us internal revenue service: p564--1997

8/14/2019 US Internal Revenue Service: p564--1997

1/15

ContentsIntroduction ........................................ 1

Tax Treatment of Distributions ....... 2Kinds of Distributions ..................... 2Reinvestment of Distributions ......... 3How To Report ............................... 3

Keeping Track of Your Basis ............ 3Basis of Shares Sold ...................... 3

Adjusted Basis ... ............... ............. 4

Sales, Exchanges,and Redemptions ...................... 6

Identifying the Shares Sold ........... 6Gains and Losses .......................... 7How To Figure Gains and Losses

on Schedule D .............. .......... 8

Investment Expenses ....................... 9Limit on Investment Interest

Expense .................................. 10

How To Get More Information .......... 10

Comprehensive Example ................. 11

Index ................................................... 15

Important ChangesNew maximum tax rates on net capitalgain. The maximum tax rate on a net capitalgain has been reduced for some sales andexchanges after May 6, 1997. The maximumrate may be 10%, 20%, 25%, or 28%, de-pending on the situation. See Using themaximum capital gains rates, later, for moreinformation.

Capital gains distributions. You mustreport your capital gain distributions onSchedule D (Form 1040) in all cases. This isso you can benefit from the new maximum taxrates.

IntroductionThis publication explains the federal incometax treatment of distributions paid or allocatedto an individual shareholder of a mutual fund.A mutual fund is a regulated investmentcompany generally created by pooling fundsof investors to allow them to take advantageof a diversity of investments and professionalmanagement.

This publication provides information oninvestment expenses and will help you figureyour taxable gain or deductible loss when you

sell, exchange, or redeem your mutual fundshares. It discusses how to report your mutualfund distributions on Schedule B (Form 1040),Interest and Dividend Income, Schedule D(Form 1040), Capital Gains and Losses, andpage 1 of Form 1040. It also provides acomprehensive filled-in example.

The rules in this publication also apply tomoney market funds. A money market fundis a mutual fund that tries to increase currentincome available to shareholders by pur-chasing short-term market investments. Usu-ally, dividends are declared and reinvesteddaily. When you dispose of your shares, theproceeds generally equal your investment inthe fund because the value of the sharesgenerally does not change. Money market

Departmentof theTreasury

InternalRevenueService

Publication 564Cat. No. 15112N

Mutual Fund

Distributions

For use in preparing

1997 Returns

Get f orms and other informat ion faster and easier by:COMPUTER

World Wide Web www.irs.ustreas.gov FTP ftp.irs.ustreas.gov IRIS at FedWorld (703) 321-8020

FAX From your FAX machine, dial (703) 368-9694See How To Get More Information in this publication.


2/15

funds pay dividends and should not be con-fused with bank money market accounts thatpay interest.

Qualified retirement plans. Individuals mayown shares of mutual funds as a part of anindividual retirement arrangement (IRA).Self-employed persons and partners mayown shares of mutual funds as a part of asimplified employee pension (SEP) plan,a savings incentive match (SIMPLE) plan,or an H.R 10 (Keogh) plan. The value of themutual fund shares and any earnings (distri-butions) from the fund are included in yourretirement plan assets, which stay tax freeuntil distributed to you from the plan in lateryears. The plan distributions are not dis-cussed in this publication. Get Publication 590for information concerning the treatment ofIRA contributions and distributions and Publi-cation 560 for information on retirement plansfor the self-employed.

Useful ItemsYou may want to see:

Publication

514 Foreign Tax Credit for Individuals

550 Investment Income and Expenses 551 Basis of Assets

560 Retirement Plans for the Self-Employed

590 Individual Retirement Arrange-ments (IRAs)

Form (and Instructions)

1099B Proceeds from Broker andBarter Exchange Transactions

1099DIV Dividends and Distributions

1116 Foreign Tax Credit

2439 Notice to Shareholder of Undis-

tributed Long-Term Capital Gains 4952 Investment Interest Expense De-

duction

See How To Get More Information nearthe end of this publication for informationabout getting these publications and forms.

Tax Treatmentof DistributionsA mutual fund will send you a Form1099DIV, Dividends and Distributions, or asubstitute form containing substantially thesame language, to tell you what you mustreport or take into account on your income taxreturn. See How To Report, later.

Community property states. If you aremarried and receive dividend income that iscommunity income, one-half of the income isgenerally considered to be received by eachspouse. If you file separate returns, you musteach report one-half of the dividends.

If the dividends are not considered com-munity income under state law and you andyour spouse file separate returns, each of youmust report your separate income.

However, if you and your spouse livedapart all year, special rules may apply. GetPublication 555, Community Property, formore information on community income.

Share certificate in two or more names. Iftwo or more persons, such as you and yourspouse, hold shares as joint tenants, tenantsby the entirety, or tenants in common, divi-dends on those shares are considered re-ceived by each of you to the extent providedby local law.

Certain year-end dividends received inJanuary. Dividends declared and madepayable by mutual funds in October, Novem-ber, or December are considered received byshareholders on December 31 of that yeareven if the dividends are actually paid duringJanuary of the following year.

Kinds of DistributionsThere are several kinds of distributions thatyou, as a shareholder, may receive from amutual fund. They include:

Ordinary dividends,

Capital gain distributions,

Exempt-interest dividends, and

Return of capital (nontaxable) distribu-tions.

Tax-exempt mutual fund. Distributions from

a tax-exempt mutual fund (one that investsprimarily in tax-exempt securities) may con-sist of ordinary dividends, capital gain distri-butions, undistributed capital gains, or returnof capital like any other mutual fund. Thesedistributions generally follow the same rulesas a regular mutual fund.

Distributions designated as exempt-interest dividends are not taxable (seeExempt-Interest Dividends, later).

Ordinary DividendsAn ordinary dividend is a distribution by amutual fund out of its earnings and profits.Include ordinary dividends that you receivefrom a mutual fund as dividend income onyour individual income tax return.

Ordinary dividends are the most commontype of dividends. They will be reported in box1b of Form 1099DIV. If you reinvested yourdividends, see Reinvestment of Distributions,later.

Capital Gain DistributionsThese distributions are paid by mutual fundsfrom their net realized long-term capital gains.The Form 1099DIV (box 1c) or the fund'sstatement will tell you the amount you are toreport as a capital gain distribution. Reportcapital gain distributions as long-term capitalgains on your return regardless of how longyou have owned the shares in the mutualfund.

Report capital gain distributions onSchedule D, line 13. Enter on line 13 , column(f), the total capital gain distributions paid toyou. Enter on line 13, column (g), theamounts reported to you as the 28% rate gainportion of your total capital gain distributions.

If you have over $400 of totaldividends,you must also report all of your capital gaindistributions on Schedule B.

If you received a capital gain distributionon mutual fund shares that you held for 6months or less and sold at a loss, see Cer-tain short-term lossesunder Holding Period.

Undistributed capital gains. Mutual fundsmay keep some of their long-term capitalgains and pay taxes on those undistributed

amounts. The mutual fund allocates thesegains to you as capital gain distributions, eventhough you did not actually receive a distri-bution. You must report these amounts aslong-term capital gains. You can take a creditfor any tax paid because you are consideredto have paid it.

Form 2439. The fund will send you Form2439, Notice to Shareholder of UndistributedLong-Term Capital Gains, showing yourshare of the undistributed capital gains andany tax paid by the mutual fund. The undis-tributed capital gain shown on line 1a of Form2439 is not reported on Form 1099DIV. Re-port it on Schedule D, line 11. Enter on line11, column (f), the total undistributed capitalgain distributions. Enter on line 11, column(g), the amounts reported as 28% rate gainfrom line 1b of Form 2439.

The tax paid by the mutual fund is shownon line 2 of Form 2439. Take the credit bychecking box a on line 59, Form 1040, andentering the tax shown from line 2 of Form2439. Attach Copy B of Form 2439 to yourreturn.

Increase to basis. When a mutual fundallocates undistributed capital gains to you,you can increase your basis in the shares.See Adjusted Basis, later.

