Proposed Regs Detail Broker Reporting for Debt Instruments, Options

The Energy Improvement and Extension Act of 2008 (the "2008 Act") amended IRC Section 6045 and thereby expanded the broker reporting requirements.  Beginning January 1, 2011, brokers, in addition to reporting the gross proceeds from sales of stock by their customers, are required to report the adjusted basis and holding period of certain "covered securities" (including stock) acquired and sold by their customers after that date. See IRC § 6045(g).  In October 2010 the IRS issued final regulations pertaining to the reporting requirements of "covered securities."  See 2010-2 C.B. 670, T.D. 9504 (I.R.S. 2010).   The changes made by the 2008 Act also affect the reporting of information pertaining to debt instruments and options.

The IRS has issued proposed regulations amending Treasury Regulation Sections 1.6045-1, 1.6045A-1, and 1.6045B-1 to require additional information reporting by a broker for a debt instrument acquired on or after January 1, 2013. The proposed regulations also require information reporting for an option granted or acquired on or after January 1, 2013. Many of the changes incorporate debt instruments and options into the rules established for stock in the final regulations published in TD 9504. The general rules of Treasury Regulation Section 1.6045-1 that currently apply to stock also will apply to a debt instrument or an option that is a covered security, including the wash sale and short sale provisions. Further, the general rules of Treasury Regulation Section 1.6045A-1 relating to transfer statement requirements and Treasury Regulation Section 1.6045B-1 relating to issuer statement requirements will apply to a debt instrument or an option.

With regard to an option that is a covered security, IRC Section 6045(h) requires brokers to report gross proceeds, adjusted basis, and whether any gain or loss is short-term or long-term.   Under Proposed Treasury Regulation Section 1.6045-1 certain options have been added to the definition of a security, specified security, and covered security. In general, an option on one or more specified securities, including an index of such securities or financial attributes of such securities, that is granted or acquired on or after January 1, 2013, will be a covered security. See 76 FR 72652.   Note that the proposed regulations retain the existing rules for a compensation-related option, but make those rules applicable to all compensation-related options, and not just those granted or acquired before January 1, 2013. Also, the definitions for the terms closing transaction and sale have been modified so they are consistent with IRC Sections 1234 and 1234A and to accommodate the reporting of options granted or acquired on or after January 1, 2013.

As for debt instruments, the proposed regulations provide that if a debt instrument is sold prior to maturity, a broker is required to report any accrued market discount as of the sale date based on a constant interest rate. Further, a broker must determine a customer's basis in a debt instrument by computing any OID, bond premium, or acquisition premium using the default method. A broker also must adjust the basis for any principal payments received.   However, if a taxable debt instrument has bond premium, a broker must assume a customer has elected current amortization when computing the amount of the customer's basis. See 76 FR 72652.

...

Discover the features and benefits of LexisNexis® Tax Center

For quality Tax & Accounting research resources, visit the LexisNexis® Store