Regulations: Broker reporting, premium, basis in securities, debt instruments, options

Regulations: Broker reporting, premium

The Treasury Department and IRS today released for publication in the Federal Register final and temporary regulations (T.D. 9713) and, by cross-reference, proposed regulations (REG-143040-14) concerning information reporting by brokers for:

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  • Bond premium and acquisition premium
  • Transactions involving debt instruments and options, including:
    • 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
    • Transfer reporting for section 1256 options and debt instruments

 

Read text of the regulations—T.D. 9713 [PDF 217 KB] and REG-143040-14 [PDF 227 KB]

Comments on the proposed regulations are due by a date that is 90 days after publication in theFederal Register, scheduled for March 13, 2015

Overview

As explained in the preamble, provisions in these regulations require a broker or payor to report amortizable bond premium on taxable and tax-exempt debt instruments acquired on or after January 1, 2014, and acquisition premium on taxable debt instruments acquired on or after January 1, 2014—thus, providing information that enables the IRS to verify that a taxpayer is reporting the correct amount of interest (including OID) each year.

Also, this information is used to report a taxpayer’s adjusted basis in a debt instrument under section 6045(g)—further enabling the IRS to verify that a taxpayer is reporting the correct amount of gain or loss upon the sale of a debt instrument.

Provisions of the temporary regulations require a broker to report OID and acquisition premium on tax-exempt obligations acquired on or after January 1, 2017—i.e., to reflect proper taxpayer reporting of tax-exempt interest each year for alternative minimum tax and other purposes. This information also is used to report a taxpayer’s adjusted basis in a debt instrument—allowing for verification of the reporting of the correct amount of gain or loss upon the sale of a tax- exempt obligation.

Transfer statement reporting

Previously, a broker did not have to provide a transfer statement for a section 1256 option, and did not have to provide the last date on or before the transfer date that the broker made an adjustment for a particular item relating to a debt instrument. Today’s temporary regulations now require a broker to transfer this information for a section 1256 option transferred on or after January 1, 2016, and for a debt instrument transferred on or after June 30, 2015.

On the transfer of a covered security, the transferring broker is required to provide to the transferee broker a transfer statement containing certain information relating to the security. This transfer statement generally provides the transferee broker with information needed to determine a customer’s adjusted basis and whether any gain or loss with respect to the security is long-term, short-term, or ordinary. This information must be transferred for a section 1256 option transferred on or after January 1, 2016, and for a debt instrument transferred on or after June 30, 2015.

Elections

The holder of a debt instrument is permitted to make a number of elections that may affect how basis is computed. Also, a broker is required to take into account certain specified elections in reporting information to a customer. The customer, therefore, must provide certain information concerning an election to the broker in a written notification (including a writing in electronic format).

Certain specified elections include:

  • The election under Reg. section 1.1272-3 to treat all interest as OID (“all OID election”)
  • The election under section 1276(b)(2) to accrue market discount on a constant yield method, in reporting information to the customer

Although the “all OID election” is made on a bond-by-bond basis, an election would deem the holder to make certain elections for the holder’s other bonds (that is, the amortizable bond premium election and the election under section 1278(b) to include market discount in income as it accrues). Under the existing final regulations, a broker was required to take into account a holder’s election under Reg. section 1.1272-3 for the bond for which the election was made and for the reporting of amortizable bond premium or market discount with respect to other bonds held by the holder. Because of the burden placed on brokers by the existing rule, the temporary regulations change the rule and provide that a broker must not take into account the election under Reg. section 1.1272-3 in reporting a customer’s adjusted basis in a debt instrument. Therefore, a customer is no longer required to notify the broker that the customer has made or revoked an election under Reg. section 1.1272-3.

Also under the temporary regulations, a broker must take into account the election under section 1276(b)(2) unless the customer timely notifies the broker that the customer has not make the election. The temporary regulations reverse the assumption in existing regulations, and because the section 1276(b)(2) election results in what is identified as a more taxpayer-favorable result than the default ratable method for accruing market discount in most cases, the preamble states that it is anticipated that more customers will want to use this method and that these customers will no longer need to notify their brokers that they have made the election.

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