Final regulations amend broker basis reporting requirements

The IRS issued final and temporary regulations providing rules for brokers to report bond premium and acquisition premium as well as governing information reporting of transactions involving debt instruments and options. These rules and information reporting include the reporting of original issue discount (OID) on tax-exempt obligations, the treatment of certain holder elections for reporting a taxpayer’s adjusted basis in a debt instrument, and a new requirement to report transfers of Sec. 1256 options and debt instruments.

Under Sec. 6045, a broker is required to report gross proceeds on the sale of a security, its adjusted basis, and whether the gain or loss is long-term or short-term. Sec. 6045A requires certain information to be reported when a security is transferred to another broker, and Sec. 6045B requires an issuer of a specified security to file a return relating to certain actions that affect the basis of the security. Finally, Sec. 6049 requires interest payments (including accruals of OID treated as payments) to be reported. Final and temporary regulations governing these reporting requirements were issued in 2013. The IRS issued the new regulations in response to comments received on the 2013 rules.

OID adjusted for acquisition premium: One change from the 2013 regulations involves how a broker must report OID adjusted for an acquisition premium. For a debt instrument acquired on or after Jan. 1, 2015, even if a customer has elected to amortize acquisition premium based on a constant yield, a broker cannot take the election into account when reporting acquisition premium.

Basis calculation elections: Another significant change from the 2013 regulations involves the requirement that a customer notify a broker of how it wants the broker to calculate its basis using certain available elections. To minimize the burden on taxpayers, the new rule presumes a customer has made a Sec. 1276(b)(2) election (constant interest rate instead of ratable accrual), unless the customer notifies that broker otherwise.

Options on debt instruments: To conform the reporting requirements for gross proceeds on an option on a debt instrument that requires a payment of either interest or principal in a currency other than the U.S. dollar or an option on a debt instrument issued by a non-U.S. issuer to the reporting requirements for basis on these options, these regulations delay reporting for both gross proceeds and basis on these options to Jan. 1, 2016.

Elections to treat interest as OID: Under the 2013 regulations, brokers were required to recognize an election under Regs. Sec. 1.1272-3, which permits customers to treat all interest as OID. Because brokers commented about difficulties with this rule and the IRS recognized that most customers did not make the election, brokers may not take into account any election to treat all interest as OID when calculating basis. This new rule applies to a debt instrument acquired on or after Jan. 1, 2015, but brokers may rely on it for debt instruments acquired on or after Jan. 1, 2014.

OID for tax-exempt obligations: Another clarification involves how to report OID for tax-exempt obligations. For tax-exempt obligations acquired on or after Jan. 1, 2017, a broker may report either a gross amount for both OID and amortized 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.  

Transfers of Sec. 1256 options: Another significant change to the 2013 regulations is a new rule requiring brokers to report transfers of Sec. 1256 options to other brokers. Because this new rule reverses the rule in the earlier regulations, it will apply only to transfers of these options that occur on or after Jan. 1, 2016.

• T.D. 9713

—By Sally P. Schreiber, J.D., a JofA senior editor.