Source: https://www.federalregister.gov/documents/2013/04/18/2013-09085/basis-reporting-by-securities-brokers-and-basis-determination-for-debt-instruments-and-options
Timestamp: 2018-12-12 00:44:35
Document Index: 356821916

Matched Legal Cases: ['§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', 'art 1', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u200931', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u2009601', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u2009601', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091']

Federal Register :: Basis Reporting by Securities Brokers and Basis Determination for Debt Instruments and Options; Reporting for Premium
A Rule by the Internal Revenue Service on 04/18/2013
23116-23134 (19 pages)
https://www.federalregister.gov/d/2013-09085 https://www.federalregister.gov/d/2013-09085
This PDF is the current document as it appeared on Public Inspection on 04/17/2013 at 8:45 am.
Start Preamble Start Printed Page 23116
Applicability Dates: For dates of applicability, see §§ 1.1275-3(c)(4), 1.6045-1(a)(15)(i)(C) through 1.6045-1(a)(15)(i)(F), 1.6045-1(a)(18), 1.6045-1(c)(3)(vii)(C) and (D), 1.6045-1(c)(3)(x), 1.6045-1(c)(3)(xiii), 1.6045-1(d)(2), 1.6045-1(d)(5), 1.6045-1(d)(6)(ii)(A), 1.6045-1(m), 1.6045-1(n), 1.6045A-1(d), 1.6045B-1(j), and 1.6049-9T(a).
The collection of information contained in these final regulations related to the furnishing of information in connection with the transfer of securities has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number 1545-2186. The collection of information in these final regulations in §§ 1.6045-1(c)(3)(xi)(C) and 1.6045A-1 is necessary to allow brokers that effect sales of transferred covered securities to determine and report the adjusted basis of the securities and whether any gain or loss with respect to the securities is long-term or short-term in compliance with section 6045(g) of the Internal Revenue Code (Code). This collection of information is required to comply with the provisions of section 403 of the Energy Improvement and Extension Act of 2008, Division B of Public Law 110-343 (122 Stat. 3765, 3854 (2008)) (the Act).
In addition, the collection of information contained in § 1.6045-1(n)(5) of these final regulations related to the furnishing of information in connection with the sale or transfer of a debt instrument that is a covered security is an increase in the total annual burden under control number 1545-2186. Under section 6045(g), a broker is required to determine and report the adjusted basis upon the sale or transfer of a debt instrument that is a covered security. If a sale has occurred, a broker must also determine and report whether any gain or loss with respect to the debt instrument is long-term or short-term in compliance with section 6045(g). The holder of a debt instrument is permitted to make a number of elections that affect how basis is computed. To minimize the need for reconciliation between information reported by a broker to both a customer and the IRS and the amounts reported on the customer's tax return, a broker is required to take into account certain specified elections in reporting information to the customer. A customer, therefore, must provide certain information concerning an election to the broker in a written notification, which includes a writing in electronic format. The adjusted basis information will be used for audit and examination purposes. The likely respondents are recipients of Form 1099-B.
The burden for the collection of information contained in the amendment to § 1.1275-3 will be reflected in the burden on Form 8281, “Information Return for Publicly Offered Original Issue Discount Instruments,” when revised to request the additional information in the regulations. The burden for the collection of information contained in the other amendments to § 1.6045-1 will be reflected in the burden on Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” when revised to request the additional information in the regulations. The burden for the collection of information contained in the amendments to § 1.6045B-1 will be reflected in the burden on Form 8937, “Report of Organizational Actions Affecting Basis of Securities,” when revised to request the additional information in the regulations. The burden for the collection of information contained in § 1.6049-9T will be reflected in the burdens on Form 1099-INT and Form 1099-OID when revised to request the additional information in the regulations. The information described in this paragraph is required to enable the IRS to verify that a taxpayer is reporting the correct amount of income or gain or claiming the correct amount of losses or deductions.
This document contains amendments to the Income Tax Regulations (26 CFR part 1) relating to information reporting by brokers and others as required by section 6045 of the Code. This section Start Printed Page 23117was amended by section 403 of the Act to require the reporting of adjusted basis for a covered security and whether any gain or loss upon the sale of the security is long-term or short-term if gross proceeds reporting is required with respect to such security. The Act also requires the reporting of gross proceeds for an option that is a covered security. In addition, the Act added section 6045A, which requires certain information to be reported in connection with a transfer of a covered security to another broker, and section 6045B, which requires an issuer of a specified security to file a return relating to certain actions that affect the basis of the security. Final regulations under these provisions relating to stock were published in the Federal Register on October 18, 2010, in TD 9504 (the 2010 final regulations).
Another commenter requested a safe-harbor for good faith reliance upon debt instrument data that is provided by third-party vendors for purposes of both basis and transfer reporting. With respect to information from third-party vendors, §§ 1.6045-1(d)(2)(iv)(B) and 1.6045A-1(b)(8)(ii) of the 2010 final regulations provide that a broker is deemed to rely upon the information provided by a third party in good faith if the broker neither knows nor has reason to know that the information is incorrect (§ 1.6045A-1(b)(8)(ii) is redesignated in these final regulations as § 1.6045A-1(b)(11)(ii)). Therefore, because the 2010 final regulations already address the concerns raised by these comments, no change on this issue is needed in these final regulations.
Several commenters requested a safe-harbor for purposes of both basis and transfer reporting for good faith reliance upon information received on a section 6045A transfer statement. With respect to basis reporting, § 1.6045-1(d)(2)(iv)(A) of the 2010 final regulations provides for penalty relief if a broker relies upon transferred information when preparing a return under section 6045. With respect to transfer reporting, § 1.6045A-1(b)(8)(i) of the 2010 final regulations (redesignated in these final regulations as § 1.6045A-1(b)(11)(i)) provides for penalty relief if a broker relies upon transferred information when preparing a transfer statement under section 6045A. Because the 2010 final regulations already address the concerns raised by these comments, no change on this issue is needed in these final regulations.