Exempt-Interest Dividends

A mutual fund may pay exempt-interest divi-dends to its shareholders if it meets certainrequirements. These dividends are paid fromtax-exempt interest earned by the fund. Sincethe exempt-interest dividends keep their tax-exempt character, you do not include them inincome, but you may need to report them onyour return. See Information reporting re-quirement, next. The mutual fund will sendyou a statement within 60 days after the closeof its tax year showing your exempt-interestdividends. Exempt-interest dividends are notshown on Form 1099DIV. However, if youreceived exempt-interest dividends on mutualfund shares that you held for 6 months or lessand sold at a loss, see Certain short-termlossesunder Holding Period, later.

Information reporting requirement. Al-though exempt-interest dividends are nottaxable, you must report them on your taxreturn if you are required to file. This is aninformation reporting requirement and doesnot convert tax-exempt interest to taxable in-terest. Also, this income is generally a taxpreference item and may be subject to thealternative minimum tax (AMT). If you receiveexempt-interest dividends, you should getForm 6251, Alternative Minimum Tax Indi-viduals, for more information.

Return of Capital(Nontaxable) Distributions

A distribution that is not out of earnings andprofits is a return of your investment, or capi-tal, in the mutual fund and is shown in box1d of Form 1099DIV. These return of capitaldistributions are not taxed as ordinary divi-dends and are sometimes called tax-freedividends or nontaxable distributions. How-ever, they may be fully or partly taxable ascapital gains.

A return of capital distribution reducesyour basis in the shares. Basis is explainedlater. Your basis cannot be reduced below

Page 2


3/15

zero. If your basis is reduced to zero, youmust report the return of capital distributionon your tax return as a capital gain. The dis-tribution is taxable if it, when added to all re-turn of capital distributions received in pastyears, is more than your basis in the shares.Report this capital gain on Schedule D (Form1040). Whether it is a long-term or short-termcapital gain depends on how long you heldthe shares.

Example. You bought shares in a mutual

fund in 1993 for $12 a share. In 1994, youreceived a return of capital distribution of $5a share. You reduced your basis in eachshare by the $5 received to an adjusted basisof $7. In 1995, you received a return of capitaldistribution of $1 per share and further re-duced your basis in each share to $6. In1996, you received a return of capital distri-bution of $2 per share. Your basis is now re-duced to $4. In 1997, the return of capitaldistribution from the mutual fund is $5 ashare. You reduce your basis in each shareto 0 and report the excess ($1 per share) asa long-term capital gain on Schedule D.

Reinvestmentof DistributionsMost mutual funds permit shareholders toautomatically reinvest distributions, includingdividends and capital gains, in more sharesin the fund. Instead of receiving cash, yourdistributions are used to purchase additionalshares in the fund. You must report the rein-vested amounts the same way as you wouldreport them if you received them in cash.

How the distributions are reported de-pends on the kind of distribution reinvested.This means that reinvested ordinary divi-dends and capital gains distributions gener-ally must be reported as income. Reinvested

exempt-interest dividends generally are notreported as income. Reinvested return ofcapital distributions are reported as explainedunder the discussion above. See Basis ofShares Sold, later, to determine the basis ofthe additional shares.

How To ReportYour mutual fund reports amounts distributedto you and amounts allocated to you on Form1099DIV, or on a substitute form containing

substantially the same language. If the distri-bution consists of ordinary dividends only, youcan file Form 1040A. Otherwise, you must fileForm 1040. If the total distribution reported toyou by the fund includes only ordinary divi-dends of $400 or less, report the entireamount only on line 9 of Form 1040 or Form1040A. Otherwise, you have to file one ormore additional schedules depending on thenature of the dividend income you receive.

Table 1 explains where on Form 1040 orits related schedules to report distributionsfrom mutual funds.

Foreign tax deduction or credit. Somemutual funds invest in foreign securities orother instruments. Your mutual fund may

choose to allow you to claim a deduction orcredit for the taxes it paid to a foreign countryor U.S. possession. The fund will notify youif this applies to you. The notice will includeyour share of the foreign taxes paid to eachcountry or possession and the part of thedividend derived from sources in each countryor possession.

You must complete Form 1116 if youchoose to claim the credit for income tax paidto a foreign country. However, it may be toyour benefit to treat the tax as an itemizeddeduction on Schedule A (Form 1040). Formore information on claiming a foreign taxdeduction or credit, get Publication 514.

Keeping Trackof Your BasisYou should keep track of your basis in mutualfund shares because you need the basis tofigure any gain or loss on the shares whenyou sell, exchange, or redeem them.

When you buy or sell shares in a fund,keep the confirmation statements you re-ceive. The statements show the price you

paid for the shares when you bought themand the price you received for the shareswhen you disposed of them. The informationfrom the confirmation statement when youpurchased the shares will help you figure yourbasis in the fund.

If you acquire the shares by gift or inher-itance, you need information different thanwhat is in a confirmation statement to helpyou figure the basis of those shares, as dis-cussed later.

Basis of Shares SoldIf you dispose of your shares in a mutual fund,it is important that you know their basis tofigure your gain or loss. Their basis depends

on how you acquired the shares.

Shares Acquired by PurchaseThe original basis of mutual fund shares youbought is usually their cost or purchase price.The purchase price usually includes anycommissions or load charges paid for thepurchase.

Example. You bought 100 shares ofFund A for $10 a share. You paid a $50commission to the broker for the purchase.Your cost basis for each share is $10.50($1,050 100).

Table 1. Reporting Mutual Fund Distributions on Form 1040

Type of Distribution

Where to Report If TotalDividends From All Payers Are:

$400 or Less More than $400

Gross DividendsForm 1099-DIV, Box 1a

Ordinary DividendsForm 1099-DIV, Box 1b

Capital Gain DistributionsForm 1099-DIV, Box 1c

Nontaxable DistributionsForm 1099-DIV, Box 1d

Exempt-Interest Dividends(Not included on Form 1099-DIV)

Undistributed Capital Gains

Form 2439, line 1a

Form 2439, line 2

Total amount in Box 1(a) is notreported on form or schedule

Form 1040, line 9

Schedule D, line 13

Basis of shares reduced to zero?

NoNot reported on form orschedule

YesReport on Schedule D

Form 1040, line 8b

GainSchedule D, line 11

TaxForm 1040, line 59

Schedule B, line 5

Already included in Gross Dividendamount on line 5 of Schedule B

Schedule B, line 7andSchedule D, line 13

Schedule B, line 8

Form 1040, line 8b

GainSchedule D, line 11

TaxForm 1040, line 59

Page 3


4/15

Commissions and load charges. The feesand charges you pay to acquire or redeemshares of a mutual fund are not deductible.You can usually add these fees and chargesto your cost of the shares and thereby in-crease your basis. A fee paid to redeem theshares is usually a reduction in the redemp-tion price (sales price).

You cannot add the fee or load charge toyour cost if all of the following apply:

1) You get a reinvestment right because ofthe purchase of the mutual fund shares

or the payment of the fee or charge,

2) You dispose of the shares within 90 daysof the purchase date, and

3) You acquire new shares in the samemutual fund or another mutual fund, forwhich the fee or charge is reduced orwaived.

If the load charge is reduced, rather thanwaived, the amount in excess of the reductionis added to the cost of the original shares.

The amount of the load charge that is re-duced or waived is added to the cost basisof the new shares (unless all of the aboveitems apply to the purchase of the newshares).

Reinvestment right. This is the right toacquire mutual fund shares in the same oranother mutual fund without paying a fee orload charge, or paying a reduced fee or loadcharge.

Shares Acquired by ReinvestmentIf your distributions are reinvested, keep thestatements that show each date, amount, andnumber of full or fractional shares purchased.You should keep track of any adjustments tothe basis of your mutual fund shares when theadjustment occurs.

Generally, you must know the basis pershare to compute gain or loss when you dis-pose of the shares. This is explained laterunder Identifying the Shares Sold.

Ordinary dividends and capital gain dis-tributions. The amount of the distributionused to purchase each full or fractional shareis the cost basis for that share.

Exempt-interest dividends. The amount ofthe dividend used to purchase each full orfractional share is the cost basis for thatshare, even though exempt-interest dividendsare not reported as income.

Shares Acquired by GiftTo determine your original basis of shares ina mutual fund you acquired by gift, you mustknow:

The donor's adjusted basis,

The date of the gift,

The fair market value at the time of the gift,and

Any gift tax paid on the gift of the shares.

