us internal revenue service: p564--1998

8/14/2019 US Internal Revenue Service: p564--1998

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

Tax Treatment of Distributions ....... 2Ordinary Dividends ......................... 2Capital Gain Distributions ............... 2Exempt-Interest Dividends .............. 2Return of Capital (Nontaxable)

Distributions ............................. 2Reinvestment of Distributions ......... 3

How To Report ............................... 3

Keeping Track of Your Basis ............ 4

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

Identifying the Shares Sold ........... 6Gains and Losses .......................... 7How To Figure Net Gain or Loss on

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

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

Expense .................................. 9

Comprehensive Example ................. 10

How To Get More Information .......... 14

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

Important Changefor 1998Elimination of 18month holding periodfor lowest capital gains rates. Beginning in1998, you no longer have to hold property formore than 18 months to be eligible for thelowest capital gains rates. Now, in mostcases, you only have to hold property morethan 1 year to be eligible for the 10% or 20%tax rate. For more information, see Using the

maximum capital gains rates under How ToFigure Net Gain or Loss on Schedule D.

Important ReminderReporting capital gains distributions. Youmust report your capital gain distributions onSchedule D (Form 1040) in all cases. This isso you can benefit from the lowest capitalgains rates.

Introduction

This publication provides federal income taxinformation for individual shareholders ofmutual funds, including money market funds.It explains how to report distributions paid orallocated to you by a mutual fund and anyexpenses connected with your investment. Italso explains how to figure and report yourgain or loss when you sell, exchange, or re-deem your mutual fund shares. A compre-hensive example, with filled-in forms, appearsat the end of the publication.

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. A money market fund is a mu-tual fund that tries to increase current income

Departmentof theTreasury

InternalRevenueService

Publication 564Cat. No. 15112N

Mutual Fund

Distributions

For use in preparing

1998 Returns


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available to shareholders by buying short-term market investments. Money marketfunds pay dividends and should not be con-fused with bank money market accounts thatpay interest.

Qualified retirement plans. The rules inthis publication do not apply to mutual fundshares held in individual retirement arrange-ments (IRAs), H.R. 10 (Keogh plans), section401(k) plans, and other qualified retirementplans. The value of the mutual fund sharesand earnings allocated to you are included inyour retirement plan assets and stay tax freeuntil the plan distributes them to you. The taxrules that apply to retirement plan distribu-tions are explained in the following publica-tions.

Publication 560, Retirement Plans forSmall Business (SEP, SIMPLE, andKeogh Plans).

Publication 571, Tax-Sheltered AnnuityPrograms for Employees of PublicSchools and Certain Tax-Exempt Organ-izations.

Publication 575, Pension and Annuity In-come.

Publication 590, Individual RetirementArrangements (IRAs) (Including RothIRAs and Education IRAs).

Publication 721, Tax Guide to U.S. CivilService Retirement Benefits.

Useful ItemsYou may want to see:

Publication

550 Investment Income and Expenses

Form (and Instructions)

Schedule B (Form 1040) Interest and

Ordinary Dividends Schedule D (Form 1040) Capital Gains

and Losses

Schedule 1 (Form 1040A) Interest andOrdinary Dividends for Form1040A Filers

1099B Proceeds from Broker andBarter Exchange Transactions

1099DIV Dividends and Distributions

2439 Notice to Shareholder of Undis-tributed Long-Term Capital Gains

4952 Investment Interest Expense De-duction

See How To Get More Information near

the end of this publication for informationabout getting this publication and these forms.

Tax Treatmentof DistributionsA distribution you receive from a mutual fundmay be an ordinary dividend, a capital gaindistribution, an exempt-interest dividend, or anontaxable return of capital. The fund willsend you a Form 1099DIV or similar state-ment telling you the kind of distribution youreceived. This section discusses the taxtreatment of each kind of distribution, de-

scribes how to treat reinvested distributions,and explains how to report distributions onyour return.

CAUTION

!You may be treated as having re-ceived a distribution of capital gainsrealized by the mutual fund even if the

fund does not distribute them. The fund willsend you a Form 2439 if it allocates any un-distributed capital gains to you. SeeUndis-tributed capital gains underCapital Gain Dis-tributions.

Community property states. If you aremarried and receive a distribution that iscommunity income, one-half of the distribu-tion is generally considered to be received byeach spouse. If you file separate returns, youmust each report one-half of any taxable dis-tribution.

If the distribution is not considered com-munity income under state law and you andyour spouse file separate returns, each of youmust report your separate taxable distribu-tions.

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, distri-butions 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.

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 are treated the sameas distributions from 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 a

mutual 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 inbox 1 of the Form 1099DIV or on a similarstatement you receive from the mutual fund.

Capital Gain DistributionsThese distributions are paid by mutual funds

from their net realized long-term capital gains.The Form 1099DIV (box 2a) 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.

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,later.

Undistributed capital gains. Mutual fundsmay keep some of their long-term capitalgains and pay taxes on those undistributedamounts. 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 in box1a and any tax paid by the mutual fund in box2. The undistributed capital gain is not re-ported on Form 1099DIV.

