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I'm doing the investment club taxes, and have a question.

For background, we disbanded the club entirely in 2015, and did the complete distribution in stock to the members, so no one has any capital gain on the actual distribution since nothing has been sold.

When I read the Form 1065 instructions on what to put on Line 19a to show the distribution, I read this on page 40 of the instructions:

However, the value of marketable securities doesn't include the distributee partner's share of the gain on the securities distributed to that partner. See section 731(c)(3)(B) for details.
If the amount on line 19a includes marketable securities treated as money, state separately on an attached statement to Schedules K and K-1 (a) the partnership's adjusted basis of those securities immediately before the distribution and (b) the FMV of those securities on the date of distribution (excluding the distributee partner's share of the gain on the securities distributed to that partner).


Since the club was disbanded and everything was distributed to the members as shares of stock, I am reading this that I report the club's basis (which is equal to the members' basis) as the value of the distribution because, even though the shares have appreciated, I don't include the members' share of the gain. By disbanding, there's no one left and no assets left.

And looking at the attached statement, it looks like I report the basis, and then the FMV on the date of distribution less the gain, which is still the same basis since all members are leaving.

Am I reading that right?

Similarly, I think I am reporting basis on the members' Schedule K-1's because there is no gain if everything is transferred as appreciated stock. Gain (or loss) will only be recognized when the member finally sells, but that's their problem to track.

I think the statement that I attach to the members' K-1's should include a statement that the distribution was done completely in stock, and so there is no gain.

If I am reading this correctly, it doesn't look like I report FMV anywhere on the taxes, although I have that in the records.

Is this correct?
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There are a number of inconsistencies/errors in your comments. First, member's cost basis does not equal the club's cost basis in the shares owned by the club. Member's cost basis is based on what they contributed, less what they withdrew, plus/minus their shares of every item of income/expense/gain/loss during their time in the club.

The instructions for lines 19(a) and 19(b) do not apply to investment clubs because investment clubs do not treat shares of stock as marketable securities. Line 19(a) should only include the cash distributed. The stock gets reported on 19(b) and is reported at the club's cost basis.

On the K-1, cash is reported on line 19, code A; club stock cost basis is reported on line 19, code C.

Were you using investment club accounting software in the past (bivio, Club Accounting 3, myiclub.com)? If so, you should use that software to prepare your final return as it will calculate everything for you correctly.

There is no statement to attach to the K-1 as the K-1 would never report the individual member's gain or loss from leaving the club.

The member gets his/her gain or loss, and FMV and personal cost basis for the shares received from his/her withdrawal report. A copy of the withdrawal report should be provided to each member along with his/her K-1. The withdrawal report is not sent to the IRS or state tax authority.

As an aside, I don't understand how there could be no cash involved as it is extremely unlikely that you could hold shares of stock with values such that you could distribute whole shares which total to the value that each withdrawing member was entitled to without balancing out with cash. That would be a first for me in over 15 years of working with investment clubs.

Ira
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There are a number of inconsistencies/errors in your comments. First, member's cost basis does not equal the club's cost basis in the shares owned by the club. Member's cost basis is based on what they contributed, less what they withdrew, plus/minus their shares of every item of income/expense/gain/loss during their time in the club.

I understand that, and so this gives me another question. I do have the records for both the club basis and the individual members' basis, so it is not difficult for me to report the members' basis, and I thought that made sense, but perhaps I am mistaken. There are just 2 of us, and we have been the only members since Day 1, so it's pretty easy for me to have the complete records and track it.

The instructions for lines 19(a) and 19(b) do not apply to investment clubs because investment clubs do not treat shares of stock as marketable securities. Line 19(a) should only include the cash distributed. The stock gets reported on 19(b) and is reported at the club's cost basis.

OK, this helps as I was not reading it like that. I will split out the cash and the securities basis as you note.

On the K-1, cash is reported on line 19, code A; club stock cost basis is reported on line 19, code C.

OK. Thanks. Do the members then each just worry about their own cost basis when they finally sell the shares, and not have to report anything else? We do have all of that, and it is correctly reflected at the new brokerage for each of us, so it will be easy to report gains/losses when something is sold.