Section 6045(g) by its terms requires basis reporting by brokers with respect to any note, bond, debenture, or other Start Printed Page 23118evidence of indebtedness that is a covered security. After consideration of the comments, however, the Treasury Department and the IRS appreciate that the proper implementation of broker basis reporting for debt instruments will require time to build and implement reporting systems, especially for debt instruments with more complex features. Thus, to facilitate an orderly transition to basis reporting for debt instruments, these final regulations implement basis reporting for debt instruments in phases.
For a debt instrument with less complex features, these final regulations require basis reporting by a broker if the debt instrument is acquired on or after January 1, 2014, consistent with Notice 2012-34. This category of less complex debt instruments includes a debt instrument that provides for a single fixed payment schedule for which a yield and maturity can be determined for the instrument under § 1.1272-1(b), a debt instrument that provides for alternate payment schedules for which a yield and maturity can be determined for the instrument under § 1.1272-1(c) (such as a debt instrument with an embedded put or call option), and a demand loan for which a yield can be determined under § 1.1272-1(d). Commenters requested delayed reporting for any debt instrument with an embedded put or call option. The Treasury Department and the IRS believe that brokers should be able to implement reporting for a debt instrument with an embedded option that entitles the issuer to call or the holder to put the debt instrument prior to its scheduled maturity. Moreover, because an embedded put or call option is a common feature of debt instruments, delaying basis reporting for debt instruments with such a feature could delay basis reporting for an unduly large proportion of debt instruments.
Some debt instruments with a fixed yield and a fixed maturity date nevertheless pose challenges for information reporting. For these debt instruments and for more complex debt instruments that do not have a fixed yield and a fixed maturity date, these final regulations require basis reporting for debt instruments acquired on or after January 1, 2016. The Treasury Department and the IRS believe that brokers may need additional time to implement basis reporting for these debt instruments because of their more complex features or the lack of public information for the debt instruments. Fixed yield, fixed maturity debt instruments that are subject to reporting if they are acquired on or after January 1, 2016, include a debt instrument that provides for more than one rate of stated interest (such as a debt instrument with stepped interest rates), a convertible debt instrument, a stripped bond or coupon, a debt instrument that requires payment of either interest or principal in a non-U.S. dollar currency, certain tax credit bonds, a debt instrument that provides for a PIK feature, a debt instrument issued by a non-U.S. issuer, a debt instrument for which the terms of the instrument are not reasonably available to the broker within 90 days of the date the debt instrument was acquired by the customer, a debt instrument that is issued as part of an investment unit, and a debt instrument evidenced by a physical certificate unless such certificate is held (whether directly or through a nominee, agent, or subsidiary) by a securities depository or by a clearing organization described in § 1.1471-1(b)(18). Other debt instruments that do not have a fixed yield and fixed maturity date but are subject to reporting if they are acquired on or after January 1, 2016, include a contingent payment debt instrument, a variable rate debt instrument, and an inflation-indexed debt instrument.
The proposed regulations attempted to simplify reporting requirements by specifying the elections brokers were to assume to compute OID, market discount, bond premium, and acquisition premium reported to holders, and not permitting brokers to support alternative customer elections. A number of commenters, however, indicated a desire by brokers to support debt instrument elections made by their customers rather than rely on assumptions provided in the Start Printed Page 23119regulations. Some commenters stated that they already support some or all elections for debt as a service to their customers, and these commenters predict that similar customer service demands will eventually require all brokers to support customer elections, just as they support customer elections with respect to stock. Other commenters pointed out that the default assumptions in the proposed regulations might be preferred by most individual taxpayers, but other customers, such as trusts or partnerships, might not prefer the default assumptions. One commenter noted that the reporting rules provided in the proposed regulations would make computations by brokers simpler, but that educating customers about permissible elections, and the computations that each election would entail if an election is made, would become critical. This commenter recommended permitting a broker to support customer elections in the future as systems are upgraded.
These final regulations do not prescribe a particular day count convention brokers must use for basis reporting. Instead, these final regulations provide that a broker may use any reasonable day count convention. The terms of a debt instrument, however, generally include Start Printed Page 23120the day count convention that the issuer will use to compute interest payments. The Treasury Department and the IRS expect that a broker generally will choose to use this day count convention to determine the accruals of interest and OID on the debt instrument and the related basis adjustments, which will facilitate reconciliation of the accruals with the amount of cash received by a broker and distributed to a customer. These final regulations also do not prescribe a particular rounding convention.
These final regulations continue the approach taken in the proposed regulations. The basis reporting rules are not intended to, and do not, change the substantive rules applicable to debt instruments. Thus, when assessing the effect of an embedded put or call option on a debt instrument, a broker must apply the rules described in § 1.1272-1(c)(5) or § 1.171-3(c)(4), whichever is applicable, to determine the correct date to be used in accrual calculations. The rules described in § 1.1272-1(c)(5) have been in effect since 1994 and the rules described in § 1.171-3(c)(4) have been in effect since 1997. Both rules provide a clear and workable framework for determining the effect, if any, of an embedded put or call option on a debt instrument.
For purposes of section 6045, § 1.6045-1(a)(9) defines a sale to include any disposition of a debt instrument, which includes a retirement of a debt instrument at or prior to its stated maturity. These final regulations do not change this definition of a sale with respect to a debt instrument; however, these final regulations clarify that a sale for purposes of section 6045 includes a partial principal payment. Moreover, under these final regulations, in the case of a sale, accrued market discount will be reported only on the Form 1099-B, which would associate the accrued market discount with a specific sale of a single security. In connection with this comment, these final regulations amend the rule in § 1.6045-1(d)(3) for reporting accrued stated interest on a Form 1099-INT when a debt instrument is sold between interest payment dates to make it clear that the rule does not apply to accrued market discount.
A number of comments were received that address narrower issues. One commenter requested guidance about how to determine and translate interest income or expense (including OID) on certain non-functional currency debt. Rules regarding the determination and translation of interest income and expense on certain debt instruments denominated in a non-functional currency are explicitly addressed in the regulations under section 988. See, for example, § 1.988-2(b).
