Message Font: Serif | Sans-Serif
No. of Recommendations: 1
On Fri, 02 May 97 09:44:00 -0600, JeanDavid wrote:

I bought a closed-end mutual fund in about 1967 that

traded as a stock on the NYSE. I re-invested capital gains.

Now capital gains on stocks can be evaluated

FIFO or identified lots method. I took delivery of all the

stock certificates. Sometime in the 1970's or 1980's the

fund changed to an open-end fund for which the average-cost

method is used for computing capital gains.

Last year I sold some of the shares represented by the

certificates by sending them to the fund requesting that

they be sold. Considering them as a stock, I used the

FIFO method of computing capital gains. Since that time, I

have sold all the shares I bought as stock in closed-end

mutual fund. I hope this was legal. Does the IRS consider

those shares as stock (since I bought and sold them that

way), or a mutual fund, since that is what the new

corporation is?

I now have only the shares represented by

the reinvested dividends and capital gains. When I sell

these, I assume I will use the average cost method to

compute the capital gains. I guess I compute the average

cost by dividing the number of shares I have by the cost

basis as given by, e.g., Quicken, since I have a record

of all my transactions in there. Right?

Problem is: A closed end mutual fund is still a mutual fund (or more properly, a "Regulated Investment Company" (or RIC) as defined by the Internal Revenue Code. And so the laws, rules and regulations applicable to RICs also apply to closed end mutual funds.

The good news is that you took the shares in your posession. One of the methods of selling a mutual fund is the "specific shares method". But you blew it when you elected the FIFO method (which is also a valid method to sell mutual fund shares). Now that the FIFO method has been elected, you MUST stick with the FIFO method for all shares remaining in the fund. Rats.

Your problem is that you sold all of the "shares" using the FIFO method, but ignored the reinvested dividends. Owch. Can't do it. FIFO means FIFO. First in-First out. Regardless of HOW they were purchased (via reinvested dividends or direct cash purchase). So, when the original sales were made, it appears that your share identification for FIFO purposes was invalid. Interspersed with your "original" purchased shares should have also been those shares that you purchased via "reinvested dividends".

So you've got TWO strikes against you:

1. You are now stuck with the FIFO method.

2. Your gain or loss computation on your original "shares" was probably incorrectly computed.

What to do now?? Well, the right thing to do would be to recompute your gain/loss on the sales transaction, and file an amended 1996 individual income tax return (via Form 1040X). Since you have made a FIFO election on a timely filed return, you can't go back and select another method. So you're still stuck with FIFO. BUT, you'll recompute your gain/loss using the FIFO on the various "reinvested" shares interspersed with your other shares. Then you would continue with the FIFO method with your remaining shares.

But the curious thing is that, you may have thought that you used the FIFO method, but you may have REALLY used the specific identification method. If you specifically identified the shares sold, that may be your "out" card. If this is the case, you would be able to "identify" your remaining shares. Obviously, I don't know what you actually did without seeing more of the transaction history of the actual shares.

You might also decide to ignore what happened last year, under the theory of "what is done is done" (not recommended). But should you chose to do so, whatever method you used to dispose of your initial shares MUST be continued to be used to dispose of your remaining shares.

You've got kind of an "odd" issue on your hands. I hope that this is of some help to you. If you need any clarification, please feel free to e-mail me directly or leave another post right here.

Thanks for the question...

TMF Taxes

Roy Lewis>>
Print the post  


In accordance with IRS Circular 230, you cannot use the contents of any post on The Motley Fool's message boards to avoid tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions.
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.