Attach Copy B of Form 2439 to your re-turn. Keep Copy C for your records.

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

Exempt-Interest DividendsA 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. If you receivedexempt-interest dividends on mutual fundshares that you held for 6 months or less and

sold at a loss, see Certain short-term lossesunder 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 doesnotconvert tax-exempt interest to taxable in-terest. Also, this income is generally a taxpreference item and may be subject to thealternative minimum tax. 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 box 3of Form 1099DIV. These return of capitaldistributions are generally not taxed and aresometimes called tax-free dividends or non-taxable distributions.

A return of capital distribution reducesyour basis in the shares. Basis is explainedlater. Your basis cannot be reduced belowzero. If your basis is zero, you must report thereturn of capital distribution on your tax returnas a capital gain. Report this capital gain on

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Schedule D (Form 1040). Whether it is along-term or short-term capital gain dependson how long you held the shares.

Example. You bought shares in a mutualfund in 1994 for $12 a share. In 1995, 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 1996, you received a return of capitaldistribution of $1 per share and further re-duced your basis in each share to $6. In

1997, you received a return of capital distri-bution of $2 per share. Your basis was re-duced to $4. In 1998, the return of capitaldistribution from the mutual fund was $5 ashare. You reduce your basis in each shareto zero and report the excess ($1 per share)as a long-term capital gain on Schedule D.

Reinvestmentof DistributionsMost mutual funds permit shareholders toautomatically reinvest distributions in moreshares in the fund, instead of receiving cash.You must report the reinvested amounts thesame way as you would report them if you

received them in cash. This means that rein-vested ordinary dividends and capital gaindistributions generally must be reported asincome. Reinvested exempt-interest divi-dends generally are not reported as income.Reinvested return of capital distributions arereported as explained under the discussionabove. See Keeping Track of Your Basis,later, to determine the basis of the additionalshares.

How To ReportYou must report mutual fund distributions onForm 1040 or Form 1040A. You cannot reportmutual fund distributions on Form 1040EZ.

Form 1040A. If you file Form 1040A, reportyour ordinary dividend distributions on line 9and your exempt-interest dividends on line8b. However, if the total of the ordinary divi-dends you received is more than $400 or youreceived ordinary dividends as a nominee,report the ordinary dividends in Part II ofSchedule 1, on line 5. Then report the amountfrom line 6 of that schedule on line 9 of Form1040A. Attach Schedule 1 to your return.

However, you cannot use Form 1040Aand must use Form 1040 in any of the fol-lowing situations.

You received a capital gain distribution.

You received a return of capital distribu-tion that is more than your basis in yourmutual fund shares.

You were allocated an undistributedcapital gain.

Form 1040. If you file Form 1040, report your

ordinary dividend distributions on line 9 andyour exempt-interest dividends on line 8b.However, if the total of the ordinary dividendsyou received is more than $400 or you re-ceived ordinary dividends as a nominee, re-port the ordinary dividends in Part II ofSchedule B, on line 5. Then report the amountfrom line 6 of that schedule on line 9 of Form1040. Attach Schedule B to your return.

If you received capital gain distributionsor were allocated undistributed capital gains,you must complete Schedule D and attach itto your return. Report your capital gain distri-butions on line 13. If you were allocated un-distributed capital gains, report them on line11 and attach Copy B of Form 2439 to yourreturn. Report the tax paid by the mutual fund

on these gains on Form 1040, line 63, andcheck box a on that line.

See Table 1 for more information onwhere to report your mutual fund distributionson Form 1040.

Nominees. If you received a Form 1099DIVor Form 2439 as a nominee (that is, it in-cludes amounts that actually belong tosomeone else, other than your spouse), youmust file a Form 1099DIV or Form 2439 withthe Internal Revenue Service and give the

actual owner a copy. See the instructions forForms 1099 or Form 2439 for details.If you received an ordinary dividend dis-

tribution as a nominee, report it on line 5 ofSchedule B (Form 1040) or Schedule 1 (Form1040A). Under your last entry on line 5, puta subtotal of all ordinary dividends listed. Be-low this subtotal, enter NomineeDistribution and show the total ordinary divi-dends you received as a nominee. Subtractthis amount from the subtotal and enter theresult on line 6.

If you received a capital gain distributionor were allocated an undistributed capital gainas a nominee, report only the amount thatbelongs to you on Schedule D. Attach astatement to your return showing the fullamount you received or were allocated andthe amount you received or were allocatedas a nominee.

