No. of Recommendations: 13
Author: brucedoe | Date: 4/27/05 10:01 AM | Number: 12411
It is not as much of a pain to sell a fund in which you have reinvested dividends and capital gains as the other repliers say. Most, if not all, mutual fund companies will provide you with a record and make the calculations for you.

Take my word for it. It can be a royal pain!! Brokers have absolutely no responsibility to track your cost basis!!

Let me tell you a story:

I am currently working with a widow on her estate, in which she has just sold all of her Phoenix Bond Fund (PHTBX) that her late husband had purchased back in the early 1980s. I was asked to find the total cost basis so we could figure out capital gains for her income taxes.

She remembered that her late husband had purchased several large lots at different times, and reinvested the dividends for several years, on a sporadic basis, but she didn't even know if her husband had kept any records of any of the purchases. I spent weeks digging through her husbands old records and found some information, but not the details needed to calculate cost basis. I had hoped that the broker they had been using could provide the info.

Unfortunately they had changed brokers twice since the original funds were purchased, and brokers normally do not carry cost info over from a previous broker. The current broker had detailed records only back to 1998, and microfiche of the end of year summaries back to 1995, when they moved their account there, but no information prior to that.

I found the name of the previous broker who had since retired (same firm, by the way - just a broker in a different city, and after about six weeks, together we found some more microfiche in a warehouse that provided a few more details back to 1993. However, the warehouse was not willing to pull, or didn't retain, all the individual records necessary to determine cost basis on the dividend reinvestment shares.

Another complication was that the original shares were called 'National Tax Exempt'. Working directly with Phoenix I found that the name Phoenix was the result of some sort of merger, and the new shares were exchanged at 1.1078 to one.

To make a very long story shorter, I was finally able to find records for some of the original purchases of National Tax Exempt shares, but I was not able to find the cost basis for any of the shares that were purchased by dividend reinvestment, which accounted for about 25% of the shares she sold. The end result is that it looks like I will have to assign a cost basis of $0 for tax purposes for about 25% of her shares. That will cause a big tax hit that should not have happened. I have contacted the IRS to see if we can work something out - maybe they will accept a reasonable estimate of cost basis.

The moral of this story is: DO NOT DEPEND ON YOUR BROKER, THE MUTUAL FUND COMPANY, OR ANYONE ELSE TO KEEP COST BASIS INFORMATION. Keep your own good clean records for every purchase and sale, including every dividend reinvestment, and the associated fees if any, so that your heirs won't have to pay someone to do all the financial archaeology that I had to go through for this widow.

Personally, I think dividend reinvestment record keeping is far more trouble than it is worth. I would much rather accumulate dividends from all sources in a single money market fund, and once a year use that money to help with rebalancing the portfolio.

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