Were you using investment club accounting software in the past (bivio, Club Accounting 3, myiclub.com)? If so, you should use that software to prepare your final return as it will calculate everything for you correctly.


I never moved to using that as I have had a spreadsheet all these years that breaks everything out for each line. It's different this year because there is final distribution which includes cash and stock, so I wasn't quite sure how to handle that.

There is no statement to attach to the K-1 as the K-1 would never report the individual member's gain or loss from leaving the club.

OK, this helps.

The member gets his/her gain or loss, and FMV and personal cost basis for the shares received from his/her withdrawal report. A copy of the withdrawal report should be provided to each member along with his/her K-1. The withdrawal report is not sent to the IRS or state tax authority.

We actually each already have the withdrawal report which shows that info. We needed it to get the basis reported correctly at the receiving broker, and so I'm thinking I don't need to provide it again.

As an aside, I don't understand how there could be no cash involved as it is extremely unlikely that you could hold shares of stock with values such that you could distribute whole shares which total to the value that each withdrawing member was entitled to without balancing out with cash. That would be a first for me in over 15 years of working with investment clubs.

There is some cash involved, but my question was mostly around how to show the distribution in stock since that does not cause a taxable event until it is sold. The cash that exists was from sales, and so we already had those capital gains/losses to report, as that is where the cash came from, as you have surmised.

You have, as usual, been very helpful, and so I can finish the 1065 and K-1's now.

Thanks so much.
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I doubt you can complete everything correctly on your own. The calculation of the cost basis for the received shares is a complicated calculation - at one time it was detailed in IRS Pub. 541, but I don't think it is now. You can't ignore the cash distributed as that affects the member cost basis that must be allocated across the received shares. Additionally, the receiving broker will (most likely) never have the correct cost basis for the transferred shares because of the rules instituted with cost basis tracking. Those rules state that the receiving broker must take the cost basis information from the sending broker. The sending broker is going to send the club cost basis for the shares transferred. The receiving broker "may" accept correcting information from the beneficial owner of the shares, but doesn't have to. The brokers I have dealt with have all refused to adjust the cost basis on shares transferred from an investment club and have basically said, it's your responsibility to track this and correct it on your tax return when you sell the shares.

Good luck.

Ira
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I doubt you can complete everything correctly on your own. The calculation of the cost basis for the received shares is a complicated calculation - at one time it was detailed in IRS Pub. 541, but I don't think it is now. You can't ignore the cash distributed as that affects the member cost basis that must be allocated across the received shares.

Thanks. I didn't realize that a final cash distribution would need to be reflected across the share basis since this is cash that was received from selling shares, and the associated capital gains have to be reported. I do have the NAIC instructions on doing that, however, and as we had previously had a cash distribution a few years ago, I had already done the adjusting with that cash distribution. That's why I knew the members' cost basis needed to be adjusted, and those adjustments had been made.

Sounds like I need to revisit for this new small amount of cash, and it is a very small amount.

Additionally, the receiving broker will (most likely) never have the correct cost basis for the transferred shares because of the rules instituted with cost basis tracking. Those rules state that the receiving broker must take the cost basis information from the sending broker. The sending broker is going to send the club cost basis for the shares transferred. The receiving broker "may" accept correcting information from the beneficial owner of the shares, but doesn't have to. The brokers I have dealt with have all refused to adjust the cost basis on shares transferred from an investment club and have basically said, it's your responsibility to track this and correct it on your tax return when you sell the shares.


Actually, I took the time to work with the broker to ensure that the members' cost basis was accurate. It took several months (somewhere on the boards, I did mention my Scottrade saga), but they did finally get it correct with the adjusted basis. And then when the accounts were moved to the final broker, I confirmed that the cost basis followed, so that is actually correct.

That said, it sounds like we will each need to now account for the return of this cash, and track that for future sales to reduce the basis by that small cash amount. I can actually take the time now to add a new column to our cost basis for this new basis, which is pretty easy as I have it all in a spreadsheet.

Thanks again for the help. I will be working on this more this weekend.
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