US Internal Revenue Service: p564--2000

8/14/2019 US Internal Revenue Service: p564--2000

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ContentsImportant Changes ............................ 1

Introduction ........................................ 1

Tax Treatment of Distributions ....... 2

Ordinary Dividends ......................... 2

Capital Gain Distributions ............... 2

Exempt-Interest Dividends .............. 2

Return of Capital (Nontaxable)

Distributions ............................. 2Reinvestment of Distributions ......... 4

How To Report ............................... 4

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

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

Identifying the Shares Sold ........... 6

Gains and Losses .......................... 8

Investment Expenses ....................... 9

Limit on Investment InterestExpense .................................. 10

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

How To Get Tax Help ......................... 15

Index ................................................... 16

Important Changes

Reporting capital gain distributions onForm 1040A. You may be able to report yourcapital gain distributions from mutual funds(or other regulated investment companies) onForm 1040A, instead of on Form 1040. Aworksheet in the Form 1040A instructions isused to figure the tax. For details, see HowTo Report, later.

Photographs of missing children. TheInternal Revenue Service is a proud partnerwith the National Center for Missing and Ex-ploited Children. Photographs of missingchildren selected by the Center may appearin this publication on pages that would other-wise be blank. You can help bring thesechildren home by looking at the photographsand calling 1800THELOST (18008435678) if you recognize a child.

IntroductionThis publication provides federal income taxinformation for individual shareholders ofmutual funds, including money marketfunds. It explains how to report distributionspaid to you by a mutual fund and any ex-penses connected with your investment. Inaddition, it explains how to report undistrib-uted long-term capital gains. It also explainshow to figure and report your gain or losswhen you sell, exchange, or redeem yourmutual fund shares. A comprehensive exam-ple, with filled-in forms, appears at the endof the publication.

Mutual fund. A mutual fund is a regulatedinvestment company generally created bypooling funds of investors to allow them totake advantage of a diversity of investmentsand professional management.

Departmentof theTreasury

InternalRevenueService

Publication 564Cat. No. 15112N

Mutual Fund

Distributions

For use in preparing

2000 Returns


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Money market fund. A money marketfund is a mutual fund that tries to increasecurrent income available to shareholders bybuying short-term market investments.

Money market funds pay dividends andshould not be confused with bank moneymarket accounts that pay interest.

Qualified retirement plans and IRAs. Therules in this publication do not apply to mutualfund shares held in individual retirement ar-rangements (IRAs), H.R. 10 (Keogh) plans,section 401(k) plans, and other qualified re-tirement plans. The value of the mutual fundshares and earnings allocated to you are in-cluded in your retirement plan assets and staytax free until the plan distributes them to you.The tax rules that apply to retirement plandistributions are explained in the followingpublications.

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

Publication 571, Tax-Sheltered AnnuityPlans (403(b) Plans).

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.

Comments and suggestions. We welcomeyour comments about this publication andyour suggestions for future editions.

You can e-mail us while visiting our website at www.irs.gov/help/email2.html.

You can write to us at the following ad-dress:

Internal Revenue ServiceTechnical Publications BranchW:CAR:MP:FP:P1111 Constitution Ave. NWWashington, DC 20224

We respond to many letters by telephone.Therefore, it would be helpful if you wouldinclude your daytime phone number, includ-ing the area code, in your correspondence.

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 Gainsand 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 Tax Help near the endof this publication for information about get-ting these publications and forms.

Tax Treatmentof DistributionsA distribution you receive from a mutual fundmay be an ordinary dividend, a capital gaindistribution, an exempt-interest dividend, or a

nontaxable 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 gainseven if the fund does not distribute

them to you. SeeUndistributed capital gainsunderCapital Gain Distributions.

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. Get Publication 555, CommunityProperty, for more information on communityincome.

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.

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 the sameyear even if the dividends are actually paidduring January of the following year.

Tax-exempt mutual fund. Distributions froma 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. These

distributions 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 fundsfrom 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. Capitalgain distributions are taxed as long-termcapital gains regardless of how long you haveowned the shares in the mutual fund.

Undistributed capital gains. Mutual funds

may keep some of their long-term capitalgains and pay taxes on those undistributedamounts. You must report your share of theseamounts as long-term capital gains, eventhough you did not actually receive a distri-bution. You can take a credit for any tax paidbecause you are considered to have paid it.

Form 2439. The fund will send you Form2439, showing your share of the undistributedcapital gains in box 1a and any tax paid bythe mutual fund in box 2. The undistributedcapital gain is not reported on Form1099DIV.

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

Increase to basis. When you report un-distributed capital gains from a mutual fund,

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, do not include them in in-come. However, you may need to report themon your 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.

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) DistributionsA 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 explainedunder Keeping Track of Your Basis, later.Your basis cannot be reduced below zero. Ifyour basis is zero, you must report the returnof capital distribution on your tax return as acapital gain. Report this capital gain on

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Table 1A. Reporting Mutual Fund Distributions on Form 1040

IF you receive... THEN report the distribution on...

