Cost Basis Reporting: Issues for Transfer Agents

Transcription

1 SECURITIES TRANSFER ASSOC. ANNUAL MEETING Cost Basis Reporting: Issues for Transfer Agents Stevie D. Conlon Tax Director, GainsKeeper October 23, 2009 Amelia Island, FL

2 Overview An overview of the new cost basis law, its requirements and penalty risks Key focus on issues for transfer agents: LOT RELIEF METHODS & AVERAGING DISTINGUISHING DRIP ELIGIBLE STOCK FROM NON- DRIP WASH SALES TRANSFER REPORTING New issuer corporate action reporting rules Key concerns for transfer agents

3 Cost Basis Reporting is Law Included as part of H.R. 1424, the Emergency Economic Stabilization Act of 2008 (EESA), enacted in response to the financial market crisis Signed into law by President Bush on Friday, October 3, 2008 (Pub. L. No ) Cost basis reporting is Section 403 of the Act Text of cost basis reporting provision is at

4 What Must Brokers Report? Brokers currently report gross proceeds for securities sales on Form 1099-B (under Code Sec. 6045) Law adds new Code Sec. 6045(g) The law requires brokers to report the customer's adjusted basis in such security and whether any gain or loss with respect to such security is long-term or short-term

5 Who Must Report? Same person who files current Form 1099-B any person that stands ready to effect sales made by others (including a person that regularly retires its own debt or redeems its own stock) ( effect means either as agent or principal) Examples: mutual fund; broker; custodian; escrow agent; stock transfer agent; Filing obligation generally rests with last person in line that actually makes the payment to the customer Brokers = Transfer Agents

6 Key Additional New Rules To provide brokers & transfer agents with needed information to comply with cost basis reporting there are two additional key new rules: Transfer reporting New Code Sec. 6045A requires a broker, transfer agent or others to provide cost basis information to a broker when securities are transferred Issuer reporting New Code Sec. 6045B requires issuers of securities to report to IRS and holders regarding corporate action events

7 Penalty Risks Tax penalty risks raise the bar $100 per return for incorrect returns (up to $350,000 per year) Greater of $200 or 10% of amount that should have been reported if intentional disregard (with no maximum limit) 2 separate penalties 1 relating to forms to IRS (Code Sec. 6721) & 1 to forms to taxpayers Tax penalties could be increased

8 Effective Dates Staggered effective dates: Stock Jan. 1, 2011 Mutual fund share & DRIP shares Jan. 1, 2012 Fixed income & Options Jan. 1, 2013 Securities covered in later effective dates require more preparation due to greater tax complexities

9 Need to be Ready by January 2011 Systems must have lot relief method working to match sales with lots during 2011 For customer account transfers during 2011, brokers & transfer agents must provide a statement with adjusted cost basis and holding period information to receiving broker within 15 days of transfer (This also justifies need for real time or daily system as opposed to year end batch)

10 Key Requirements Adjusted basis must be reported (new Code Subsection 6045(g)) Long-term/short-term gain/loss must be reported (holding period accuracy) Basis must be adjusted for wash sales Multiple lot relief methods must be supported Special corporate action and broker transfer reporting rules (new Code Sections 6045B & 6045A-45 & 15 days)

11 Other Important Details Deadline for Form 1099-B delivery to customers would be changed from January 31 to February 15 (effective for 2009) S corporations would be treated as partnerships subject to Form 1099-B reporting purposes (effective January 1, 2012)

12 Pending IRS Guidance In February 2009, IRS issued Notice soliciting public comments on 36 issues IRS has indicated that it intends to issue proposed guidance and then revise after receiving additional public comments IRS wants to issue final regulations by end of 2009 It would not be surprising for guidance to be issued later less than a year before 2011 initial deadline Guidance will likely not be comprehensive and could be released in phases at different times Securities Transfer Assoc. has submitted comments and met with IRS and Treasury

13 Key Issues For Transfer Agents LOT RELIEF METHODS & AVERAGING DISTINGUISHING DRIP ELIGIBLE STOCK FROM NON-DRIP WASH SALES MECHANICS & DETAILS OF TRANSFER REPORTING

14 Lot Relief Methods - Stock Generally, FIFO method applies unless customer notifies broker and has adequately identified specific shares (HIFO, and other methods) Lot relief method is applied on by customer and by security basis

15 Lot Relief Methods Mutual Fund & DRIP Shares Mutual fund & DRIP shares acquired on or after Jan. 1, 2012 broker determines method unless customer notifies broker and elects another method The customer election out means broker must provide all available methods as an option

16 Averaging for Mutual Funds & DRIP Single category or double category averaging permitted in regulations They have special wash sale rules Effective date means two averaging pools for each customer s shares pre-effective and posteffective Fund (or broker as nominee) can make a single account election to create one averaging pool per customer s shares

17 Distinguishing DRIP Eligible Stock What is a Dividend Reinvestment Plan? The term `dividend reinvestment plan' means any arrangement under which dividends on any stock are reinvested in stock identical to the stock with respect to which the dividends are paid. Why is it important to determine DRIP or NON- DRIP? DRIP shares are subject to cost basis reporting for shares acquired on or after Jan., DRIP shares are eligible for averaging BROKER drives lot relief election (but with opt-out) Can other identical shares be commingled?

