I am not an accountant

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scrim67's picture
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Joined: 2005-04-28

I have a client who is showing a very sizable long term gain (cost basis 50k gross proceeds 90K) on their 2005 1099 form.    They bought the fund in 1999 and sold it in 2005.
I ran a hypo on this fund and the average annual return was about 2% during this time frame.
I also looked at historical prices for the time period and the share price is basically the same at where they bought it.
I'm no accountant but something just doesn't seem right here.
Help?!
scrim
 
 

TheLostSoul's picture
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Joined: 2006-07-20

If they bought the fund and reinvested the div and capital gains that could be it. When you reinvest these items they are added to your cost basis, because you report them on your 1040 return every year and you pay taxes then.

scrim67's picture
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Joined: 2005-04-28

that would make the cost basis higher lessening the tax burden.
this is done to prevent being taxed twice.
still doesn't make sense.
scrim

Indyone's picture
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Joined: 2005-05-31

No, it certainly doesn't.  It makes me wonder if there are more purchases that are missing for some reason...or if the purchase date is incorrect.  Sometimes that happens when funds are transferred again and again and the purchase date gets lost.  If that's the case, there are probably reinvestments not showing also.

FreedomLvr's picture
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Joined: 2006-02-10

Did the stock ever split?

Indyone's picture
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Joined: 2005-05-31

It's a mutual fund...those don't usually split...

knucklehead's picture
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Joined: 2006-07-27

scrim67 wrote:
I have a client who is showing a very sizable long term gain (cost basis 50k gross proceeds 90K) on their 2005 1099 form.    They bought the fund in 1999 and sold it in 2005.
I ran a hypo on this fund and the average annual return was about 2% during this time frame.
I also looked at historical prices for the time period and the share price is basically the same at where they bought it.
I'm no accountant but something just doesn't seem right here.
Help?!
scrim
 
 

Who cares? It's between him and his accountant.

FreedomLvr's picture
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Joined: 2006-02-10

Indyone wrote:It's a mutual fund...those don't usually split...
Okay, so I typed that while in Food Coma (I ate a double decker turkey and corned beef sandwich).  Thanks Indy!
 

NASD Newbie's picture
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Joined: 2005-08-01

knucklehead wrote:
Who cares? It's between him and his accountant.

For you young people who are reading this--whatever you do, don't become a fool like this guy and his alter ego Philo.
Just to touch a rule.  Unless you are a qualified accountant you should not give tax advice--however if Knucklehead had an IQ higher than room temperature he'd know that a rate of return on an investment is not a tax question at all.

knucklehead's picture
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Joined: 2006-07-27

NASD Newbie wrote:knucklehead wrote:
Who cares? It's between him and his accountant.

For you young people who are reading this--whatever you do, don't become a fool like this guy and his alter ego Philo.
Just to touch a rule.  Unless you are a qualified accountant you should not give tax advice--however if Knucklehead had an IQ higher than room temperature he'd know that a rate of return on an investment is not a tax question at all.

I hope your dog gets hit by a car.

troll's picture
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Joined: 2004-11-29

knucklehead wrote:NASD Newbie wrote:knucklehead wrote:
Who cares? It's between him and his accountant.

For you young people who are reading this--whatever you do, don't become a fool like this guy and his alter ego Philo.
Just to touch a rule.  Unless you are a qualified accountant you should not give tax advice--however if Knucklehead had an IQ higher than room temperature he'd know that a rate of return on an investment is not a tax question at all.

I hope your dog gets hit by a car. I wouldn't wish that fate on my worst enemy's car!

knucklehead's picture
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Joined: 2006-07-27

joedabrkr wrote: knucklehead wrote:NASD Newbie wrote:knucklehead wrote:
Who cares? It's between him and his accountant.

For you young people who are reading this--whatever you do, don't become a fool like this guy and his alter ego Philo.
Just to touch a rule.  Unless you are a qualified accountant you should not give tax advice--however if Knucklehead had an IQ higher than room temperature he'd know that a rate of return on an investment is not a tax question at all.

I hope your dog gets hit by a car.
I wouldn't wish that fate on my worst enemy's car!

I guess it would be really gross to hit NASD Newbie's dog and end up with human body fluids all over my car.

Proton's picture
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Joined: 2005-08-28

A couple responses to the original post:
1. As noted in an earlier response, be certain that you do not give tax advice.  However, you can and should work with the client's accountant to help him frame the issue.
2. Clients frequently misunderstand the impact of reinvested distributions on basis and the impact can be dramatic with respect to realized gain/loss.  I'm not saying that this is the case here, but it is the first thing to check.
3. I agree that this one sounds a little odd, but this is actually a great opportunity for you.  Call the client and get the name of his accountant.  Contact the accountant and work with him to solve the problem.
4. The end result is likely to be a happy client and an accountant that will be impressed with you.   Happy clients and impressed accountants will ulimately lead to warm referrals of prospective clients.