During the preparation of these final regulations, the Treasury Department and the IRS reviewed the existing reporting requirements for short-term debt instruments. Based on this review, these final regulations exempt from gross proceeds reporting all short-term debt instruments. This exemption is consistent with the existing exemption from reporting for certain short-term debt instruments in § 1.6045-1(c)(3)(vii)(C), and the provisions in these final regulations that exempt short-term debt instruments from basis reporting. Moreover, almost all income related to short-term debt instruments is captured through the income reporting rules under section 6049 and any capital gain or loss related to a short-term debt instrument is expected to be very small.
In general, under the proposed regulations, basis and gross proceeds reporting applied to the following options granted or acquired on or after January 1, 2013: an option on one or more specified securities, including an option on an index substantially all the components of which are specified securities; an option on financial attributes of specified securities, such as interest rates or dividend yields; and a warrant or a stock right on a specified security. The scope provisions in these final regulations are generally the same as the scope provisions in the proposed regulations, except that these final Start Printed Page 23121regulations explicitly exclude a compensatory option. As announced in Notice 2012-34, these final regulations generally apply to an option granted or acquired on or after January 1, 2014.
One commenter asked for clarification of the concept of “financial attributes” in the scope provision. After reviewing the proposed language, the Treasury Department and the IRS believe that the list of items provided in § 1.6045-1(m)(2)(i)(B) provides adequate detail to describe the concept.
Numerous comments were received related to nonequity options that are covered by section 1256(b)(1)(C) (“section 1256 options”), which includes a listed option on a stock index that is not a narrow-based security index. Several commenters noted that the substantive rules that apply to section 1256 options are different from the rules that apply to non-section 1256 options and asked for different reporting treatment for the two types of options. Some commenters requested an exemption from reporting for all section 1256 options. The commenters suggested that if a blanket exemption from reporting is not provided, the IRS should consider extending the reporting rules for regulated futures contracts described in § 1.6045-1(c)(5) to section 1256 options. One commenter noted that although the current rules only require reporting for regulated futures contracts on Form 1099-B, some brokers may already be reporting section 1256 options in a similar manner.
The Treasury Department and the IRS agree that there should be different reporting rules for section 1256 options and non-section 1256 options. In general, an option is subject to reporting under section 6045 only if the option references one or more specified securities. For a nonequity option described in section 1256(b)(1)(C) on one or more specified securities, a broker will apply the reporting rules that apply to a regulated futures contract, which are described in § 1.6045-1(c)(5). For an option on one or more specified securities that is not described in section 1256(b)(1)(C), a broker will report gross proceeds and basis in accordance with the rules in these final regulations for a non-section 1256 option, which are described later in this preamble.
For a cash settled non-section 1256 option, the proposed regulations required a broker to adjust gross proceeds related to an option transaction by increasing gross proceeds by the amount of any payments received for issuing the option and decreasing gross proceeds by the amount of any payments made on the option. A number of commenters requested that, instead of decreasing gross proceeds by amounts paid out, brokers be permitted to report gross amounts paid and received with respect to the option. Under this approach, the gross proceeds box on Form 1099-B would include all payments received, and the basis box on Form 1099-B would reflect any payments made. These commenters noted that some broker systems already deal with equity options this way. This suggestion has not been adopted because it is not consistent with the overall concept of gross proceeds and basis reporting, which applies to all covered securities. The rules in these final regulations for a cash settled option are based upon the basic idea that costs related to the acquisition of a position affect basis, while the costs related to the sale or closeout of a position affect gross proceeds. This is consistent with the changes to the Start Printed Page 23122definition of gross proceeds in the proposed regulations.
One commenter requested that for cash-settled options, acquisition costs be treated as adjustments to gross proceeds and that no adjustments be made to basis for acquisition costs. This comment has not been adopted because it is contrary to the requirements of § 1.263(a)-4(c), which require that acquisition costs be treated as part of basis.
One commenter asked for guidance on how to implement backup withholding for option transactions. In particular, the commenter asked for clarification about whether a rule similar to § 31.3406(b)(3)-2(b)(4) applies, permitting a broker to withhold at either the time of sale or upon a closing transaction or lapse. The commenter also asked how to apply backup withholding to several situations involving physically settled options or when the taxpayer transfers an option or ends up closing out an option transaction at a loss. This comment is not adopted because backup withholding rules are outside the scope of these final regulations.
After consideration of the comments, these final regulations provide that a broker is permitted, but not required, to apply the rules of sections 305 and 307 when reporting the basis of a stock right or warrant or any stock related to a stock right or warrant. This rule will permit the industry to deploy its resources Start Printed Page 23123most efficiently. A broker who already supports adjustments under sections 305 and 307 will not need to reprogram its systems, while a broker who does not currently support the adjustments can decide to do so later, or not at all. Note that, under these final regulations, a stock right or a warrant purchased from the original recipient is treated as an option.
A few commenters focused specifically on the list of debt instrument-specific data that was included in proposed § 1.6045A-1(b)(3). One commenter asked if the amount of acquisition premium already amortized should be added to the list, pointing out that accrued market discount and amortized bond premium are already reportable. One commenter asked that the date through which the transferor broker made adjustments be added to the list. These final regulations adopt these comments and add these data to the list of transfer statement items.
One commenter asked for penalty relief for transfer reporting analogous to the relief that was provided for transfer reporting for stock in Notice 2010-67, 2010-43 I.R.B. 529. Under Notice 2010-67, although broker reporting for basis began for some stock acquired on or after January 1, 2011, transferring brokers were given penalty relief if they did not provide transfer statements for transfers occurring during 2011, and receiving brokers were instructed to treat a transfer during 2011 for which no transfer statement was received as the transfer of a noncovered security. Instead of penalty relief, the Treasury Department and the IRS believe that it is appropriate to provide additional time for brokers to phase in transfer reporting for transfers of debt instruments, options, and securities futures contracts, and the final regulations provide that transfer reporting for debt instruments, options, and securities futures contracts will be Start Printed Page 23124applicable no earlier than January 1, 2015.
