Securities Industry Association. March 1, Re: Information reporting relating to taxable stock transactions

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1 Securities Industry Association 1425 K Street, NW Washington, DC (202) Fax (202) info@sia.com March 1, 2005 CC:PA:LPD:PR (NOT ) Room 5203 Internal Revenue Service POB 7604 Ben Franklin Station Washington, DC Re: Information reporting relating to taxable stock transactions Dear Sir/Madam: This letter provides comments of the Securities Industry Association ("SIA") 1 concerning the proposed regulations under Section 6043(c) and Section 6045 of the Internal Revenue Code published in December 2003, as well as recommendations concerning the 2005 Form 1099-B to be used by brokers in reporting acquisitions of control and substantial changes in capital structure to shareholders and the IRS. In addition, we provide recommendations on the implementation of the new information reporting rules provided in Section 6043A of the Internal Revenue Code. Summary of comments As discussed in more detail below, SIA believes that the proposed regulations provide basically sound and very helpful rules for providing brokers with notice that a reportable transaction under section 6043(c) has occurred. With minor modifications to the content of the information to be published by the IRS and to be provided to clearing organizations, these rules should enable brokers to obtain on a timely basis the information necessary to meet their tax reporting obligations concerning the corporate transactions covered by Section 1 The Securities Industry Association, established in 1972 through the merger of the Association of Stock Exchange Firms and the Investment Banker's Association, brings together the shared interests of nearly 600 securities firms to accomplish common goals. SIA member-firms (including investment banks, broker-dealers, and mutual fund companies) are active in all U.S. and foreign markets and in all phases of corporate and public finance. According to the Bureau of Labor Statistics, the U.S. securities industry employs 780,000 individuals. Industry personnel manage the accounts of nearly 93-million investors directly and indirectly through corporate, thrift, and pension plans. In 2003, the industry generated an estimated $209 billion in domestic revenue and $278 billion in global revenues. (More information about SIA is available on its home page: Broadway 35 Fl. New York, NY (212) , Fax (212)

2 6043(c). We greatly appreciate the opportunity that SIA was given to provide input as these rules were crafted, and would welcome the opportunity to continue to work with the IRS and the Treasury Department as the rules are further refined. SIA believes there should be changes to the regulations in two areas relating to how these transactions will be required to be reported. First, the regulations should clearly state that brokers may separately report cash and other property on separate Forms 1099-B. Such reporting would not in any way diminish tax compliance, yet without such a rule, firms with very separate systems for cash payments and stock exchanges otherwise will be forced to undergo extremely challenging and costly systems changes solely for tax reporting purposes. Second, SIA strongly believes that the Form 1099-B should revert back to the 2003 version for 2005 and future years, and the regulations should be modified in any way necessary to permit this result. As discussed below, the old form with revised instructions can easily accommodate tax administration goals, without causing most firms to incur the very substantial costs that would be involved in moving to a new form. With respect to the implementation of new Section 6043A, SIA recommends that the IRS exercise the authority provided in the new statute to make the proposed regulations under Section 6043(c) and Section 6045 (as modified to reflect comments) the exclusive rules applicable to the reporting of transactions involving an acquisition of control or a substantial change in capital structure. To the extent that additional taxable transactions are required to be reported under Section 6043A, SIA believes that rules similar to those in the new regulations under Sections 6043(c) and 6045 (as modified to reflect comments) should be adopted concerning (i) the mechanisms for ensuring that information is widely available to the tax reporting community (i.e., publication by the IRS or reliance on clearing organizations to receive and disburse the information), (ii) the specific information required to be reported, and (iii) the timing of reporting by the corporation to the IRS and to clearing organizations. Recommended changes to the proposed regulations under Sections 6043(c) and 6045 SIA believes that the proposed regulations under Section 6043(c), with the minor modifications recommended below, would operate well to ensure that brokers responsible for reporting these transactions to their customers receive 2

