The IRS has issued proposed regulations that reflect the changes made by the Emergency Economic Stabilization Act of 2008 regarding information reporting requirements for sales of securities by brokers and mutual fund companies. The proposed regulations describe who is subject to this reporting requirement, which transactions are reportable and what information must be reported.

Brokers are currently required to show the gross proceeds from sales of securities on Form 1099-B. Beginning in 2011 for corporate stock transactions, the customer’s adjusted basis in the security and whether any gain or loss is long-term or short-term must be reported on the form as well. This reporting requirement becomes effective in 2012 for sales of stock in a regulated investment company (RIC) or stock acquired in connection with a dividend reinvestment plan (DRP). For sales of notes, bonds, debentures, commodities and other financial instruments, this additional reporting is required beginning in 2013.

The basis a broker is required to report is the total amount paid by a customer or credited against a customer’s account as a result of the acquisition of securities. This amount should be adjusted for commissions and the effects of other transactions occurring within the account, such as transfers or organizational actions. The adjusted basis of any security (other than RIC or DRP stock) must be reported using the “first-in, first out (FIFO)” method. However, a broker must report basis using any permitted lot identification and basis determination method, including the “average basis” method, if a valid instruction to do so is received from the customer.

Beginning in 2011, transfers of securities are required to be reported on transfer statements and given to the receiving broker within 15 days after the transfer occurs. The transfer statement is not filed with the IRS, so there is no official form or format. However, the transfer statement must provide the name of the person furnishing the statement, the broker receiving the statement, the owner or owners transferring the securities, and if different, the owner or owners of the securities after any transfer other than a sale, such as a transfer of gifted or inherited securities. The date the transfer is initiated and the settlement date of the transfer must be provided, and the securities being transferred must be identified. Additionally, the following information must be included:

• the total adjusted basis of the securities;
• the original date of acquisition;
• the date for determining whether any gain or loss with respect to the security would be long-term or short-term at the time of sale; and
• the extent to which the reported basis amount has been adjusted to reflect any organizational actions.

There are several additional requirements included in these regulations. Along with the additional reporting requirements, the IRS imposes penalties on brokers for failing to file or furnish complete and correct returns and statements after the sale of a security. These penalties will be applied to the revised Form 1099-B and the new reporting required for transfers and organizational actions.

These proposed reporting requirements will substantially increase the recordkeeping and paperwork burden for brokers. Our Tax Team can help you understand the requirements to ensure your compliance by the effective date of January 1, 2011. Please contact us or post any questions or comments you have.