Short Sales in Drake

[erchess]

I am trying to do a corrected Sch D for 06 in Drake and I can't make the program display a short sale correctly. The Rep I got didn't know what a short sale was but he insisted that no one working today knows more about Investments in Drake than he does. He suggested that I wanted to use F 6781 but he had no advice on how. But he insisted that if I put an amount in the proceeds box on Sch D and NA in the basis box then proceeds would have to show up as profit. He didn't even know about the option of calling it a personal loss, which however does not print correctly even though it totals correctly.

Any help would be appreciated.

[BHoffman]

Software reps will not give tax advice on how to fill out forms. Looks like Sch D to me.


From Pub 550:

"Short Sales
A short sale occurs when you agree to sell property you do not own (or own but do not wish to sell). You make this type of sale in two steps.

You sell short. You borrow property and deliver it to a buyer.

You close the sale. At a later date, you either buy substantially identical property and deliver it to the lender or make delivery out of property that you held at the time of the sale. Delivery of property borrowed from another lender does not satisfy this requirement.


You do not realize gain or loss until delivery of property to close the short sale. You will have a capital gain or loss if the property used to close the short sale is a capital asset.

Exception if property becomes worthless. A different rule applies if the property sold short becomes substantially worthless. In that case, you must recognize gain as if the short sale were closed when the property became substantially worthless.

Exception for constructive sales. Entering into a short sale may cause you to be treated as having made a constructive sale of property. In that case, you will have to recognize gain on the date of the constructive sale. For details, see Constructive Sales of Appreciated Financial Positions, earlier."

[erchess]

Thank you BH

I am a paid up user of Drake and I was talking to a tech support agent. Not a very good one in my opinion but a tech support agent. Also the sales reps at Drake have in my experience walked me through how to do things in the software. That makes them different from any other sales reps I have encountered in this industry.

I have the instructions to Sch D and before I posted I knew what they said the printed product should look like. What I don't know is in this unusual situation how to make Drake print what is needful.

What makes this situation unusual in my experience is that at the end of the year the short sale was still open because the taxpayer had not "covered" the sale by buying the securities in question and delivering them to the broker from whom he borrowed them in order to make the sale.

[BHoffman]

You might have to use special CPA (Cut, Paste, Attach) powers to report that open short sale

[erchess]

rofl CPA

You are right by the way, Drake does not allow me to do what must be done without a hand correction. I have already written to my Sales guy wanting my money back. I am also informed by the Drake message board that they cannot handle corporate short years. And the awful part is that until today I was so pleased with Drake. In this case it may have been better never to have loved at all than to have loved and lost as I did.

[erchess]

How many other software packages

would have the same problem?

[BHoffman]

I don't know about all of them, but my 2003 version of Lacerte won't allow it either and it cost about 5 times as much as Drake software. I've been using Drake since 2004 and like it, especially the price.

What software did you use previously?

[tpert]

Not sure what the issue is

A short sale that closes before the end of the year should be able to be reported in any software program. The only issue would be that the purchase date would be after the sale date. I doubt Drake prevents this. I would think most software allows it.

For incomplete short sales, you would generally not show the transaction but you will need to provide a statement to show why the total sales reported do not match the 1099-B proceeds sale. I do not think that Drake would create this statement for you automatically. I am not sure that many software packages would. I would be interested in finding out what packages do.

One alternative I have seen is that some preparers report the cost basis and sale as the same amount if the transaction is incomplete in the year of the short sale. This really has the same effect except that it obviates the need for the statement. I can't imagine Drake or any other package not supporting this, but it is not really the way the IRS wants it done

Another alternative I have heard suggested is to report the transaction as "OPEN" in terms of the date acquired with "N/A" as the purchase amount. This is an even greater deviation from the way the IRS wants it since it requires entrees in the amount and date fields which are not valid for efiling. I doubt Drake accepts this method since they tend to not support entries that deviate that far from the efiling specifications. Plus, without a purchase price, this would report the transaction as a taxable gain. Not sure how many software packages allow you to override the gain or loss computation, but Drake does not.

Hope this helps.

[David1980]

Personally I would go with the "attach a statement" (in the form of IRS preparer notes) to report the open sale.

As for how many software companies have things like this, my guess is "most". At least with everyone I've tried I've found something that requires attaching a manually prepared form because the program does it wrong or a cheesy work-around that isn't really correct per form instructions but results in right total. Only for those really rare "I'll probably only see this the one time anyway" kind of situations though.

And you know what? I'm OK with that. As long as the software does it for me the majority of the time I'm willing to spend a little extra time on the rare/unusual returns to manually preparer some forms.

As for working with technical support from tax software I've found if you can tell them exactly what you want they are much better at telling you how to do it. Saying that you want to enter on form 1234 line 55 an amount of 5000 works well. Telling them you have a form that has an amount (or worse a "tax document") and you want to know where to put that amount is doomed to either no answer at all or an incorrect answer. Frequently it seems while they know how to get an amount on the right line they really don't know why you would put an amount on that line, and thus if you ask the question in a "How do I preparer a tax return?" style you get no help.

[tpert]

David,

I agree with the philosophy of wanting the software to cover most situations but not insisting on it covering them all.

I also would agree with attaching a statement (since that is what the IRS wants in this situation). If I have to compose a statement like this because the software doesn't do it automatically, it is not a make or break decision on whether I remain a customer:

Explanation of the difference between Forms 1099-B and Schedule D Sales Total:

Forms 1099-B include $10,000 of short sales which were opened in 2007 and remained open on 12/31/2007.

Forms 1099-B Totals: $123,456

Less short positions opened during 2007 which remained open on 12/31/2007: $10,000

Schedule D Sales Total: $113,456

Of course, I would prefer it if this were automatic, but I don't see a lot of these. If I had a high percentage of clients in this situation, perhaps I would see it differently.

[snowbird]

Probably the software does not handle because the IRS has not given any guidance on the verbage they are looking for on Sch D.

"If you are able to defer the reporting of gain or loss until the year the short sale closes, there are certain notations you can make on you Form 1040, Schedule D (PDF), Capital Gains and Losses that will allow you to reconcile your Form 1099-B (PDF) to your Form 1040, Schedule D (PDF) ..."

Then where they normally provide a bullet refence ... they have a bullet but it is blank.

http://www.irs.gov/faqs/faq-kw171.html

[Bucky]

I would just show sch d description open short sale, show cost and sale breaking even, make a note in file and go on with life. History has proven to me that they don't read attached notes etc. If the total sales don't equal what IRS has you will get a letter. The above mentioned way to report, while not probably the IRS recommended way will work 99.999% of the time.

[taxxcpa]

Path of Least resistence

As long as it does not cause the taxes to be wrong, I tend to follow the path of least resistence. In this case, report the sale and show the cost as the same amount as the sale. Next year when the sale is closed, show the actual sales and purchase values.

I haven't read what the IRS asks you to do, but if it requires somethilng on the Schedule D that the software won't handle, then I would do it the only way the software will handle it. You could also attach a written explanation whether it is required or not.

When I do something that may be doubtful, I always disclose it so I can't be accused of sneaking it in.