Security cost basis

Stubby wrote in news:8d9f092c-a39d-4b9b- snipped-for-privacy@hh9g2000vbb.googlegroups.com:

I believe the IRS will want documentation from you about the cost basis, if what you say on your return raises doubts. Probably the IRS computers have data on at least the most common stocks and mut fuds going back years.

If your gains are outsized, it may be more advantageous for you to donate the securities to charity, because basis doesn't figure in that case. Your donation is valued as a charitable contribution at the value of the date of donation. Basis doesn't come into play. No capital gains taxes either. You'll get a statement from the charity as to what they calculate the value of the donation. At least that is what I have done several times with appreciated securities. I set up a charitable trust account at Fidelity, but other institutions will be happy to oblige as well. In my case Fidelity had the lowest minimum to set it up.

Hi, Stubby.

Just remember Rule 1: The IRS doesn't have to prove anything. It's up to YOU to prove your basis.

RC

-- R. C. White, CPA San Marcos, TX (Retired. No longer licensed to practice public accounting.) snipped-for-privacy@grandecom.net Microsoft Windows MVP (2002-2010) (Using Quicken 2012 Deluxe R 3 and Windows Live Mail in Win7 x64)

If you sell a stock you will have to pay capital gains tax. The gain is the current price minus the cost basis. The IRS may want to check this by contacting the finiancial institution that holds the stock for you.

In my case that is usually Vanguard. But I believe Vanguard is only keeping 5 years of cost info. How can the IRS check it if my Quicken data has failed? Or will Vanguard switch to some sort of average-cost method that eliminates the oldest dollar amount and adds in the newest?

Not if you sell it at a loss!

True, and you can carry any such loss forward and deduct a part of it from any other capital gains over the next few years. I don't remember how long this can be used but I think it is four or five years.

Gordon

See IRS Pub 550 - generally, you can carry the unused portion (only allowed to use your losses up to $3,000 per year to offset gains) forever until it is used up. (caveat: not a professional, check with your own tax adviser for details).

It's a huge change. For this tax year (for returns for t/y 2011 filed normally by April 2012), you'll see a new Schedule D, no more schedule D-1s, and a new form 8949 ("Sales and Other Dispositions of Capital Assets.") where you list your individual details of capitol gains/losses that USED to be reported on Sch D.

And depending on who and what determines the cost basis as a result of the new changes that Bartt indicated, you can have up to THREE 8949s filed with your return, each of which feeds the revamped Sch D, which in turn feeds (generally) the 1040.

Yikes!

Stubby wrote in news: snipped-for-privacy@j10g2000vbe.googlegroups.com:

I'm in a similar situation. What Quicken tells me is the basis for some of my Magellan that I just sold can't be true. So now I'll have to go back decades to figure it out. But (according to the IRS), it's my duty to have the records. If all else fails I'll have to guestimate, and likely it's going to be a loss

Hi, Stubby.

The point is that you are asking us to tell you how to perform magic. :>(

If it comes to a court case (not likely), the IRS could take the extreme position of assuming that all your shares cost you NOTHING. So your entire sales proceeds are your capital gains. It would then be your burden to prove that you did, in fact, have some basis in the shares. How you do that is YOUR problem. It would have to be something that satisfies the court that you have at least made a good faith effort and that your proposed determination is reasonable.

In an unrelated case that I read long ago, a banker was trying to justify his travel and entertainment expenses - for which he had lost or destroyed his records. The judge told him, "Mr. Banker, you had the evidence in your hand. All you had to do was hold on to it. You didn't do that, and the court has no other evidence that you paid anything at all. So we accept the Commissioner's determination."

