You re Doing Cost Basis Reporting But Are You Doing It Right?

Transcription

1 You re Doing Cost Basis Reporting But Are You Doing It Right? Stevie D. Conlon Senior Director & Tax Counsel, Wolters Kluwer Financial Services Securities Transfer Association Annual Meeting October 21, 2011

2 Overview Introduction Applicability of Cost Basis Reporting to Transfer Agents Penalty Risks for Noncompliance and Errors Cost Basis Reporting Basics for Issuers, Brokers & Transferors Transfer Reporting Starts in Jan., 2012 Issuer Corporate Action Reporting Starts in Jan., 2012 Special Burdens for Gifted & Inherited Shares Basis Averaging Complexities for DRP stock 2

3 Cost Basis Law Overview Regulatory requirement for brokers, transfer agents and issuers to report cost basis information to IRS & taxpayers enacted in 2008 Three staggered effective dates for different types of securities: Stock acquired on or after Jan. 1, 2011; Mutual fund & dividend reinvestment plan stock acquired on or after Jan. 1, 2012; Debt & options acquired on or after Jan. 1, 2013; Plus, other IRS designated securities after Jan. 1, Final regs for stocks and mutual fund shares issued Oct (TD 9504) Transfer reporting effectively delayed until 2012 per Notice Issuer reporting for corporate actions occurring during 2011 effectively delayed until Jan. 18, 2012 per Notice Significantly higher tax penalties per Small Business Jobs Act of 2010 (P.L. No ) enacted on Sept. 27,

4 Transfer Agents Subject to Cost Basis Law A transfer agent is subject to transfer reporting and must provide cost basis information to the receiving broker within 15 days of the date of transfer for each tax lot of a covered security A transfer agent may be subject to issuer reporting as the agent of the issuer of a specified security and would need to provide the IRS and holders with corporate action information within 45 days of the date of the corporate action or Jan. 15 th of the following calendar year A transfer agent could be a broker and would be required to provide cost basis on Form 1099-B to the IRS and taxpayers for covered securities 4

5 Assessing the Transfer Agent s CBRL Obligation Transfer agent currently provides data for or prepares Form 1099-B this transfer agent is likely a broker subject to almost all of the cost basis reporting rules any person U.S. or foreign, that, in the ordinary course of a trade or business during the calendar year, stands ready to effect sales to be made by others. Transfer agent represents the issuer of stock this transfer agent could be responsible for issuer reporting of corporate actions on Form 8937 under Code Sec. 6045B Transfer agent represents holders of record on behalf of issuer or broker this transfer agent is likely an applicable person as defined in Treas. Reg A-1 a [broker], a person that acts as a custodian of securities in the ordinary course of a trade or business, an issuer of securities, a trustee or custodian of an individual retirement plan, or any agent of these persons. 5

6 Cost Basis Reporting Code Sections Code Sec. 6045(g) primary rule for cost basis reporting Code Sec rule for lot relief method and availability of basis averaging for mutual fund and dividend reinvestment plan (DRP) shares Code Sec. 6045A transfer reporting rule that dictates the reporting of cost basis data from the transferor to the transferee within 15 days of the date of transfer Code Sec. 6045B issuer reporting of corporate action events to the IRS within 45 days of the date of the corporate action and to holders by Jan. 15 th of following year Final regs issued under each of these Code Sections 6

7 Significantly Higher Tax Penalties Reporting penalties were increased under the Small Business Jobs Act of 2010 (P.L. No ) enacted on Sept. 27, 2010 Penalty for incorrect or nondelivered 1099s is $100 per return Penalty for incorrect or nondelivered payee stmts (including transfer statements) is $100 per return Maximum annual aggregate penalty for 1099s delivered to IRS and payee statements t t delivered d to taxpayers to $1,500, each ($3m total) Intentional disregard minimum penalty is $250 per return Intentional disregard penalty is greater of minimum or 10% of the amount that should have been reported There is no maximum annual limit for the intentional disregard penalty New penalties effective for returns and statements filed on or after Jan. 1,

8 Cost Basis Reporting Basics for Brokers Brokers must report the cost basis of covered securities on Form 1099-B, beginning for 2011 Brokers must also identify whether gain or loss is short-term or long-term on Form 1099-B Basis will be based on lot relief method provided at time security was sold (no later than settlement date) Determining the lot sold (lot relief method) or averaging basis must be done in accordance with strict rules Brokers must adjust cost basis for corporate actions Brokers must calculate wash sales under a simplified method and adjust basis and holding period and report loss deferrals on Form 1099-B Brokers must report basis on account transfers and provide special reporting for inheritance and gifts However, transferors of stock may delay transfer reporting due to IRS penalty relief set forth in Notice Brokers must correct 1099 cost basis information for up to 3 years 8