Foreign tax deduction or credit. Somemutual funds invest in foreign securities orother instruments. Your mutual fund maychoose 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 may be able to claim a credit for in-come tax paid to a foreign country. However,

Table 1. Reporting Mutual Fund Distributions on Form 1040

Kind of Distribution Where to Report

Ordinary dividends(Form 1099-DIV, Box 1)

Capital gain distributions(Form 1099-DIV, Boxes 2a2d)

Return of capital (nontaxable) distributions (Form 1099-DIV, Box 3)

Undistributed capital gains(Form 2439, boxes 1a1d)

Total ordinary dividends received aremore than $400, or

Total distribution (box 2a)

Unrecaptured section 1250 gain (box 2c)

Total undistributed capital gains (box 1a)

Unrecaptured section 1250 gain (box 1c)

Section 1202 gain (box 1d)

Schedule B, line 5

Schedule D, line 25(See Schedule D instructions)

Schedule D, line 11, column (f)

Schedule D, line 25(See Schedule D instructions)

See Schedule D instructions

Total ordinary dividends received are $400or less

Form 1040, line 9

You received ordinary dividends as anominee

Schedule D, line 13, column (f)

See Schedule D instructionsSection 1202 gain (box 2d)

Exempt-interest dividends (Not shown on Form 1099-DIV)

Generally, not reported1

Form 1040, line 8b

1Report any amount in excess of your basis in your mutual fund shares on Schedule D, line 8, column (f) (or on Schedule D, line 1, if you held your mutual fund

shares one year or less).

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it may be to your benefit to treat the tax asan itemized deduction on Schedule A (Form1040). For more information on claiming aforeign tax deduction or credit, get Publication514.

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. Theirbasis depends on how you acquired theshares.

Shares Acquired byPurchaseThe original basis of mutual fund shares you

bought 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).

RECORDS

When you buy or sell shares in a fund,keep the confirmation statements youreceive. The statements show the

price you paid for the shares when youbought them and the price you received forthe shares when you disposed of them. Theinformation from the confirmation statementwhen you purchased the shares will help youfigure your basis in the fund.

Commissions and load charges. The feesand charges you pay to acquire or redeemshares of a mutual fund are not deductible.You can usually add acquisition fees andcharges to your cost of the shares andthereby increase your basis. A fee paid toredeem the shares is usually a reduction inthe redemption price (sales price).

You cannot add an acquisition fee or loadcharge to the cost of mutual fund shares ifall of the following conditions apply.

1) You get a reinvestment right because ofthe purchase of the shares or the pay-ment of the fee or charge.

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

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

However, if the load charge is reduced,rather than waived, the amount of the chargein excess of the reduction is added to the costof 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 byReinvestmentThe original cost basis of mutual fund sharesyou acquire by reinvesting your distriubutionsis the amount of the distributions used to

purchase each full or fractional share. Thisrule applies even if the distribution is anexempt-interest dividend that you do not re-port as income.

RECORDS

When you acquire shares through re-investment, keep the statements thatshow each date, amount, and number

of full or fractional shares purchased. Keeptrack of any adjustments to basis of theshares as they occur.

TIP

Generally, you must know the basisper share to compute gain or losswhen you dispose of the shares. This

is explained later underIdentifying the SharesSold.

Shares Acquired by Gift

To determine your original basis of mutualfund shares you acquired by gift, you mustknow:

The donor's adjusted basis,

The date of the gift,

The fair market value (the last quotedpublic redemption price, commonlyknown as the bid price) of the sharesat the time of the gift, and

Any gift tax paid on the gift of the shares.

Fair market value less than donor's ad-justed basis. If the fair market value (FMV)of the shares at the time of the gift was lessthan the adjusted basis to the donor at thetime 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 sell

the 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's ad-justed basis. If the FMV of the shares at thetime of the gift was more than the donor'sadjusted basis at the time of the gift, yourbasis is the donor's adjusted basis at the timeof the gift, plus all or part of any gift tax paidon the gift, depending on 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 byInheritanceIf you inherited shares in a mutual fund, your

basis is generally the fair market value (FMV)(the last quoted public redemption price,commonly known as the bid price) on thedate of the decedent's death, or the alternatevaluation date if chosen for estate tax pur-poses.

Community property states. In community

property states, you and your spouse gener-ally are considered to each own half the es-tate (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 FMV of the com-munity property at the date of death becomesthe basis of both halves of the property.

For example, if the FMV of the entirecommunity interest in a mutual fund is$100,000, the basis of the surviving spouse'shalf 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 you gave the decedent. A differentbasis rule applies to inherited shares that youor your spouse gave the decedent within theone-year period ending on the date of thedecedent's death if, on the date of the gift, theshares were appreciated property. In thissituation, the basis of the inherited shares isthe decedent's adjusted basis in them imme-diately before his or her death, rather thantheir FMV.

This basis rule also applies if the dece-dent's estate (or a trust of which the decedentwas the grantor) sells the shares instead of

distributing them to you, and you are entitledto the proceeds.

Appreciated property. Appreciatedproperty is any property (including mutualfund shares) whose FMV is more than itsadjusted basis.

Exceptions. This basis rule does notapply if the decedent died before 1982 or yougave the shares to the decedent before Au-gust 14, 1981.

Adjusted BasisAfter you acquire mutual fund shares, youmay need to make further adjustments to yourbasis. The adjusted basis of your shares isthe original basis, increased or reduced asdescribed here.

Addition to basis. Increase the basis in yourshares by the difference between the amountof undistributed capital gain you include inincome and the tax considered paid by youon that income.

The mutual fund reports the amount ofyour undistributed capital gain in box 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 your shares by any return of capitaldistributions that you receive from the fund.You do not reduce your basis for distributions

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from the fund that are exempt-interest divi-dends.