Donor's adjusted basis. The donor's adjusted basis is the original cost or other ori-ginal basis increased by such things as un-distributed capital gains and decreased bysuch things as return of capital. Adjusted ba-sis is discussed later.

Fair market value. The fair market value(FMV) of a share in a mutual fund you ac-quired by gift is the public redemption price(commonly known as the bid price) at thetime the gift was made.

Fair market value less than donor's

adjusted basis. If the shares were given toyou, and their FMV at the time of the gift wasless than the adjusted basis to the donor atthe time of the gift, your basis for gain on theirdisposition is the donor's adjusted basis. Yourbasis for loss is their FMV at the time of thegift. In this situation, it is possible to sell theshares at neither a gain nor a loss becauseof the basis you have to use.

Example. You are given a gift of mutualfund shares with an adjusted basis of $10,000at the time of the gift. The FMV of the sharesat the time of the gift is $9,000. You later sellthe shares for $9,500. The basis for figuringa gain is $10,000, so there is no gain. Therealso is no loss, since the basis for figuring aloss is $9,000. In this situation, you haveneither a gain nor a loss.

Fair market value more than donor'sadjusted basis. If the shares were given toyou, and their FMV at the time of the gift wasmore than the donor's adjusted basis at thetime of the gift, your basis is the donor's ad-

justed basis at the time of the gift, plus all orpart of any gift tax paid on the gift, dependingon the date of the gift.

For information on figuring the amount ofgift tax to add to your basis, see PropertyReceived as a Gift in Publication 551.

Shares Acquired by InheritanceIf you inherited shares in a mutual fund, yourbasis is generally their FMV at the date of the

decedent's death, or at the alternate valuationdate, if chosen for estate tax purposes.

Determining fair market value of inheritedshares. The FMV of a share in a mutualfund acquired from a decedent is the lastquoted public redemption price (commonlyknown as the bid price) on the date of death,or the alternate valuation date, if chosen forestate tax purposes.

Community property states. In com-munity property states, you and your spousegenerally are considered to each own half theestate (excluding separate property). If onespouse dies and at least half of the commu-nity interest is includible in the decedent'sgross estate (whether or not the estate is re-

quired to file a return), the fair market valueof the community property at the date of deathbecomes the basis of both halves of theproperty.

For example, if the FMV of the entirecommunity interest in a mutual fund is$100,000, the basis of the surviving spouse's

half of the shares is $50,000. The basis of theheirs' half of the shares also is $50,000.

In determining the basis of assets ac-quired from a decedent, property held in jointtenancy is community property if its statuswas community property under state law.(Community property state laws override jointtenancy rules.) This is true regardless of theform in which title was taken.

Shares decedent received as a gift. Theabove rule does not apply to appreciatedproperty you or your spouse receive from adecedent if all the following conditions apply.

1) You or your spouse originally gave theshares to the decedent after August 13,1981.

2) You gave the shares to the decedentduring the one-year period ending on thedate of death.

3) The death occurred after 1981.

In this situation, the basis of the shares isthe decedent's adjusted basis in the sharesimmediately before his or her death, ratherthan their FMV. The same rule applies if theestate, or a trust of which the decedent wasthe grantor, sells the appreciated property

and the donor (or the donor's spouse) is en-titled to the proceeds.Appreciated property is any property (in-

cluding mutual fund shares) whose FMV onthe day it was given to the decedent is morethan its adjusted basis.

Adjusted BasisAfter you acquire mutual fund shares, youmay need to make further adjustments to yourbasis. The adjusted basis of stock is the ori-ginal basis, increased or reduced as de-scribed here.

Addition to basis. Increase your basis in thefund by 65% of any undistributed capital gainthat you include in your income. This has theeffect of increasing your basis by the differ-ence between the amount of gain you includein income and the credit you claim for the taxconsidered paid by you on that income.

The mutual fund reports the amount ofyour undistributed capital gain on line 1a ofForm 2439. You should keep Copy C of allForms 2439 to show increases in the basisof your shares.

Reduction of basis. You must reduce yourbasis in the fund by any return of capital dis-tributions that you receive from the fund. Youdo not reduce your basis for distributions fromthe fund that are exempt-interest dividends.

RECORDS

Table 2 is a worksheet you can use

to keep track of the adjusted basis ofyour mutual fund shares. Enter thecost per share when you acquire new sharesand any adjustments to their basis when theadjustment occurs. This worksheet will helpyou figure the adjusted basis when you sellor redeem shares.

Page 4


5/15

Table 2. Mutual Fund Record

Mutual Fund

Acquired1

DateNumber

ofShares

CostPer

ShareAdjustments toBasis Per Share

Adjusted2

Basis PerShare

Sold or redeemed

DateNumber

ofShares

1Include shares received from reinvestment of dividends.

2Cost plus or minus adjustments.

Page 5


6/15

Sales, Exchanges,and RedemptionsWhen you sell, exchange, or redeem yourmutual fund shares, you will generally havea taxable gain or a deductible loss. This in-cludes shares in a tax-exempt mutual fund.The amount of the gain or loss is the differ-ence between your adjusted basis in theshares and the amount you realize from the

sale, exchange, or redemption. This is ex-plained further under Gains and Losses.In general, a sale is a transfer of shares

for money only. An exchange is a transfer ofshares in return for other shares. A redemp-tion occurs when a fund reacquires its shares.Sales, exchanges, and redemptions are alltreated as taxable sales of capital assets.

Exchange of shares in one mutual fund forshares in another mutual fund. Any ex-change of one fund for another fund is a tax-able exchange. This is true even if you canexchange shares in one fund for shares inanother fund that has the same distributor orunderwriter without paying a sales charge.Report any gain or loss on the investment inthe original shares as a capital gain or loss inthe year in which the exchange occurs. Usu-ally, you can add any service charge or feepaid in connection with an exchange to thecost of the shares acquired. For an exception,see Commissions and load charges, earlier,under Basis of Shares Sold.

Information returns. Mutual funds andbrokers must report to the Internal RevenueService the proceeds from sales, exchanges,or redemptions. They must give each cus-tomer a written statement with that informa-tion by January 31 of the year following thecalendar year the transaction occurred. Form1099B, or a substitute, may be used for thispurpose. Report your sales shown on Form(s)1099B (or substitute) on Schedule D (Form

1040) along with your other gains and losses.If the total sales reported on Form(s) 1099Bis more than the total you report on lines 3and 10 of Schedule D, attach a statement toyour return explaining the difference.

Taxpayer identification number. Youmust give the broker your correct taxpayeridentification number (TIN). Generally, an in-dividual will use his or her social securitynumber as the TIN. If you do not provide yourTIN, your broker is required to withhold taxat a rate of 31% on the gross proceeds of atransaction, and you may be penalized.

Identifying the Shares SoldWhen you dispose of mutual fund shares, you

need to determine which shares were soldand the basis of those shares. If your sharesin a mutual fund were acquired all on thesame day and for the same price, figuringtheir basis is not difficult. However, shares aregenerally acquired at various times, in variousquantities, and at various prices. Therefore,the process can be more difficult. You maychoose to use either the cost basis or theaverage basis.

Cost BasisUnder the cost basis, you can choose one ofthe following methods:

Specific share identification, or

First-in first-out (FIFO)

Specific share identification. If you candefinitely identify the shares you sold, you canuse the adjusted basis of those particularshares to figure your gain or loss.

You will adequately identify your mutualfund shares, even if you bought the shares indifferent lots at various prices and times, ifyou:

1) Specify to your broker or other agent theparticular shares to be sold or trans-ferred at the time of the sale or trans-fer, and

2) Receive confirmation of your specifica-tion from your broker in writing within areasonable time.

The confirmation by the mutual fund mustconfirm that you instructed your broker to sellparticular shares. You continue to have theburden of proving your basis in the specifiedshares at the time of sale or transfer.

First-in first-out (FIFO). If the shares wereacquired at different times or at differentprices and you cannot identify which sharesyou sold, use the basis of the shares you

acquired first as the basis of the shares sold.Therefore, the oldest shares still available areconsidered sold first. You should keep aseparate record of each purchase and anydispositions of the shares until all sharespurchased at the same time have been dis-posed of completely. Table 3 shows how tofigure basis on a sale of shares in a mutualfund using the FIFO method. It also showshow to figure basis using the average basismethod, discussed next.