18 Wash Sales Wash sales trigger complex basis and holding period adjustments Wash sales typically force the subdivision of tax lots into sub-lots Ordering rules mandate the application of specific wash sale deferrals to particular lots (or portions of lots) Adjustments must be tracked to prevent double counting Holding period adjustments must also be tracked

19 The Scalability Issue with Wash Sale Processing Most tax lot systems do not support sub-lots (required for wash sale adjustments). 392,932,556 2,000,000 6,837,050 The volume of tax lots when not adjusting for wash sales 61,576, ,296,682 The volume of tax lots when adjusting for wash sales 300% increase.

20 Transfer Reporting New Code Sec. 6045A requires applicable persons to provide a broker with cost basis information within 15 days of the transfer of securities to a broker Many details of the law have been left to IRS guidance that has not yet been issued for example what information must be provided and in what format? DTCC has a CBRS service but it is only available to DTCC members

21 Open Issues Who is an applicable person? Includes brokers and others as provided by IRS Who is a broker (Sec. 6045(c)(1))? Examples: [an issuer] that regularly issues and retires its own debt obligations or a corporation that regularly redeems its own stock. Treas. Reg. Sec (a)(1) A stock transfer agent for a corporation. A dividend reinvestment agent for a corporation Treas. Reg. Sec (b), Example 1(iv) and (v). Some issuers are considered brokers due to nature and volume of their activity How will non-dtcc members such as corporate issuers and shareholder services groups provide transfer information?

22 Transfer Reporting Penalties Failure to comply with transfer reporting results in same potential penalty risk as other information returns including cost basis reporting discussed earlier $100 per return for incorrect returns (up to $350,000 per year) Greater of $200 or 10% of amount that should have been reported if intentional disregard (with no maximum limit)

23 Issuer Corporate Action Reporting Cost basis law includes new Code Sec. 6045B that requires issuers to report corporate action events to IRS and holders Corporate actions events include splits, reorgs anything that affects basis Issuer must report quantitative effect on basis of corporate actions on a new type of information return to IRS by the earlier of 45 days after event or Jan. 15 of following year Must report to holders by Jan. 15 of following year

24 Effective Dates Same effective dates as cost basis reporting initial effective date for equities (January 1, 2011) Effective date relates to actions occurring on or after January 1 st for all specified securities outstanding ( specified versus covered ) Impact on option, debt security and possibly derivative instrument reporting under later effective dates unclear who is the issuer and current trustee/paying agent reporting

25 Issuer Reporting Penalties Failure to comply with issuer reporting results in same potential penalty risk as other information returns including cost basis reporting discussed earlier $100 per return for incorrect returns (up to $350,000 per year) Greater of $200 or 10% of amount that should have been reported if intentional disregard (with no maximum limit)

26 Open Issues Tax form for reporting does not yet exist Many details of law left to IRS guidance that has not yet been issued for example how detailed is quantitative effect reporting? What if there is no clear or single answer? Very little public comment on issuer reporting Sec. 6045B(e) permits IRS to waive reporting requirement if information is made publicly available in a manner specified by IRS no guidance yet on this provision

27 Key Observations for Transfer Agents Significant burden to comply with cost basis reporting The rules are complex and will require substantial calculation decisions: LOT Relief methods DRIP (applicable effective date & averaging) versus Non-DRIP Wash Sales The rules essentially require daily calculations of cost basis rather than year-end due to transfer reporting

28 Additional Observations - 1 New issuer reporting rule requires more detailed tax reporting of corporate actions by issuers with non-calendar year reporting deadlines (45 days) Some issuers or their agents are also brokers for 1099-B purposes today or could be applicable persons that also be subject to transfer reporting of cost basis due to the level or nature of their activities

29 Additional Observations - 2 Transfer reporting triggers much more complicated cost basis (corporate actions and wash sales) and reporting obligations (including 15 day reporting to transferee) Issuers subject to 1099-B broker reporting will need to provide S corporations with 1099s Fear of the corrected 1099 Significant tax penalty risks mandate compliance

30 Additional Resources Whitepaper: The New Cost Basis Reporting Law: An Overview Copies of the law, comments and other materials including reprints of recent cost basis law article for SIFMA Dividend Digest Newsletter and others All available at

31 Stevie D. Conlon, Tax Director GainsKeeper, Wolters Kluwer Financial Services Ms. Conlon authored Wolters Kluwer Financial Services comments on IRS Notice , its comments to the Senate Finance Committee staff on an earlier version of cost basis reporting, as well as numerous articles on the law including: New Cost Basis Reporting Law Creates Challenges for Brokers, Journal of Taxation of Financial Products, (Jan. 2009). Before joining GainsKeeper, Stevie was Senior Tax Editor for Capital Changes. She is a former Chair of the American Bar Association Tax Section Financial Transactions Committee, a former Tax Section Council Director, former Chair of the Chicago Bar Association Federal Taxation Committee and a Fellow of the American College of Tax Counsel. An author of a tax law treatise and over 35 tax articles, Ms. Conlon has extensive experience regarding the taxation of financial products and corporate actions, was previously a tax partner in national law firms, is a member of the New York and Illinois Bars, and is a Certified Public Accountant (CPA).

32 Considerations GainsKeeper does not provide tax advice. You should consult your own tax advisers and they (and not GainsKeeper) are solely responsible for any tax, tax penalties or interest related to their tax returns GainsKeeper is a tool to assist taxpayers but does not cover a variety of specific tax rules or taxpayer circumstances and facts