One commenter pointed out that currently there is no safe harbor for modifications to non-debt instruments, so any modification of an option technically might result in a taxable event. The commenter recommended providing an assumption for brokers that changes to option terms do not result in a taxable event if section 1001 does not apply. This request is outside the scope of the current project and so no changes were made to these final regulations in response to this comment. It should be noted, however, that under these final regulations, an option issuer only needs to comply with § 1.6045B-1 if the change in the underlying asset results in a different number of option contracts. If the terms of the option are changed to reflect a corporate event, but the number of option contracts does not change, a section 6045B event has not occurred.
Under section 171(e) (which was added to the Code in 1988) and § 1.171-1 (which was amended in 1997 to reflect the addition of section 171(e)), amortized bond premium offsets stated interest payments. As a result, only the portion of a stated interest payment that is not offset by the amortized premium is treated as interest for federal income tax purposes. Under section 6049(a), the Secretary can prescribe regulations to implement the reporting of interest payments, which includes the determination of the amount of a payment that is reportable interest. Similarly, notwithstanding section 6049(d)(6)(A)(i), under section 6049(a), the Secretary can prescribe regulations to implement the reporting of OID, which includes the determination of the amount reportable as OID (interest).
Under the temporary regulations, for purposes of section 6049, a broker will assume that a customer has elected to amortize bond premium unless the broker has been notified that the customer has not made the election. It should be noted that this change applies only to the information reported by the broker to its customer. Thus, a customer that does not prefer to make the section 171 election can report interest on the customer's income tax return unadjusted for bond premium because the information reporting rules do not change the substantive rules affecting bond premium (or any of the other rules pertaining to OID, market discount, or acquisition premium). Moreover, a customer can notify a broker that the customer has not made or has revoked a section 171 election, and the broker is required to reflect this fact on the Form 1099-INT and the Form 1099-B. If a broker is required to report amounts reflecting amortization of bond premium, the temporary regulations allow a broker to report either a gross amount for both stated interest and amortized bond premium or a net amount of stated interest that reflects the offset of the stated interest payment Start Printed Page 23125by the amount of amortized bond premium allocable to the payment.
In addition, under the temporary regulations, for purposes of section 6049, a broker must report OID adjusted for acquisition premium in accordance with § 1.1272-2 by assuming that a customer has not elected to amortize acquisition premium based on a constant yield. However, if the broker has been notified that the customer has made an election to amortize acquisition premium based on a constant yield, the broker is required to reflect this fact on the Form 1099-OID and the Form 1099-B. The temporary regulations allow a broker to report either a gross amount for both OID and acquisition premium, or a net amount of OID that reflects the offset of the OID by the amount of amortized acquisition premium allocable to the OID.
Under § 1.1275-3(c) of the current final regulations, an issuer of a publicly offered debt instrument issued with OID must file a Form 8281, “Information Return for Publicly Offered Original Issue Discount Instruments,” within 30 days after the issue date of the debt instrument. The information from Form 8281 is used to develop the tables of OID information that are part of Publication 1212, “Guide to Original Issue Discount (OID) Instruments.” To be publicly offered, a debt instrument generally must be registered with the Securities and Exchange Commission as of the instrument's issue date. In many instances, a debt instrument issued in a private placement is registered with the Securities and Exchange Commission after the issue date. As a result, a Form 8281 is not required to be filed with the IRS and, therefore, the OID information generally does not appear in the Publication 1212 tables. A number of commenters on the proposed regulations asked that OID information on more debt instruments be provided in the tables to Publication 1212. In response to these comments, the regulations under § 1.1275-3(c) are amended to require the filing of a Form 8281 for a debt instrument that is part of an issue the offering of which is registered with the Securities and Exchange Commission after the issue date of the debt instrument. The Form 8281 is required to be filed within 30 days of the date the offering is registered with the Securities and Exchange Commission.
These regulations are effective when published in the Federal Register as final regulations. In general, the regulations regarding reporting of basis and whether any gain or loss on a sale is long-term or short-term under section 6045(g) apply to certain debt instruments acquired on or after January 1, 2014. See § 1.6045-1(n)(2). In general, for all other debt instruments, the regulations apply to debt instruments acquired on or after January 1, 2016. See § 1.6045-1(n)(3). The regulations regarding reporting of gross proceeds, basis, and whether gain or loss on a sale is long-term or short-term under section 6045(h) apply to options granted or acquired on or after January 1, 2014. The regulations regarding reporting of basis and whether any gain or loss on a sale is long-term or short-term apply to securities futures contracts entered into on or after January 1, 2014. In general, the regulations regarding transfer reporting for certain debt instruments, options, and securities futures contracts apply to transfers occurring on or after January 1, 2015. The regulations regarding transfer reporting for more complex debt instruments apply to transfers occurring on or after January 1, 2017. See § 1.6045A-1(d). The regulations regarding reporting for issuer actions that affect the basis of certain debt instruments, options, and securities futures contracts apply to issuer actions occurring on or after January 1, 2014. The regulations regarding reporting for issuer actions that affect the basis of more complex debt instruments apply to issuer actions occurring on or after January 1, 2016. See § 1.6045B-1(j). The final regulations regarding the filing of Form 8281 apply to a debt instrument that is part of an issue the offering of which is registered with the Securities and Exchange Commission on or after January 1, 2014. The temporary regulations under section 6049 relating to the reporting of premium apply to covered securities acquired on or after January 1, 2014.