The mutual fund reports the amount of anyreturn of capital distributions in box 3 of Form

1099DIV. You should keep the form to showthe decrease in the basis of your shares.

RECORDS

Table 2 is a worksheet you can useto keep track of the adjusted basis ofyour mutual fund shares. Enter the

cost 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.

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.

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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 transferof shares in return for other shares. A re-demption occurs when a fund reacquires itsshares. Sales, exchanges, and redemptionsare all treated as taxable sales of capital as-sets.

RECORDS

When you sell shares in a fund, keepthe confirmation statement you re-ceive. The statement shows the price

you received for the shares and other infor-mation you need to report gain or loss on yourreturn.

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 ex-change shares in one fund for shares inanother fund within the same family of funds.Report any gain or loss on the shares yougave up as a capital gain or loss in the yearin which the exchange occurs. Usually, youcan add any service charge or fee paid inconnection with an exchange to the cost ofthe shares acquired. For an exception, seeCommissions and load charges, earlier, un-der Keeping Track of Your Basis.

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 (Form1040) along with your other gains and losses.If the total sales price amounts reported onForm(s) 1099B in box 2 is more than thetotal you report on lines 3 and 10 of ScheduleD, attach a statement to your return explain-ing 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 SoldTo figure your gain or loss when you disposeof mutual fund shares, you need to determinewhich shares were sold and the basis of thoseshares. If your shares in a mutual fund wereacquired all on the same day and for thesame price, figuring their basis is not difficult.However, shares are generally acquired atvarious times, in various quantities, and at

various prices. Therefore, the process can bemore difficult. You may choose to use eitherthe cost basis or the average basis.

Cost BasisYou can figure your gain or loss using thecost basis only if you did not previously usethe average basis for a sale, exchange, orredemption of other shares in the same mu-tual fund.

To figure the cost basis, you can chooseone of the following methods.

Specific share identification.

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 writingwithin 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 youacquired 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 illustrates the use of cost basisunder the FIFO method to figure the basis ofshares sold, compared with the use of aver-age basis (discussed next) under the single-category method.

Average BasisYou can figure your gain or loss using anaverage basis only if you acquired the sharesat various times and prices, and you left theshares on deposit in an account handled bya custodian or agent who acquires or re-

deems those shares.To figure average basis, you can use one

of the following methods.

Single-category method.

Double-category method.

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. (You must also continue touse the same method.) However, you mayuse the cost basis (or a different method of

figuring the average basis) for shares in otherfunds, even those within the same family offunds.

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

Single-category method. In the single-category method, you find the average costof allshares owned at the time of each dis-position, regardless of how long you ownedthem. Include shares acquired with reinvesteddividends or capital gain distributions.

Table 3 illustrates the use of average ba-sis under the single-category method to figurethe basis of shares sold, compared with theuse of cost basis (discussed earlier) under theFIFO method.

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 shares sold, fol-

low these steps.1) ADD: Cost of all shares owned. (For

other than your first sale, add the re-maining basis of the shares you ownedafter the last sale and the cost or otherbasis of shares acquired since that sale.)

2) DIVIDE: Result of (1) by the number ofshares owned. This is your average ba-sis per share.

3) MULTIPLY: Result of (2) by the numberof shares sold. This is the basis ofshares sold.

Example 1. You bought the followingshares in the LJP Mutual Fund: 100 sharesin 1995 at $10 per share; 100 shares in 1996

at $12 per share; and 100 shares in 1997 at$26 per share. On May 16, 1998, you sold150 shares. The basis of shares sold is$2,400 ($16 / share), computed as follows.

Remaining shares. The basis of theshares you still hold after a sale of some ofyour shares is the average basis for that sale.If no shares were acquired since the last sale,the basis of the remaining shares at the timeof the next sale does not change.

Example 2. Using the same facts as inExample 1, assume you sold an additional50 shares on December 15, 1998. You wouldnot recompute the average basis of the 150shares you owned at that time because noshares were acquired or sold since the lastsale; rather, your basis is the $16 per sharecomputed 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.

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

2) Average basis per share($4,800 300) .................................... $16

3) Basis of shares sold($16 150) ......................................... $2,400

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The basis of each share in a category isthe average basis for that category. This isthe total remaining basis of all shares in thatcategory at the time of disposition divided bythe total shares in the category. You mayspecify, to the custodian or agent handlingyour account, from which category the sharesare to be sold or transferred. The custodianor agent must confirm in writingyour spec-ification. If you do not specify or receive con-firmation, you must first charge the sharessold against the long-term category and thencharge any remaining shares sold against theshort-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 otherbasis to you or, if some of the shares in theshort-term category have been disposed of,the average basis of the undisposed sharesat the time of the most recent disposition fromthis 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 used

an 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.

Shares received as gift. If your accountincludes shares that you received by gift, andthe fair market value of the shares at the timeof the gift was not more than the donor's ba-sis, special rules apply. You cannot chooseto use the average basis for the account un-less you submit a statement with your initialchoice. It must state that the basis used infiguring the average basis of the gift shareswill be the FMV at the time of the gift. This

statement applies to gift shares received be-fore and after making the choice, as long asthe choice to use the average basis is in ef-fect.