9 Cost Basis Reporting Basics for Transfer Agents Transferors must provide transferees with cost basis information within 15 days of date of transfer info must be provided in writing unless transferor & transferee agree to another format (such as DTCC CBRS) Transfer agents must report basis on account transfers and provide special reporting for inheritance and gifts Basis and acquisition date (plus any holding period adjustment due to wash sales) must be reported at a tax lot (sub-lot) level Additional info is reported for gifts and inheritance transfers Transferor must determine whether transfer is a gift, inheritance or general transfer gift is default if transferred to another named acct. Transfer agents are responsible for adjusting cost basis for corporate actions during time securities held Transfer agents must correct transfer cost basis information for up to 18 months 9

10 Transfer Reporting Starts in January Notice delayed transfer reporting start date Provided penalty relief for failure to report most transfers occurring during 2011 There is no penalty relief for transfers occurring after 2011 therefore transferors must timely report transfers occurring in 2012 First transfer statements would be due Jan. 17th 10

11 Cost Basis Reporting Basics for Issuers Issuers must report corporate actions to IRS & holders within the earlier of 45 days of the corporate action and Jan. 15 th of the following calendar year Corporate actions are reported on Form 8939 or the issuer s public website Issuer must report quantitative effect on basis Issuers must correct corporate action information reporting at any time (there is no cutoff date) 11

12 Issuer Reporting Starts in January Notice delayed issuer reporting start date Issuer reporting for corporate actions occurring during 2011 delayed until Jan. 17 th 2012 Potential backlog for processing due to deadline for all 2011 corporate actions IRS Form 8937 has not yet been finalized 12

13 Draft Form

14 Latest Draft Form 1099-B 14

15 Which Securities Holdings Are Subject to Cost Basis Reporting? Covered Securities Effective Dates Two key terms Covered securities and Specified securities Covered securities are subject to cost basis reporting Noncovered securities are subject to transfer reporting but cost basis does not need to be provided Specified securities are securities reported on Form 1099-B Covered securities include: Stock acquired on or after Jan. 1, 2011 CBRIC and CDRP shares acquired on or after Jan. 1, 2012 Options and debt securities acquired on or after Jan. 1, 2013 (Final Regs do not address CBR rules for options or debt) Other securities designated by IRS acquired on or after Jan. 1,

16 Inheritance Related Transfers Transfer statement must indicate that the transfer consists of an inherited security Statement must report the date of death as the original acquisition date and report the adjusted basis according to instructions or values provided by authorized representative of the estate If authorized representative of the estate does not provide the instructions or valuations regarding basis, the broker must report values if readily ascertainable If values are not readily ascertainable, the transferor must indicate that the security is inherited but can otherwise report it as a noncovered security If the applicable person later receives the information (within 18 months), a corrected transfer statement must be provided within 15 days reporting the security as covered 16

17 Gift & Change of Ownership Transfers Transfer statement must indicate that the transfer consists of a gift and report the date of the gift Statement must report the adjusted basis, acquisition date and holding date of the donor Statement must also report the fair market value of the security on the date of the gift (if known when furnishing the statement) If the securities are subsequently transferred to a different account of the same owner, the applicable person must include the additional gift related information set forth above If a transfer affects a change of ownership securities are transferred from an account of one person or persons to the account of another person (that does not share at least one common owner) the applicable person must report the transfer as a gift (and obtain the required information if available) unless the transfer is between persons for whom gift-related basis adjustments are inapplicable Transferor will need to know WHY 17

18 Inheritance Related Data Issues An estate may transfer shares held by decedent (date of date value and long-term holding period) or shares acquired by estate (purchase cost and date of acquisition) Estate may elect to recognize gain ( 643(e)(3)) or may satisfy a cash bequest and recognize gain or loss (new basis and holding period) Shares may have been in a qualified joint account with spouse (50% step up) or in another joint account (partial basis step up) Issues regarding obtaining information and whether to automate adjustments 18

19 Basis Averaging for DRP Stock Some DRP plans will not qualify as DRP plans under cost basis regulations ( CDRP ) 10% minimum reinvestment requirement DRP stock is noncovered if acquired before Jan Stock transferred into a DRP DURING 2011 becomes noncovered due to transfer DRP shares acquired before 2011 are not eligible for averaging DRP shares acquired during 2011 are eligible for averaging at the taxpayer s/customer s election DRP shares acquired after 2011 are eligible for averaging at the broker s election BUT customer can opt-out or opt-in to averaging A shareholder can combine noncovered and covered shares and aggregate g them for averaging g purposes p if a single account election is made but most believe accurate information rule is a showstopper and prevents making the election 19

20 Basis Averaging Complexities Separate averaging pools for covered and noncovered shares (Treas. Reg (e)(10)(iii)) )) Segregation and ineligibility for certain gifted shares (Treas. Reg (e)(8)) Revocation versus prospective change of method away from averaging (Treas. Reg (e)(9)(iii)&(iv)) Mandatory FIFO lot relief for average method shares for sales & transfers (Treas. Reg (e)(7)(ii)) Ineligibility ibilit of shares that t do not have accurate cost basis information for single account election (Treas. Reg (e)(11)(ii)) 20

21 Considerations Wolters Kluwer Financial Services does not provide tax advice. You should consult your own tax advisers and they (and not Wolters Kluwer Financial Services, GainsKeeper or Capital Changes) are solely l 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 For more information about the Cost Basis Law, visit: 21