Hi all, I have what some might call a silly/dumb question, but here it is!
I have enough invested in RSEMX (Royce Special Equity Multi-cap) to exchange into the Inst. class RSMCX. The annual fee difference is .15% (1.24%; 1.39%, respect..) according to the 2013 Annual report.
Is my math correct; $100,000 * .0015 = $150 annual savings? Is this enough savings to offset the inconvienence of the $75 transaction fee for purchasing RSMCX through FIDO?
The performance difference (according to M*) is .1% last year (2012) and .15% YTD 2013.
Any and all thoughts are welcome!!
Matt
Comments
Is this such a stupid question that it does not deserve a response???
Sorry for wasting everyone's time; I will try not to ask for help/opinions of such ignorance again.
Short answer, yes.
Longer answer - you talk about doing an exchange, but you also talk about a $75 fee. Every post I've ever seen about doing swaps at Fidelity has said that if they do the exchange for you (as opposed to doing a buy/sell yourself) is done without a transaction fee. So it would appear that you're thinking about doing the swap by placing the orders yourself.
Since the minimum for RSMCX in a Fidelity IRA is $500, we can reasonably assume you're talking about a taxable account. In a taxable account, there could be tax implications if you did a buy/sell yourself. Might not be - we don't know if you've got unrealized gains. Would make a difference in the answer.
So let's say you were in error about being charged $75 for the initial exchange, and were thinking about Fidelity doing the exchange for you. Have you checked with Fidelity - do you know whether they are able to execute this as a tax-free exchange? That requires cooperation and coordination between the brokerage and the fund family. Sometimes it can be done, sometimes not. I recently asked Fidelity about an exchange that would save me many fewer basis points than you're talking about, and they told me that they couldn't do a tax-free exchange (yet), but that I was hardly the first to ask about that particular exchange - they were working on it.
Would you be planning to purchase more? If so, in lump sums, or a few bucks at a time? In the former case, you could easily absorb the $5/trade that it would cost using their automated investment system. In the latter case, you might be better off keeping the more expensive share class, or perhaps setting up two positions - one with the shares exchanged, and one to hold new purchases.
You also didn't say how long you typically hold positions. If it's under a year, the answer would likely be no - you'd be at best saving a few bucks, at the cost of your time and effort. Of course, if you're retired/unemployed, and value your time so cheaply, the answer might again be different.
So now you've got 15 views and one response.
Oh, as msf also stated there are different requirements when making purchases in taxable vs. IRA accounts. The TIBIX example cited above works in an IRA account but doesn't in a taxable account.
I do appreciate the responses so far, thank you!!!
A little more info as requested. I hold this in a TAXABLE brakerage account at Fidelity. And I do make period additions, not monthly, maybe one or twice a year on average.
I did not know that FIDO can do the "exchange", I will have to look into that, thanks!! And yes, I would have LT cap gains if I have to sell than buy. BUT I do not think that is the case, I believe I can "exchange" w/o incurring the LtCG.
I do hold positions typically for much more than one year; I've had this postion for about 18 months.
Mark, I tried to research RMUIX on FIDO's website and it did not bring up a webpage. It could not find it. This has happend before with other Institutional funds and what I've been told it that this fund is "unavailable" to be purchased by a "retail" investor. I certainly can look into this again, though, thanks!!
To
I also kept a small position in the retail shares (RSEMX), for when I need to add money to this fund. I can then again, ask FIDO to "convert" those shares w/o incurring and fees and I don't have to wait for a holding period to be met.
Thanks MSF and AndyJ for your insights and suggestions!! I appreciate your time and knowledge!!
Matt
YMMV, but I've spoken with more than one accountant who also agrees with this interpretation.
It's not risky, it's the only correct way to account for such a transaction regardless of what the 1099-B says. Granted it's better to also have a correct 1099-B by initiating the conversion through a broker/fund, but the problem is that brokers and fund companies won't always comply with these requests and, in this case, the taxpayer has an obligation to report the transaction correctly in opposition to the erroneous 1099-B:
"NO gain or loss SHALL BE recognized if common stock in a corporation is exchanged solely for common stock in the same corporation"
http://www.law.cornell.edu/uscode/text/26/1036
No ifs ands or buts...the law says you shall not recognize the gain whether you want to pay the tax or not. Period.