Section 403(a) of the Act requires a broker to report the adjusted basis of a debt instrument that is a covered security. The holder of a debt instrument is permitted to make a number of elections that affect how basis is computed. To minimize the need for reconciliation between information reported by a broker to both a customer and the IRS and the amounts reported on the customer's tax return, the final regulations require a broker to take into account certain specified elections in reporting information to the customer. Therefore, under the final regulations, a customer must provide certain information concerning an election to the broker in a written notification, which includes a writing in electronic format. It is anticipated that this collection of information will not fall on a substantial number of small entities. Further, the final regulations generally implement the statutory requirements for reporting adjusted Start Printed Page 23126basis. Moreover, any economic impact is expected to be minimal because it should take a customer no more than seven minutes to satisfy the information-sharing requirement in these final regulations.
Section 403(c) of the Act added section 6045A, which requires applicable persons to furnish a transfer statement in connection with the transfer of custody of a covered security. The modifications to § 1.6045A-1 effectuate the Act by giving the broker who receives the transfer statement the information necessary to determine and report adjusted basis and whether any gain or loss with respect to a debt instrument or option is long-term or short-term as required by section 6045 when the security is subsequently sold. Consequently, the final regulations do not add to the impact on small entities imposed by the statutory scheme. Instead, it limits the information to be reported to only those items necessary to effectuate the statutory scheme.
Section 403(d) of the Act added section 6045B, which requires issuer reporting by all issuers of specified securities regardless of size and even when the securities are not publicly offered. The modifications to § 1.6045B-1 limit reporting to the additional information for debt instruments and options necessary to meet the Act's requirements. Additionally, the final regulations, as modified, retain the rule that permits an issuer to report each action publicly instead of filing a return and furnishing each nominee or holder a statement about the action. The final regulations therefore do not add to the statutory impact on small entities but instead eases this impact to the extent the statute permits.
Par. 2. Section 1.1271-0(b) is amended by adding an entry for § 1.1275-3(c)(4) to read as follows:
§ 1.1275-3
OID information reporting requirements.
(4) Subsequent registration. Except as provided in paragraph (c)(3) or (d) of this section, the information reporting requirements of paragraph (c)(1) of this section apply to any debt instrument that has original issue discount if the instrument is part of an issue the offering of which is registered with the Securities and Exchange Commission (SEC) after the issue date of the debt instrument. For example, this paragraph (c)(4) applies to a newly issued debt instrument (B bond) exchanged for an otherwise identical non-SEC-registered debt instrument (A bond) if the B bond is part of an issue the offering of which is registered with the SEC and the B bond has an issue date that is the same as the issue date of the A bond for federal tax purposes because the exchange is not a realization event under § 1.1001-3. If a debt instrument is subject to this paragraph (c)(4), the prescribed form (Form 8281 or any successor) must be filed with the Internal Revenue Service within 30 days after the date the offering is registered with the SEC. This paragraph (c)(4) applies to a debt instrument that is part of an issue the offering of which is registered with the SEC on or after January 1, 2014.
1. Revising paragraphs (a)(3)(v) and (a)(3)(vi) and adding paragraphs (a)(3)(vii) and (a)(3)(viii).
2. Revising paragraphs (a)(8) and (a)(9).
3. Revising paragraphs (a)(14) and (a)(15)(i)(A).
4. Redesignating paragraph (a)(15)(i)(C) as paragraph (a)(15)(i)(G) and adding new paragraphs (a)(15)(i)(C) through (a)(15)(i)(F).
5. Adding a new sentence at the end of paragraph (a)(15)(ii).
6. Adding new paragraphs (a)(17) and (a)(18).
7. Adding two new sentences at the end of paragraph (c)(3)(vii)(C) and adding a new sentence at the end of paragraph (c)(3)(vii)(D).
8. Adding a new sentence at the end of paragraph (c)(3)(x) and revising the first two sentences in paragraph (c)(3)(xi)(C).
9. Adding new paragraph (c)(3)(xiii).
10. Revising the last sentence of paragraph (c)(4) Example 9 (i).
11. Adding two new sentences at the end of paragraph (d)(2)(i) and revising paragraph (d)(2)(ii) and the first sentence of paragraph (d)(2)(iii).
12. Revising paragraph (d)(3).
13. Removing the first four sentences of paragraph (d)(5) and adding six sentences in their place.
14. Revising the second sentence and adding two new sentences at the end of paragraph (d)(6)(i).
15. Removing the first three sentences of paragraph (d)(6)(ii)(A) and adding five sentences in their place.
16. Revising the heading for paragraph (d)(6)(ii)(B).
17. Revising the last sentence of paragraph (d)(6)(iii)(A).
18. Revising paragraph (d)(6)(iv).
19. Revising paragraph (d)(6)(vii) Example 4. Start Printed Page 23127
20. Revising the second sentence of paragraph (d)(7)(i).
21. Removing the first sentence of paragraph (d)(8)(i)(A) and adding a sentence and a parenthetical phrase in its place.
22. Adding paragraphs (m) and (n).
(A) A specified security described in paragraph (a)(14)(i) of this section acquired for cash in an account on or after January 1, 2011, except stock for which the average basis method is available under § 1.1012-1(e).
(17) For purposes of this section, the terms debt instrument, bond, debt obligation, and obligation mean a debt instrument as defined in § 1.1275-1(d) and any instrument or position that is treated as a debt instrument under a specific provision of the Internal Revenue Code (for example, a regular interest in a REMIC as defined in section 860G(a)(1) and § 1.860G-1). Solely for purposes of this section, a security classified as debt by the issuer is treated as debt. If the issuer has not classified the security, the security is not treated as debt unless the broker knows that the security is reasonably classified as debt under general Federal tax principles or that the instrument or position is treated as a debt instrument under a specific provision of the Internal Revenue Code.
(x) Certain retirements. * * * The preceding sentence does not apply to a debt instrument issued on or after January 1, 2014.