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.

Amount you realize. The amount you real-ize 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).

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

Wash sales. If you sell mutual fund sharesat a loss and within 30 days before or afterthe sale you buy, acquire in a taxable ex-change, or acquire a contract or option to buy,substantially identicalproperty, you have awash sale. You cannot deduct losses fromwash sales.

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

02/4/97 Invest $4,000 $25 160 160

08/5/97 Invest $4,800 $20 240 400

12/16/97 Reinvest $300

dividend $30 10 410

09/29/98 Sell $6,720 $32 210 200

FIFO: To figure the basis of the 210 shares sold on 9/29/98, use the shareprice of the first 210 shares you bought, namely the 160 shares youpurchased on 2/4/97 and 50 of those purchased on 8/5/98.

$4,000

$1,000

Basis = $5,000

(cost of 160 shares on 2/4/97)

(cost of 50 shares on 8/5/97)

AVERAGEBASIS

(single-category)

To figure the basis of the 210 shares sold on 9/29/98, use theaverage basis of all 410 shares owned on 9/29/98.

$9,100

410

$22.20

(cost of 410 shares)

(number of shares)

(average basis per share)

$22.20

210

Basis = $4,662

In determining whether the shares aresubstantially identical, you must consider allthe 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.

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 expenses of sale from itwhen 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. If your Form 1099B shows thatthe gross sales price less commissions wasreported to IRS, enter the net amount in col-umn (d) of Schedule D and do not increaseyour basis in column (e) by the sales com-mission.

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 theIRS. Report this amount in column (d) ofSchedule D.

Example 2. You sold 200 shares of FundKLM for $10,000. You paid a $100 commis-sion at the time of the sale. You bought theshares for $5,000. The broker reported thegross proceeds to IRS on Form 1099B, soyou 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 showthe 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 whetherthe 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 theday you bought the shares. (The day youbought the shares is the trade date.) This

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same 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 partof your holding period.

Example. If you bought shares on Janu-ary 11, 1998 (trade date), start counting withJanuary 12 to find out how long you have heldthem. The 12th of each following month is thebeginning of a new month. If you sold theshares on January 11, 1999 (trade date), yourholding period would not be more than one

year. If you sold them on January 12, 1999,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 havestarted on the same day that the donor'sholding period started.

Inherited mutual fund shares. If you inheritmutual fund shares, you are considered tohave held the shares for more than one year,regardless of how long you held them, if yourbasis 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 you gave the decedent, underShares Acquired by Inheritance.

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 rulesmay apply if you have a short-term loss on thesale of shares on which you received anexempt-interest dividend or a capital gaindistribution.

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. On Schedule D, column(d), increase the sales price by the amountof exempt-interest dividends. Report the lossas a short-term capital loss.

Example. On January 8, 1998, youbought a mutual fund share for $40. OnFebruary 3, 1998, the mutual fund paid a $5dividend from tax-exempt interest, which isnot taxable to you. On February 12, 1998, yousold the share for $34. If it were not for thetax-exempt dividend, your loss would be $6($40 $34). However, you must increase thesales price from $34 to $39 (to account for the$5 portion of the loss that is not deductible).You can deduct only $1 as a short-term cap-ital loss.

Capital gain distribution before short-term loss. Generally, if you received, orwere considered to have received, capital

gain 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, 1998, you boughta mutual fund share for $20. On June 25,1998, the mutual fund paid a capital gaindistribution of $2 a share, which is taxed asa long-term capital gain. On July 13, 1998,

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.

How To FigureNet Gain or Losson 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 lines 1through 6 in column (f) of Part I, Schedule D(Form 1040), Capital Gains and Losses. Line7 is the net short-term capital 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 net long-term capital gainor loss, you should include any undistributedcapital gain you reported on line 11 ofSchedule D and any capital gain distributionsyou reported on line 13 of Schedule D.

Total Net Gain or LossThe total net gain or loss is determined by

combining the net short-term capital gain orloss on line 7 with the net long-term capitalgain or loss on line 16. Enter the result on line

17 of Part III, Schedule D (Form 1040). If line17 shows a gain, enter the amount on line 13of Form 1040. If line 17 shows a loss, seeLimit on capital loss deduction, later.

Using the maximum capital gains rates.You will need to use Part IV of Schedule D(Form 1040) to figure your tax using themaximum capital gains rates if both of thefollowing 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, line39, is more than zero.

The maximum rate may be 10%, 20%,25%, or 28%, or a combination of those rates,as shown in Table 4.

Limit on capital loss deduction. If line 17of Part III, Schedule D (Form 1040) shows aloss, your allowable capital loss deduction isthe smaller of:

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

2) Your total net loss shown on line 17 ofSchedule D.

Enter your allowable loss on line 13 of Form1040.

Example. Bob and Gloria sold all of theirshares in a mutual fund. The sale resulted ina capital loss of $7,000. They had no othersales of capital assets during the year. Ontheir joint return, they can deduct $3,000,which is the smaller of their loss or the netcapital loss limit.