NASD Newbie's picture
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Joined: 2005-08-01

The question is not a tax question--what is being asked is how does one explain that 50,000 became 90,000 yet the software being used shows it to be a 2% per year gain.
That number is obviously too small and the question is asking why?
The reinvestment of dividends and gains could explain why the NAV is virtually unchanged--but 50 to 90 is clearly more than 2% per year.
There really can only be three reasons:
1.  The software is faulty--not likely
2.  The input was faulty--quite possible
3.  The result is being misinterpreted.  For example if you ask most kids under forty to calculate something as simple as the yield if a stock pays $1 per share in dividends and is priced at $20 many will correctly divide 1 by 20 but then decide it's .05 percent because they have no clue that the .05 in their calculator means 5% and they have no rough idea what the answer should look like.
That seems to be what's in play here--you kids don't even understand that the question is how could it be so low as 2%.  You think it's a tax question having to do with reinvesting dividends and gains and their effect on basis.
Scary.

scrim67's picture
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Joined: 2005-04-28

I simply gleaned my data using THOMSON FINANCIAL software we use at my firm.
It says average annual total return is 2% during the years she held the mutual fund.
The information on this particular client's account is showing the cost basis and the realized gain aforementioned.
Something is simply not adding up here and it's my job to resolve this.
I'm surmising that the cost basis is off.
I've seen it before where a client transfers a position to my firm and the cost basis is out of whack but usually in that case the cost basis reflects a value of zero.
I will work together with my back office and my client's accountant for resolution.
I'll keep you posted.
scrim

knucklehead's picture
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Joined: 2006-07-27

scrim67 wrote:
I simply gleaned my data using THOMSON FINANCIAL software we use at my firm.
It says average annual total return is 2% during the years she held the mutual fund.
The information on this particular client's account is showing the cost basis and the realized gain aforementioned.
Something is simply not adding up here and it's my job to resolve this.
I'm surmising that the cost basis is off.
I've seen it before where a client transfers a position to my firm and the cost basis is out of whack but usually in that case the cost basis reflects a value of zero.
I will work together with my back office and my client's accountant for resolution.
I'll keep you posted.
scrim

Was there an original fund that was absorbed by the current one? Have you looked at a price chart?

NASD Newbie's picture
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Joined: 2005-08-01

scrim67 wrote:
I have a client who is showing a very sizable long term gain (cost basis 50k gross proceeds 90K) on their 2005 1099 form.    They bought the fund in 1999 and sold it in 2005.
I ran a hypo on this fund and the average annual return was about 2% during this time frame.

How about this.
You said that the NAV remained essentially the same.  I'll wager that what your software measured was a 2% increase in the NAV instead of a much larger increase in the actually market value of the account.

knucklehead's picture
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Joined: 2006-07-27

Have you considered telling your client to take a look at the statements and confirms that have been sent to him? Your time SHOULD be more important than trying to figure out this garbage.

vbrainy's picture
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Joined: 2006-07-26

scrim67 wrote:
I simply gleaned my data using THOMSON FINANCIAL software we use at my firm.
It says average annual total return is 2% during the years she held the mutual fund.
The information on this particular client's account is showing the cost basis and the realized gain aforementioned.
Something is simply not adding up here and it's my job to resolve this.
I'm surmising that the cost basis is off.
I've seen it before where a client transfers a position to my firm and the cost basis is out of whack but usually in that case the cost basis reflects a value of zero.
I will work together with my back office and my client's accountant for resolution.
I'll keep you posted.
scrim

What is the fund and what was the holding period.

scrim67's picture
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Joined: 2005-04-28

Here is the answer:
When my firm absorbed another firm a few years ago the systems didn't "talk" to one another so any cost basis info is not trustworthy.
I just looked at her old statements and saw the date that this fund converted her B shares to A shares.   Once I got that date I subtracted 8 years to figure out her purchase date.
Using this methodology, I am fairly confident I have arrived at her cost basis.
I am still awaiting a return call from her accountant to go over these numbers.
I does appear she did have a significant gain.
Since the fund in question is a tax managed fund that tries to avoid capital gains payouts annually it certainly does appear much of the increase is in the NAV.
scrim

scrim67's picture
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Joined: 2005-04-28

So to summarize she actually purchased this in 1997 not 1999.
I guess it's good news bad news.
She made about 40k but will have to be capital gains taxes on the gain.
I'm glad I have a switch letter on file for compliance.
scrim

Greenbacks's picture
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Joined: 2004-12-21

I use Yahoo finance in the history section you can pull up Adjusted cost basis. I worked for several CPA firms for many years and have done thousands of tax returns. This is what we used when push comes to shove and we have no other info to go on!
On a side note I do & can give tax advice! Another advantage of not being in wirehouse with hand cuffs on!
Good luck!
    

NASD Newbie's picture
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Joined: 2005-08-01

Greenbacks wrote:
I use Yahoo finance in the history section you can pull up Adjusted cost basis. I worked for several CPA firms for many years and have done thousands of tax returns. This is what we used when push comes to shove and we have no other info to go on!
On a side note I do & can give tax advice! Another advantage of not being in wirehouse with hand cuffs on!
Good luck!

What is the upside of offering tax advice on the side?

knucklehead's picture
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Joined: 2006-07-27

I'm an accountant and the MOST I'll do is bring an issue to someone's attention, so they can give their accountant a heads up. It's a funny thing...when all you do is annuity business, you don't have to mess with 1099's and cost basis stuff. What an easy life!

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