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Merlo
Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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This year my client received an assessment of about $5000 ...

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This year my client received an assessment of about $5000 for an item she did not disclose on her 2005 tax return. she sold a "Scuder California Tax free Bond " for $20,000. she thought because it was "tax free" she didn't have to tell me. I received from Morgan Stanley data that showed she paid $10000 for the bond and reinivested all of the interest since 1993. I told the IRS that it was tax free income and the essentially her basis was $10000 plus all       of the tax free interest and therefore there was no taxable    amount. the IRS wrote back and said show us where she   included the interest income on her prior returns. We wrote      back and said none was taxable therefore it was not on     any reurn. their last reply was just because it says "tax free"   doesn't mean all dividends and capital gains were tax free.    since 1993 she received about $180 in dividends and            according to Scudder's statement about $54 in non      taxable capitable gains. what do you say?
Submitted: 6 years ago.
Category: Tax
Expert:  Merlo replied 6 years ago.

HelloCustomer

I believe that the Scudder California tax free bond which your client sold is free from California state tax, but not federal. As dividends and/or interest are paid on the bond each year and reinvested, they are not taxed like stock dividends. The gain on bonds is taxed when the bond is sold. When she sold her bond in 2005 she should have received a 1099-B from Morgan Stanley showing the sale price of the bond, and this transaction should have been reported at that time on Schedule D.

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Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
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