Comprehensive Example

Robert and Janice Martin have the following four sources of investment income to report on their 2001 tax return. Their Schedules B and D (Form 1040) are shown later.

1. $1,204 gain from the sale of 200 shares of Mutual Fund S on October 6, 2001. They received Form 1099-B, and they report the sale on Schedule D (Form 1040).

   Robert and Janice purchased these shares in 1987 at $10 each. They received some return of capital distributions in 1989, 1990, and 1998 that reduced their basis in the shares. In 1999 and 2000, the Martins reported undistributed capital gains that increased their basis in their shares. They received no distributions in 2001 before the sale.

2. $265 in ordinary dividends and $61 in capital gain distributions from Mutual Fund R. The capital gain distributrions include $30 of qualified 5-year gain. The Martins received Form 1099-DIV showing these amounts. They report the capital gain distributions on Schedule D (Form 1040) because they have other capital transactions. They complete the Qualified 5-Year Gain Worksheet in the instructions for Schedule D. They report the ordinary dividends on Schedule B (Form 1040) because their total ordinary dividends were over $400.

   Robert and Janice invested $3,800 in this fund in June 2001 and received 153.16 shares that cost $24.81 per share. They requested that all of their distributions be reinvested in more shares of the fund. On December 29, 2001, they acquired an additional 13.03 shares at $25.01 per share from their reinvested dividends.

3. $101 of exempt-interest dividends from Mutual Fund X. They receive a statement from the fund, and they report this nontaxable amount on line 8b of Form 1040.

   The Martins invested $2,600 in this fund in April 1999 and received 87.54 shares at $29.70 per share. They received exempt-interest dividends of $92 in 1999 and $107 in 2000.

4. $237 in ordinary dividends from 100 shares of common stock in Green Publishing Company. They received Form 1099-DIV, and they report the dividends on Schedule B (Form 1040).

   Robert and Janice bought this stock in 1987 for $10.29 per share.

Mutual Fund Record. Robert and Janice keep track of all their basis adjustments on their Mutual Fund Record, shown later. They show the return of capital distributions and the undistributed capital gains from Mutual Fund S and the reinvested dividends from Mutual Fund R. They do not show the exempt-interest dividends from Mutual Fund X 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 to report their 2001 sale of Mutual Fund S.

Preparing the return. The Martins first use their two Forms 1099-DIV to figure the dividend income to report on Schedule B. They then use their Form 1099-B and their Mutual Fund Record to figure the gain from the sale of Mutual Fund S to report on Schedule D.

Schedule B. On line 5, Robert and Janice list the $265 ordinary dividends from Mutual Fund R and the $237 ordinary dividends from Green Publishing Company (from box 1 of Forms 1099-DIV). They enter the total of $502 on line 6 and also on line 9 of Form 1040.

Schedule D. Robert and Janice enter the $61 capital gain distribution from Mutual Fund R (from box 2a of Form 1099-DIV) on line 13, column (f). They do not make an entry in column (g) of line 13 because Mutual Fund R did not indicate that any of the capital gain distribution was a 28% rate gain distribution (box 2b of Form 1099-DIV).

They enter the $30 qualified 5-year gain (from box 2c of Form 1099-DIV) on line 2 of the Qualified 5-Year Gain Worksheet in the instructions for Schedule D.

They report the sale of their shares in Mutual Fund S on line 8 because they owned the shares for more than 1 year. They use the information from their Mutual Fund Record to complete columns (a), (b), and (e). After adjustment for their return of capital distributions and their undistributed capital gains, their basis is $1,996 ($9.98 per share). They use their Form 1099-B to complete columns (c) and (d). Their sales price in column (d) (the gross proceeds shown in box 2 of Form 1099-B) is $3,200 ($16 per share). They enter their gain of $1,204 in column (f). They do not make an entry in column (g) because the gain was not 28% rate gain.

Because they owned their shares in mutual fund S for more than 5 years, the $1,204 gain is qualified 5-year gain. They enter $1,204 on line 1 of the Qualified 5-Year Gain Worksheet. They add the amounts on lines 1 and 2 of the worksheet and enter the total, $1,234, on line 5 and line 7 of the worksheet and on line 29 of Schedule D.

Robert and Janice add the amounts on lines 8 and 13 of Schedule D and enter their net long-term capital gain of $1,265 on line 16. They also enter that amount on line 17. Because lines 16 and 17 are gains, they compute their tax using Part IV of Schedule D. (Part IV is shown, but not filled in, except line 29 for reporting qualified 5-year gain.)

Mutual Fund Record

Qualified 5-Year Gain Worksheet

Schedule B

Schedule D, page 1

Schedule D, page 2