3 timely notice of the occurrence of the transactions and the information necessary to fulfill their tax reporting obligations. Require additional information to be provided by the reporting corporation to the IRS and to clearing organizations. The regulations set forth two basic methods for brokers to obtain the information they need concerning reportable transactions. While both mechanisms are sound in concept, a minor modification to the rules concerning the content of the information to be provided by reporting corporations is required if the rules are to operate as intended. Under the first mechanism set forth in the proposed regulations, a reporting corporation may elect to allow the IRS to publish certain information that it provides to the IRS with respect to the transaction. Sec T(a)(2). In the absence of an IRS publication election, the regulations intend for clearing organizations to be the source of information for brokers and others in the tax reporting community. Clearing organizations are to obtain Forms 1099-CAP from reporting corporations providing notice of reportable transactions. Sec T(b)(4), (5). Clearing organizations receiving this information are expected to make use of well-established procedures for notifying the financial community that a significant corporate action has occurred, which will result in brokers and others obtaining on a timely basis the information required to fulfill reporting obligations. See the Preamble to the proposed regulations, Summary of Comments and Explanation of Provisions. Reliance on IRS publication and on clearing organizations and their existing notification procedures, as SIA recommended, is ideal. However, the IRS should require the reporting corporation to furnish to the IRS or to clearing organizations, as the case may be, and the IRS should publish, additional information beyond that set forth in Sections T(a)(1)(v) and (2) of the proposed regulations. Of particular importance, the reporting corporation should be required to provide to the IRS and to clearing organizations, and the IRS should publish, a breakdown of (i) the amount of cash, (ii) the fair market value of taxable stock or other property, and (iii) the number of shares of nontaxable stock received with respect to each share exchanged. CUSIP numbers should be provided for both the shares exchanged and those received, so that the information is clear and in an easily usable form. Because the Form 1099-CAP does not contain this information, corporations should not be required to use this form to meet their obligation to report to clearing organizations. Any brief, clear statement containing the information should be allowed. Clarify that brokers may report cash and taxable stock or other property either separately or in aggregate. The proposed regulations should be modified to clearly permit brokers to report cash and other taxable property from a single transaction on either separate Forms 1099-B or in aggregate on one form. Section T(f) of the proposed regulations (like the 2004 instructions to Form 1099-B) clearly seems to contemplate separate reporting as one option, 3

4 but Section T(d)(4) could be read to require brokers to aggregate all taxable consideration with respect to a transaction on one form. SIA believes that taxpayers and the IRS will get clear and complete information concerning taxable transactions with either type of reporting. However, requiring aggregate reporting for all firms would impose very substantial programming costs on some firms without a corresponding benefit for the IRS or investors. The ability to report all taxable consideration on one form varies considerably among SIA firms. In many firms, there are very separate systems for tracking cash flows and exchanges of securities, and the systems are not set up to work together. For these firms, modifying their systems to generate an aggregate number solely for use on the Form 1099-B would require a very substantial systems revision. The costs of these changes for this subset of firms would far outweigh any benefits that could come from this change. Eliminate requirement for brokers to report address of corporation and build some flexibility concerning content into the regulations. The contents of the Form 1099-B specified in Section T(d) of the proposed regulations should be modified to delete the requirement in paragraph (2) to report the address of the corporation. (As discussed below, the 2005 Form 1099-B should similarly be modified to delete the box labeled CORPORATION S name, street address, city, state, and zip code, and the form's instructions should direct that the corporation's name be provided in the Description box.) This information is not helpful to taxpayers or the IRS. The IRS has this information, and if a payer's customer has an inquiry, the appropriate contact is the payer rather than the corporation, which does not have the customer's account or transaction information on its books and records. It would also be highly desirable to build into any final regulations more flexibility concerning the content of forms, in order to make it easier to address any implementation issues that the IRS, SIA or others identify following the effective date of regulations. Effective date. SIA believes that the new reporting rules should take effect no earlier than 90 days following the date on which they are finalized or January 1st of the following year, whichever occurs first. It takes some time to change tax reporting systems to reflect the final regulations, and programming changes are typically not undertaken until the regulations are final, in order to avoid costly efforts should the rules be modified. For this reason, new reporting rules generally should not take effect until after there is a reasonable period for systems changes to be completed. Issues relating to the 2005 Form 1099-B SIA strongly believes that the 2005 Form 1099-B should revert back to the 2003 version, rather than incorporate the three new boxes included in the