Remember, Stubby, YOU get "the first shot". Whatever you put down on your return is accepted as fact - unless and until the IRS questions it. The IRS gets the next shot, and whatever they determine is then accepted as fact - unless and until you can convince the judge otherwise with your next shot. When you cannot produce evidence, your job is not always impossible, but it is a LOT harder. :>(

When I was in practice, we had several tools for reconstructing bases of stocks. My practice ended over 20 years ago and I don't know how many of those tools are still available. You might ask your own CPA about these. One was the annual "Dividend Record"; these showed not just cash dividends, but also dividends paid in stock, stock splits, and some other such transactions from which bases could be adjusted, assuming we had a starting point. (A 3-for-1 split adjusted the basis from X to 1/3 of X, but we still needed to know what X had been.) A much more complete - and expensive - resource was the Capital Changes Reports from CCH, the publisher Commerce Clearing House. In addition to tracking splits, mergers, spin-offs and such over many years, it also offered prices of some stocks at some points. So if you knew that your stock was bought in 1958, and you found that it had been valued at $100 per share in an acquisition that year, you might convince the IRS that $100 was a good-faith estimate of its original cost, and then work through later splits. It can be a LOT of work, so be ready to do it yourself or pay your CPA a fee for hours of professional work. Yes, I've done it, quite a few times, but not recently.

With a mutual fund, reinvesting dividends quarterly, the chain of basis calculations can get very long and tedious. That's why we (and the IRS) appreciate a fund manager (such as Vanguard) who will use its computers to maintain the chain of calculations for us. Without that resource, though, I don't know any shortcuts in doing it ourselves. I'm not aware of the "new IRS rule" you mention. Does it require the FI to reconstruct the history before 2012? Does it tell the FI how to do that? They will still need a starting point.

If you did not purchase the original stock yourself, but inherited it or acquired it in some other way, your starting basis is probably not your "cost". It may depend on the value of that stock at some specific date, such as the date of the previous owner's death, plus "adjustments" later, to arrive at your "adjusted basis".

See how quickly we can move from a simple "cost basis" to an "adjusted basis" that might be much more complicated?

My original comment still stands, Stubby: It's up to YOU to prove your basis.

How to YOU plan to do that?

RC

-- R. C. White, CPA San Marcos, TX (Retired. No longer licensed to practice public accounting.) snipped-for-privacy@grandecom.net Microsoft Windows MVP (2002-2010) (Using Quicken 2012 Deluxe R 3 and Windows Live Mail in Win7 x64)

We're drifting off point. My question is how can I provide a cost basis to the IRS when neither Vanguard nor I have any records?

RC - As I mentioned earlier in this thread, there's a *huge* change in how cost basis is reported to the IRS starting (but not finishing!) in THIS tax year, and continue to roll out over the next few years. For a good overview, see

if you care!

Goodbye old Sch D as we knew it, goodbye D-1 completely, hello new 8949! You retired 20 years too soon to have this much fun with the new forms and reporting!

Hi, Andrew.

Thanks for that link. I'll study it when I get a chance.

Oh, I had plenty of fun during my 30 years of practice! ;^}

But none of this new reporting can help Stubby now. His first post said, "...Vanguard is only keeping 5 years of cost info." This leads me to believe that he has held his shares more than 5 years. And his latest post said, "...since neither Vanguard nor I have any records?" :>(

RC

-- R. C. White, CPA San Marcos, TX (Retired. No longer licensed to practice public accounting.) snipped-for-privacy@grandecom.net Microsoft Windows MVP (2002-2010) (Using Quicken 2012 Deluxe R 3 and Windows Live Mail in Win7 x64)

R. C. White wrote:

RC - As I mentioned earlier in this thread, there's a *huge* change in how cost basis is reported to the IRS starting (but not finishing!) in THIS tax year, and continue to roll out over the next few years. For a good overview, see

you care!

Goodbye old Sch D as we knew it, goodbye D-1 completely, hello new 8949! You retired 20 years too soon to have this much fun with the new forms and reporting!

Hi, Stubby.

We HALF agree on this. That's why I mentioned the third-party resources, such as the annual dividend record and CCH's Capital Changes Reports. Those can help us reconstruct your account. But we still need a starting point: Date, Dollars, Number of Shares. If we don't have the starting numbers, then MAYBE we can work backwards from the ending amounts. But you said that neither you nor Vanguard have records; that's why I suggested magic.

