Some large brokerages reporting FMV & Basis of stock incorrectly for in-kind IRA distributions?

[Solar Eclipse]

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

[dmertz]

I think I've had this discussion before.  I don't recall finding any IRS guidance specifically addressing this.

Regardless of the valuation used, the total taxable amount once the shares are sold will be essentially the same:  the taxable amount from Form 1099-R plus the taxable amount from Form 1099-B.  What can differ is the tax rate that applies.  If the in-kind-distributed shares are held for more than a year outside of the retirement account, the amount in excess of the basis that was established upon distribution from the retirement account will be taxed at long-term capital gains rates.

[Solar Eclipse]

I found plenty of documentation that backs using market data on the day of transfer to determine FMV but nothing that supports using prior day closing price.  Having an incorrect FMV can be a huge deal with in-kind transfers from IRA to taxable account because the transfer and the sale often times won't occur in the same year, which would result in multiple years of incorrect filings.  And discrepency could be by huge amounts as the market can easily swing a few percentage points any given day, not to mention individual stocks can sometimes move double digit percentages. Especially when large positions are held, as is often the case in retirement accounts, this can really create a problem if the FMV is not calculated/reported correctly.

This is definitely not a small or trivial matter.  HOW are these large brokerages getting away with this, and refusing to justify their actions?  I want to believe there is some actual justification for using prior day closing price but am coming up emtpy so far...

[rjs]

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@Solar Eclipse wrote:

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.

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Your possible conclusion #2 is probably correct. "This is actually an acceptable method." Apparently there is no law or regulation that specifies the value to be used, and there is no IRS guidance. If the rules are unclear or nonexistent, each brokerage follows the conclusions of its own tax experts or lawyers, and they may reach different conclusions. No one is "getting away" with anything. If there are no explicit rules, no rule is being violated.

[Solar Eclipse]

FMV of a publicy traded stock on a given day is it's FMV regardless of situation.  For example, FMV on date of death uses market data on the date of death (unless on a day where the market was closed), never the day before.  The same should apply for in-kind transfers from IRA to taxable account. The FMV is the FMV on the day the transfer initiates.  This much is well documented and rather apparent after even the most rudimentary research.  The details of how the market data on a given day are used to compute FMV may be debatable, but there is NOTHING I've found so far that supports using market data from the PRIOR day to compute FMV of a publicly traded stock.  Doing so seems clearly incorrect and might well be a legacy habit some big brokerages have been getting away with, not because it is legal or ok.  The bottom line is that it is certainly not ok for the client if the FMV is being applied and reported incorrectly.

If anybody can point at any credible documentation indicating it is okay to use prior day closing price as FMV for an in-kind transfer of publicly traded stock from IRA to taxable account, please share.

SE

[fanfare]

Your new basis in-kind should be the amount of the distribution on the 1099-R.

That is my experience.

Move your business to a brokerage that does the recording correctly.

@Solar Eclipse 

[Solar Eclipse]

The new basis in-kind and the amount of the distribution on the 1099-R matching is not the concern, rather it's the amount reported potentially being incorrect.  As I understand things, what is reported is supposed to be the FMV of the stock on the date of distribution.  But instead some big brokerages are reporting the PRIOR DAY market closing price as the FMV.  I can't find anything that supports using prior day market activity as a valid method of computing FMV of publicy traded stock.

SE