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)

Your total ordinary dividends received aremore than $400, or

You have to file Schedule D

You have unrecaptured section 1250gain (box 2c)

You have total undistributed capitalgains (box 1a)

You have unrecaptured section 1250gain (box 1c)

You have 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

Your total ordinary dividends received are$400 or less

Form 1040, line 9

You received ordinary dividends as anominee

Schedule D, line 13, column (f)

See Schedule D instructionsYou have Section 1202 gain (box 2d)

Exempt-interest dividends (Not shown onForm 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 sharesone year or less).

You do not have to file Schedule D Form 1040, line 13, and Capital Gain TaxWorksheet, line 2

AND...

Table 1B. Reporting Mutual Fund Distributions on Form 1040A

IF you receive... THEN report the distribution on...

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)

Your total ordinary dividends received aremore than $400, or

You have to file Form 1040

Any Form 1099-DIV has an amount inbox 2b, 2c, or 2d

Schedule 1, line 5

Your total ordinary dividends received are$400 or less

Form 1040A, line 9

You received ordinary dividends as anominee

Form 1040; see Table 1A

Exempt-interest dividends (Not shown onForm 1099-DIV)

Generally, not reported; see Table 1A

Form 1040A, line 8b

You do not have to file Form 1040 Form 1040A, line 10, and Capital Gain TaxWorksheet, line 2

AND...



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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 1996 for $12 a share. In 1997, youreceived a return of capital distribution of $5a share. You reduced your basis in eachshare by $5 to an adjusted basis of $7. In1998, you received a return of capital distri-bution of $1 per share and further reducedyour basis in each share to $6. In 1999, youreceived a return of capital distribution of $2

per share. Your basis was reduced to $4. In2000, the return of capital distribution from themutual fund was $5 a share. You reduce yourbasis in each share to zero and report theexcess ($1 per share) as a long-term capitalgain 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 youreceived 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 Return of Capital(Nontaxable) Distributions, earlier. SeeKeeping Track of Your Basis, later, to deter-mine the basis of the additional shares.

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

You cannot use Form 1040A and mustuse Form 1040 in either of the following situ-ations.

You received a return of capital distribu-tion that must be reported as a capitalgain because it is more than your basisin your mutual fund shares.

You must report an undistributed capitalgain.

Form 1040A. If you file Form 1040A, reportyour ordinary dividend distributions on line 9and your exempt-interest dividends on line8b. If the total of the ordinary dividends youreceived is more than $400 or you receivedordinary dividends as a nominee, first reportthe ordinary dividends in Part II of Schedule1, on line 5. Report the total from line 6 of that

schedule on line 9 of Form 1040A. AttachSchedule 1 to your return.

Capital gain distributions. If you re-ceived capital gain distributions, you mayhave to file Form 1040. But you can reportcapital gain distributions on line 10 of Form1040A, instead of on Form 1040, if both of thefollowing are true.

1) None of the Forms 1099DIV (or substi-tute statements) you received have anamount in box 2b, 2c, or 2d.

2) You do not have to file Form 1040 forany other reason. (For example, youmust not have any other capital gainsor any capital losses.)

Form 1040. If you file Form 1040, report yourordinary dividend distributions on line 9 andyour exempt-interest dividends on line 8b. Ifthe total of the ordinary dividends you re-ceived is more than $400 or you received or-dinary dividends as a nominee, first report theordinary dividends in Part II of Schedule B,on line 5. Report the total from line 6 of thatschedule on line 9 of Form 1040. AttachSchedule B to your return.

CAUTION

!Do not include capital gain distribu-tions as dividend income on Form

1040 or Schedule B.

Capital gain distributions. If you re-ceived capital gain distributions, you reportthem either directly on Form 1040, line 13,or on Schedule D, line 13, depending on yoursituation. Report them on Schedule D, line13, unless all of the following are true.

1) The only amounts you would have toreport on Schedule D are capital gaindistributions from box 2a of Form1099DIV (or similar statement).

2) You do not have an amount in box 2b,2c, or 2d of any Form 1099DIV (orsimilar statement).

3) You are not filing Form 4952 or, if youare, the amount on line 4e of that formis not more than zero.

If all of the above statements are true, reportyour capital gain distributions directly on line13 of Form 1040 and check the box on thatline. Also use the Capital Gain Tax Worksheetin the Form 1040 instructions to figure yourtax.

Undistributed capital gains. To reportundistributed capital gains, you must com-plete Schedule D and attach it to your return.Report these gains on Schedule D, line 11,and attach Copy B of Form 2439 to your re-turn. Report the tax paid by the mutual fundon these gains on Form 1040, line 64, andcheck box a on that line.

Tables 1A and 1B. See Tables 1A and 1Bfor more information on where to report yourmutual fund distributions on Form 1040 orForm 1040A.

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 theactual 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 line 10 of Form 1040A, line13 of Form 1040, or Schedule D (Form 1040),whichever is appropriate. Attach a statementto your return showing the full amount youreceived or were allocated and the amountyou received or were allocated as 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,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, Foreign Tax Credit for Individuals.

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.

