How can I determine my basis for a gift of mutual funds?

Question

My parents, saving for college many (20+?) years ago, purchased some Evergreen mutual funds for each of their children. I believe the accounts were established in the children's names.

Thanks to some scholarships and working for the school, I graduated with about $3500 left in that account.

The account has changed brokers (Wachovia?, First Union, Wells Fargo), and each time the investments in the portfolio would be converted to the acquiring bank's equivalent fund.

Fast forward to 2013--the account has increased in value (through dividend reinvestment and appreciation) to about $6500.

I sold the mutual funds to finance construction of our new home. I received a form 1099-B from Wells Fargo detailing the basis of $142 in dividends reinvested while they held the account. They also sent a 1099-B basically saying "we don't know your basis for the principal, we just know you sold it for $6300".

How can I determine my basis for this gift of mutual funds?

Answer 1

You'll have to go back to your records and find the original investment amounts and calculate all the reinvested dividends. It is your responsibility. You may ask the banks for historical statements of the relevant accounts, but:

1. They don't have to keep it for so long.

2. They'll charge tons of money for doing the research.

If you know how many units you held in the fund, you can try and get the historical quotes form the funds, but that may not be as reliable and IRS might audit you out of that.

It may be cheaper to just pay long-term capital gains tax on the whole proceeds amount than spend hundreds of dollars on trying to figure out the basis.

Get a professional (EA/CPA licensed in your state) advice on the matter.

Answer 2

Your basis depends both on their basis and whether or not they held the shares at a gain or loss at the time of the gift.

If they held the shares at a gain at the time of the gift, your basis is their basis.

If they held the shares at a loss at the time of gift, your basis is more complicated and depends on what you sell it for:

• If you sell it for more than their basis, your basis is their basis.
• If you sell it for less than its value on day of gift, your basis is its value on day of gift.
• If you sell it for between those numbers, your basis is the sales proceeds (i.e. the law says you have neither gain nor loss)

The point of this scheme is to prevent people from giving away unrealized losses. If an asset held at a loss is given away, this operates to forfeit the loss. See IRS Publication 551 ("Basis of Assets") for more details.