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Don’t Sweat It if Cost-Basis Data Differs From Broker’s


Focus on Keeping Accurate Club Records



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Recent changes in the law require brokers to track the cost basis of their clients’ investments and in many cases report that cost basis to the Internal Revenue Service when the investment is sold. This past tax year was the first year in which broker cost-basis information was reported to the IRS. This caused many treasurers some distress when the cost basis in the club’s records didn’t match the reported cost basis on the Form 1099. With a new tax season approaching, I thought I’d cover some transactions that are more prone to generate differences between a broker’s figures and a club’s.

Buy transactions rarely generate cost-basis differences as long as all fees and commissions are included when recording them in the records.
   
Sell transactions may cause cost-basis differences especially when the shares sold don’t match. This will occur when partial positions are sold and the broker chooses a different block to sell from what’s chosen in the software. Be sure the blocks sold match with the broker’s. This was covered in the May 2013 issue.  
   
Spinoffs are probably the biggest reason for differences in cost-basis values between the broker’s and a club’s records. IRS regulations require the cost basis of the parent and spinoff companies be allocated in proportion to their relative fair market values. The regulations aren’t specific on how “fair-market value” should be determined.
   
As a result, there are multiple reasonable ways to calculate how the cost basis is allocated in a spinoff, as there are multiple ways to determine the fair-market value of the companies involved.
   
Here are three quick examples that revolve around what price to use when determining value. On the effective date of the spinoff, the opening prices, closing prices or an average of the two could be used to determine the value of the parent and daughter company. Each will give a slightly different allocation of cost basis.
   
If what you choose isn’t the same as what your broker used, there will be a cost-basis difference. Many companies give an example of a way to compute the cost-basis allocation and describe the price employed to determine market value on their website. There’s even a new IRS form, Form 8937, that companies file to report cost-basis changes. The company might post this form on its website.
   
A split-off (or exchange) is also likely to cause cost-basis differences. These transactions aren’t common, but Pfizer recently was involved with one.
   
If you’re enrolled in a dividend reinvestment program, or DRP, your broker may consolidate multiple small
purchases when reporting its sale. The accounting and tax software don’t currently allow for consolidation.  
  
The last item involves a type of investment — publicly traded partnerships — rather than a specific transaction type. Distributions received during the year are nearly always return of capital and affect cost basis.
   
Also, the Schedule K-1 information needs to be entered because it also changes cost basis. Be sure you’re entering these properly. Your K-1 also will give cost-basis information so that you can double-check.
   
Now some good news: The club’s cost-basis records aren’t required to match the broker’s figures. The tax forms have specific lines to report the differences.
   
The Tax Printer software has fields for both the club’s values and the broker’s and automatically completes the reconciliation lines. The differences should be small.
   
Broker errors are becoming rarer, but they still occur. Ultimately, the club is responsible for keeping accurate records, not your broker.


Russell Malley is the Club Accounting Adviser for ICLUBcentral.


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