If Bob and Gloria's capital loss had been$2,000, their capital loss deduction would

have been $2,000, because it is less than the$3,000 limit.

Capital loss carryover. If your total net lossis more than your allowable capital loss de-duction, you may carry over the excess tolater years until it is completely used up. Todetermine your capital loss carryover, sub-tract from your total net loss the lesser of:

1) Your allowable capital loss deduction forthe year, or

Table 4. What Is Your Maximum Capital Gains Rate?

IF your net capital gain is from ...

1 Does not apply if your regular tax rate would be 15%.

THEN your maximum

capital gains rate is ...

Collectibles gain

Section 1202 gain

Unrecaptured section 1250 gain

Other gain, and your regular tax rate would be 28%or higher

Other gain

28%1

28%1

25%1

20%

10%2

2 The 10% rate applies only to the part of your net capital gain that would be taxed at 15% if therewere no maximum capital gains rates.

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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 in (2) abovewith a negative number.

Use the Capital Loss Carryover Work-sheetin the Schedule D instructions to figureyour capital loss carryover.

When carried over, the loss will keep itsoriginal character as long-term or short-term.Therefore, a long-term capital loss carriedover from a previous year will offset long-termgains of the current year before it offsetsshort-term gains of the current year. For moreinformation on figuring capital loss carryovers,get Publication 550.

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.

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 arenot 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 box5 of Form 1099DIV. A nonpublicly offered

mutual 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 held by fewer than 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 that

are for the collection or production ofexempt-interest dividends. Expenses must beallocated if they were for both taxable andtax-exempt income. One accepted methodfor allocating expenses is to divide them in thesame proportion that each type of incomefrom the mutual fund is to your total incomefrom the fund. To find the part of the ex-penses that relates to the tax-exempt income,you must first divide your tax-exempt incomeby your total income. Then multiply your ex-penses by the result. You cannot deduct thispart.

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.Therefore, 80% ($480 $600) of William'sexpense is for exempt-interest income. Hecannot deduct $40 (80% of $50) of the ex-pense. William may claim the balance of theexpense, $10, as a miscellaneous itemizeddeduction subject to the 2% of adjusted grossincome limit. That is the part of the expenseallocable to the taxable dividends.

Limit on InvestmentInterest ExpenseThe amount you can deduct as investment

interest 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, your deduction for investment in-terest expense is limited to the amount of yournet investment income.

Net investment income. This is figured bysubtracting your investment expenses other

than interest from your investment income.

For this purpose, do not include any incomeor expenses taken into account to figure gainor loss from passive 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 orcapital 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 expenses, that are allow-able deductions after subtracting 2% of ad-

justed gross income. In computing theamount 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 ofinvestment interest expense during the year.She had no passive activity losses. Jane fig-ures net investment income and the limit onher investment interest expense deduction asfollows:

For the year, Jane's investment interest

expense deduction is limited to $11,020 (hernet investment income). The disallowed in-terest expense of $1,480 ($12,500 $11,020)can be carried forward to the following yearas 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, Investment In-terest Expense Deduction, to figure your in-vestment interest expense deduction. Formore information about investment interest

expense, get Publication 550.

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

(other than interest) ................... 980Net investment income .............................. $11,020

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ComprehensiveExampleRobert and Janice Martin have the followingfour sources of investment income to reporton their 1998 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, 1998.They received Form 1099B, and they

report the sale on Schedule D (Form1040).

Robert and Janice purchased theseshares in 1984 at $10 each. They re-ceived some return of capital distribu-tions in 1986, 1987, and 1995 that re-duced their basis in the shares. TheMartins never reinvested any of the dis-tributions from this fund, and they re-ceived no 1998 distributions before thesale.

2) $265 in ordinary dividends and $61 incapital gain distributions from MutualFund R. They received Form 1099DIV.They report the capital gain distributionson Schedule D (Form 1040). They re-port the ordinary dividends on Schedule

B (Form 1040) because their total ordi-nary dividends were over $400.

Robert and Janice invested $3,800 inthis fund in June 1998 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,

1998, 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 1996 and received 87.54shares at $29.70 per share. They re-ceived exempt-interest dividends of $92

in 1996 and $107 in 1997.4) $237 in ordinary dividends from 100

shares 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 1984 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 reduce

their basis in the shares.The Martins keep this record with their

mutual fund documents, and they use it toreport their 1998 sale of Mutual Fund S.

Preparing the return. The Martins first usetheir two Forms 1099DIV to figure the divi-dend income to report on Schedule B. They

then use their Form 1099B and their MutualFund Recordto figure the gain from the saleof Mutual Fund S to report on Schedule D.

Schedule B, Part II. On line 5, Robertand Janice list the $265 ordinary dividendsfrom Mutual Fund R and the $237 ordinarydividends from Green Publishing Company(from box 1 of Forms 1099DIV). They enterthe total of $502 on line 6 and also on line 9of Form 1040.

Schedule D, Part II. Robert and Janiceenter the $61 capital gain distribution fromMutual Fund R (from box 2a of Form1099DIV) on line 13, column (f). They do notmake an entry in column (g) of line 13 be-cause Mutual Fund R did not indicate that anyof the capital gain distribution was a 28% rategain distribution (box 2b of Form 1099DIV).