Average BasisYou may be able to choose to use an averagebasis to figure your gain or loss when you sellall or part of your shares in a regulated in-vestment company. You can make this choice

only if you acquired the shares at varioustimes and prices, and you left the shares ondeposit in an account handled by a custodianor agent who acquires or redeems thoseshares.

TIP

You may be able to find the averagebasis of your shares from informationprovided by the fund.

Once you elect to use an average basis,you must continue to use it for all accounts inthe same fund. However, you may use a dif-ferent method for shares in other funds, eventhose within the same family of funds.

Example. You own two accounts thathold shares of the income fund issued byCompany A. You also own 100 shares of the

growth fund issued by Company A. If youelect to use average basis for the first accountof the income fund, you must use averagebasis for the second account. However, youmay use cost basis for the growth fund.

To figure average basis, you can use oneof the following methods:

Single-category method

Double-category method

Single-category method. In the single-category method, you find the average costof all shares owned at the time of each dis-position, regardless of how long you owned

them. Include shares acquired with reinvesteddividends or capital gains distributions.

Even though you use only one categoryto compute basis, you may have short-termor long-term gains or losses. To determineyour holding period, the shares disposed ofare considered to be those acquired first.

To compute the basis of your shares sold,follow these steps:

1) ADD: Cost of all shares owned.

2) DIVIDE: Result of #1 by number of

shares owned. This is your average ba-sis per share.

3) MULTIPLY: Result of #2 by number ofshares sold. This is your basis of sharessold.

Example 1. You bought the followingshares in the LJP Mutual Fund: 100 sharesin 1994 at $10 per share; 100 shares in 1995at $12 per share; and 100 shares in 1996 at$26 per share. On May 16, 1997, you sold150 shares. The basis of shares sold is$2,400, computed as follows:

Remaining shares. The basis of yourshares determined under average basis is thebasis of all your shares in the account at thetime of each sale. If no shares were acquiredor sold since the last sale, the basis of theremaining shares at the time of the next saleis the same as the basis of the shares soldin the last sale.

Example 2. Using the same facts as inExample 1, assume you sold an additional50 shares on December 15, 1997, at $20 pershare. You would not recompute the averagebasis of the 150 shares you owned at that

time because no shares were acquired orsold since the last sale; rather, your basis isthe $16 per share computed earlier.

Double-category method. In the double-category method, all shares in an account atthe time of each disposition are divided intotwo categories: short-term and long-term.Shares held one year or less are short-term.Shares held longer than one year are long-term.

The adjusted basis of each share in acategory is the total adjusted basis of allshares in that category at the time of dispo-sition divided by the total shares in the cate-gory. You may specify, to the custodian oragent handling your account, from which cat-egory the shares are to be sold or transferred.The custodian or agent must confirm in writ-ing your specification. If you do not specifyor receive confirmation, you must first chargethe shares sold against the long-term cate-gory and then, any remaining shares soldagainst the short-term category.

Changing categories. After you haveheld a mutual fund share for more than oneyear, you must transfer that share from theshort-term category to the long-term category.When you make the change, the basis of atransferred share is its actual cost or adjustedbasis to you, or if some of the shares in theshort-term category have been disposed of,its basis under the average basis method.You would figure the average basis of the

1) Total cost($1,000 + $1,200 + $2,600) ................ $4,800

2) Average basis per share($4,800 300) .................................... 16.00

3) Basis of shares sold(16.00 150) ...................................... $2,400

Page 6


7/15

undisposed shares at the time of the mostrecent disposition from this category.

Making the choice. You choose to use theaverage basis of mutual fund shares byclearly showing on your income tax return, foreach year the choice applies, that you usedan average basis in reporting gain or lossfrom the sale or transfer of the shares. Youmust specify whether you used the single-category method or the double-categorymethod in determining average basis. Thischoice is effective until you get permissionfrom the IRS to revoke it.

Making the choice for gift shares. Ifyour account includes shares that you re-ceived by gift, and the fair market value of theshares at the time of the gift was less than thedonor's basis, special rules apply. To use theaverage basis, you must submit a statementwith your initial choice to use one of the av-erage basis methods. It must state that thebasis used in figuring the average basis of thegift shares under either method will be theFMV at the time of the gift. This statementapplies to gift shares you receive before andafter making the choice, as long as the choiceto use the average basis is in effect. If youdo not make this statement, you cannotchoose to use the average basis for any ac-

count that contains gift shares.

Gains and LossesYou figure gain or loss on the disposition ofyour shares by comparing the amount yourealize with the adjusted basis of yourshares. If the amount you realize is more thanthe adjusted basis of the shares, you have again. If the amount you realize is less than theadjusted basis of the shares, you have a loss.

Adjusted basis. Adjusted basis is explainedearlier under Keeping Track of Your Basis.

Amount you realize. The amount you re-alize from a disposition of your shares is the

money and value of any property you receivefor the shares disposed of, minus your ex-penses of sale (such as redemption fees,sales commissions, sales charges, or exitfees).

Reporting information from Form 1099B.Mutual funds and brokers report dispositionsof mutual fund shares on Form 1099B, or asubstitute form containing substantially thesame language. The form shows the salesprice and indicates whether the amount re-ported is the gross amount or the net amount(gross amounts minus commissions).

If your Form 1099B or similar statementfrom the payer shows the gross sales price,

do not subtract the sales commissions fromit when reporting your sales price in column(d) on Schedule D. Instead, report the grossamount in column (d) and increase your costor other basis, column (e), by any expenseof the sale such as sales commissions. If yourForm 1099B shows that the gross salesprice less commissions was reported to IRS,enter the net amount in column (d) ofSchedule D and do not increase your basisin column (e) by the sales commission.

Example 1. You sold 100 shares of FundHIJ for $2,500. You paid a $75 commissionto the broker for handling the sale. Your Form1099B shows that the net sales proceeds,$2,425 ($2,500 $75), were reported to IRS.

Table 3. How To Figure Basis of Shares Sold

This is an example showing two different ways to figure basis. It compares the FIFOmethod and the average basis (single-category) method.

Date Action Share Price No. of Shares Shares Owned

02/4/96 Invest $4,000 $25 160 160

08/5/96 Invest $4,800 $20 240 400

12/16/96 Reinvest $300

dividend $30 10 410

09/29/97 Sell $6,720 $32 210 200

FIFO: To figure the basis of the 210 shares sold on 9/29/97, use the shareprice of the first 210 shares you bought, namely the 160 shares youpurchased on 2/4/96 and 50 of those purchased on 8/5/96.

$4,000

$1,000

Basis = $5,000

(cost of 160 shares on 2/4/96)

(cost of 50 shares on 8/5/96)

AVERAGEBASIS

(single-category)

To figure the basis of the 210 shares sold on 9/29/97, use theaverage basis of all 410 shares owned on 9/29/97.

$9,100

410

$22.20

(cost of 410 shares)

(number of shares)

(average basis per share)

$22.20

210

Basis = $4,662

Report this amount in column (d) of ScheduleD.

Example 2. You sold 200 shares of FundKLM for $10,000. You paid a $100 commis-sion to the broker for handling the sale. You

bought the shares for $5,000. Your brokerreported the gross proceeds to IRS on Form1099B, so you increase your basis in column(e) of Schedule D to $5,100.

Note: Whether you use Schedule D's line1 (for a short-term gain or loss) or line 8 (fora long-term gain or loss) depends on howlong you held the shares, discussed next.

Holding PeriodWhen you dispose of your mutual fundshares, you must determine your holding pe-riod. Determine your holding period by usingthe trade dates. The trade date is the dateon which you contract to buy or sell the mu-tual fund shares. Most mutual funds will show

the trade date on your purchase and saleconfirmation statements.

CAUTION

!Do not confuse the trade date with thesettlement date, which is the date bywhich the mutual fund shares must

be delivered and payment must be made.Your holding period determines whether

the gain or loss is a short-term capital gainor loss or a long-term capital gain or loss. Ifyou hold the shares for one year or less, yourgain or loss will be a short-term gain or loss.If you hold the shares for more than one year,your gain or loss will be a long-term gain orloss.