5 form. In our 2003 comment letter, we requested that brokers be permitted to report on either Form 1099-CAP or Form 1099-B. The primary purpose of this request was to prevent those brokers that had historically been reporting the taxable stock portion of a reorganization transaction from having to make substantial systems changes in order to meet the Form 1099-CAP reporting requirements. We were grateful that our request was granted, and in fact reporting on Form 1099-B became the requirement. SIA had worked closely with the IRS and Treasury every step of the way to help make the reporting rules for taxable stock transactions workable. For this reason, it was quite unexpected when the 2004 Form 1099-B form was modified without an opportunity for us to provide input. The changes were quite substantial: a new box for providing information regarding the reporting corporation; a new Box 5 for reporting the number of shares exchanged; a new Box 6 for reporting the classes of stock exchanged; and a rearrangement of the boxes on the form. These changes effectively undercut our request to utilize Form 1099-B rather than the Form 1099-CAP, and would force firms to incur substantial new programming costs without producing an offsetting benefit for tax administrators. SIA believes that all tax reporting objectives can be fully met by use of the 2003 version of the form, with appropriate modifications to the instructions. SIA strongly believes that the following modifications should be made to the Form 1099-B and instructions for 2005 and future years: Eliminate new Box 5. SIA believes that the information requested in the 2004 box 5, entitled "No. of shares exchanged," can easily be required to be incorporated in the "Description" box (box 5 in 2003, box 7 in 2004). This is where many firms have included this information in the past, and the 2004 Instructions to the Description box contain an example illustrating this. See 2004 Instructions for Form 1099-B ("100 shares of XYZ Corp. stock"). Eliminate new Box 6. The information called for in the 2004 box 6, "Class of stock exchanged," also can be easily provided on the 2003 Form Whether or not a security constitutes debt can be determined from its CUSIP number (provided in box 1b), which always contain letters as both the 7th and 8th character. Brokers could be required to identify stock other than common stock in the Description box, with an absence of a preferred designation signifying that the equity constitutes common stock. Eliminate box for issuer information. We believe that the box labeled CORPORATION S name, street address, city, state, and zip code should be deleted from Form 1099-B (although this information is required by Section 6043A(d) to be provided by the corporation to its shareholders). The corporation's name can be required to be provided in the Description 5

6 box, where it is currently typically included. If a payer's customer has an inquiry, the appropriate contact is the payer rather than the corporation, which does not have the customer's account or transaction information on its books and records. Shareholder losses from these transactions. The Instructions for Form 1099-B relating to box 2 state that if the aggregate amount reported includes a loss from a corporation that has undergone a change in control or substantial change in capital structure, advise the recipient separately of the loss amount and check box 12. Brokers plan to check box 12 on every Form 1099-B provided to a shareholder with respect to a reorganization transaction in which no loss is permitted to be recognized. It should be noted that brokers generally do not compute gains and losses for shareholders, as brokers typically do not have the necessary basis information. Although mechanical computations are provided for select accounts, they are provided as a convenience but with the caveat that they do not constitute tax information. Given the wide range of events outside of the broker's knowledge that can affect a taxpayer's basis in stock, calculation of gain or loss has always been the client s responsibility. Because there were no known transactions involving reincorporations offshore in 2004, most firms have not yet changed their Form 1099-B programs to reflect the 2004 changes designed to pick up these transactions. As a result, reverting back to the 2003 Form 1099-B would save brokers very substantial reprogramming costs. SIA believes that this recommendation to use the 2003 form for 2005 and future years would not compromise the government's tax compliance objectives in any way, since the information required on the 2004 form concerning the stock exchanged can be easily accommodated using the unaltered 2003 version of the 1099-B. It should be noted that this decision would also have the added benefit of preserving a form widely used for 20 years and well-known to investors, which should be desirable in the absence of compelling reasons for change. Apply rules under Section 6043(c) and Section 6045 to any additional transactions required to be reported under Section 6043A The rules under Section 6043(c) and Section 6043A should not impose duplicative, overlapping or conflicting reporting requirements that would be confusing to investors, unnecessarily burdensome for brokers, and more difficult for the IRS to administer. SIA believes that the simplest way to avoid these problems would be for any additional transactions that are not currently covered by Section 6043(c) but are to be reportable under Section 6043A to be governed by either the rules under Section 6043(c) or rules that are modeled on those rules. In particular, the proposed regulations under Sections 6043(c) and 6045 (modified as described above) provide a carefully considered set of rules which 6

7 should be adopted under Section 6043A with respect to (i) the mechanisms for ensuring that information concerning reportable transactions is widely available to the tax reporting community (i.e., publication by the IRS, and reliance on clearing organizations in the absence of IRS publication to receive and pass on to brokers the transaction information), (ii) the specific information required to be reported, and (iii) the timing of reporting by the corporation to the IRS and to clearing organizations. Finally, it would be useful to clarify in any implementing regulations that, as under Section 6043(c), brokers should not report to customers any nonrecognition property received in a partially taxable transaction required to be reported under Section 6043A. * * * * * * Thank you for your consideration of our comments. We would welcome the opportunity to discuss these issues with you further. Please contact me (at or by at pmcclanahan@sia.com) if we can be helpful in any way as you work on finalizing this guidance. Sincerely, Patti McClanahan Vice President and Director for Tax Policy Securities Industry Association Cc: Michael Hara Robert Erickson Helen Hubbard Curt Wilson 7