If you fear the IRS will go against the law then you have a moral obligation to defend it instead of "doing yourself a favor", but the spinelessness and naked self-interest of some people is downright sickening. Ptooey!
If your tax return does not match what broker is reporting to IRS, you are opening yourself up to an audit. The opinion of a number of CPAs do not matter. The decision and interpretation of IRS matters and you can try taking them to tax court.
If they disagree with what you have done, I guarantee you will have headache at the minimum. Just ask Wesley Snipes (yeah he showed spine until he went to jail). In the end, if you owe IRS, they have the power to get it out of you. In the end it is one thing to do what you do on your own and another thing to advise other people. My warning is really to @mcmarasco. It is not worth taking such risks and open up yourself to scrutiny. In this case, doing the right thing is so easy (have the broker/fund company do the conversion and get the correct records in the first place) that it is really pointless.
Have the last word if you really want. I would not do it your way nor advise anyone else that way.
Sigh. This is one of those issues that I haven't had enough interest in to research all the details (i.e. to connect all the dots), and this thread hasn't changed that. That said, here's what I can say confidently, and what I reasonably speculate. Note that reading statutes and other legal writings may often entail context (legal framework) that completely changes what you may consider "plain English". In my speculations, I'll take note of that.
1. Mutual funds are a type of investment company. (SEC: Mutual Funds). "Generally, an 'investment company' is a company (corporation, business trust, partnership, or LLC) ..." (SEC: Investment Companies)
2. In particular, the Royce Fund (of which all the Royce mutual funds are portfolios) is "a Delaware statutory trust, [] a diversified open-end registered management investment company". (Royce: SAI).
3. "Delaware law provides that a Delaware statutory trust is an unincorporated association recognized as an entity separate from its owners." (IRS Rev Rul 2004-86 [discussing 1031 exchange of real property within a Delaware statutory trust.)
So already we know that RSEMX is not a corporation (it is unincorporated). Remember too, that a corporation (except for an S-corp) is not a passthrough entity. It is taxed separately - that's the problem with SteelPath funds.
Now here's where I get somewhat speculative. We know that tax free exchanges of share classes of the same fund are possible.
4. IRC Section 1036 is the applicable section of the tax code, despite the fact that it applies specifically to corporations. (Fairmark: Capital Gains and Losses forum; Kay Thomas post.)
So we may reasonably infer that the IRS reads "corporation" loosely with respect to this section of the code. This section also references 1031 (for the purpose of computing basis, i.e. that the exchange was tax free), which is where I believe the detailed rules and procedures for executing the exchanges come from.
As I read about 1031 exchanges, I see various warnings about needing to do a direct exchange - property for property; no cash in the middle. There are "safe harbors", where an intermediary may be used. But these require precise steps and due care. Here's an ABA article talking about the rules, safe harbors, and danger zones:
https://www.americanbar.org/newsletter/publications/law_trends_news_practice_area_e_newsletter_home/savetaxdollars.html
Some observations, and then a little more wild speculation. When you own shares of a fund through a brokerage, the brokerage has legal title (shares held in "street name"). This may gum up the works, if you try your "self help" approach; I don't know.
Brokerages require two days to execute a sell/buy transaction across fund families. This is because they submit the buy order on day 1, and only after market close do they know the amount of cash available for the subsequent buy (on day 2). Sometimes, but not always, they can do an intra-family "swap" on one day - as if you owned the shares directly through the fund company, and the fund company provided that service for you. Sometimes brokerages can't do an intra-family swap in a single day.
My wild speculation is that the issue of a tax-free exchange of share classes is related. That this swap provides for a cashless exchange, via an intermediary, which may be what's needed.
I really haven't yet read enough on the rules to say how much of the speculation is correct. I am quite confident, however, that a note to oneself does not conform to any procedure or rule I have found to date.
And again I agree that one should always do a direct conversion if possible and mcmarasco is fortunate that this option was available to him in this case, but my comment was to those for which this option isn't available...most of the time brokers do not offer conversion service for all funds and share classes and, in some cases, even fund companies themselves will refuse conversions to share classes even though they allow purchases through a third party broker.