Original basis. As explained in the followingparagraphs, original basis depends on howyou acquired your shares.

Adjusted basis. As described later, underAdjusted Basis, your original basis is adjusted(increased or decreased) by certain events.You must keep accurate records of all eventsthat affect basis so you can figure the properamount of gain or loss.

Shares Acquired byPurchaseThe original basis of mutual fund shares youbought is usually their cost or purchase price.The purchase price usually includes any

commissions 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 your entire acquisition feeor load charge to the cost of mutual fundshares if allof 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.

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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

DateNumber

ofShares

1Include shares received from reinvestment of distributions.

2Cost plus or minus adjustments.

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.

The amount of the original load charge inexcess of the reduction in (3) is added to thecost of the original shares. The rest of theoriginal load charge is added to the cost basisof the new shares (unless all three conditionsabove apply to the purchase of the newshares).

Reinvestment right. This is the right to

acquire mutual fund shares in the same oranother mutual fund without paying a fee orload charge, or by paying a reduced fee orload charge.

Shares Acquired byReinvestmentThe original cost basis of mutual fund sharesyou acquire by reinvesting your distributionsis the amount of the distributions used topurchase 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 under Identifying the SharesSold, later.

Shares Acquired by GiftTo 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) of the shares atthe 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 less

than 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 lossis the FMV of the shares at thetime of the gift. In this situation, it is possibleto sell the shares at neither a gain nor a lossbecause of the basis you have to use.

Example. You are given mutual fundshares with an adjusted basis of $10,000 atthe 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 equal to or more thandonor's adjusted basis. If the FMV of theshares at the time of the gift was equal to ormore 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, Basisof Assets.

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Shares Acquired byInheritanceIf you inherited shares in a mutual fund, youroriginal basis is generally the fair marketvalue (FMV) (the last quoted public redemp-tion price) on the date of the decedent'sdeath, or the alternate valuation date if cho-sen for estate tax purposes.

Community property states. In communityproperty 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.

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 ofdistributing 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 adjustments to your basis.The adjusted basis of your shares is your or-iginal basis (defined earlier), increased or re-duced as described 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 reduceyour basis in your shares by any return ofcapital distributions that you receive from thefund.

The mutual fund reports the amount of anyreturn of capital distributions in box 3 of Form1099DIV. You should keep the form to showthe decrease in the basis of your shares.

No reduction of basis. You do not re-duce your basis for distributions from the fundthat are exempt-interest dividends.

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.

Sales, Exchanges,and RedemptionsWhen you sell or exchange your mutual fundshares, or if they are redeemed (a redemp-tion), you will generally have a taxable gainor a deductible loss. This also applies toshares of a tax-exempt mutual fund. Sales,exchanges, and redemptions are all treatedas sales of capital assets. The amount of thegain or loss is the difference between youradjusted basis (defined earlier) in the sharesand the amount you realize from the sale,exchange, or redemption. This is explainedfurther under Gains and Losses, later.

Sale. In general, a sale is a transfer of sharesfor money only.

Exchange. An exchange is a transfer ofshares in return for other shares.

Redemption. A redemption occurs when afund reacquires its shares from you in ex-change for money or other property.

RECORDS

When there is a sale, exchange, orredemption of your shares in a fund,keep the confirmation statement you

receive. The statement shows the price youreceived for the shares and other informationyou need to report gain or loss on your return.

Exchange of shares in one mutual fund forshares in another mutual fund. Any ex-change of shares in one fund for shares inanother fund is a taxable exchange. This istrue even if you exchange shares in one fundfor shares in another fund within the samefamily of funds. Report any gain or loss on theshares you gave up as a capital gain or lossin the year in which the exchange occurs.Usually, you can add any service charge orfee paid in connection with an exchange tothe cost of the shares acquired. For an ex-ception, see Commissions and load chargesunder Keeping Track of Your Basis, earlier.

Information returns. Mutual funds andbrokers must report proceeds from sales, ex-changes, or redemptions to the Internal Rev-enue Service. They must give each customera written statement with that information byJanuary 31 of the year following the calendaryear the transaction occurred. Form 1099B,or a substitute, may be used for this purpose.

Report your sales shown on Form(s)1099B (or substitute) on Schedule D (Form1040) along with your other gains and losses.If the total of the sales price amounts reported

on Form(s) 1099B in box 2 is morethan 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 atvarious prices. Therefore, figuring your basiscan be more difficult. You can choose to useeither a cost basis or an average basis tofigure your gain or loss.

Cost Basis

You can figure your gain or loss using a costbasis only if you did not previously use anaverage basis for a sale, exchange, or re-demption of other shares in the same mutualfund.

To figure cost basis, you can choose oneof the following methods.

Specific share identification.

First-in first-out (FIFO).

Specific share identification. If you ade-quately 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 your 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.In other words, the oldest shares you own 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 the FIFOmethod to figure the cost basis of shares sold,compared with the use of the single-categorymethod to figure average basis (discussednext).

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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 oneof the following methods.

Single-category method.

Double-category method.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 offiguring 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, you

may use cost basis for the growth fund.