To find out how long you have held yourshares, begin counting on the day after the

day you bought the shares. (The day youbought the shares is the trade date.) Thissame date of each succeeding month is thestart of a new month regardless of the numberof days in the month before. The day youdispose of the shares (trade date) is also part

of your holding period.

Example. If you bought shares on Janu-ary 10, 1997 (trade date), start counting withJanuary 11 to find out how long you have heldthem. The 11th of each following month is thebeginning of a new month. If you sold theshares on January 10, 1998 (trade date), yourholding period would not be more than oneyear. If you sold them on January 11, 1998,your holding period would be more than oneyear (12 months plus 1 day).

Mutual fund shares received as a gift. Ifyou receive a gift of mutual fund shares andyour basis is determined by the donor's basis,your holding period is considered to have

started on the same day that the donor'sholding period started.

Inherited mutual fund shares. If you in-herit mutual fund shares, you are consideredto have held the shares for more than eigh-teen months, regardless of how long you heldthem, if your basis is:

1) The FMV at the date of the decedent'sdeath (or the alternate valuation date),or

2) The decedent's adjusted basis in thecase of shares described earlier inShares decedent received as a gift, un-der Shares Acquired by Inheritance.

Page 7


8/15

Report the sale of inherited mutual fundshares on line 8 of Schedule D and write In-herited in column (b) instead of the date youacquired the shares.

Reinvested dividends. If your dividends arereinvested, each full share or fractional shareis considered to have been purchased on thedate that each share was purchased for you.Therefore, if you sell all or part of your mutualfund shares, you might have some short-termand some long-term gains and losses.

Certain short-term losses. Special rulesapply if you have a short-term loss on the saleof shares on which you received an exempt-interest dividend or a capital gain distribution.

Exempt-interest dividends. If you re-ceived exempt-interest dividends on mutualfund shares that you held for 6 months or lessand sold at a loss, you may claim only the partof the loss that is more than the exempt-interest dividends. Report the loss as ashort-term capital loss.

Example. On January 8, 1997, youbought a mutual fund share for $40. On Feb-ruary 3, 1997, the mutual fund paid a $5 div-idend from tax-exempt interest, which is nottaxable to you. On February 12, 1997, yousold the share for $34. If it were not for thetax-exempt dividend, your loss would be $6($40 $34). However, you can deduct only$1, the part of the loss that is more than theexempt-interest dividend ($6 $5). OnSchedule D, column (d), increase the salesprice from $34 to $39 (the $5 portion of theloss that is not deductible). You can deductonly $1 as a short-term capital loss.

Capital gain distribution before short-term loss. Generally, if you received, orwere considered to have received, capitalgain distributions on mutual fund shares thatyou held for 6 months or less and sold at aloss, report only the part of the loss that ismore than the capital gain distribution as ashort-term capital loss. The part of the lossthat is not more than the capital gain distri-bution is reported as a long-term capital loss.

Example. On April 7, 1997, you boughta mutual fund share for $20. On June 25,1997, the mutual fund paid a capital gaindistribution of $2 a share, which is taxed asa long-term capital gain. On July 11, 1997,you sold the share for $17.50. If it were notfor the capital gain distribution, your losswould be a short-term loss of $2.50. However,the part of the loss that is not more than thecapital gain distribution ($2) must be reportedas a long-term capital loss. The remaining$0.50 of the loss can be reported as a short-term capital loss.

Wash sales. If you sell mutual fundshares at a loss and within 30 days beforeor after the sale you buy, acquire in a taxableexchange, or acquire a contract or option tobuy, substantially identical property, youhave a wash sale. You cannot deduct lossesfrom wash sales.

In determining whether the shares aresubstantially identical, you must consider all

the facts and circumstances. Ordinarily,shares issued by one company are not con-sidered to be substantially identical to sharesissued by another company.

For more information on wash sales, getPublication 550.

How To FigureGains and Losseson Schedule DSeparate your short-term gains and lossesfrom your long-term gains and losses on allthe mutual fund shares and other capital as-sets you disposed of during the year. Thendetermine your net short-term gain or lossand your net long-term gain or loss.

Net short-term capital gain or loss. Netshort-term capital gain or loss is determinedby adding the gains and losses from column(f) of Part I, Schedule D (Form 1040), CapitalGains and Losses. Line 7 is the net short-termcapital gain or loss.

Net long-term capital gain or loss. Netlong-term capital gain or loss is determinedby adding the gains and losses from lines 8through 14 in column (f) of Part II, ScheduleD (Form 1040). Line 16 is the net long-termcapital gain or loss.

In figuring the long-term capital gain, youshould include on line 11 of Part II, ScheduleD (Form 1040), undistributed capital gaindistributions and on line 13 of Part II, Sched-ule D (Form 1040), capital gain distributionsreceived during the year.

Total Net Capital Gain or Loss

The total net capital gain or loss is determinedby combining the net short-term capital gain

or loss on line 7 with the net long-term capitalgain or loss on line 16. Enter the result on line17 of Part III, Schedule D (Form 1040).

Net capital gain. If line 17 of Part III,Schedule D (Form 1040) shows a gain, enterthe amount on line 13 of Form 1040.

Using the maximum capital gains rates.The 31%, 36%, and 39.6% income tax ratesfor individuals do not apply to a net capitalgain. In some cases, the 15% and 28% ratesdo not apply either. Instead, your net capitalgain is taxed at a lower maximum rate.

Figuring your tax. You will need to usePart IV of Schedule D (Form 1040) to figureyour tax using the maximum capital gainsrates if both of the following are true.

1) You have a net capital gain. You havea net capital gain if both lines 16 and 17of Schedule D (Form 1040) are gains.(Line 16 is your net long-term capitalgain or loss. Line 17 is your net long-term capital gain or loss combined withany net short-term capital gain or loss.)

2) Your taxable income on Form 1040, line38, is more than zero.

The maximum rate may be 10%, 20%,25%, or 28%, or a combination of those rates,as shown in the following table.

Note:Also see Table 4.

Net capital loss. If line 17 of Part III,Schedule D (Form 1040) shows a loss, yourallowable capital loss deduction is the smaller

of:

1) $3,000 ($1,500 if you are married andfiling a separate return), or

2) Your net capital loss shown on line 17of Schedule D.

Enter your allowable loss on line 13 of Form1040.

Example 1. Bob and Gloria sold all oftheir shares in a mutual fund. The sale re-sulted in a capital loss of $7,000. They hadno other sales of capital assets during theyear. On their joint return, they can deduct

$3,000, which is the smaller of their loss orthe net capital loss limit.If Bob and Gloria's capital loss had been

$2,000, their capital loss deduction wouldhave been $2,000, because it is less than the$3,000 limit.

Example 2. Margaret has capital gainsand losses for the year as follows:

Margaret's deductible capital loss is$1,700, which she figures as follows:

TheMaximumRate is . . . For . . .

28% Gain on a sale beforeMay 7, 1997, of property heldmore than 1 year

Gain on a sale after July 28, 1997,of property held more than 1 yearbut not more than 18 months

A collectibles gain

25% Unrecaptured section 1250 gain

on a sale after May 6, 1997,and before July 29, 1997, ofproperty held more than 1 year

Unrecaptured section 1250 gainon a sale after July 28, 1997, ofproperty held more than18 months

20% Gain on a sale after May 6, 1997,and before July 29, 1997, ofproperty held more than 1 year(unless 28%, 25%, or 10% rateapplies)

Gain on a sale after July 28, 1997,of property held more than18 months (unless 28%, 25%, or10% rate applies)

10% Gain on a sale that would qualify

for the 20% maximum rate exceptthat, if there were no maximumcapital gains rates, the gainwould be taxed at the15% regular tax rate

The term sale includes a trade, involuntaryconversion, and installment payment received.

Short-term Long-termGains ... .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . $700 $400Losses ...................................... (800) (2,000)

Page 8


9/15

Table 4. What Is Your Maximum Capital Gains Rate for 1997?

IF the sale* tookplace . . .

Before May 7, 1997 More than 1 year

* The term sale includes a trade, involuntary conversion, and installment payment received.

