Publication 564 - Mutual Fund Distributions Instructions

Shares Acquired by

of any adjustments to basis of the shares as they

and at least half of the community interest is

occur.

includible in the decedent’s gross estate

Purchase

(whether or not the estate is required to file a

Generally, you must know the basis

return), the FMV of the community property at

The original basis of mutual fund shares you

TIP

per share to compute gain or loss

the date of death becomes the basis of both

bought is usually their cost or purchase price.

when you dispose of the shares. This is

halves of the property.

The purchase price usually includes any com-

explained under Identifying the Shares Sold,

missions or load charges paid for the purchase.

For example, if the FMV of the entire commu-

later.

nity interest in a mutual fund is $100,000, the

Example. You bought 100 shares of Fund A

basis of the surviving spouse’s half of the shares

for $10 a share. You paid a $50 commission to

is $50,000. The basis of the heirs’ half of the

Shares Acquired by Gift

the broker for the purchase. Your cost basis for

shares also is $50,000.

each share is $10.50 ($1,050 ÷ 100).

To determine your original basis of mutual fund

In determining the basis of assets acquired

shares you acquired by gift, you must know:

from a decedent, property held in joint tenancy is

When you buy or sell shares in a fund,

community property if its status was community

keep the confirmation statements you

•

The donor’s adjusted basis,

receive. The statements show the

property under state law.

RECORDS

•

price you paid for the shares when you bought

The date of the gift,

them and the price you received for the shares

Shares you gave the decedent. A different

•

The fair market value (the last quoted pub-

when you disposed of them. The information

basis rule applies to inherited shares that you or

lic redemption price) of the shares at the

from the confirmation statement when you pur-

your spouse gave the decedent within the

time of the gift, and

chased the shares will help you figure your basis

one-year period ending on the date of the

•

in the fund.

Any gift tax paid on the gift of the shares.

decedent’s death if, on the date of the gift, the

shares were appreciated property. In this situ-

Commissions and load charges. The fees

ation, the basis of the inherited shares is the

Fair market value less than donor’s adjusted

and charges you pay to acquire or redeem

decedent’s adjusted basis in them immediately

basis. If the fair market value (FMV) of the

shares of a mutual fund are not deductible. You

before his or her death, rather than their FMV.

shares at the time of the gift was less than the

can usually add acquisition fees and charges to

This basis rule also applies if the decedent’s

adjusted basis to the donor at the time of the gift,

your cost of the shares and thereby increase

estate (or a trust of which the decedent was the

your basis for gain on their disposition is the

your basis. A fee paid to redeem the shares is

grantor) sells the shares instead of distributing

donor’s adjusted basis. Your basis for loss is the

usually a reduction in the redemption price

them to you, and you are entitled to the pro-

FMV of the shares at the time of the gift. In this

(sales price).

ceeds.

situation, it is possible to sell the shares at

You cannot add your entire acquisition fee or

neither a gain nor a loss because of the basis

load charge to the cost of the mutual fund shares

Appreciated property. Appreciated prop-

you have to use.

acquired if all of the following conditions apply.

erty is any property (including mutual fund

shares) whose FMV is more than its adjusted

1) You get a reinvestment right because of

Example. You are given mutual fund shares

basis.

the purchase of the shares or the payment

with an adjusted basis of $10,000 at the time of

of the fee or charge.

Exceptions. This basis rule does not apply

the gift. The FMV of the shares at the time of the

if the decedent died before 1982 or you gave the

gift is $9,000. You later sell the shares for

2) You dispose of the shares within 90 days

shares to the decedent before August 14, 1981.

$9,500. The basis for figuring a gain is $10,000,

of the purchase date.

so there is no gain. There also is no loss, since

3) You acquire new shares in the same mu-

Adjusted Basis

the basis for figuring a loss is $9,000. In this

tual fund or another mutual fund, for which

situation, you have neither a gain nor a loss.

the fee or charge is reduced or waived

After you acquire mutual fund shares, you may

because of the reinvestment right you got

need to make adjustments to your basis. The

Fair market value equal to or more than

when you acquired the shares.

adjusted basis of your shares is your original

donor’s adjusted basis. If the FMV of the

basis (defined earlier), increased or reduced as

The amount of the original fee or charge in

shares at the time of the gift was equal to or

described here.

excess of the reduction in (3) is added to the

more than the donor’s adjusted basis at the time

cost of the original shares. The rest of the origi-

of the gift, your basis is the donor’s adjusted

Addition to basis. Increase the basis in your

nal fee or charge is added to the cost basis of the

basis at the time of the gift, plus all or part of any

shares by the difference between the amount of

new shares (unless all three conditions above

gift tax paid on the gift, depending on the date of

undistributed capital gain you include in income

apply to the purchase of the new shares).

the gift.

and the tax considered paid by you on that

Reinvestment right. This is the right to ac-

For information on figuring the amount of gift

income.

quire mutual fund shares in the same or another

tax to add to your basis, see Property Received

The mutual fund reports the amount of your

mutual fund without paying a fee or load charge,

as a Gift in Publication 551, Basis of Assets.

undistributed capital gain in box 1a of Form

or by paying a reduced fee or load charge.

2439. You should keep Copy C of all Forms

Shares Acquired by

2439 to show increases in the basis of your

Shares Acquired by

Inheritance

shares.

Reinvestment

If you inherited shares in a mutual fund, your

Reduction of basis. You must reduce your

The original cost basis of mutual fund shares

original basis is generally the fair market value

basis in your shares by any return of capital

you acquire by reinvesting your distributions is

(FMV) (the last quoted public redemption price)

distributions that you receive from the fund.

the amount of the distributions used to purchase

on the date of the decedent’s death, or the

The mutual fund reports the amount of any

each full or fractional share. This rule applies

alternate valuation date if chosen for estate tax

return of capital distributions in box 3 of Form

even if the distribution is an exempt-interest divi-

purposes.

1099 – DIV. You should keep the form to show

dend that you do not report as income.

the decrease in the basis of your shares.

Community property states.

In community

When you acquire shares through rein-

property states, you and your spouse generally

No reduction of basis.

You do not reduce

vestment, keep the statements that

are considered to each own half the estate (ex-

your basis for distributions from the fund that are

show each date, amount, and number

RECORDS

cluding separate property). If one spouse dies

of full or fractional shares purchased. Keep track

exempt-interest dividends.

Page 5

Publication 564 - Mutual Fund Distributions Instructions - 2002 Page 5

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