(C) Short sale obligation transferred to another account. If a short sale obligation is satisfied by delivery of a security transferred into a customer's account accompanied by a transfer statement (as described in § 1.6045A-1(b)(7)) indicating that the security was borrowed, the broker receiving custody of the security may not file a return of information under this section. The Start Printed Page 23128receiving broker must furnish a statement to the transferor that reports the amount of gross proceeds received from the short sale, the date of the sale, the quantity of shares, units, or amounts sold, and the Committee on Uniform Security Identification Procedures (CUSIP) number of the sold security (if applicable) or other security identifier number that the Secretary may designate by publication in the Federal Register or in the Internal Revenue Bulletin (see § 601.601(d)(2) of this chapter). * * *
(i) * * * N indicates on the transfer statement that the transferred stock was borrowed in accordance with § 1.6045A-1(b)(7).
(2) Transactional reporting—(i) Required information. * * * In addition, for a sale of a covered security on or after January 1, 2014, a broker must report on Form 1099-B whether any gain or loss is ordinary. See paragraph (m) of this section for additional rules related to options and paragraph (n) of this section for additional rules related to debt instruments.
(ii) Specific identification of securities. Except as provided in § 1.1012-1(e)(7)(ii), for a specified security described in paragraph (a)(14)(i) of this section sold on or after January 1, 2011, or for a specified security described in paragraph (a)(14)(ii) of this section sold on or after January 1, 2014, a broker must report a sale of less than the entire position in an account of a specified security that was acquired on different dates or at different prices consistently with a customer's adequate and timely identification of the security to be sold. See § 1.1012-1(c). If the customer does not provide an adequate and timely identification for the sale, the broker must first report the sale of securities in the account for which the broker does not know the acquisition or purchase date followed by the earliest securities purchased or acquired, whether covered securities or noncovered securities.
(3) Sales between interest payment dates. For each sale of a debt instrument prior to maturity with respect to which a broker is required to make a return of information under this section, a broker must show separately on Form 1099 the amount of accrued and unpaid qualified stated interest as of the sale date that must be reported by the customer as interest income under § 1.61-7(d). See § 1.1273-1(c) for the definition of qualified stated interest. Such interest information must be shown in the manner and at the time required by Form 1099 and section 6049.
(6) Adjusted basis—(i) In general. * * * A broker is not required to consider transactions or events occurring outside the account except for an organizational action taken by an issuer during the period the broker holds custody of the security (beginning with the date that the broker receives a transferred security) reported on an issuer statement (as described in § 1.6045B-1) furnished or deemed furnished to the broker. Except as otherwise provided in paragraph (n) of this section, a broker is not required to consider customer elections. For rules related to the adjusted basis of a debt instrument, see paragraph (n) of this section.
(B) Basis of transferred securities * * *
(iii) Adjustments for wash sales—(A) In general. * * * The broker must increase the basis of the purchased security by the amount of loss disallowed on the sale transaction.
R, an employee of C, a corporation, participates in C's stock option plan. On April 2, 2014, C grants R a nonstatutory option under the plan to buy 100 shares of stock. The option becomes substantially vested on April 2, 2015. On October 2, 2015, R exercises the option and purchases 100 shares. On December 2, 2015, Start Printed Page 23129R sells the 100 shares. Under paragraph (d)(6)(ii)(A) of this section, C is required to determine adjusted basis from the amount R pays under the terms of the option. Under paragraph (d)(6)(ii)(A) of this section, C is not permitted to adjust basis for any amount R must include as wage income with respect to the October 2, 2015, stock purchase.
(7) Long-term or short-term gain or loss—(i) In general. * * * A broker is not required to consider transactions, elections, or events occurring outside the account except for an organizational action taken by an issuer during the period the broker holds custody of the security (beginning with the date that the broker receives a transferred security) reported on an issuer statement (as described in § 1.6045B-1) furnished or deemed furnished to the broker.
(8) Conversion into United States dollars of amounts paid or received in foreign currency—(i) Conversion rules—(A) When a payment other than a payment of interest is made in a foreign currency, a broker must determine the U.S. dollar amount of the payment by converting the foreign currency into U.S. dollars on the date it receives, credits, or makes the payment, as applicable, at the spot rate (as defined in § 1.988-1(d)(1)) or pursuant to a reasonable spot rate convention. (For interest payments, see paragraph (n)(4)(v) of this section concerning a customer's spot rate election.) * * *
(ii) Delayed effective date for certain options. Notwithstanding paragraph (m)(2)(i) of this section, if an option, stock right, or warrant is issued as part of an investment unit described in § 1.1273-2(h), paragraph (m) of this section applies to the option, stock right, or warrant if it is acquired on or after January 1, 2016.
(6) Determination of index status. Penalties will not be asserted under sections 6721 and 6722 if a broker in good faith determines that an index is, or is not, a narrow-based index described in section 1256(g)(6) and Start Printed Page 23130reports in a manner consistent with this determination.
(A) A debt instrument that provides for a single fixed payment schedule for which a yield and maturity can be determined for the instrument under § 1.1272-1(b);
(B) A debt instrument that provides for alternate payment schedules for which a yield and maturity can be determined for the instrument under § 1.1272-1(c); or
(C) A debt instrument for which the yield of the debt instrument can be determined under § 1.1272-1(d).
(B) A convertible debt instrument described in § 1.1272-1(e);
(I) A debt instrument that is issued as part of an investment unit described in § 1.1273-2(h); or
(J) A debt instrument evidenced by a physical certificate unless such certificate is held (whether directly or through a nominee, agent, or subsidiary) by a securities depository or by a clearing organization described in § 1.1471-1(b)(18).
(iii) Remote or incidental. For purposes of paragraphs (n)(2)(i) and (n)(2)(ii) of this section, a remote or incidental contingency (as determined under § 1.1275-2(h)) is ignored.
(i) Election to amortize bond premium. An election under section 171 and § 1.171-4 to amortize bond premium on a taxable debt instrument (this election applies to all taxable debt instruments held by a taxpayer during the taxable year the election is effective and thereafter; this election may be revoked with the consent of the Commissioner).
(iv) Election to treat all interest as OID. An election under § 1.1272-3 to treat all interest on a taxable debt instrument (adjusted for any acquisition premium or premium) as original issue discount (this election is generally made on an instrument-by-instrument basis and must be made for the taxable year the debt instrument is acquired by the taxpayer; this election may be revoked with the consent of the Commissioner).
