Correcting an incorrect cost basis

[Dan32]

I belonged to an investment club which recently disbanded. The broker divided the investments among all the members based on the percentages which we provided. However, the tax lots were divided somewhat randomly. For example some members received a higher cost basis on individual stocks than other members. The broker appears to have done this randomly. We can correct this for issues bought before ~2013, but not for issues covered by more recent tax law changes. The broker has not been helpful in resolving this issue. Has anyone dealt with a similar issue or have any recommendations?

Thanks!

 

[pb4uski]

Never dealt with this issue.

I would have the investment club, as one of its final acts, prepare an analysis of the distribution of shares and cost basis by the club's purchase lots for each member and provide that to both the members and the broker. Also, the club should request the broker to correct its records. (All this assumes that the distribution was relatively recent and not years ago).

If the broker agrees to correct its records then you are all set. Otherwise, you'll need to track and report your own correct cost basis, keep supporting documentation such as the terminal distribution memo from the club and be prepared to defend the filing position that you took if/when the IRS questions it.

If the amount involved isn't significant it might be easiest to just sell and pay the 15% capital gains tax and move on. Are there a lot of tickers and/or purchase lots involved? Are the amounts significant?

 

[Dan32]

Thanks for the reply. We have contacted the broker, who is not willing to correct the basis. We are distributing the correct cost basis to each club member. The concern is that this will be different than what is reported to the IRS and what is reported on the 1099-Bs. Will this trigger an automatic audit? Even though what we want to do is 100% correct, none of us wants to trigger an audit over what is for some members a relatively small amount of money. In addition since we transferred shares to the individual members, could it trigger audits in any subsequent years when any of these shares are sold? Obviously none of us will be using this broker long term.

 

[bingybear]

what a mess. I would think the most fair way to do this is to either have the club sell all the shares and have the final K-1's filed with the appropriate information. I'm assuming here that the purchases you are referring to the club owned shares, not personally owned.

I'm assuming the shares were purchased over time with club money -- owned buy many and bought under the club EIN (tax number). The broker likely would not have known who all the individuals were or the distribution of stock among the members of each purchase. For the broker to track, he would need separate accounts.

Did the club provide the broker a list of all fractional share purchases and date for each member?

Note the one investment club was a partnership. Was yours a partnership? How does the partnership detail how to dissolve and distribute when a member leaves or the club ends its existence? I expect some on the shares may have been sold if others left. How were they determined? I doubt anyone would have picked the exact fractional shares for each persons representative shares.

If you did not use a partnership, what legal structure did you use?

 

[Par34]

Contact the brokerage seems like the best solution

 

[bingybear]

looking at 1099-B instructions and question is tax act... there are "investment Sales - Adjustment Codes where B is basis was reported wrong. Will this cause an audit? don't know. Will some of the members who got better basis correct theirs... don't know.

When I gifted shares to my children, I could select the exact tax lot of shares and # of shares and move them into his account. The club might have been able to do that. Not sure I could move fractional shares or not.

At this point.. either file adjustment code B or talk to someone higher up in the brokerage.

I repeat.. what a mess. Glad my experiences as less problematic. We just cashed out at the end and tax info went in the last K-1. The amount the investment club jointly invested was small. Each member could do extra investments in their own accounts. Tax wise the club investments were minimal

 

[pb4uski]

Thanks for the reply. We have contacted the broker, who is not willing to correct the basis. We are distributing the correct cost basis to each club member. The concern is that this will be different than what is reported to the IRS and what is reported on the 1099-Bs. Will this trigger an automatic audit? Even though what we want to do is 100% correct, none of us wants to trigger an audit over what is for some members a relatively small amount of money. In addition since we transferred shares to the individual members, could it trigger audits in any subsequent years when any of these shares are sold? Obviously none of us will be using this broker long term.

I would tell the broker that since they are unwilling to report the correct cost basis that the club will notify the IRS of the situation and the broker's refusal to correct the cost basis. While I doubt that will cause the broker to change their mind, it might. Then contact the IRS and explain the situation. If they agree that you are trying to do the right thing they may pressure the broker to go along.

Meanwhile, there is risk that as members sell shares and report gains or losses that they may be questioned because the they will be reporting a different basis than the broker. While it is likely that you will be questioned because of the discrepancy in the cost basis, you should be able to prevail once you provide the supporting documentation for the basis and explain the situation.

 

[meierlde]

I would tell the broker that since they are unwilling to report the correct cost basis that the club will notify the IRS of the situation and the broker's refusal to correct the cost basis. While I doubt that will cause the broker to change their mind, it might. Then contact the IRS and explain the situation. If they agree that you are trying to do the right thing they may pressure the broker to go along.

Meanwhile, there is risk that as members sell shares and report gains or losses that they may be questioned because the they will be reporting a different basis than the broker. While it is likely that you will be questioned because of the discrepancy in the cost basis, you should be able to prevail once you provide the supporting documentation for the basis and explain the situation.

The other question is how big are the amounts involved. I suspect that for small amounts the IRS won't bother because it is not worth their trouble to do so. If its less that a $100 gain difference recall that is typically $15 to the IRS and considering their case load would they find it worth the trouble.

 

[Bamaman]

Sorry you had problems with an investment club. I have an amusing story about an investment club that my uncle in Birmingham belonged to.

The investment club would meet once per month for breakfast, and the members would get together and pick their stock buy & sells for the month.

In storms one of the members that was always fashionably late--Bear Bryant. After he got through dominating the rest of the meeting, they always did what investment decisions he preferred doing.

The Bear was quite a very savvy investor--ending up owning a big chunk of CocaCola in Alabama and Golden Flake potato chips who were sponsors of his television program. He also set his son up in a large greyhound dog track.

 

[Dan32]

Yes, the club was a partnership. The shares and cash were moved from a club account at the brokerage to individual accounts at the same brokerage. This avoided all transfer fees. We provided the percentages to go to each member. The broker however, didn't apply the percentage to each tax lot, only to the overall value. Therefore some members received a cost basis advantage on some stocks and a disadvantage on others. Since the shares have already been moved, we can't sell the shares and move the cash as some people have suggested. In fact we wanted to move shares (and the correct cost basis) to delay any tax consequences. Since we know what the correct values should be, this should be a problem that could be solved. But we're not sure how to get it done without triggering an unnecessary audit. The brokerage has been less than helpful. It is a smaller brokerage that provided an incentive for investment clubs to join, so they should have been able to handle this.