How do you do this? In my experience, $1,000 worth of a stock would cost $1,000. If you got it for $900, that's the kind of transaction that the IRS would probably like to see documented. And there's a good chance that your basis in that $1,000 of stock might be only $900, not $1,000.

This is the kind of information we could get from those third-party resources.

We're getting off the track here; at least I am. Changes in the VALUE of a stock seldom have anything to do with the BASIS of that stock. Reinvested dividends often reflect changes in both value and cost since additional shares are purchased at current market values. But in all the cases that I can recall, mutual fund dividends are based on dollars per existing share, rather than on a percent of their dollar value. (I sold all my mutual funds years ago and no longer have clients whose mutual fund reports I can study, so maybe my memory has a gap here.)

But we should be able to work this out IF we know the number of shares at some starting point.

OK. That's essentially what I said earlier. But we still need signposts along the way. If there was a single purchase at the beginning and a single sale or redemption at the end, this could work. But if there were other purchases and sales along the way, then we need details of those transactions. Just knowing that we bought SOME shares at SOME price on SOME date in 1999 won't help if we don't know whether it was before or after the June 14, 1999, dividend distribution. You said that "neither Vanguard nor I have any records". In that case, we'll probably need some magic. :>(

I'm sorry you had an unhappy experience with a CPA a few years ago. In my own experience as a public accountant, including the years when I limited my practice to tax matters, I almost never dealt with a client on an ad hoc basis. The client and CPA need to establish good rapport and maintain that year after year. The first year's bill will probably need to be higher because a lot of background must be established. I always asked a new client to bring the past 3 years' returns so that I could learn the background. Sometimes we needed to prepare amended returns to correct errors; these could result in refunds or additional taxes, and often affected the bases of assets that were still held and would become a part of future transactions - like your current situation. My fees (more than 20 years ago) usually were much less than $750, but in a few cases were much more; these depended on the amount of time needed. Annual fees after the first year were usually much lower after the background was established and, if needed, corrected.

The greatest value of a continuing relationship with a tax professional is not the mechanical preparation of the return. Any city has plenty of tax preparers who can prepare returns - at varying degrees of competence and fees, which are not always related. Too many of these preparers disappear after "tax season" and spring up again next year. For the typical taxpayer, whose entire income is on a W-2 and who has few complications, these preparers are usually adequate. But for a taxpayer with a more complex tax situation, the real value of a CPA is the ability to understand - and to explain to the client - the effect that financial transactions and investments will have on his tax return and on his long-term wealth. The CPA needs to understand the client's attitude toward taxes and other financial matters before giving advice on such subjects as whether to engage in installment sales of real estate or "tax-free exchanges", or whether to form a corporation, or on how to plan the estate so that heirs will retain family wealth that might otherwise go to taxes. Subjects like that just won't come up in filing a single year's tax return for someone you probably will never see again.

Very few of my clients were for only a single year. Most relationships lasted for a decade or more - sometimes several decades. Many of my clients told me they valued being able to call with a "quick question" during the year and getting an answer without my "having to pull the file" just to remember who was calling. Some also mentioned being able to sleep without worrying about whether their taxes were in order.

RC

-- R. C. White, CPA San Marcos, TX (Retired. No longer licensed to practice public accounting.) snipped-for-privacy@grandecom.net Microsoft Windows MVP (2002-2010) (Using Quicken 2012 Deluxe R 3 and Windows Live Mail in Win7 x64)

I believe no magic is needed to determine the cost basis of a long- held security. You do need a list of the transactions that occured on the stock itself, but not on my individual account. For instance, suppose you bought $1000 worth of a stock for $900 and it pays a 2% dividend on, say, January 1 and that is reinvested. If you see the value of the stock go up to $1020 during the year, you'll know all is well and you can increase the cost basis in your records by $20 to $920.