(v) Election to translate interest income and expense at the spot rate. An election under § 1.988-2(b)(2)(iii)(B) to translate interest income and expense at the spot rate on the last day of the interest accrual period or, in the case of a partial accrual period, the last day of the taxable year (this election applies to all taxable debt instruments held by a taxpayer during the taxable year the election is effective and thereafter; this election may be revoked with the consent of the Commissioner).
(ii) Effect of customer notification of an election or revocation—(A) Election to amortize bond premium. If a customer notifies a broker in writing that the customer does not want the broker to take into account the election to amortize bond premium, the broker must report the information required under paragraph (d) of this section without taking into account the election to amortize bond premium. The customer must provide this notification to the broker by the end of the calendar year for which the customer does not want to amortize bond premium. If for a subsequent calendar year, the Start Printed Page 23131customer wants the broker to take into account the election to amortize bond premium, the customer must notify the broker in writing by the end of the calendar year that the customer wants to amortize bond premium. If the customer provides such notification, the broker must report the information required under paragraph (d) of this section as if the customer made the election to amortize bond premium for that year.
(ii) Amortizable bond premium—(A) Taxable bond. A broker is required to adjust the customer's basis for any taxable bond acquired at a premium and held in the account in accordance with § 1.1016-5(b). If a customer, however, informs a broker under the rules in paragraph (n)(5)(ii)(A) of this section that the customer does not want to amortize bond premium, the broker must not adjust the customer's basis for any premium.
(B) Tax-exempt bonds. A broker is required to adjust the customer's basis for any tax-exempt obligation acquired at a premium and held in the account in accordance with § 1.1016-5(b).
(iii) Acquisition premium. If a debt instrument is acquired at an acquisition premium (as determined under § 1.1272-2(b)(3)), a broker must decrease the customer's basis in the debt instrument by the amount of acquisition premium that is taken into account each year to reduce the amount of the original issue discount that is otherwise includible in the customer's income for that year. See § 1.1272-2(b)(4) to determine the amount of the acquisition premium taken into account each year. However, if a customer informs a broker under the rules in paragraph (n)(5) of this section that the customer elects under § 1.1272-3 to use a constant yield to amortize the acquisition premium, then the broker must decrease the customer's basis in the debt instrument by the amount of acquisition premium that is taken into account each year to reduce the amount of the original issue discount that is otherwise includible in the customer's income for that year in accordance with § 1.1272-2(b)(5) and § 1.1272-3.
(v) Principal and certain other payments. A broker must decrease the customer's basis in a debt instrument by the amount of any payment made to the customer during the period the debt instrument is held in the account, other than a payment of qualified stated interest as defined in § 1.1273-1(c).
(8) Accrual period. For purposes of this section, a broker generally must use the same accrual period that is used to report any original issue discount or stated interest to a customer under section 6049 for a debt instrument. In any other situation, a broker must use a semi-annual accrual period or, if a debt instrument provides for scheduled payments of principal or interest at regular intervals of less than six months over the entire term of the debt instrument, a broker must use an accrual period equal in length to this shorter interval. For example, if a debt instrument provides for monthly payments of interest over the entire term of the debt instrument, the broker must use a monthly accrual period. The rules in § 1.1272-1(b)(4)(iii) apply for purposes of an initial short accrual period. In computing the length of an accrual period, any reasonable counting convention may be used (for example, 30 days per month/360 days per year, or actual days per month/365 days per year).
(9) Premium on convertible bond. If a customer acquires a convertible bond (as defined in § 1.171-1(e)(1)(iii)(C)) at a premium (as determined under § 1.171-1(d)), then, solely for purposes of this section and § 1.6049-9T, a broker must Start Printed Page 23132assume that the premium is attributable to the conversion feature. Based on this assumption, no portion of the premium is amortizable for purposes of this section and § 1.6049-9T.
1. Adding new paragraph (a)(1)(vi) and revising paragraph (b)(1) introductory text and paragraph (b)(1)(v).
2. Revising the second sentence of paragraph (b)(1)(vii).
3. Redesignating paragraphs (b)(2) through (b)(9) as paragraphs (b)(5) through (b)(12) respectively.
4. Redesignating paragraph (b)(1)(viii) as paragraph (b)(2).
5. Revising the introductory text to newly redesignated paragraph (b)(2).
6. Adding new paragraphs (b)(3) and (b)(4).
7. Revising newly redesignated paragraph (b)(5).
8. Revising the first and last sentences of newly redesignated paragraph (b)(6).
9. Revising newly redesignated paragraph (b)(8)(ii).
10. Revising the first sentence of newly redesignated paragraph (b)(9)(ii).
11. Revising the introductory text to newly redesignated paragraph (b)(9)(iii), the fifth sentence of paragraph (b)(9)(iii) Example 1, and the second sentence of paragraph (b)(9)(iii) Example 2.
12. Revising the last sentence of newly redesignated paragraph (b)(10).
13. Redesignating the text of newly redesignated paragraph (b)(12) as paragraph (b)(12)(i), adding a heading for newly redesignated paragraph (b)(12)(i), and adding new paragraph (b)(12)(ii).
(vi) Section 1256 options. A transferor of an option described in § 1.6045-1(m)(3) is not required to furnish a transfer statement.
(v) Security identifiers. The Committee on Uniform Security Identification Procedures (CUSIP) number of the security transferred (if applicable) or other security identifier number that the Secretary may designate by publication in the Federal Register or in the Internal Revenue Bulletin (see § 601.601(d)(2) of this chapter), quantity of shares, units, or amounts, and classification of the security (such as stock or debt).