TIP

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

Single-category method. Under thesingle-category method, you find the averagecost of allshares owned at the time of eachdisposition, regardless of how long youowned them. Include shares acquired withreinvested dividends or capital gain distribu-tions.

Table 3 illustrates the use of the single-category method to figure the average basisof shares sold, compared with the use of theFIFO method to figure cost basis (discussedearlier).

Even though you include all unsold sharesof a fund in a single category to compute av-erage basis, you may have both short-termand long-term gains or losses when you sellthese shares. To determine your holding pe-riod, the shares disposed of are consideredto be those acquired first.

Example. You bought 400 shares in theLJO Mutual Fund: 200 shares on May 15,1999, and 200 shares on May 15, 2000. OnNovember 11, 2000, you sold 300 shares.The basis of all the shares sold is the same,but the holding period of 200 shares is long-term and the holding period of 100 shares is

short-term.

How to figure the basis of shares sold.Follow these 4 steps.

1) Total the cost of all shares of the fundowned. (For other than the first sale, addthe cost or other basis of shares ac-quired since the last sale to the remain-ing basis of the shares you owned afterthat sale.)

2) Total all shares owned. (For other thanthe first sale, add the number of sharesacquired since the last sale to the re-maining shares you owned after thatsale.)

Table 3. How To Figure Basis of Shares Sold

This is an example showing two different ways to figure basis. It compares the cost basisusing the FIFO method and the average basis using the single-category method.

Date Action Share Price No. of Shares Total SharesOwned

02/4/99 Invest $4,000 $25 160 160

08/5/99 Invest $4,800 $20 240 400

12/16/99 Reinvest $300

dividend $30 10 410

09/29/00 Sell $6,720 $32 210 200

COST BASIS(FIFO)

To figure the basis of the 210 shares sold on 9/29/00, use the shareprice of the first 210 shares you bought, namely the 160 shares youpurchased on 2/4/99 and 50 of those purchased on 8/5/99.

$4,000

$1,000

Basis = $5,000

(cost of 160 shares on 2/4/99)

(cost of 50 shares on 8/5/99)

AVERAGEBASIS

(single-category)

To figure the basis of the 210 shares sold on 9/29/00, use theaverage basis of all 410 shares owned on 9/29/00.

$9,100

410

$22.20

(cost of 410 shares)

(number of shares)

(average basis per share)

$22.20

210

Basis = $4,662

3) Divide the result of (1) by the result of(2). This is your average basis pershare.

4) Multiply the result of (3) by the numberof shares sold. This is the basis ofshares sold.

Example 1. You bought the followingshares in the LJP Mutual Fund: 100 sharesin 1997 at $10 per share; 100 shares in 1998at $12 per share; and 100 shares in 1999 at$26 per share. On May 16, 2000, you sold150 shares. The basis of shares sold is$2,400 ($16 per share), computed as follows.

Remaining shares. The average basisof the shares you still hold after a sale ofsome of your shares is the same as the av-erage basis of the shares sold. The next timeyou make a sale, your average basis will stillbe the same, unless you have acquired ad-ditional shares (or have made a subsequentadjustment to basis).

Example 2. Using the same facts as inExample 1, assume you sold an additional50 shares on December 15, 2000. 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.

Example 3. Using the same facts as inExample 1, assume you bought an additional150 shares at $14 a share on September 19,2000, and then sold 50 shares on December15, 2000. The basis of the shares sold is $750($15 a share), computed as follows.

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 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 at that time.To use this method, you specify, to thecustodian or agent handling your account,from which category the shares are to be soldor transferred. The custodian or agent mustconfirm in writing your specification. If youdo not specify or receive confirmation, youmust first charge the shares sold against thelong-term category and then charge any re-

1) Basis of remaining shares($16 150) ......................................... $2,400

2) Cost of shares acquired 9/19/00($14 150) ......................................... $2,100

3) Cost of all shares owned($2,400 + $2,100) ............................... $4,500

4) Total shares owned(150 + 150) ......................................... 300

5) Average basis per share1) Total cost ($4,500 300) .................................... $ 15

($1,000 + $1,200 + $2,600) ................ $4,800 6) Basis of shares sold2) Total shares ($15 50) ........................................... $ 750

(100 + 100 + 100) ............................... 3003) Average basis per share

($4,800 300) .................................... $ 164) Basis of shares sold

($16 150) ......................................... $2,400

Page 7


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maining shares sold against the short-termcategory.

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.The basis of a transferred share is its actualcost or other basis to you unless some of theshares in the short-term category have beendisposed of. In that case, the basis of atransferred share is the average basis of theundisposed 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.

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 choose

to 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. Thisstatement 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 a

gain. 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 themoney 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 explainedunder Keeping Track of Your Basis, earlier.

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 buysubstantially identical shares, you have awash sale. You cannot deduct losses fromwash sales.

Substantially identical. In determiningwhether the shares are substantially identical,you must consider all the facts and circum-stances. Ordinarily, shares issued by onemutual fund are not considered to be sub-stantially identical to shares issued by anothermutual fund.