Then follow that forward up to the present, observing splits, money removed and added. You end up with a cost basis in your model of the account. Scale everything so that the actual stock value matches your presumed value. The scaled basis with then be accurate.

Unfortunately, I cannot afford a CPA. I used one to do my return(s) a few years ago when I was laid up and suffering the effects of anesthesia and chemo that resulted in "chemo fog". I just couldn't make sense of anything. It got down to the wire and the CPA was happy to take care of it quickly and efficiently, for $750 of my retirement funds!

Ha. And double Ha.

I had the pleasure, a few years back, of getting my parents' finances in order. By this time my father was in a nursing home with dementia and my mother, while competent, had never been really involved in my father's (pretty much successful) investments. However, he had been buying, selling, and holding stocks since the 1950s, and, at the time, had all the paper stock certificates (!) in an old suitcase in the back of a closet. And, yes, what he had in there was worth a significant amount of money. And my mother had not an idea of what was going on.

I was having fun entering everything into Quicken and was seriously concerned about the cost bases of stocks bought back in the late 50s and

60s, back, I guess, before yearly statements were the rule. And, out of the blue, one of my brothers popped up with a 3"x5" "investment ledger" into which every transaction my father had done was written in very careful print.

It saved the day. All the costs bases, including the dividend reinvestment programs, were in there.

Rule: SAVE those annual statements. Forever.

Ken Becker

Hi, Ken.

Thanks for that story!

That's music to the ears (and heart) of an old packrat like me. ; Hi, Andrew.

Ha. And double Ha.

I had the pleasure, a few years back, of getting my parents' finances in order. By this time my father was in a nursing home with dementia and my mother, while competent, had never been really involved in my father's (pretty much successful) investments. However, he had been buying, selling, and holding stocks since the 1950s, and, at the time, had all the paper stock certificates (!) in an old suitcase in the back of a closet. And, yes, what he had in there was worth a significant amount of money. And my mother had not an idea of what was going on.

I was having fun entering everything into Quicken and was seriously concerned about the cost bases of stocks bought back in the late 50s and

60s, back, I guess, before yearly statements were the rule. And, out of the blue, one of my brothers popped up with a 3"x5" "investment ledger" into which every transaction my father had done was written in very careful print.

It saved the day. All the costs bases, including the dividend reinvestment programs, were in there.

Rule: SAVE those annual statements. Forever.

Ken Becker

Hi, Stubby.

Not really. YOU are still the party with something to prove. And YOU have (or had) more access to the evidence of your specific transactions than anyone else. The IRS does not need to prove that you are wrong; they only have to challenge your assertions and make YOU prove that you are right.

The only time I can think of when the burden of proof is on the IRS is when they allege a crime - such as fraud.

The good news is that whatever you put on your return will PROBABLY never be challenged, so what you write down will be accepted as fact without the requirement that you produce proof. Just be prepared to justify your numbers IF they are challenged - or to pay additional taxes if you are unable to convince the auditor, or his supervisors, that your estimates and calculations are reasonable in the circumstances. If worse comes to worst, you'll have to either (a) petition the Tax Court for relief from the IRS Commissioner (and don't pay until the case is settled), or (b) pay the additional tax demanded, then file a claim for refund and, when the claim is denied, sue the United States in federal district court for your refund. In either (a) or (b), YOU still bear the burden of proof. And the costs of litigation.

Of course, I am not and have never been a lawyer, so you may hear opposing arguments. ;^}

RC

-- R. C. White, CPA San Marcos, TX (Retired. No longer licensed to practice public accounting.) snipped-for-privacy@grandecom.net Microsoft Windows MVP (2002-2010) (Using Quicken 2012 Deluxe R 3 and Windows Live Mail in Win7 x64)

OK. I'll do my best at determining the cost basis of those old securities. That should throw the burden of proof onto the IRS. Does anyone know if Club Fed offers internet service for white collar crimals?