Question: Re your column of July 11 on the treatment of reinvested dividends on Schedule D: "Add total value of all reinvested dividends (previously declared as taxable income) to the cost of the original shares." Are you sure? Companies furnish us with a fair market value on the day acquired for cost purposes. Any discount is subject to income tax in the current year, and future dividends are income in the following years and have no effect on cost--just as though we'd been paid the dividend in cash and turned around and bought new stock on that date. If we are in error in handling this, we'd sure like to know--though I'd hate to have to keep track of individual dividends on each stock over the years.

Answer: Sorry to be the bearer of sad tidings, but I am sure and you do have to keep track of reinvested dividends for each stock.

You have the answer right in your question. If you did accept a dividend in cash and then turned around and bought additional shares with the money, wouldn't the amount of the dividend (i.e. the cost of the new shares) be the cost basis for those shares when you sell them?

If you didn't include the value of the dividend shares in the cost basis, you would end up paying tax twice on the same money: once as dividend, then again as a capital gain when you sell the stock.

Maybe these questions arise because I haven't really explained the circumstances adequately. Please continue reading to the next question and answer and perhaps everything will then become crystal clear.

Q: In your column, you discussed the sale of stock purchased by reinvestment dividends to the cost of the original shares. What if the original shares have already been sold? Or if you're selling only the shares purchased by the reinvestment program?

A: I'm paying the price for my own imprecision in the earlier response.

The value of the reinvested dividends does not actually get added to the cost of the original shares. Instead, it represents the cost basis of the shares purchased by the dividend and added to your dividend share account.

If you sell only the original shares, leaving the accumulated reinvested shares in your account, then the cost basis of the original shares remains unchanged from its original cost.

If you sell only the shares accumulated from the reinvestment program, retaining the original shares, then the cost basis for the shares sold is the value of all the accumulated dividends (on which you have been paying income tax over the years).

But if you sell the total holding--original shares plus the shares accumulated by the reinvestment of dividends--then the basis for capital gain or loss for the entire package is the original cost plus the value of all the accumulated dividends.

I went astray because I limited my thinking to the context of the original question of last July. If you sell all the shares at one time, then the cost basis for calculating capital gain or loss is the total of the original purchase price added to the cost of all the reinvested dividends.

But if you consider the shares as two separate entities, then for capital gain purposes the original shares continue to carry just the original cost, unadjusted by dividends; and the value of the quarterly dividends over the years adds up to the cost basis for the dividend shares.

To be sure I don't leave anything out this time, I should tell you about something the writer of the first letter above mentioned. In some instances, a public utility will tell you that some portion of the dividends for a given year represents a nontaxable return of capital. hat portion is not subject to income tax as a dividend in the year received. Instead, the original cost basis of the shares must be reduced by the corresponding amount, reflected later when the stock is sold as a larger gain (or smaller loss).

I hope this further explanation clarifies the situation for these two readers as well as anyone else who was confused by the original column but didn't write.