Tuesday, October 14, 2008


{ IMPORTANT REMINDER – Before I begin my post I just want to remind you that tomorrow, October 15th, is the final deadline for filing your 2007 Form 1040 on time. If you owe “Sam” it is very important that you get your completed Form 1040 (or 1040A) signed and in the mail by October 15th – even if you cannot pay all or any of the tax due on the return. If “Sam” owes you it is not an issue – there is no penalty or interest (other than for underpayment of estimated tax) if “he” owes you. }

Now on to the business at hand -

Can you guess what provision of the recently signed kitchen sink “don’t call it a bailout” Act is my absolute favorite?

No it is not the one that “fixes” the standards imposed on tax prepares so that they now conform to the standards imposed on the taxpayer. This issue never really concerned me all that much.

And no, I do not ride my bike to work. I work out of my home, so my commute consists of walking from the living room to the office.

I am obviously “pleased as punch” that the annual AMT fix was included – but that is not my favorite “sweetener”.

Of course it is the provision that brokers will be required to report (to the taxpayer and to the IRS) the adjusted cost basis of publicly traded securities, and identify the gain or loss as short-term or long-term, in addition to the gross proceeds on Form 1099-B.

Actually many brokerage houses already do include a Profit and Loss statement, showing both sale and purchase information and indicating the amount of gain or loss, in their Consolidated Year-End Statements, and most mutual fund houses will provide an Average Cost Statement for fund shares sold during the year – although this information is not also sent to the IRS.

This information is essential for we tax professionals to properly complete a return that involves the sale of investments. It is the rare client that keeps complete and accurate records of the purchases, splits, dividend reinvestments for all his/her stocks and mutual funds.

The biggest culprit for the delay in the timely completion of a 1040 - and the cause for many a GD extension - is missing cost basis information!

Often the Profit and Loss reports in the Consolidated Year-End Statements are incomplete. Mostly this is because the initial purchase, and/or some of the dividend reinvestment, was made while the taxpayer was a client of a different brokerage firm. The YE Statements will only reflect cost basis information for purchases made by that firm – except on the very rare occasion when either the client or the broker, who has moved over from another house, has provided the firm with the appropriate missing cost basis information.

As is common today with stockbrokers, there is frequent moving from firm to firm as upward mobility. A broker may start out with Oppenheimer and then move to UBS for awhile and then move again to Merrill Lynch (or should I now say Banc of America) as they are enticed by signing bonuses and increased income opportunities. Many of these brokers will take their clients with them from house to house, as the enticing firm hopes will happen. While the broker, who has purchased all of a taxpayer’s stocks and funds over his investment life, should know the correct cost basis for each investment purchased, this information does not always make it to the new firm’s computer data base (mostly due to the laziness of the broker).

And then there are still brokerage firms whose year-end 1099 statements do not include a P+L – only the Gross Proceed information required to be reported on a 1099-B.

Many mutual fund houses will only report the cost basis of shares purchased within the past five or so year period (and only on an “Average Cost” basis and not using “FIFO”). A taxpayer may have purchased his initial shares of a Fidelity fund a dozen years ago, and have done so directly from Fidelity, but apparently the Fidelity data base does not go back that far.

While I may have some of the information available to me from documentation I have copied over the years and attached to prior year tax return copies in my files, and some information can be determined or “estimated” via online resources, I really do not have the time during the tax filing season to waste doing excessive research for one return.

If the client contacts me during the “regular” year, say in November or December, with his/her investment sales for that year I would have no problem doing the necessary research, for an hourly fee of course (although probably less than the fee that I would be charging if forced to take precious time in the tax season to do the work). But I can count on the fingers of one hand the number of clients who have done just that over the past 35+ years.

No, the best source of cost basis information is the broker who purchased the investment for you in the first place.

Over the years I have gotten many of my clients’ brokers properly trained – and to their credit I must admit that for the most part they have been ready and willing to be of help in this area. I actually have several brokers who send me directly (via postal mail or as email attachments) copies of the clients’ Consolidated Year End Statements, with any missing cost basis information filled in by hand. This includes the various several corrected copies that have become common lately. Other brokers have provided me with their email address so I can contact them directly to request missing information, and I usually get a prompt and thorough response. This is a big help to me in properly preparing the tax return, and is greatly appreciated.

This issue was on my mind recently as one of the GD extensions I worked on had lots of cost basis.

For one thing, the client has three separate brokerage accounts with the same firm – all in the client’s name only. During 2007 the broker moved to a new firm and took the client with him, opening three accounts at the new firm. So I have six (6) sets of Consolidated Year-End Statements to contend with. And I am not talking about a handful of trades. Each of the six different accounts had a multitude of trades. All-in-all there is pages and pages and pages of trades to report! While both the old and the new firm include a P+L report in the year-end statement, there are a great many sales that do not have purchase details.

The client has confirmed that he has had the same broker since day one, so it was the same broker that made each and every purchase.

Without questioning why the need for three separate accounts, and without accusing the broker of “churning” the accounts to generate commissions and fees (if the broker has college age children I certainly know who paid the tuition last year), the bottom line is that since there was only one broker who made all the purchases over the years there is absolutely no reason why that one broker cannot provide me with the missing cost basis information.

Unfortunately for we tax preparers, this new important requirement does not take effect for a few years. It begins with stock acquired in 2011, mutual fund shares acquired in 2012, and “other securities” acquired in 2013. Too bad it did not begin with all investments acquired in 2009 – I see no reason why it could not. Oh well. I plan to put in 50 tax seasons before retiring - I have 13 more to go - so I will be able to benefit from this provision.

This new requirement will not absolve taxpayers from the need to keep good investment records! And note that it only applies to shares of stock purchased on or after January 1, 2011. So if in 2012 you sell stock that you purchased in 1993 the broker has no obligation to report the cost basis. My special report MY BEST ADVICE has a section on “Keeping Track of Investment Cost Basis”. Click here to order.
A major problem in the calculation of cost basis for stocks sold comes when the company whose stock is initially purchased has gone through a multitude of splits, mergers, spin-offs and buy-outs over the years – the most infamous example being AT+T. I hope the information required to be reported by brokers will be correctly adjusted for such items.
And what of inherited investments – will the brokerage houses be required to determine the date of death value?

Any questions?


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