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TAX NEWS - DECEMber 2009 | |||||||||||||||||||||||||||||||||||||||
IRS issues proposed regs on broker basis reporting, computation of basisThe proposed regulations will generally become effective when published as final rules, but numerous exceptions are provided. Broker information returns The proposed rules modify the definition of "broker" to reflect the section 1441 regulations related to non-U.S. persons, who would be defined as brokers only to the extent of their participation in a withholding agreement with the IRS. Form and manner of reporting – The proposed rules clarify that the basis reported by a broker must reflect commissions and the effects of other transactions occurring within the account, information received on a transfer statement in connection with the transfer of a covered security (including transfers from a decedent and gift transfers), and information received from issuers of stock about the quantitative effect on basis from corporate actions. The IRS largely retained the existing rules related to the reporting of securities acquired on different dates or at different prices, allowing brokers to report such sales on a single return. However, the IRS noted that "a single sale in an account could necessitate as many as three returns if the sale included covered securities held more than a year, covered securities held one year or less, and noncovered securities." Covered and noncovered securities – The proposed rules clarify that a broker's reporting requirement arises based on the status of the security as covered or noncovered at the time of acquisition. Thus, for example, no reporting is required for a security purchased by a tax-exempt organization that later loses its exempt status. Proposed rules address the treatment of securities as covered or noncovered following a transfer from one broker to another. In response to requests by commentators, the proposed rules allow, but do not require, brokers to report with respect to noncovered securities on a security-by-security basis. If the broker undertakes voluntary cost basis reporting for pre-effective date securities, reporting errors are deemed to be due to reasonable cause if the security is identified as a noncovered security on Form 1099-B. Determination of basis When a customer sells less than the entire position of a security in an account, the proposed rules clarify that the selling broker must follow the customer's instruction, if any, identifying the security sold. Absent specific identification of the securities selected for sale, a broker must report basis of any security – other than dividend reinvestment program (DRP) or regulated investment company (RIC) shares – using the default first-in, first-out (FIFO) method. Unless a customer elects another permissible method, a broker must determine the basis of stock in a RIC or DRP in accordance with the broker's default method. Averaging method – The proposed regulations allow brokers to use the average basis method for shares of stock acquired after 2010 in connection with a DRP, but only if the shares are identical. The rules define "identical shares" as stock with the same CUSIP number or other permitted identifier, and identical shares will include the stock of successor entities or entities resulting from mergers and spinoffs and other similar corporate actions. Dividend reinvestment plans – The proposed rules provide guidance for defining a DRP, including a provision that a plan qualifies as a DRP if the plan requires that at least 10 percent of any dividend paid be reinvested in identical stock. The IRS received varied comments regarding the appropriate treatment of shares acquired in connection with a DRP, particularly subsequent additions and purchases. The proposed rules provide that stock is acquired in connection with a DRP if the stock is acquired under the DRP or the dividends paid are subject to the DRP, including the initial purchase of stock in the DRP, subsequent transfers of identical stock into the DRP, additional periodic purchases of identical stock through the DRP, and all identical stock acquired through reinvestment of dividends paid under the DRP. Average basis computation – While requesting further comments on this issue, the proposed rules eliminate the doublecategory method of computing average basis in favor of the single-category method, under which all shares are averaged together regardless of holding period. A transition rule is provided for taxpayers using the double-category method. Accompanying this change is a new ordering rule for use under the FIFO method. Electing the average basis method – The proposed rules require that a taxpayer must notify a custodian or agent in writing to elect the average basis method, but otherwise do not specify requirements for that communication. The rules also address revocation of the average basis method election. Account-by-account rules – The proposed regulations provide that the average basis method election applies to all identical RIC stock or DRP stock in an account. A taxpayer may use different basis determination methods for identical stock held in two separate accounts (for stock dispositions after 2011, and even if held by the same broker) and for shares of stock held in the same account that are not identical. Single-account election by RICs – The proposed rules provide additional guidance regarding the single-account election by which a RIC, DRP, or broker (if the broker holds the stock as nominee) may irrevocably elect, on a stockholder-bystockholder basis, to treat identical stock held in separate accounts as held in a single account if the taxpayer has elected to use the average basis method. FIFO method – The proposed rules provide guidance regarding a taxpayer's identification of specific lots of shares sold or transferred, including the timing of lot selection (previously addressed by Rev. Rul. 67-436) and allowing taxpayers to establish standing orders for lot selection. Wash sales – The proposed rules provide some guidance regarding a broker's reporting requirements in connection with wash sales, such as clarifying the meaning of "identical securities," but largely rejected commentators' requests for changes in this area. Short sales – For purposes of reporting short sales in the year in which it is closed, as required by the recent statutory change to section 6045, the proposed rules apply this change to all short sales opened after 2009. The rules also specify the information brokers must report. This requirement differs for sales opened and closed in 2010, sales closed after 2010 using covered securities, and sales closed after 2010 using noncovered securities. The proposed rules modify the backup withholding rules for short sales and attempt to alleviate duplicate reporting by brokers. Transferred securities – Under the proposed regulations, every transfer of custody effected by an applicable person to a broker or other professional custodian on or after January 1, 2011, that is not a sale, is presumed to be a transfer of a covered security subject to reporting, even if the security transferred is a noncovered security or is treated as a noncovered security. However, in the case of a noncovered security or a security that is treated as a noncovered security, the transfer statement is not required to include any information other than that the security transferred is a noncovered security. The transfer statement will not be filed with the IRS and no specific format will be required, but the proposed rules specify the information required on the statement, including the total adjusted basis, original date of acquisition, and the date for determining whether any gain or loss would be long-term or short-term at the time of sale. The proposed rules provide that securities acquired by gift and inheritance that were covered securities in the account of the donor or decedent remain covered securities when transferred to the recipient's account and accompanied by a transfer statement. The preamble acknowledges opposition to subjecting gifted and inherited securities to transfer reporting (because of the complex basis computation rules), but explains that these transfers fall within the plain language of section 6045. The preamble adds that the proposed rules attempt to "minimize complexity." Issuer actions affecting basis – Under new section 6045B, the proposed rules provide guidance for issuers of securities that take actions affecting basis, such as a stock split or a merger or acquisition. The rules address the information that the issuer must report (or make public). Reporting of sales by S corporations – Brokers are required to report sales of covered securities by S corporations acquired on or after January 1, 2012. As a result, brokers will not be able to rely solely on the corporation's name to determine whether a corporate customer is exempt from reporting. To facilitate the change, the IRS is considering modifications to Form W-9. Additional guidance The proposed regulations also provide rules for the reporting of sales to trust interest holders in a widely held fixed investment trust, and the due date for payee statements furnished in a consolidated reporting statement. Finally, the proposed rules address the application of existing penalties to the statements required by these statutory and regulatory changes. | |||||||||||||||||||||||||||||||||||||||
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