AND the capital assetwas held . . . AND your gain . . .

THEN yourmaximumcapital gainsrate is . . .

Is from selling any type ofcapital asset

28%

After May 6, 1997, butbefore July 29, 1997

More than 1 year but notmore than 18 months

1) Is a collectibles gain 28%

After July 28, 1997

After July 28, 1997

More than 1 year

More than 18 months

2) Is an unrecapturedsection 1250 gain

25%

3) Is not a gain that (1), (2), or(4) applies to

20%

4) Would be taxed, if therewere no maximum capitalgains rates, at the 15%regular tax rate and (1)and (2) dont apply

10%

Is from selling any type ofcapital asset

28%

1) Is a collectibles gain 28%

2) Is an unrecapturedsection 1250 gain

25%

3) Is not a gain that (1), (2), or(4) applies to

20%

4) Would be taxed, if therewere no maximum capitalgains rates, at the 15%regular tax rate and (1)and (2) dont apply

10%

Example 3. Mary and Les file a joint re-turn. They have a net long-term capital lossof $5,600 and a net short-term capital gainof $450. Their net capital loss is $5,150($5,600$450). Because their net capital lossexceeds $3,000, the amount they can deductfor the year is limited to $3,000.

Capital loss carryovers. If your net capitallosses are more than your allowable netcapital loss deduction, you may carry over theexcess to later years until it is completely

used up. To determine your capital loss car-ryover, subtract from your capital loss thelesser of:

1) Your allowable capital loss deduction forthe year, or

2) Your taxable income increased by yourallowable capital loss deduction for theyear and by your deduction for personalexemptions.

If your deductions exceed your gross in-come, you start the computation with a neg-ative number.

When carried over, the loss will keep itsoriginal character as long-term or short-term.

Short-term capital losses ............ ($800) Therefore, a long-term capital loss carriedover from a previous year will offset long-termgains of the current year before it offsets

short-term gains of the current year.Use the Capital Loss Carryover Work-

sheetin the Schedule D instructions to figureyour capital loss carryover.

Separate returns. Capital loss carry-overs from separate returns are combined ifyou now file a joint return. However, if youonce filed jointly and are now filing separately,a capital loss carryover from the joint returncan be deducted only on the separate returnof the spouse who actually had the loss.

For more information on figuring capitalloss carryovers, get Publication 550.

Investment ExpensesYou can generally deduct the expenses ofproducing taxable investment income. Theseinclude expenses for investment counselingand advice, legal and accounting fees, andinvestment newsletters. These expenses aredeductible as miscellaneous itemized de-ductions to the extent that they exceed 2%of your adjusted gross income. See chapter3 in Publication 550 for more information.

Interest paid on money to buy or carry in-vestment property is also deductible. SeeLimit on Investment Interest Expense, later.

Publicly offered mutual funds. Generally,mutual funds are publicly offered funds. Ex-penses of publicly offered mutual funds are

not treated as miscellaneous itemized de-ductions. This is because these mutual fundsreport only the net amount of investment in-

come after your share of the investment ex-penses has been deducted.

Nonpublicly offered mutual funds. If youown shares in a nonpublicly offered mutualfund during the year, you can deduct yourshare of the investment expenses on yourSchedule A (Form 1040). Claim them as amiscellaneous itemized deduction to the ex-tent your miscellaneous deductions exceed2% of your adjusted gross income. Yourshare of the expenses will be shown in box1e of Form 1099DIV. A nonpublicly offeredmutual fund is one that:

1) Is not continuously offered pursuant toa public offering,

2) Is not regularly traded on an establishedsecurities market, and

3) Is not held by at least 500 persons at alltimes during the tax year.

Contact your mutual fund if you are notsure whether it is nonpublicly offered.

Expenses allocable to exempt-interestdividends. You cannot deduct expenses thatare for the collection or production ofexempt-interest dividends. Expenses must beallocated if they were for both taxable andtax-exempt income. One accepted method forallocating expenses is to divide them in thesame proportion that your tax-exempt income

Subtract short-term capital gains..................................................... 700

Net short-term capital loss ......... ($100)Long-term capital losses ............ ($2,000)Subtract long-term capital gains . 400Net long-term capital loss . ... ... ... ($1,600)Deductible capital loss ($1,700)

Page 9


10/15

from the mutual fund is to your total incomefrom the fund. To do this, you must first divideyour tax-exempt income by your total income.Then multiply the result by your expenses tofind the part of the expenses that relates tothe tax-exempt income. You cannot deductthis part.

Example. William received $600 in divi-dends from his mutual fund exempt-interest dividends of $480 and taxable divi-dends of $120. In earning this income, he had

a $50 expense for a newsletter on mutualfunds. William divides the exempt-interestdividends by the total dividends to figure thepart of the expense that is not deductible($480 $600 = .80). Therefore, 80% ofWilliam's expense is for exempt-interest in-come. He cannot deduct $40 (80% of $50)of the expense. William may claim the bal-ance of the expense, $10, as a miscellaneousdeduction subject to the 2% of adjusted grossincome limit. That is the part of the expenseallocable to the taxable dividends.

Limit on InvestmentInterest Expense

The amount you can deduct as investmentinterest expense may be limited in two differ-ent ways. First, you may not deduct the in-terest on money you borrow to buy or carryshares in a mutual fund that distributes onlyexempt-interest dividends. If the fund alsodistributes taxable dividends, you must allo-cate the interest between the taxable andnontaxable income. Allocate the interest us-ing the method of allocation explained underExpenses allocable to exempt-interest divi-dends.

Second, investment interest is limited bythe amount of investment income. This is ex-plained in the following discussions.

Limit on deduction. Your deduction for in-vestment interest expense is limited to theamount of your net investment income. Netinvestment income is figured by subtractingyour investment expenses other than interestfrom your investment income. For this pur-pose, do not include any income or expensestaken into account to figure gain or loss frompassive activities.

Investment income. Investment incomegenerally includes gross income derived fromproperty held for investment (such as interest,dividends, annuities, and royalties). It gener-ally does not include net capital gain derivedfrom disposing of investment property or

capital gain distributions from mutual fundshares. However, you can choose to includepart or all of your net capital gain in invest-ment income. For information on this choice,see chapter 3 of Publication 550.

Investment expenses. Investment ex-penses include all income-producing ex-penses relating to the investment property,other than interest expense, that are allow-able deductions after subtracting 2% of ad-

justed gross income. In computing the

amount over the 2% limit, miscellaneous ex-penses that are not investment expenses aredisallowed before any investment expensesare disallowed.

For information on the 2% limit, get Publi-cation 529, Miscellaneous Deductions. Formore information on passive activity losses,get Publication 925, Passive Activity and At-Risk Rules.

Example. Jane, a single taxpayer, hasinvestment income for the year of $12,000.Jane's investment expenses (other than in-terest expense) directly connected with theproduction of income were $980 after sub-tracting the 2% limit on miscellaneous item-ized deductions. Jane incurred $12,500 of

investment interest expense during the year.She had no passive activity losses. Jane fig-ures net investment income and the limits onher investment interest expense deduction asfollows:

For the year, Jane's investment interestexpense deduction is limited to $11,020 (hernet investment income). The disallowed in-terest expense of $1,480 can be carried for-ward to the following year as explained next

under Carryover.

Carryover. You can carry forward to thenext tax year the investment interest that youcannot deduct because of the limit. You candeduct the interest carried forward to the ex-tent that your net investment income exceedsyour investment interest in that later year.

Form 4952. Use Form 4952, InvestmentInterest Expense Deduction, to figure yourinvestment interest expense deduction. Formore information about investment interestexpense, get Publication 550.

How To GetMore Information

You can get help from the IRS in severalways.

Free publications and forms. To order free

publications and forms, call 1800TAX-FORM (18008293676). You can alsowrite to the IRS Forms Distribution Centernearest you. Check your income tax packagefor the address. Your local library or post of-fice also may have the items you need.

For a list of free tax publications, orderPublication 910, Guide to Free Tax Services.It also contains an index of tax topics andrelated publications and describes other freetax information services available from IRS,including tax education and assistance pro-grams.

