Regulations Proposed on Basis Reporting by Brokers

The IRS issued proposed regulations (REG-101896-09) on Wednesday relating to how securities brokers report sales to the IRS and how stock basis is determined. The regulations project also proposes to set a Feb. 15 deadline for brokers to supply certain information statements. The proposed rules reflect changes made in 2008 by the Energy Improvement and Extension Act, PL 110-343.

Reporting by Brokers

Under IRC § 6045, as amended in 2008, brokers are required to report to the IRS their customers’ adjusted basis in securities sold and to classify the customers’ gain as long term or short term. This requirement applies to any broker who is subject to the gross proceeds reporting requirements of section 6045(a) with respect to the sale of covered securities (as defined in section 6045(g)(3)(A)).

For most corporate stock, this reporting requirement will apply to any sale after Jan. 1, 2011. For regulated investment company or dividend reinvestment plan stock, the applicable date is Jan. 1, 2012. The information is reported on Form 1099-B, Proceeds From Broker and Barter Exchange Transactions.

Basis Determination

The basis reported by a broker is generally the total amount paid by the customer adjusted for commissions and the effects of other transactions occurring within the account. The proposed regulations contain detailed rules for determining the customer’s basis in the stock sold.

Under the proposed rules, brokers would be required to adjust the basis they report to take into account information received on a transfer statement in connection with the transfer of a covered security (including transfers from a decedent and gift transfers) as well as information received from issuers of stock about the quantitative effect on basis from corporate actions. However, the proposed regulations generally do not require a broker to adjust the reported basis for transactions, elections or events occurring outside the account.

The proposed regulations clarify that, when a customer sells less than the entire amount of a security held in an account, the selling broker must follow the customer’s instructions, if any, for adequately identifying the security sold. If applicable, the broker must follow a customer’s instruction that average basis be used to compute the basis of the stock.

Due Date

The due date to furnish to customers payee statements required under IRC § 6045 was extended by statute from Jan. 31 to Feb. 15, effective for statements required to be furnished after Dec. 31, 2008. In addition to forms such as 1099-B, the Feb. 15 due date also applies to any other statement required to be furnished on or before Jan. 31 of a calendar year if it is furnished with a statement required under section 6045 in a consolidated reporting statement. The proposed regulations define “consolidated reporting statement” as a grouping of statements furnished to the same customer or same group of customers on the same date whether or not the statements are furnished with respect to the same or different accounts or transactions.

The proposed regulations require that the grouping of statements be limited to those furnished to the customer based on the same relationship as the statement furnished under section 6045 (for example, broker, payor or real estate settlement agent), and not as a result of any other relationship between the parties such as debtor to creditor or employer to employee.

Based on this limitation, the IRS says the following forms may be furnished in a consolidated reporting statement with a statement required under section 6045:

• Form 1099-DIV, Dividends and Distributions;
• Form 1099-INT, Interest Income;
• Form 1099-MISC, Miscellaneous Income;
• Form 1099-OID, Original Issue Discount;
• Form 1099-PATR, Taxable Distributions Received From Cooperatives;
• Form 1099-Q, Payments From Qualified Education Programs (Under Sections 529 and 530);
• Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.;
• Form 3921, Exercise of an Incentive Stock Option Under Section 422(b) (this form is currently in development);
• Form 3922, Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section 423(c) (this form is currently in development); and
• Form 5498, IRA Contribution Information.

The IRS has requested comments on whether any other forms should be included in the definition of consolidated reporting statement.

For statements filed by brokers with respect to sales, the proposed regulations acknowledge that a customer may not sell securities in an account in every year and, thus, may not receive Form 1099-B every year. The proposed regulations provide that a broker may treat any customer as receiving a required statement under section 6045 if the customer has an account for which a statement would be required to be furnished under section 6045 had a sale occurred during the year.

Public Hearing

The IRS has scheduled a public hearing on the proposed regulations for Feb. 17, 2010, beginning at 10 a.m., in the auditorium of the IRS New Carrollton Federal Building in Lanham, Maryland.