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 a

substitute form containing substantially thesame language. The form shows the amountof the sales price and indicates whether theamount reported is the gross amount or thenet amount (gross amount minus commis-sions).

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 $2,425 in column (d) of ScheduleD.

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 enter $10,000 in column (d) of ScheduleD and increase your basis in column (e) 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. Your holding period determines whetherthe gain or loss is a short-term capital gainor loss or a long-term capital gain or loss.

Short-term gain or loss. If you hold theshares for one year or less, your gain or losswill be a short-term gain or loss.

Long-term gain or loss. If you hold theshares for more than one year, your gain orloss will be a long-term gain or loss.

Determining period held. Determine yourholding period by using the trade dates ofyour purchases and your sales. The trade

dateis the date on which you contract to buyor sell shares. Most mutual funds will showthe trade dates on confirmation statementsshowing your purchases and sales.

CAUTION

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

be delivered and payment must be made.

To find out how long you have held yourshares, begin counting on the day after thetrade date on which you bought the shares.

(Do not count the trade date itself.) The tradedate on which you dispose of the shares iscounted as part of your holding period.

Example. If you bought shares on Janu-ary 11, 2000 (trade date), and sold them onJanuary 11, 2001 (trade date), your holdingperiod would not be more than one year. Ifyou sold them on January 12, 2001, yourholding period would be more than one year(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 actually heldthem. Report the sale of inherited mutual fundshares on line 8 of Schedule D and enterINHERITED in column (b) instead of thedate you acquired the shares.

Reinvested distributions. If your dividendsand capital gain distributions are reinvestedin new shares, the holding period of each newshare begins the day after that share waspurchased. Therefore, if you sell both the newshares and the original shares, you mighthave both short-term and 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 beforeshort-term loss. If you received exempt-interest dividends on mutual fund shares thatyou held for 6 months or less and sold at aloss, you may claim only the part of the loss

Table 4. What Is Your Capital Gain Tax Rate?

IF your net capital gain is from ...

115%, if your regular tax rate is 15%.

THEN your capital gains

rate is ...

Collectibles gain

Gain on qualified small business stock equal to thesection 1202 exclusion

Unrecaptured section 1250 gain

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

Other gain, and your regular tax rate is 15%

28%1

28%1

25%1

20%

10%2

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

Page 8


9/16

that is more than the exempt-interest divi-dends. On Schedule D, column (d), increasethe sales price by the amount of exempt-interest dividends. Report the loss as ashort-term capital loss.

Example. On January 8, 2000, youbought a mutual fund share for $40. OnFebruary 3, 2000, the mutual fund paid a $5dividend from tax-exempt interest, which isnot taxable to you. On February 12, 2000, 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 capitalgain distributions (or had to report undistrib-uted capital gains) 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 (or un-distributed capital gain) as a short-term capi-tal loss. The rest of the loss is reported as along-term capital loss.

Example. On April 7, 2000, you bought

a mutual fund share for $20. On June 25,2000, the mutual fund paid a capital gaindistribution of $2 a share, which is taxed asa long-term capital gain. On July 13, 2000,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 LossSeparate your short-term gains and losses

from 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 loss. The total net gainor loss is determined by combining the netshort-term capital gain or loss on line 7 withthe net long-term capital gain or loss on line16. Enter the result on line 17 of Part III,Schedule D (Form 1040). If line 17 shows again, enter the amount on line 13 of Form1040. If line 17 shows a loss, see Limit onCapital Loss Deduction, later.

Figuring Your TaxIf you are reporting capital gain distributionson Form 1040A, use the Capital Gain TaxWorksheetin the Form 1040A instructions tofigure your tax. See How To Report, earlier,to see whether you can report your capitalgain distributions on Form 1040A.

If you are reporting capital gain distribu-tions on Form 1040, but are not required tofile Schedule D, use the Capital Gain TaxWorksheet in the Form 1040 instructions tofigure your tax. See How To Report, earlier,

to see whether you must file Schedule D.If you are required to file Schedule D, youwill need to use Part IV of Schedule D (Form1040) to figure your tax if both of the followingare true.

1) You have a net capital gain. You havea net capital gain if both lines 16 and 17of Schedule D are gains. (Line 16 is yournet long-term capital gain or loss. Line17 is your net long-term capital gain orloss combined with any net short-termcapital gain or loss.)

2) Your taxable income on Form 1040, line39, is more than zero.

The tax rate on the part of your income

that is net capital gain may be 10%, 15%,20%, 25%, or 28%, or a combination of thoserates, as shown in Table 4.

Limit on Capital Loss DeductionIf line 17 of Part III, Schedule D (Form 1040)shows a loss, your allowable capital loss de-duction is the 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 wouldhave 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

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, but thededuction may be limited. See Limit on In-vestment Interest Expense, later.

Publicly offered mutual funds. Most mutualfunds are publicly offered. Expenses of pub-licly offered mutual funds are not treated asmiscellaneous itemized deductions. This isbecause these mutual funds report only thenet amount of investment income after yourshare of the investment expenses has beendeducted.

