Federal Headlines

Proposed Regulations Address Broker Basis and Related Reporting Obligations (IR-2009-118; NPRM REG-101896-09)

Proposed regulations relating to reporting sales of securities by brokers and determining the basis of securities have been issued. The proposed regulations reflect the changes made by the Emergency Economic Stabilization Act of 2008 (P.L. 110-343) to the determination of cost basis under Code Sec. 1012, and the additional broker reporting requirements of Code Sec. 6045 (g). They also reflect the additions of Code Secs. 6045A (requiring basis information for transfers of covered securities to be reported to the receiving broker) and 6045B (relating to information reporting in connection with organizations actions such as mergers or stock splits) made by P.L. 110-343, and conforming amendments to the list of returns in Code Sec. 6724 for which penalties may be imposed if the new reporting obligations are not met.

The proposed regulations address the changes toCode Sec. 6045 that require brokers to show the gross proceeds of a covered security, together with information about the customer's adjusted basis in the security and whether any gain or loss is long-term or short-term. Covered securities are stock, notes, bonds debentures, other debt instruments, and certain commodities and other financial instruments (collectively "specified securities") held in certain accounts and acquired on or after an applicable date.

CCH Comment. The applicable date of the reporting depends on the type of specified security that is sold. For stock of a corporation, other than stock in a regulated investment company (RIC), or stock acquired in connection with a dividend reinvestment plan (DRP), the applicable date is January 1, 2011. For stock in a RIC, or stock acquired in connection with a DRP, the applicable date is January 1, 2012. For any other specified security, the applicable date is January 1, 2013, or a later date determined by the Secretary. The reporting rules related to options transactions apply only to options granted or acquired on or after January 1, 2013. The proposed regulations would clarify that for this purpose a security that the issuer classifies as stock is treated as stock, but if no classification is made by the issuer, it is not considered stock unless the broker knows, or has reason to know, that the specified security is stock.

Pursuant to the proposed regulations, all brokers required to report basis and the character of gain or loss as long or short term would use the new version of Form 1099-B, "Proceeds from Broker and Barter Exchange Transactions." The basis that brokers are required to report would be the total amount paid by a customer or credited against a customer's account as a result of the acquisition of securities adjusted for commissions and the effects of other transactions occurring within the account. The proposed regulations also would require brokers to adjust the basis they report to take into account the information received on a Code Sec. 6045A transfer statement, as well as information received pursuant to a Code Sec. 6045B statement related to organizational actions.

A broker would not, however, be required under the proposed regulations to adjust the reported basis for transactions, elections, or events occurring outside the account. The proposed regulations further clarify that a broker would not be required to report adjusted basis, and whether any gain or loss on a sale is long-term or short-term, for securities that are excepted from reporting under Code Sec. 6045 at the time of their acquisition, such as certain securities purchased by tax-exempt organizations. Moreover, a broker who either fails to receive a transfer statement, or receives an incomplete statement, would be permitted to treat the underlying security as a noncovered security if the broker requests a complete statement and none is forthcoming prior to the sale or transfer of the security.

CCH Comment. If, however, the broker receives such information after reporting the sale, the proposed regulations require the broker to file a corrected Form 1099-B. Similarly, if a broker receives the Code Sec. 6045B organization action statement after reporting the sale, the broker would be required to file a corrected Form 1099-B to report any necessary adjustments to basis.

To streamline the information-reporting requirements, the proposed regulations maintain the current requirement that brokers report a sale of securities within an account on one return, even if the sale involves multiple acquisitions. The proposed regulations would provide brokers with the option of voluntarily undertaking reporting for noncovered securities on a security-by-security basis, but no penalties would be imposed for the failure to report such information correctly if the broker indicates on the Form 1099-B that it is for a noncovered security.

CCH Comment. Because brokers must report whether any gain or loss on the sale of a covered security is short-term or long-term, and because noncovered securities must be reported separately from covered securities to avoid treatment as covered securities, 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.

The proposed regulations address how a broker determines the basis required to be reported, including clarification of how to do so for sales of less than the entire position of a security in an account. This generally would require use of the customer's instructions either identifying the security sold, or requesting that average basis be used to make such computation. If no instruction is provided by the customer, the proposed regulations would require the broker to report basis using a first in first out (FIFO) method, except for stock eligible for averaging, in which case the broker must use the default basis determination method.

Under present law, as set forth in Rev. Rul. 67-436, 1967-2 CB 266, the requirement that stock be identified at the time of sale or transfer is satisfied if such identification is made by the time of delivery within four days of the sale date. Consistent with this, the proposed regulations provide that a taxpayer makes an adequate identification of stock at the time of sale, transfer, delivery, or distribution if the taxpayer identifies the stock no later than the earlier of the settlement date or the time for settlement under Securities and Exchange Commission regulations. Rev. Rul. 67-436 will be obsoleted when the proposed regulations are finalized.

