December 1998 full conversion with shares ex-distribution payable 1/99

[Guest Condorcet]

A traditional IRA is converted in full to a Roth IRA at the same custodian in 12/98. The account includes mutual fund shares that are ex-distribution at the date when the custodian records the transfer of assets into the Roth IRA. The distribution is received in January 1999, but would be includible in 1998 income for a taxable account. The custodian omits the value of the distribution receivable from the 1099-R for 1998 and reports the amount of the distribution as a separate conversion in 1999. The account holder may be ineligible to convert in 1999. Is the custodian in error, and should it have reported the full value of the account as converted, including distributions receivable? Thanks in advance for any responses.

[John G]

The custodian did not handle it properly. At a minimum they should have notified you of the issues.

There is a very good chance that the capital gains and dividends WERE included in the value of the funds at the date of transfer. When the fund went EX in January, the value of your shares should have dropped due to the distributions. Stock splits can cause a similiar problem if handled improperly. I suggest you pull all the data from the January period for the mutual fund. Then first talk to a supervisor at the mutual fund (if they are not the custodian) about what happened. You need to pin down the dates when the mutual fund distributions were declaired and made. Then ask for a supervisor at the custodian to handle the problem.

It sounds like your custodian is taking actions without being authorized. You may want to reconsider who is handling your assets. This is sloppy work.

This is just one more reason why conversions should not be left to the end of the year.

Good luck.

[This message has been edited by John G (edited 08-15-1999).]

[Guest Condorcet]

John, Thanks for the prompt response. I agree that the custodian erred, though I think the IRS should provide some clarity on such issues. There is no doubt here that the 1099-R was based on the ex-div value of the stock in late December. I don't think the custodian did anything unauthorized; rather it failed to reflect properly what was done -- i.e., the entire value of the account was converted in 1998.

The treatment of the distribution is a minor annoyance compared to the valuation of a fairly large IRA I had converted earlier in the year -- the custodian accepted the conversion instructions and created the Roth account on date X, but journaled the securities over on date X plus one week, when they were worth $10K more, and used the values at the later date for the 1099-R. I did call and write with reqests that they reconsider the timing of the valuation, but had no response. It seems to me that once the instructions are accepted and the Roth account created, that should be the conversion date (the IRS speaks of a beneficiary converting an account on a given date), and the timing of ministerial acts by a brokerage firm should not be relevant. What do you think? Has anyone else tried to press this with a broker, or with the IRS?

[John G]

On valuation dates: I did a conversion in 1998 in October that involved thinly traded stock, the broker took 2 weeks to get the transaction done. At year end, the broker used the valuation of Dec 30 for the IRS forms. Wrong.

I was able to protest that error (which made a difference of more than 25%) and get a corrected IRS form submitted but could not get them to price the stock during the week they sat on the instructions which would have saved me more. My accountant and I differ on what further can be done. We have to Oct 15 (delayed tax filing) to decide.

I also would like to hear more from people who had valuation errors that increase the taxable amount of their conversion....and what if anything was done to correct the error.