Read the mail: You never know what bad thing may have occurred

Your Funds

Dollars & Sense

January 13, 2002|By CHARLES JAFFE

LAST month some shareholders in the MFS Massachusetts Investors Growth Stock fund received the good news that they are owed a tax refund.

It came wrapped with the bad news that these investors had overpaid their 2000 taxes due to an MFS error, and would have to file an amended tax return in order to collect their refund.

In the realm of fund-company mistakes, the MFS blunder is a doozie, both big and rare. In all, about 500,000 shareholders are affected, though only one in four knows it yet.

It's a story worth telling because it highlights the need to read everything your fund company sends, no matter how mundane or confusing. It also shows that mistakes happen, and that shareholders often pay for them.

In 2000, MFS Mass Investors Growth Stock paid "ordinary dividends" (interest, dividends, and gains on the trading of stocks held for less than a year) of 92 cents per share and long-term gains of 80 cents per share.

Investors who held the fund in a taxable account - the people for whom this is a problem - got a Form 1099-DIV showing this, and used it to figure their taxes. (This is not a problem for investors who hold the fund in tax-advantaged retirement accounts.) But fund accounting is quirky, and there are times - for reasons too complex to tackle here - when guesswork is involved. This was one of those times; since its fiscal year ends Nov. 30, MFS made its December 2000 gains payouts based on November estimates of what would happen at the end of the year.

MFS guessed wrong.

Of the original 92 cent payout, just 18 cents qualified as ordinary dividends. Forty-nine cents was actually a long-term gain, taxed at a lower rate, and 25 cents was a "return of capital," meaning investors got their own money back and owed no taxes on it at all.


By my estimate - using calculation factors MFS has now sent shareholders - an investor with about $100,000 in the fund overpaid taxes by anywhere from $400 to $1,500, depending on the investor's tax bracket and filing status.

In a rising market and using perfectly legal accounting tricks, MFS might have been able to make everything even out in the end. But with the market in a downturn, the company's only choice was to notify shareholders.

"It's tough for us to judge what the best solution would be for shareholders, since that may depend on a lot of factors outside of our fund," says Joe DelloRusso, chief administrative officer at MFS. "But shareholders are entitled to a tax refund now and that refund comes with interest. The hassle factor of having to amend their tax return is something to consider, but it's still in their best interest to know now." Best guesses lead to periodic accounting errors in mutual funds, although the numbers seldom move by more than a penny or two per share. At that tiny level, the adjustments generally get worked out through accounting maneuvers without shareholders being any poorer or wiser. There is no law saying that a fund company must correct errors on a Form 1099-DIV, though most firms would do it if a discrepancy was deemed significant.

Many Mass Investors Growth shareholders remain unaware of the error. MFS notified 125,000 shareholders last month. Another 375,000 taxable investors own the fund through brokerage firms; MFS knows it has clients with "Giant Brokerage X," but doesn't actually have their individual names and addresses. It must rely on financial advisers getting the word out to its remaining customers.

The Internal Revenue Service won't find investors due a refund without an amended tax return.

"Usually, for small shareholders, it's not worth the hassle of filing the 1040-X," says Thomas Ochsenschlager, tax partner at Grant Thornton International in Washington. "It costs more to pay for an amended return than they get in refund, and most people don't want to try this on their own."

Doing nothing doesn't make this problem go away. Technically, a "return of capital" reduces an investor's real cost for shares purchased. As a result, a Mass Investors Growth shareholder who opts not to pursue the tax refund not only forfeits money paid for taxes never owed but also ensures that those same dollars get taxed a second time when the fund holding is sold.

An investor could calculate his own cost basis and not use MFS' version, but that will just lead to hassles with the IRS down the road. If you don't want to tangle with Uncle Sam now, chances are you won't want to in the future, either.

MFS has established a Web site ( and an exclusive toll-free line (877-383-7949) to help shareholders through the process of amending federal, state and local tax returns.

Says DelloRusso: "We want everyone to know and get it right. Some people are frustrated, but most are interested in getting their money back. ...

They're certainly happy not to owe anything more."

Chuck Jaffe is mutual funds columnist at The Boston Globe. He can be reached by e-mail at or at The Boston Globe, Box 2378, Boston, Mass. 02107-2378.

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