If you have access to a personal computerand modem, you also can get many formsand publications electronically. See Quickand Easy Access To Tax Help and Forms in

your income tax package for details.Tax questions. You can call the IRS withyour tax questions. Check your income taxpackage or telephone book for the localnumber, or you can call 18008291040.

TTY/TDD equipment. If you have access toTTY/TDD equipment, you can call18008294059 to ask tax questions or toorder forms and publications. See your in-come tax package for the hours of operation.

Evaluating the quality of our telephoneservices. To ensure that IRS representativesgive accurate, courteous, and professionalanswers, we evaluate the quality of our 800number telephone services in several ways.

A second IRS representative sometimesmonitors live telephone calls. That persononly evaluates the IRS assistor and doesnot keep a record of any taxpayer's nameor tax identification number.

We sometimes record telephone calls toevaluate IRS assistors objectively. Wehold these recordings no longer than oneweek and use them to measure thequality of assistance.

We value our customers' opinions.Throughout the year, we will be surveyingour customers for their opinions on ourservice.

Total investment income ............................ $12,000Subtract: Investment expenses

(other than interest) ................... 980Net investment income .............................. $11,020Subtract: Investment interest expense ...... 12,500Excess interest expense not allowed forthe year ...................................................... $1,480

Page 10


11/15

ComprehensiveExampleRobert and Janice Martin have the followingfour sources of investment income to reporton their 1997 tax return. Their Schedules Band D (Form 1040) are shown later.

1) $1,250 gain from the sale of 200 sharesof Mutual Fund S on October 7, 1997.

They received Form 1099B, and theyreport the sale on Schedule D (Form1040).

Robert and Janice purchased theseshares in 1983 at $10 each. They re-ceived some return of capital distribu-tions in 1985, 1986, and 1994 that re-duced their basis in the shares. TheMartins never reinvested any of the dis-tributions from this fund, and they re-ceived no 1997 distributions before thesale.

2) $326 of gross distributions from MutualFund R ($265 in ordinary dividends and$61 in capital gain distributions). Theyreceived Form 1099DIV, and they re-port these distributions on Schedule B

(Form 1040) and on Schedule D (Form1040).

Robert and Janice invested $3,800 inthis fund in June 1997 and received153.16 shares that cost $24.81 pershare. They requested that all of theirdistributions be reinvested in moreshares of the fund. On December 30,1997, they acquired an additional 13.03shares at $25.01 per share from theirreinvested dividends.

3) $101 of exempt-interest dividends fromMutual Fund X. They receive a state-ment from the fund, and they report thisnontaxable amount on line 8b of Form1040.

The Martins invested $2,600 in thisfund in April 1995 and received 87.54shares at $29.70 per share. They re-ceived exempt-interest dividends of $92in 1995 and $107 in 1996.

4) $237 in ordinary dividends from 100shares of common stock in Green Pub-

lishing Company. They received Form1099DIV, and they report the dividendson Schedule B (Form 1040).

Robert and Janice bought this stockin 1983 for $10.29 per share.

Mutual Fund Record. Robert and Janicekeep track of all their basis adjustments ontheir Mutual Fund Record, shown later. Theyshow the return of capital distributions fromMutual Fund S and the reinvested dividendsfrom Mutual Fund R. They do not show theexempt-interest dividends from Mutual FundX because those dividends do not reducetheir basis in the shares.

The Martins keep this record with theirmutual fund documents, and they use it toreport their 1997 sale of Mutual Fund S.

Preparing their return. The Martins first usetheir two Forms 1099DIV to figure the divi-dend income they report on Schedule B. Theythen use their Form 1099B and their MutualFund Recordto figure the gain from the saleof Mutual Fund S they report on Schedule D.

Schedule B, Part II. On line 5, Robert andJanice list the $326 gross distributions fromMutual Fund R and the $237 in ordinary divi-

dends from Green Publishing Company (frombox 1a of Forms 1099DIV). They enter thetotal of $563 on line 6.

On line 7, they enter the $61 capital gaindistribution from Mutual Fund R (from box 1cof Form 1099DIV). They leave line 8 blankand enter $61 on line 9. They subtract thatamount from the $563 on line 6 and enter theresult, $502, on line 10. This amount is theirordinary dividends. They carry the $502 toline 9 of Form 1040, and the $61 capital gaindistribution (shown on line 7) to Schedule D.

Schedule D, Part II. Robert and Janice enterthe $61 capital gain distribution from MutualFund R on line 13, column (f). They do notmake an entry in column (g) of line 13 be-cause Mutual Fund R indicated that none ofthe capital gain distribution was a 28% rategain distribution.

They report the sale of their shares inMutual Fund S on line 8 because they ownedthe shares for more than one year. They donot make an entry in column (g) of line 8 be-cause they held the shares for 18 months ormore. They use the information from theirMutual Fund Recordto complete boxes a, b,and e. After adjustment for their return ofcapital distributions, their basis in column (e)

is $1,978 ($9.89 per share). They use theirForm 1099B to complete boxes c and d.Their sales price in column (d) is $3,228($16.14 per share). Their gain of $1,250 isentered in column (f).

Robert and Janice add the amounts onlines 8 and 13 and enter their net long-termcapital gain of $1,311 on line 16. Becauselines 16 and 17 are gains, they compute theirtax using Part IV of Schedule D (not shown).

Page 11


12/15

Table 2. Mutual Fund Record

Mutual Fund

Acquired1

DateNumber

ofShares

CostPer

ShareAdjustments toBasis Per Share

Adjusted2

Basis PerShare

Sold or redeemed

DateNumber

ofShares

1Include shares received from reinvestment of dividends.

2Cost plus or minus adjustments.

MUTUAL FUND S

MUTUAL FUND X

7-10 -8 3

4-16 -9 5

6-6 -97

12-30 -97

20 0

87.54

153.16

13.03

10 .00

29.70

24.81

25.01

12-31-85

(.05)

12-31-86

(.02)

12-31-94

(.04)9 .8 9 10 -7-97 20 0

MUTUAL FUND R

Page 12


13/15

ROBERT A and JANICE P MARTIN 123 0 0 456 7

23 7

326

56 3

6 1

6 1

50 2

GREEN PUBLISHING COMPANY

MUTUAL FUND R

X

X

Page 2OMB No. 1545-0074Schedules A&B (Form 1040) 1997Name(s) shown on Form 1040. Do not enter name and social security number if shown on other side. Your social security number

AttachmentSequence No. 08Schedule BInterest and Dividend Income

Note: If you had over $400 in taxable interest income, you must also complete Part III.Part IInterestIncome

(See pages 12and B-1.)

AmountList name of payer. If any interest is from a seller-financed mortgage and the

buyer used the property as a personal residence, see page B-1 and list this

interest first. Also, show that buyers social security number and address

1

Note: If youreceived a Form1099-INT, Form1099-OID, orsubstitutestatement froma brokerage firm,list the firmsname as thepayer and enterthe total interestshown on thatform.

1

2Add the amounts on line 12

3Excludable interest on series EE U.S. savings bonds issued after 1989 from Form8815, line 14. You MUST attach Form 8815 to Form 1040

3

Subtract line 3 from line 2. Enter the result here and on Form 1040, line 8a 4 4

Note: If you had over $400 in gross dividends and/or other distributions on stock, you must also complete Part III.Part IIDividendIncome

Amount

(See pages 12and B-1.)

5 List name of payer. Include gross dividends and/or other distributions on stock

here. Any capital gain distributions and nontaxable distributions will be deducted

on lines 7 and 8

Note: If youreceived a Form1099-DIV orsubstitutestatement froma brokeragefirm, list thefirms name asthe payer andenter the totaldividendsshown on thatform.

5

66 Add the amounts on line 577 Capital gain distributions. Enter here and on Schedule D88 Nontaxable distributions. (See the inst. for Form 1040, line 9.)

9Add lines 7 and 891010 Subtract line 9 from line 6. Enter the result here and on Form 1040, line 9

You must complete this part if you (a) had over $400 of interest or dividends; (b) had a foreign account; or(c) received a distribution from, or were a grantor of, or a transferor to, a foreign trust.

