In late November, the IRS released proposed regulations (REG-102988-11) clarifying how debt instruments and options will be treated under the new securities basis information reporting regime of Sec. 6045.
The IRS had previously addressed treatment of stock under the reporting requirement, which was instituted by the Energy Improvement and Extension Act of 2008, P.L. 110-343. Generally, Sec. 6045, as amended by the act, requires securities brokers and other affected persons to report to the IRS and customers (on Form 1099-B, Proceeds From Broker and Barter Exchange Transactions) the adjusted basis of covered securities sold and whether any gain or loss upon their sale is long or short term. It requires securities brokers to begin providing this information with respect to corporate stock purchased in 2011 and later years, or beginning in 2012 with respect to stock for which an average-basis method is permissible under Sec. 1012. Reporting on all other specified securities, including debt instruments and options, will begin with securities acquired or granted after Dec. 31, 2012. Final regulations issued in October 2010 (T.D. 9504) addressed average-basis methods and other basis determination and reporting issues (see JofA online news coverage).
The proposed regulations would amend Regs. Secs. 1.6045-1, 1.6045A-1 and 1.6045B-1 to extend to debt instruments and stock options acquired or granted after Jan. 1, 2013, the general rules that currently apply to stock. In addition, the general rules relating to transfer statements and issuer statements are extended to debt instruments and options. The proposed regulations also reconcile differences among stock, debt instruments and stock options by providing additional definitions and guidelines:
Options. Regs. Sec. 1.6045-1 adds options to the definition of “security” and clarifies that an option on one or more specified securities and indexes of such a specified security or financial attributes of such a specified security are “covered” securities.
The proposed regulations change the definition of a “closing transaction” to include the cancellation, lapse, expiration or other termination of an option as well as a cash settlement. The regulations distinguish between option transactions that are physically settled and those that are not physically settled. Brokers must adjust premiums paid or received into the basis reported for options that have been physically settled. The gross proceeds from sold options or options that are part of a closing transaction that does not require physical settlement must be reported, as well as whether the gain or loss was long or short term. Broker reporting requirements would include warrants and stock rights in a Sec. 305(a) distribution.
The proposed regulations carve out an exception for compensation-related options. A broker is not required to adjust the basis of compensation-related stock for amounts included as compensation income. The regulations note that a taxpayer may be required to provide a reconciliation of basis in such cases.
Debt instruments. The proposed regulations define “debt instrument” broadly but exclude debt instruments described in Sec. 1272(a)(6) (debt instruments with principal subject to acceleration). Brokers must determine and account for original issue discount, bond premium, acquisition premium, market discount and principal payments to comply with reporting requirements. A broker is not required to consider elections that may be made outside the account. In other words, the broker can assume that the customer has not made any elections with respect to the debt instrument. The proposed regulations provide two exceptions to this rule: (1) The broker must assume the customer has elected to use a constant interest rate to determine the amount of accrued market discount, and (2) the broker must assume that the customer has elected to amortize the bond premium. The IRS notes that this latter assumption is at odds with reporting requirements of Form 1099-INT, Interest Income, and Form 1099-OID, Original Issue Discount, and that the customer is not bound by the assumptions that the broker uses to satisfy the reporting requirements.
Changes affecting all securities. The IRS used these proposed regulations as an opportunity to respond to requests related to the October 2010 final regulations. The proposed regulations amend the earlier regulations to require brokers to reduce gross proceeds by commissions and transfer taxes related to a sale rather than allowing them to choose how to report the closing costs.
Regs. Secs. 1.6045A-1 and 1.6045B-1 are amended to include debt instruments and options in the reporting requirements for securities transferred between brokers and for issuers of securities.
The proposed regulations would take effect when published in the Federal Register as final.
By Dayna E. Roane, CPA, M. Tax., Perry & Roane PC, Boulder, Colo.
More from the JofA:
Find us on Facebook | Follow us on Twitter | View JofA videos