't add them to basis.

[JoshinNC]

My first thought too Kram

The value on 12/31/06 has nothing to do with the basis. I would get out all the old tax returns and begiin adding up the reinvested dividends and capital gains. This is the basis. There is some possiblity that these people did not even report the dividends 40 years ago. In this case you can't add them to basis.

12/31/06 value has nothing to do with basis.

I would have the client get as much as the brokerage has on file, get as many transcripts from the IRS as possible and figure the basis while billing the piss out of the client for your work. I might even add a PITA fee just to make sure it didn't happen again.

[Snaggletooth]

All of us have

...had this situation at one time or another. Maybe not 40 years, but enough years that the client has no clue. In fact, most clients are not even aware that their basis increases every year a dividend is taxed.

Client:
"Duh, I paid $1,000 for this 40 years ago and sold it last year for $25,000. Shore do hate to pay tax on that $24,000 gain."
Josh in NC:
"You probably don't realize it, but you've already paid on some of it and won't have to pay again."
Client:
"Whazzat?"
Josh in NC:
"Every year you've been paying on dividends. And every time you pay on dividends your cost is increased by the amount of the dividends."
Client:
"Sounds good to me. Just read all this stuff they sent me and add up my dividends."
Josh:
"Oh no, it's not that simple. You've got to bring me your dividend records for the last 40 years. Then I'm going to filter through all these statements and charge you out the gazoo."
Client:
"Can't the company tell me?"
Josh:
"No. They weren't required to track this stuff until the late '80s."
Client:
"No way. In 40 years we've moved 6 times. We cannot find all those records."

We've all been confronted with the conversation above, or similar. I've read all the posts about the headaches and heartaches, but no real solution. I'm going easy on everyone because I don't have a solution either.

However, some of the Fidelity Funds and American Funds claim to have earnings records dating back 50-60 years. Every time you buy one of these, they tell you that their inception-to-date earnings average 11.57%, on a fund began in 1947.

They can do all this so they can sell you a fund, but they can't give you any dividend information. I think the pressure should not be on tax preparers, but on the custodians of these funds.