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 a

miscellaneous itemized deduction to the ex-tent your miscellaneous itemized deductionsexceed 2% of your adjusted gross income.Your share of the expenses will be shown inbox 5 of Form 1099DIV. A nonpublicly of-fered 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 anytime 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 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.

Page 9


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Example. William received $600 in divi-dends from his mutual fund: exempt-interestdividends of $480 and taxable dividends of$120. In earning this income, he had a $50expense for a newsletter on mutual funds.William divides the exempt-interest dividendsby the total dividends to figure the part of theexpense that is not deductible. Therefore,80% ($480 $600) of William's expense is forexempt-interest income. He cannot deduct$40 (80% of $50) of the expense. William mayclaim the balance of the expense, $10, as amiscellaneous itemized deduction subject tothe 2%-of-adjusted-gross-income limit. Thatis the part of the expense allocable to thetaxable dividends.

Limit on InvestmentInterest ExpenseThe 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 asexplained under Expenses allocable toexempt-interest dividends, earlier.

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 otherthan 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 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 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. For

more 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 interestexpense deduction is limited to $11,020 (her

net 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 to figure yourinvestment interest expense deduction. Formore information about investment interestexpense, get Publication 550.

ComprehensiveExampleRobert and Janice Martin have the followingfour sources of investment income to reporton their 2000 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 6, 2000.They received Form 1099B, and theyreport the sale on Schedule D (Form1040).

Robert and Janice purchased theseshares in 1986 at $10 each. They re-ceived some return of capital distribu-

tions in 1988, 1989, and 1997 that re-duced their basis in the shares. In 1998and 1999, the Martins reported undis-tributed capital gains that increased theirbasis in their shares. They received nodistributions in 2000 before the sale.

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) becausethey have other capital transactions.They report the ordinary dividends onSchedule B (Form 1040) because theirtotal ordinary dividends were over $400.

Robert and Janice invested $3,800 inthis fund in June 2000 and received

153.16 shares that cost $24.81 pershare. They requested that all of theirdistributions be reinvested in moreshares of the fund. On December 29,2000, 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 1998 and received 87.54shares at $29.70 per share. They re-ceived exempt-interest dividends of $92in 1998 and $107 in 1999.

4) $237 in ordinary dividends from 100shares of common stock in Green Pub-lishing Company. They received Form1099DIV, and they report the dividends

on Schedule B (Form 1040).Robert and Janice bought this stock

in 1986 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 and theundistributed capital gains from Mutual FundS and the reinvested dividends from MutualFund R. They do not show the exempt-interest dividends from Mutual Fund X be-cause those dividends do not reduce theirbasis in the shares.

The Martins keep this record with theirmutual fund documents, and they use it toreport their 2000 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. Theythen use their Form 1099B and their MutualFund Recordto figure the gain from the saleof Mutual Fund S to report on Schedule D.

Schedule B. On line 5, Robert and Janicelist the $265 ordinary dividends from MutualFund R and the $237 ordinary dividends fromGreen Publishing Company (from box 1 ofForms 1099DIV). They enter the total of$502 on line 6 and also on line 9 of Form1040.

Schedule D. Robert and Janice enter the$61 capital gain distribution from Mutual FundR (from box 2a of Form 1099DIV) on line

13, column (f). They do not make an entry incolumn (g) of line 13 because Mutual FundR did not indicate that any of the capital gaindistribution was a 28% rate gain 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 1 year. They use theinformation from their Mutual Fund Recordtocomplete columns (a), (b), and (e). After ad-

justment for their return of capital distributionsand their undistributed capital gains, theirbasis is $1,996 ($9.98 per share). They usetheir Form 1099B to complete columns (c)and (d). Their sales price in column (d) (thegross proceeds shown in box 2 of Form1099B) is $3,200 ($16 per share). Theyenter their gain of $1,204 in column (f). Theydo not make an entry in column (g) becausethe gain was not 28% rate gain.

Robert and Janice add the amounts onlines 8 and 13 and enter their net long-termcapital gain of $1,265 on line 16. They alsoenter that amount on line 17. Because lines16 and 17 are gains, they compute their taxusing Part IV of Schedule D. (Part IV isshown, but not filled in.)

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

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

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

DateNumber

ofShares

1Include shares received from reinvestment of distributions.

2Cost plus or minus adjustments.

MUTUAL FUND S

MUTUAL FUND X

7-10 -8 6

4-16 -98

6 -6 -00

12-29 -0 0

20 0

87.54

153.16

13 .03

10 .00

29.70

24.81

25.01

12-31-88

(.05)

12-31-89

(.02)

12-31-97

(.04)9 .98 10 -6 -0 0 20 0

MUTUAL FUND R

12-3 1-9 8

.0 3 .0 6

8-3 1-99

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) 2000Name(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 page B-1and theinstructions forForm 1040,line 8a.)

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 and I U.S. savings bonds issued after 1989from Form 8815, line 14. You must attach Form 8815

3

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

Part IIOrdinaryDividends

Amount

(See page B-1and theinstructions forForm 1040,

line 9.)

