Looking for CPA and tax experts to chime in on this subject as I am stunned regarding what I have discovered recently while researching in-kind transfer IRA transfer options...
I have verified with a number of the biggest brokerages that they are reporting the FMV (and hence the new cost basis) of stocks transferred in-kind from an IRA to a taxable account in a manner that may be incorrect. If the transfer is processed prior to market close they are using the PRIOR DAY closing price instead of the day the transfer occurs. I have checked, and re-checked with the offending brokerages and after reaching out to their back offices they are all saying the same thing: Closing price of the prior day is what is used, and they 'have been doing it this way forever'. And to be clear, there was no confusion, they were understood the question was regarding standard publicly traded stocks being moved in-kind from IRA to taxable account within the same institution. All that said, SOME of the big brokerages are determining FMV based on market activity on the day of transfer, but others are not.
I would love to believe the method of using the prior day closing price is acceptable but can find nothing to support this approach. If what they are doing is indeed incorrect it puts the clients in a horrid position as clients will have an incorrect 1099R issued as well as an incorrect cost basis applied to the transferred stocks, thereby resulting in future incorrect 1099B's as well.
Granted, maybe cost basis adjustments could be made on a return for the future stock sales, but that is always a potential red-flag. And I have no idea how an incorrect 1099R could even be 'adjusted' on a filing for the year of transfer, which even if possible would again result in a potential red-flag.
I am absolutely stunned this may be happening on such a broad scale. It leaves me with only two possible conclusions: Either 1) Clients and CPA's have been oblivious this has been transpiring for ages or 2) This is actually an acceptable method. If it is the latter, can anybody point at some kind of supporting documentation that stipulates prior day closing price is indeed an acceptable method for determining FMV for the situation being discussed?
Thanks,
SE
