re-setting the cost basis

[Guest Iwonder]

Just received a question and I would like someone to speculate on why an organization would consider taking a particular action that has been recommended by a hired consultant.

Would some smart and experienced accountant please tell me why an organization would ask whether a cost basis can be changed without actually selling/buying securities. The one making the inquiry would like to establish a new cost-basis.

This seems very odd. Does the consultant's suggestion seem sound?

To me, not having an accounting background, it seemed that the only way to re-set a cost basis would be to buy or sell securities.

Also, what would resetting the cost basis do to a book value?

Thank you.

[K2retire]

This is a shot in the dark. Because a qualified plan pays no taxes, and reports unrealized gains or losses on the 5500 is this person thinking that the basis should be reset to match value reported on the most recent 5500 to assist in calculating the unrealized gains or losses attributable to the next year?

[GMK]

Although it may not apply to the OP, an S corporation owned by an ESOP is an example where basis can change without the sale/purchase of shares.

The corporation's pass-through earnings (losses) each year add to (subtract from) the basis of the shares in the ESOP accounts.

This becomes important if a lump sum distribution is paid to a participant in shares of stock that have NUA, net unrealized appreciation (= current value minus basis). In this case, the NUA is taxed at long term capital gain rates.

[Guest Iwonder]

These responses are very helpful. The investments are not ESOPs; the assets are mutual funds and publicly traded assets. It happens that the plan sponsor is a local government entity and, of course, the trust is non-taxable.

This just seems rather an odd request.

[david rigby]

What is the response of the "consultant" when you asked him/her the same question?

[masteff]

I'm curious as to what type of consultant and whether you have any idea why it's even being suggested? (I'm hoping the answer is "investment consultant" and "so the assets' gain/loss positions for the next couple years will be in the black instead of the red because of the massive market downturn".... in which case you can say the tactful version of "too bad, so sad".)

[Guest Iwonder]

I believe the consultant is an investment consultant and, therefore, the motivation could very well be as you described. This gives me a place to start and I thank you very much!

Its regretable, however, that such a beautifully concise suggested response ("too bad, so sad") must be prettied up for delivery.

[GMK]

When you ask the consultant why this would be a good idea, also ask what accounting practices would be used to calculate the change in basis. If you wish, you could post his/her reply here. There may be reasons why it would be prudent for the client to find a different consultant (or we all might learn something new and interesting).

And then send the consultant the "We are disinclined to accept your proposal" letter.

[masteff]

Of course... in the consultant's possible defense, I once had management who'd construct the question in a way that implied the query came from the consultant but was really their own thought. Then they could take credit if the answer was affirmative or "I'll tell the consultant it can't be done" if the answer was negative.