Part IIIForeignAccountsandTrusts

NoYes

At any time during 1997, did you have an interest in or a signature or other authority over a financial

account in a foreign country, such as a bank account, securities account, or other financial

account? See page B-2 for exceptions and filing requirements for Form TD F 90-22.1

11a

b If Yes, enter the name of the foreign country (Seepage B-2.) During 1997, did you receive a distribution from, or were you the grantor of, or transferor to, a

foreign trust? If Yes, you may have to file Form 3520 or 926. See page B-212

For Paperwork Reduction Act Notice, see Form 1040 instructions. Schedule B (Form 1040) 1997Printed on recycled paper

Page 13


14/15

ROBERT A. and JANICE P. MARTIN 123 0 0 456 7

MUTUAL FUND S200 Shares

7-10 -8 3 10 -7-97 3,228

3,228

1,978 1,250

6 1

1,3 11

1,3 11

*28% Rate Gain or Loss includes all gains and losses in Part II, column (f) from sales, exchanges, or conversions (includinginstallment payments received) either:

OMB No. 1545-0074SCHEDULE D Capital Gains and Losses(Form 1040)

Attach to Form 1040. See Instructions for Schedule D (Form 1040).Department of the TreasuryInternal Revenue Service

AttachmentSequence No. 12 Use Schedule D-1 for more space to list transactions for lines 1 and 8.

Your social security numberName(s) shown on Form 1040

Short-Term Capital Gains and LossesAssets Held One Year or Less(f) GAIN or (LOSS)

FOR ENTIRE YEAR.Subtract (e) from (d)

(e) Cost orother basis

(see page D-4)

(a) Description of property(Example: 100 sh. XYZ Co.)

(d) Sales price(see page D-3)

(c) Date sold(Mo., day, yr.)

1

Enter your short-term totals, if any, fromSchedule D-1, line 2

2

Total short-term sales price amounts.Add column (d) of lines 1 and 2

33

5

Short-term gain from Forms 2119 and 6252, and short-term gain or (loss)

from Forms 4684, 6781, and 88245

66

Net short-term gain or (loss) from partnerships, S corporations, estates, andtrusts from Schedule(s) K-1

7

Short-term capital loss carryover. Enter the amount, if any, from line 9 of your1996 Capital Loss Carryover Worksheet

Net short-term capital gain or (loss). Combine lines 1 through 6 incolumn (f)

Long-Term Capital Gains and LossesAssets Held More Than One Year

8

Enter your long-term totals, if any, fromSchedule D-1, line 9

9

10 Total long-term sales price amounts.Add column (d) of lines 8 and 9 10

11Gain from Form 4797, Part I; long-term gain from Forms 2119, 2439, and6252; and long-term gain or (loss) from Forms 4684, 6781, and 8824

11

1212

13

Net long-term gain or (loss) from partnerships, S corporations, estates, andtrusts from Schedule(s) K-1

14

Capital gain distributions

15 15

14

16

Long-term capital loss carryover. Enter in both columns (f) and (g) the amount,if any, from line 14 of your 1996 Capital Loss Carryover Worksheet ( )

Combine lines 8 through 14 in column (g)

Net long-term capital gain or (loss). Combine lines 8 through 14 incolumn (f) 16

For Paperwork Reduction Act Notice, see Form 1040 instructions. Schedule D (Form 1040) 1997Cat. No. 11338H

( )

44

Part I

Part II

7

13

(b) Dateacquired

(Mo., day, yr.)

2

9

(99)

1997

(f) GAIN or (LOSS)FOR ENTIRE YEAR.Subtract (e) from (d)

(e) Cost orother basis

(see page D-4)

(a) Description of property(Example: 100 sh. XYZ Co.)

(d) Sales price(see page D-3)

(c) Date sold(Mo., day, yr.)

(b) Dateacquired

(Mo., day, yr.)

(g) 28% RATE GAINor (LOSS)

Before May 7, 1997, or After July 28, 1997, for assets held more than 1 year but not more than 18 months.

It also includes ALL collectibles gains and losses (as defined on page D-4).

*(see instr. below)

Page 14


15/15

Index

AAdjusted basis ......................... 4, 7

Donor's ................................... 4Gains and losses ................... 7

Amount you realize ..................... 7Appreciated property ................... 4

Automatic reinvestment plan ....... 3Average basis:

Double-category method ........ 6

Making the choice .................. 7Shares acquired by gift .......... 7Single-category method ......... 6

BBasis of shares:

Acquired by gift .................. 4, 7Acquired by inheritance ..... 4, 7

Additions to ............................ 4Average .................................. 6Cost .................................... 3, 6Reduction of ........................... 4

Bid price ...................................... 4

CCapital gain distributions ......... 2, 8

Capital gains:Form 2439 .............................. 2Net long-term ......................... 8Net short-term ........................ 8Undistributed .......................... 2

Capital loss carryovers ................ 9Carryovers:

Capital loss ............................. 9Investment expenses ........... 10Separate returns .................... 9

Commissions ............................... 4Community property states ..... 2, 4

Inherited mutual fund shares . 4Tax treatment of dividends .... 2Cost basis ................................ 3, 6

DDistributions:

Capital gain ............................ 2Nontaxable ............................. 2Ordinary dividends ................. 2

Return of capital ..................... 2

Tax treatment of ..................... 2Dividends:

Exempt-interest .................. 2, 8Ordinary .................................. 2Reinvestment of ................. 3, 8Year-end ................................. 2

Donor's adjusted basis ................ 4Double-category method ............. 6

EExchanges of mutual funds ......... 6Exempt-interest dividends ... 2, 8, 9

Investment expense of ........... 9Short-term losses ................... 8

FFair market value:

Bid price ................................. 4Gifts ........................................ 4

Inherited mutual fund shares . 4Net asset value ...................... 4

First-in first-out (FIFO) ................. 6Foreign tax credit ........................ 3Foreign tax deduction .................. 3

Forms:1099-DIV ............................ 2, 9

1099B ............................... 6, 72439 ....................................... 24952 ..................................... 10

GGains and losses:

Amount you realize ................ 7Capital loss carryovers ........... 9How to figure ...................... 7, 8How to report ......................... 7Reporting on Schedule D (Form

1040) ................................. 7Gifts of mutual fund shares ..... 4, 7

HHelp from IRS ............................ 10

Holding period:Gifts ........................................ 7Inheritances ............................ 7Settlement date ...................... 7Short-term losses ................... 8

Trade date .............................. 7

IIdentifying shares sold:

Average basis ........................ 6Cost basis .............................. 6

First-in first-out (FIFO) ........... 6Specific share identification ... 6

Information returns ...................... 6Inherited mutual fund shares .. 4, 7Investment expenses:

Carryover .............................. 10Defined ............................. 9, 10Form 4952 ............................ 10Interest ................................. 10Limit on ................................. 10

Investment income .................... 10

JJoint tenants ................................ 2

LLimit on investment interest ex-

penses .................................. 10

Load charges ............................... 4

MMutual fund record ...................... 4

Mutual funds:Defined ................................... 1Exchanges .............................. 6

H.R. 10 (Keogh plans) ........... 2Individual retirement arrange-

ments (IRAs) ..................... 2Money market fund ................ 1

Nonpublicly offered ................ 9Redemptions .......................... 6Sales ...................................... 6Tax-exempt ............................ 2

NNet asset value ........................... 4Net capital gain ........................... 8Net capital loss ............................ 8

Nontaxable distributions .............. 2

OOrdinary dividends ...................... 2

RRedemptions of mutual funds ..... 6

Reinvestment rights ..................... 4Return of capital distributions ...... 2

SSales of mutual funds ................. 6Schedule B, how to report on ..... 3Schedule D (Form 1040):

How to report on .................... 7Net long-term ......................... 8Net short-term ........................ 8Part I ....................................... 8Part II ...................................... 8Part III ..................................... 8

Settlement date ........................... 7Short-term losses:Capital gain distributions ........ 8

Exempt-interest dividends ...... 8Gains and losses ................... 8

Net .......................................... 8Single-category method .............. 6

Specific share identification ......... 6

TTax credit:

Form 2439 .............................. 2Undistributed capital gains ..... 2

Taxpayer identification number ... 6Trade date ................................... 7

UUndistributed capital gains .......... 2

WWash sales .................................. 8Worksheet ................................... 4

YYear-end dividends ..................... 2

us internal revenue service: p564--1997

Documents