5 List name of payer. Include only ordinary dividends. If you received any capitalgain distributions, see the instructions for Form 1040, 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) 2000

Note. If you had over $400 in taxable interest, 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 2000, 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 2000, 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


13/16

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

MUTUAL FUND S

20 0 Shares

7-10 -8 6 10 -6 -0 0 3,20 0

3,200

1,996 1,20 4

6 1

1,26 5

*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-4).

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, and trustsfrom Schedule(s) K-1

7

Short-term capital loss carryover. Enter the amount, if any, from line 8 of your1999 Capital Loss Carryover Worksheet

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

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, and trustsfrom Schedule(s) K-1

14

Capital gain distributions. See page D-1

15 15

14

16

Long-term capital loss carryover. Enter in both columns (f) and (g) the amount, ifany, from line 13 of your 1999 Capital Loss Carryover Worksheet ( )

Combine column (g) of lines 8 through 14

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

For Paperwork Reduction Act Notice, see Form 1040 instructions. Schedule D (Form 1040) 2000Cat. 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 gain or(loss)

(see instr. below)*

Next: Go to Part III on the back.

( )

2000

Page 13


14/16

1,26 5

Schedule D (Form 1040) 2000

Summary of Parts I and II

Combine lines 7 and 16. If a loss, go to line 18. If a gain, enter the gain on Form 1040, line 1317 17

( )18Next: Skip Part IV below. Instead, complete Form 1040 through line 37. Then, complete the

Capital Loss Carryover Worksheet on page D-6 if:

Part III

The loss on line 17 or

($3,000) or, if married filing separately, ($1,500)

Page 2

18

Next: Complete Form 1040 through line 39. Then, go to Part IV to figure your tax if:

If line 17 is a loss, enter here and as a (loss) on Form 1040, line 13, the smaller of these losses:

Tax Computation Using Maximum Capital Gains RatesPart IV

20

Enter your taxable income from Form 1040, line 39

22

Enter the smaller of line 15 or line 23, but not less than zero

23

If you are filing Form 4952, enter the amount from Form 4952, line 4e

24

Add lines 24 and 25

25

Subtract line 26 from line 22. If zero or less, enter -0-

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

42

43

44

45

4647

48

49

50

51

52

53

54

Subtract line 39 from line 38

Add lines 33, 37, 41, 47, and 51

Figure the tax on the amount on line 19. Use the Tax Table or Tax Rate Schedules, whichever applies

Tax on all taxable income (including capital gains). Enter the smaller of line 52 or line 53 hereand on Form 1040, line 40

24

25

19

26

27

28

29

30

31

32

33

34

35

43

44

49

50

51

52

53

54

21

Enter the smaller of line 16 or line 17 of Schedule D

Enter your unrecaptured section 1250 gain, if any, from line 17 of the

worksheet on page D-8


Combine lines 7 and 15. If zero or less, enter -0-

20

21

22

23

Both lines 16 and 17 are gains and

Form 1040, line 39, is more than zero.

The loss on line 17 exceeds the loss on line 18 or

Form 1040, line 37, is a loss.


Enter the smaller of:

Enter the smaller of line 28 or line 29


Enter the larger of line 30 or line 31

Figure the tax on the amount on line 32. Use the Tax Table or Tax Rate Schedules, whichever applies


Add lines 22 and 32

Enter the amount from line 19


Subtract line 45 from line 42. If zero or less, enter -0- Multiply line 46 by 25% (.25)


Add lines 32, 36, 40, and 46


Multiply line 50 by 28% (.28)




Multiply line 36 by 10% (.10)



45

4647

48

19

36

37

38

39

40

41

42

The amount on line 19 or

$26,250 if single; $43,850 if married filing jointly or qualifying widow(er);$21,925 if married filing separately; or $35,150 if head of household

Note. If the amounts on lines 29 and 30 are the same, skip lines 34 through 37 and go to line 38.

41 Multiply line 40 by 20% (.20)

Note. If line 24 is zero or blank, skip lines 48 through 51 and go to line 52.

Note. If line 26 is zero or blank, skip lines 42 through 51 and go to line 52.

Note. If the amounts on lines 19 and 29 are the same, skip lines 38 through 51 and go to line 52.

Schedule D (Form 1040) 2000

Otherwise, stop here.

Page 14


15/16

How To Get Tax HelpYou can get help with unresolved tax issues,order free publications and forms, ask taxquestions, and get more information from theIRS in several ways. By selecting the methodthat is best for you, you will have quick andeasy access to tax help.

Contacting your Taxpayer Advocate. If youhave attempted to deal with an IRS problemunsuccessfully, you should contact your Tax-payer Advocate.

The Taxpayer Advocate represents yourinterests and concerns within the IRS byprotecting your rights and resolving problemsthat have not been fixed through normalchannels. While Taxpayer Advocates cannotchange the tax law or make a technical taxdecision, they can clear up problems that re-sulted from previous contacts and ensure thatyour case is given a complete and impartialreview.

To contact your Taxpayer Advocate:

Call the Taxpayer Advocate at18777774778.

Call the IRS at 18008291040.