Proposed special average basis method rules are provided for DRP stock, which allow a customer to elect to select such method using specified rules for all identical shares (generally defined as shares with the same Committee on Uniform Security Identification Procedures, or CUSIP) acquired after December 31, 2010. These rules would require the customer to report gain or loss consistent with such election. Absent such election, the broker would be required to use the default basis determination method, which the customer must also use in computing gain or loss.

The proposed regulations further address how to compute average basis for various transactions and accounts (including definitions of an account, and the treatment of identical stock held in two separate accounts), the rules governing a single-account election for RICs and DRPs, the time and manner of making an average basis method election and revoking such election, and how to change to another permissible method.

The proposed regulations also provide guidance with respect to various reporting obligations including wash sales, short sales, sales by S corporations and reporting to trust interest holders in a widely held fixed instrument trust. They further address reporting required in connection with transfers of gifted, inherited and borrowed securities (in the case of short sales). Clarification of the Code Sec. 6045B reporting obligations is also supplied and would require a reporting issuer to identify itself and the security on the return and provide information about the organizational action. Domestic and foreign issuers would also be required to furnish a written information statement about the organizational action to nonexempt recipients, or their nominees. These return filing and information statements would be waived, however, if the issuer posts a timely statement with the required information in a readily accessible format on its primary public website.

Finally, the proposed regulations update the penalty provision regulations to reflect the new Code Secs. 6045A and 6045B reporting obligations, and clarify that any failure to report correct information arising from reliance on such statements is deemed to be due to reasonable cause for purposes of the Code Secs. 6721 and 6722 penalties. If the broker takes into account information from a customer or third party other than as shown on statements, and the broker neither knows nor has reason to know that the information is incorrect, then the broker would be deemed to have relied on the information in good faith.

Comments on the proposed regulations have been requested. A public hearing on the proposals is scheduled for February 17, 2010.

2010FED ¶46,203

Proposed Regulations, NPRM REG-101896-09, 2010FED ¶49,439

Other References:

Code Sec. 408

CCH Reference - 2009FED ¶18,916G

Code Sec. 1012

CCH Reference - 2009FED ¶29,331C

Code Sec. 3406

CCH Reference - 2009FED ¶33,641A

Code Sec. 6039

CCH Reference - 2009FED ¶35,602G

Code Sec. 6042

CCH Reference - 2009FED ¶35,867C

Code Sec. 6044

CCH Reference - 2009FED ¶35,909C

Code Sec. 6045

CCH Reference - 2009FED ¶35,923G

CCH Reference - 2009FED ¶35,926BC

CCH Reference - 2009FED ¶35,926G

CCH Reference - 2009FED ¶35,929A

CCH Reference - 2009FED ¶35,929D

Code Sec. 6045A

CCH Reference - 2009FED ¶35,932C

Code Sec. 6045B

CCH Reference - 2009FED ¶35,935C

Code Sec. 6049

CCH Reference - 2009FED ¶36,035C

Code Sec. 6051

CCH Reference - 2009FED ¶36,424C

Code Sec. 6721

CCH Reference - 2009FED ¶40,213C

Code Sec. 6722

CCH Reference - 2009FED ¶40,232C

Tax Research Consultant

CCH Reference - TRC FILEBUS: 9,256

TRC SALES: 6,068

State Headlines

New Jersey --Corporate Income Tax: Licensing Corporation Had Sufficient Nexus Before Regulation Was Retroactively Applied

The New Jersey Supreme Court reversed a previously reported New Jersey Superior Court decision (TAXDAY, 2008/12/16, S.19) holding that a corporation that licensed its patents, trade secrets, and technologies to its parent corporation, which had facilities in New Jersey, had sufficient nexus with the state for the state to impose corporation business tax (CBT) on the income it earned from that activity in the 1994 to 1996 tax years, before retroactive application of a regulatory example. By reversing the Superior Court's decision, the Supreme Court reinstated the decision of the Tax Court, which had been reversed by the Superior Court. The Supreme Court determined that under both N.J.S.A. 54:10A-2 and N.J.A.C. 18:7-1.9, prior to the 1996 addition of an example, the corporation was "doing business" in New Jersey sufficiently to render it liable for the CBT. The corporation's intellectual property was brought to and put into continuous income-producing use in New Jersey. The Supreme Court rejected the corporation's argument that it was not liable for the CBT until the Division of Taxation added an example to the regulation that mirrored the corporation's licensing arrangement with its parent, because the argument was based on an incorrect assumption that tax liability could flow from a regulatory change. Because the corporation was liable for the CBT under both the statute and the regulation prior to addition of the example, the addition of the example was irrelevant to a determination of the corporation's CBT liability.

Praxair Technology, Inc. v. Director, Division of Taxation, New Jersey Supreme Court, No. A-91/92-08, December 15, 2009, ¶401-486

Other References:

Explanations at ¶10-075