They report the sale of their shares inMutual Fund S on line 8 because they ownedthe shares for more than one year. They usethe information from their Mutual Fund Rec-ordto complete columns (a), (b), and (e). Af-ter adjustment for their return of capital dis-tributions, their basis in column (e) is $1,978($9.89 per share). They use their Form1099B to complete columns (c) and (d).Their sales price in column (d) (the grossproceeds shown in box 2 of Form 1099B) is$3,228 ($16.14 per share). Their gain of

$1,250 is entered in column (f). They do notmake an entry in column (g) because the gainwas not 28% rate gain.

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 10


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Table 2. Mutual Fund Record

Mutual Fund

Acquired1

DateNumber

ofShares

CostPer

ShareAdjustments toBasis Per Share

Adjusted2

Basis PerShare

Sold or redeemed

DateNumbe

ofShares

1Include shares received from reinvestment of dividends.

2Cost plus or minus adjustments.

MUTUAL FUND S

MUTUAL FUND X

7-10 -8 4

4-16 -9 6

6-6 -98

12-30 -98

20 0

87.54

153.16

13.03

10 .00

29.70

24.81

25.01

12-31-86

(.05)

12-3 1-8 7

(.02)

12-3 1-9 5

(.04)9 .8 9 10 -7-98 20 0

MUTUAL FUND R

Page 11


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ROBERT A and JANICE P MARTIN 123 0 0 456 7

26 5

23 7

50 2

GREEN PUBLISHING COMPANY

MUTUAL FUND R

X

X

Page 2OMB No. 1545-0074Schedules A&B (Form 1040) 1998Name(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 Ordinary Dividends

Part IInterest

(See pages 20and B-1.)

AmountList name of payer. If any interest is from a seller-financed mortgage and thebuyer used the property as a personal residence, see page B-1 and list thisinterest 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 f rom 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

Part IIOrdinaryDividends

Amount

(See pages 21and B-1.)

5 List name of payer. Include only ordinary dividends. Report any capital gaindistributions on Schedule D, line 13

Note: If youreceived a Form1099-DIV orsubstitutestatement froma brokerage firm,list the firmsname as thepayer and enterthe ordinarydividends shownon that form.

5

66 Add the amounts on line 5. Enter the total here and on Form 1040, line 9

For Paperwork Reduction Act Notice, see Form 1040 instructions. Schedule B (Form 1040) 1998Printed on recycled paper

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

Note: If you had over $400 in ordinary dividends, you must also complete Part III.

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

ForeignAccountsand Trusts

NoYes

At any time during 1998, did you have an interest in or a signature or other authority over a financialaccount in a foreign country, such as a bank account, securities account, or other financialaccount? See page B-2 for exceptions and filing requirements for Form TD F 90-22.1

7a

b If Yes, enter the name of the foreign country (Seepage B-2.) During 1998, 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. See page B-28

Page 12


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

MUTUAL FUND S

20 0 Shares

7-10 -8 4 10 -7-98 3,228

3,228

1,978 1,250

6 1

1,311

1,311

*28% Rate Gain or Loss includes all collectibles gains and losses (as defined on page D-6) and up to 50% of the eligible gainon qualified small business stock (see page D-5).

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)Subtract (e) from (d)

(e) Cost orother basis

(see page D-6)

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

(d) Sales price(see page D-6)

(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 23

3

5

Short-term gain from Form 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 8 of your1997 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 2439 and 6252; andlong-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. See page D-2

15 15

14

16

Long-term capital loss carryover. Enter in both columns (f) and (g) the amount,if any, from line 13 of your 1997 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) 1998Cat. No. 11338H

( )

4

4

Part I

Part II

7

13

(b) Dateacquired

(Mo., day, yr.)

2

9

(99)

(f) GAIN or (LOSS)Subtract (e) from (d)

(e) Cost orother basis

(see page D-6)

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

(d) Sales price(see page D-6)

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

(b) Dateacquired

(Mo., day, yr.)

(g) 28% RATE GAINor (LOSS)

( )

*(see instr. below)

1998

Next: Go to Part III on the back.

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How To Get MoreInformationYou can order free publications and forms,ask tax questions, and get more informationfrom the IRS in several ways. By selecting themethod that is best for you, you will havequick and easy access to tax help.

Free tax services. To find out what servicesare available, get Publication 910, Guide toFree Tax Services. It contains a list of free taxpublications and an index of tax topics. It alsodescribes other free tax information services,including tax education and assistance pro-grams and a list of TeleTax topics.

Personal computer. With your per-sonal computer and modem, you canaccess the IRS on the Internet at

www.irs.ustreas.gov. While visiting our WebSite, you can select:

Frequently Asked Tax Questionsto findanswers to questions you may have.

Fill-in Formsto complete tax forms on-line.

Forms and Publicationsto download

forms and publications or search publi-cations by topic or keyword.

Comments & Helpto e-mail us withcomments about the site or with taxquestions.

Digital Dispatchand IRS Local News Netto receive our electronic newsletters onhot tax issues and news.