Call, write, or fax the Taxpayer Advocateoffice in your area.

Call 18008294059 if you are aTTY/TDD user.

For more information, see Publication1546, The Taxpayer Advocate Service of theIRS.

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 atwww.irs.gov. While visiting our web site, youcan select:

Frequently Asked Tax Questions(locatedunder Taxpayer Help & Ed) to find an-swers to questions you may have.

Forms & Pubsto download forms andpublications or search for forms andpublications by topic or keyword.

Fill-in Forms(located under Forms &Pubs) to enter information while the formis displayed and then print the completedform.

Tax Info For Youto view Internal Reve-nue Bulletins published in the last fewyears.

Tax Regs in Englishto search regulationsand the Internal Revenue Code (underUnited States Code (USC)).

Digital Dispatchand IRS Local News Net(both located under Tax Info For Busi-ness) to receive our electronic newslet-ters on hot tax issues and news.

Small Business Corner(located underTax Info For Business) to get information

on starting and operating a small busi-ness.

You can also reach us with your computerusing File Transfer Protocol at ftp.irs.gov.

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

calling 7033689694. Follow the directionsfrom the prompts. When you order forms,

enter the catalog number for the form youneed. The items you request will be faxed toyou.

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, call 18008294059 to ask tax questions or to orderforms 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 name

or tax identification number. We sometimes record telephone calls to

evaluate 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 walk in to manypost offices, libraries, and IRS officesto pick up certain forms, instructions,

and publications. Also, some libraries and IRSoffices have:

An extensive collection of products avail-able to print from a CD-ROM or photo-copy from reproducible proofs.

The Internal Revenue Code, regulations,Internal Revenue Bulletins, and Cumula-tive Bulletins available for research pur-poses.

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

you and receive a response within 10 work-days after your request is received. Find theaddress that applies to your part of thecountry.

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 on

CD-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 fromNational Technical Information Service (NTIS)by calling 18772336767 or on the Internet

at www.irs.gov/cdorders. The first releaseis available in mid-December and the finalrelease is available in late January.

IRS Publication 3207, The Business Re-source Guide, is an interactive CD-ROM thatcontains information important to small busi-nesses. It is available in mid-February. Youcan get one free copy by calling18008293676.

Page 15


16/16

Index

AAdjusted basis ............................. 6

Amount you realize ..................... 8Appreciated property ................... 6

Assistance (SeeTax help) Automatic reinvestment plan ....... 4

Average basis:Double-category method ........ 7Single-category method ......... 7

BBasis ............................................ 4

Basis of shares ............................ 6Basis of shares:

Acquired by gift ...................... 8Acquired by inheritance ......... 8

Average .................................. 7

CCapital gain distributions ..... 2, 4, 9

Capital gains:Form 2439 .............................. 2Net long-term ......................... 9Net short-term ........................ 9Undistributed .......................... 2

Capital loss carryover .................. 9

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

Comments ................................... 2Commissions ........................... 4, 8

Community property states:Inherited mutual fund shares . 6Tax treatment of dividends .... 2Cost basis .................................... 6

DDistributions ................................. 2

Dividends:Exempt-interest .................. 2, 8Ordinary .................................. 2Reinvestment of ................. 4, 8Year-end ................................. 2

Double-category method ............. 7

EExchanges ................................... 6

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

Exit fees ....................................... 8

FFirst-in first-out (FIFO) ................. 6Foreign tax credit ........................ 4Foreign tax deduction .................. 4

Forms:1099-DIV ............................ 2, 91099B ............................... 6, 82439 ....................................... 24952 ..................................... 10

Free tax services ....................... 15

G

Gains and losses ..................... 8, 9Gifts of mutual fund shares ..... 5, 8

HHelp (SeeTax help) Holding period ............................. 8How to report distributions .......... 4

IInformation returns ...................... 6

Inherited mutual fund shares .. 6, 8

Investment expenses .................. 9Investment income .................... 10

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

LLimit on investment interest ex-

penses .................................. 10Load charges ............................... 4

MMore information (SeeTax help) Mutual fund record ...................... 6

Mutual funds:Defined ................................... 1

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

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

Nonpublicly offered ................ 9Tax-exempt ............................ 2

NNet capital gain ........................... 9Net capital loss ............................ 9

Nominees .................................... 4Nontaxable distributions .............. 2

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

PPublications (SeeTax help)

RRecordkeeping ........................ 5, 6Redemption fees ......................... 8Redemptions ............................... 6Reinvestment rights ..................... 4

Return of capital distributions ...... 2

SSales ............................................ 6

Schedule D (Form 1040), how toreport on ................................. 8Settlement date ........................... 8Single-category method .............. 7Suggestions ................................. 2

TTax credit:

Form 2439 .............................. 2Undistributed capital gains ..... 2Tax help ..................................... 15Taxpayer Advocate ................... 15

Taxpayer identification number ... 6Trade date ................................... 8TTY/TDD information ................ 15

UUndistributed capital gains ...... 2, 4

WWash sales .................................. 8Worksheet ................................... 6

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

Documents

US Internal Revenue Service: p564--2000