Which one of the following describes the tax effect of executing a "telephone transfer" and switching the balance in the XYZ growth and income fund to the XYZ intermediate bond fund?
1) No gain or loss will be recognized by the taxpayer, but the basis of the new fund will be reduced by any deferred gain or increased by any unrecognized loss.
2) Any loss will be recognized by the taxpayer, but any gain will be deferred through a reduction in the basis of the new fund.
3) Gain or loss will be recognized by the taxpayer on the redemption of the old fund.
4) No gain or loss will be recognized by the taxpayer, and the basis in the new fund will be the same as that of the old fund.