"For purposes of this subtitle, the term “regulated investment company” means any domestic corporation— (1) which...". So IRS Rev Rul 2004-86 is not relevant to this particular issue even though it may be germane to other legal situations involving such mutual funds. Also, notably, there is another IRS ruling which clarifies that exchanges within mutual fund families (ie under the overarching umbrella of the trust "family", rather than the subumbrella of the incorporated "fund") are specifically taxable events.
But in any case, if you read section 1031 you'll see that it is mostly not about the kinds of exchanges found in section 1036 and does not specify any procedure or rules for an exchange to qualify under section 1036 but only how the basis is to be adjusted AFTER an exchange has taken place (and gains/losses have been recognized) per section 1036 (which gives no qualification except that "common stock in a corporation is exchanged solely for common stock in the same corporation").
Moreover, obviously any buys or sells that happen before, after, or concurrent to the exchange are not effected or relevant to the exchange itself and, therefore, so long as the shareholder holds both shares simultaneously (ie using margin or matching up the settlement times as can be done with certain brokers/funds so it's not over two days) and exchanges them there are no issues about cash redemption because the cash transaction is separate and independent from the exchange which only effects the cost basis of that cash transaction. Although you do raise a good point that the shares being held in street name might create an issue about the shareholder's right to exchange those shares without the involvement of the broker since the shareholder does not have legal title, it is hard to see how to shareholder could be liable if the conclusion is that he is not, in fact, the holder of the shares.
However even so, under the step transaction doctrine it is obvious that since the procedure I've advocated accomplishes exactly the same thing and yields exactly the same result as a "direct" conversion it is to be taxed in exactly the same way. Whatever magic incantation is or isn't spoken to a broker does not change the facts of the situation because, in the end, the only result is that shares are in fact exchanged in-kind and that's the bottom line. Period.
But if anyone is afraid to engage in perfectly legitimate and normal business transaction then seek legal counsel and be sure to also ask them if it's safe to ever crawl out from living under a rock without being spanked by the big bad government…if they know anything about the law then they will say "no, we are all criminals and there is nothing you can do for which you couldn't have your brains spanked out if the government chose to prosecute you".
"Although it is true that most mutual fund families (such as the Royce Fund) are Delaware trusts, the "portfolios" (or whatever the trust chooses to call them) are also regulated investment companies which must be corporations as defined by 26 USC § 851 which says, "So IRS Rev Rul 2004-86 is not relevant to this particular issue even though it may be germane to other legal situations involving such mutual funds."
Remember I wrote: Note that reading statutes and other legal writings may often entail context (legal framework) that completely changes what you may consider "plain English".
You've provided a perfect case in point. You originally wrote that RICs are corporations without reference to 851; thus you were using the standard, plain English meaning of a corporation - a company incorporated according to state law, having articles of incorporation, common stock, etc.
But that's not what Section 851 means by corporation. The IRS underlying reg (1.851-1) says unambiguously: "As to the definition of the term 'corporation', see section 7701(a)(3)," which in turn states that "The term 'corporation' includes associations, joint-stock companies, and insurance companies." Emphasis added (since Delaware statutory trusts are associations).
I'll bet that's the first time you thought of a mutual insurance company (i.e. one owned by its policy holders) as a (domestic) corporation. Wonder what "demutualization" means for these "corporations".
Obviously since we are talking about the same shares of the same funds, the extent of the fund's corporate character is not changed in our indirect procedure, so it doesn't matter to us whether it is incorporated, associated, in trust, etc, etc because whatever it was before it is the same thing in our case.
Therefore, the only thing relevant for us is the definition of "exchange" and while it's true that we cannot depend on our understanding of English for its meaning, I've not been able to detect any legal context or framework which would alter its meaning (whatever it may be) in our particular application/context to such a great extent that it contradicts the facts of the situation which are that we are starting with share class A and ending with share class B without any other byproducts just as we are with a direct conversion. In other words, IMO, an important legal framework that would make such a big impact in the face of what are really almost identical matters of fact is likely to leave some evidence or sign of its existence, but there is none.
...and, even if I'm wrong, if I man being raked over the coals for engaging in a good faith effort to understand and obey the law isn't worth fighting for and seeking justice via the courts then what is? The only other alternatives are the tyranny of cowardice and the anarchy of lawlessness and I, for one, cannot chose either in good conscience.