You can also reach us with your computerusing any of the following.

Telnet at iris.irs.ustreas.gov

File Transfer Protocol atftp.irs.ustreas.gov

Direct dial (by modem) 7033218020

TaxFax Service. Using the phoneattached to your fax machine, you canreceive forms, instructions, and tax

information by calling 7033689694. Followthe directions from the prompts. When youorder forms, enter the catalog number for theform you need. The items you request will befaxed to you.

Phone. Many services are availableby phone.

Ordering forms, instructions, and publi-

cations. Call 18008293676 to ordercurrent and prior year forms, instructions,and publications.

Asking tax questions. Call the IRS withyour tax questions at 18008291040.

TTY/TDD equipment. If you have accessto TTY/TDD equipment, call18008294059 to ask tax questions orto order forms and publications.

TeleTax topics. Call 18008294477 tolisten to pre-recorded messages coveringvarious tax topics.

Evaluating the quality of our telephoneservices. To ensure that IRS representativesgive accurate, courteous, and professionalanswers, we evaluate the quality of our tele-phone 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 only to measure thequality of assistance.

We value our customers' opinions.Throughout this year, we will be survey-ing our customers for their opinions onour service.

Walk-in. You can pick up certainforms, instructions, and publicationsat many post offices, libraries, and

IRS offices. Some libraries and IRS officeshave an extensive collection of productsavailable to print from a CD-ROM or photo-copy from reproducible proofs.

Mail. You can send your order forforms, instructions, and publicationsto the Distribution Center nearest to

you and receive a response 7 to 15 workdaysafter your request is received. Find the ad-

dress that applies to your part of the country.

Western part of U.S.:Western Area Distribution CenterRancho Cordova, CA 957430001

Central part of U.S.:Central Area Distribution CenterP.O. Box 8903Bloomington, IL 617028903

Eastern part of U.S. and foreign ad-dresses:Eastern Area Distribution CenterP.O. Box 85074Richmond, VA 232615074

CD-ROM. You can order IRS Publi-cation 1796, Federal Tax Products onCD-ROM, and obtain:

Current tax forms, instructions, and pub-lications.

Prior-year tax forms, instructions, andpublications.

Popular tax forms which may be filled-inelectronically, printed out for submission,and saved for recordkeeping.

Internal Revenue Bulletins.

The CD-ROM can be purchased from Na-

tional Technical Information Service (NTIS)for $25.00 by calling 18772336767 or for$18.00 on the Internet at www.irs.ustreas.gov/cdorders. The first release is availablein mid-December and the final release isavailable in late January.

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Index

AAdjusted basis ......................... 4, 7Gains and losses ................... 7

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

Assistance (SeeMore information) Automatic reinvestment plan ....... 3

Average basis:Double-category method ........ 6

Single-category method ......... 6

BBasis of shares:

Acquired by gift .................. 4, 8Acquired by inheritance ..... 4, 8

Additions to ............................ 4Average .................................. 6Cost .................................... 4, 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 carryover .................. 8Carryovers:

Capital loss ............................. 8Investment expenses ............. 9Separate returns .................... 9

Commissions ........................... 4, 7Community property states:

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

DDistributions:

Capital gain ............................ 2How to report ......................... 3

Nontaxable ............................. 2Ordinary dividends ................. 2

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

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

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

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

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

Exit fees ....................................... 7

FFair market value:

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

Net asset value ...................... 4First-in first-out (FIFO) ................. 6Foreign tax credit ........................ 3Foreign tax deduction .................. 3

Forms:1099-DIV ............................ 2, 91099B ............................... 6, 72439 ....................................... 24952 ....................................... 9

Free tax services ....................... 14

GGains and losses ..................... 7, 8Gifts of mutual fund shares ..... 4, 7

HHelp (SeeMore information) Holding period:

Gifts ........................................ 8Inheritances ............................ 8Settlement date ...................... 7Short-term losses ................... 8Trade date .............................. 7

How to report distributions .......... 3

IIdentifying shares sold:

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

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

Inherited mutual fund shares .. 4, 8Investment expenses .................. 9Investment income ...................... 9

J Joint tenants ................................ 2

LLimit on investment interest ex-

penses .................................... 9Load charges ............................... 4

MMore information ....................... 14

Mutual fund record ...................... 5Mutual funds:

Defined ................................... 1Exchanges .............................. 6

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

ments (IRAs) ..................... 2

Money market fund ................ 1Nonpublicly offered ................ 9Redemptions .......................... 6Sales ...................................... 6Tax-exempt ............................ 2

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

Nominees .................................... 3Nontaxable distributions .............. 2

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

PPublications (SeeMore information)

RRedemption fees ......................... 7

Redemptions of mutual funds ..... 6Reinvestment rights ..................... 4

Return of capital distributions ...... 2

SSales of mutual funds ................. 6

Schedule D (Form 1040):How to report on .................... 7

Net 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 ..... 2Tax help (SeeMore information) Taxpayer identification number ... 6

Trade date ................................... 7TTY/TDD information ................ 14

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

WWash sales .................................. 7Worksheet ................................... 5

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

us internal revenue service: p564--1998

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