(vii) Adjusted basis and acquisition date.* * * The transferor must determine this information as provided under §§ 1.6045-1(d), 1.6045-1(m), and 1.6045-1(n), including reporting the adjusted basis of the security in U.S. dollars.* * *
(i) A description of the payment terms used by the broker to compute any basis adjustments under § 1.6045-1(n);
(vi) Any market discount that has accrued as of the transfer date (as determined under § 1.6045-1(n));
(vii) Any bond premium that has been amortized as of the transfer date (as determined under § 1.6045-1(n));
(viii) Any acquisition premium that has been amortized as of the transfer date (as determined under § 1.6045-1(n)); and
(ix) Whether the transferring broker has computed any of the information described in this paragraph (b)(3) by taking into account one or more elections described in § 1.6045-1(n), and, if so, which election or elections were taken into account by the transferring broker.
(6) Transfers of noncovered securities. The information described in paragraphs (b)(1)(vii), (b)(3), (b)(4), (b)(8), and (b)(9) of this section is not required for a transfer of a noncovered security if the transfer statement identifies the security as a noncovered security. * * * For purposes of this paragraph (b)(6), a transferor must treat a security for which a broker makes a single-account election described in § 1.1012-1(e)(11)(i) as a covered security.
(ii) Subsequent transfers of gifts by the same customer. If a transferor transfers to a different account of the same customer a security that a prior transfer statement reported as a gifted security, the transferor must include on the Start Printed Page 23133transfer statement the information described in paragraph (b)(9)(i) of this section for the date of the gift to the customer. * * *
(12) Failure to receive a complete transfer statement—(i) In general. * * *
(ii) Transition rules for transfers of debt instruments, options, and securities futures contracts. If an option described in § 1.6045-1(a)(14)(iii), a securities futures contract described in § 1.6045-1(a)(14)(iv), or a debt instrument described in § 1.6045-1(a)(15)(i)(C) is transferred in 2014 and no transfer statement is received, the receiving broker is not required to request a transfer statement from the transferor and may treat the security as a noncovered security. If a debt instrument described in § 1.6045-1(a)(15)(i)(D) is transferred in 2016 and no transfer statement is received, the receiving broker is not required to request a transfer statement from the transferor and may treat the security as a noncovered security.
(1) A transfer on or after January 1, 2011, of stock other than stock in a regulated investment company within the meaning of § 1.1012-1(e)(5);
(3) A transfer on or after January 1, 2015, of an option described in § 1.6045-1(a)(14)(iii), a securities futures contract described in § 1.6045-1(a)(14)(iv), or a debt instrument described in § 1.6045-1(a)(15)(i)(C); and
(4) A transfer on or after January 1, 2017, of a debt instrument described in § 1.6045-1(a)(15)(i)(D).
1. Adding two new sentences at the end of paragraph (a)(3).
2. Redesignating paragraph (h) as paragraph (j), adding new paragraph (h), adding and reserving paragraph (i), and revising newly-designated paragraph (j).
§ 1.6045B-1
Returns relating to actions affecting basis of securities.
(3) Exception for public reporting. * * * An issuer may electronically sign a return that is publicly reported in accordance with this paragraph (a)(3). The electronic signature must identify the individual who attests to the declaration in the jurat.
(1) Organizational actions occurring on or after January 1, 2011, that affect the basis of specified securities within the meaning of § 1.6045-1(a)(14)(i) other than stock in a regulated investment company within the meaning of § 1.1012-1(e)(5);
(3) Organizational actions occurring on or after January 1, 2014, that affect the basis of debt instruments described in § 1.6045-1(n)(2)(i) (not including the debt instruments described in § 1.6045-1(n)(2)(ii));
(4) Organizational actions occurring on or after January 1, 2016, that affect the basis of debt instruments described in § 1.6045-1(n)(3);
(5) Organizational actions occurring on or after January 1, 2014, that affect the basis of options described in § 1.6045-1(a)(14)(iii); and
(6) Organizational actions occurring on or after January 1, 2014, that affect the basis of securities futures contracts described in § 1.6045-1(a)(14)(iv).
Premium subject to reporting for a debt instrument acquired on or after January 1, 2014 (temporary).
(a) General rule. Notwithstanding § 1.6049-5(f), for a debt instrument acquired on or after January 1, 2014, if a broker (as defined in § 1.6045-1(a)(1)) is required to file a statement for a debt instrument under § 1.6049-6, the broker generally must report any bond premium (as defined in § 1.171-1(d)) or acquisition premium (as defined in § 1.1272-2(b)(3)) for the calendar year. This section, however, only applies to a debt instrument that is a covered security as defined in § 1.6045-1(a)(15).
(b) Reporting of bond premium amortization. Unless a broker has been notified in writing in accordance with § 1.6045-1(n)(5) that a customer does not want to amortize bond premium under section 171, the broker must report the amount of any amortizable bond premium allocable to a stated interest payment made to the customer during the calendar year. See §§ 1.171-2 and 1.171-3 to determine the amount of amortizable bond premium allocable to a stated interest payment. Instead of reporting a gross amount for both stated interest and amortizable bond premium, a broker may report a net amount of stated interest that reflects the offset of the stated interest payment by the Start Printed Page 23134amount of amortizable bond premium allocable to the payment. In this case, the broker must not report the amortizable bond premium as a separate item. This paragraph (b) also applies to amortizable bond premium on a tax-exempt obligation, which is required to be amortized under section 171.
(c) Reporting of acquisition premium amortization. A broker must report the amount of any acquisition premium that reduces the amount of original issue discount includible in income by the customer during a calendar year. Unless a broker has been notified in writing in accordance with § 1.6045-1(n)(5) that a customer has made an election under § 1.1272-3 to use a constant yield to amortize the acquisition premium, the broker must use the rules in § 1.1272-2(b)(4) to determine the amount of acquisition premium. Instead of reporting a gross amount for both original issue discount and acquisition premium, a broker may report a net amount of original issue discount that reflects the offset of the original issue discount includible in income by the customer for the calendar year by the amount of acquisition premium allocable to the original issue discount. In this case, the broker must not report the acquisition premium as a separate item. This paragraph (c) does not apply to a tax-exempt obligation.
1.6045-1(n)(5) 1545-2186