The IRS has released final regulations on corporate and broker basis reporting requirements for debt instruments and options, and the final rules delay the effective date for "complex debt instruments" until 2016. The guidance package also includes temporary and proposed regulations for the treatment of bond and acquisition premiums in interest reporting.
Brokers have long been required to report sales price in securities transactions on Form 1099-B, but new rules added to Section 6045 in 2008 require them to also report basis. To help brokers fulfill their new reporting requirements, the 2008 legislation also added sections 6045A and 6045B to require basis reporting on broker transfers of securities and to require corporations to report any organizational actions affecting basis.
The new reporting requirements apply to stock beginning in 2011, and expanded in 2012 to apply to mutual funds and dividend reinvestment plans. The rules were scheduled to expand again to cover debt securities and options in 2013, but the IRS last year delayed this expansion until 2014. The final regulations now provide that the reporting rules will apply to "less complex debt instruments" acquired on or after Jan. 1, 2014, and to "more complex debt instruments" acquired on or after Jan. 1, 2016. In addition, the IRS provided a general exemption for debt instruments with a fixed maturity date of a year or less.
The less-complex debt instruments that are subject to reporting beginning in 2014 include:
- a debt instrument that provides a single fixed payment schedule for which a yield and maturity can be determined for the instrument under Treas. Reg. Sec. 1.1272-1(b),
- a debt instrument that provides for alternate payment schedules for which a yield and maturity can be determined for the instrument under Treas. Reg. Sec. 1.1272-1(c) (such as a debt instrument with an embedded put or call option), and
- a demand loan for which a yield can be determined under Treas. Reg. Sec. 1.1272-1(d).
Debt instruments without a fixed yield or fixed maturity date will generally be considered complex debt instruments for which reporting is not required until 2016. The following fixed-yield, fixed- maturity debt instruments will also be complex debt instruments:
- A debt instrument that provides for more than one rate of stated interest (such as a debt instrument with stepped interest rates)
- A convertible debt instrument
- A stripped bond or coupon
- A debt instrument that requires payment of either interest or principal in a non-U.S. dollar currency
- Certain tax credit bonds
- A debt instrument that provides for a PIK feature
- A debt instrument issued by a non-U.S. issuer
- A debt instrument for which the terms of the instrument are not reasonably available to the broker within 90 days of the date the debt instrument was acquired by the customer
- A debt instrument that is issued as part of an investment unit
- A debt instrument evidenced by a physical certificate unless such certificate is held (whether directly or through a nominee, agent or subsidiary) by a securities depository or by a clearing organization described in Treas. Reg. Sec. 1.1471-1(b)(18)
The final regulations clarify that in most cases, the issuance of a debt instrument will not be considered an organizational action affecting basis that a corporation is required to report under Section 6045B. However, the issuance of a debt instrument in a recapitalization, including a recapitalization resulting from a significant modification or bankruptcy reorganization, can be an issuer action affecting the basis of a debt instrument for purposes of Section 6045B.
Corporations with an organizational action to report can fulfill the reporting requirements by:
- filing Form 8937 with the IRS within 45 days of the organizations' action (or by Jan. 15 of the following year if earlier) and furnishing a statement to each security holder of record by Jan. 15 of the following year, or
- posting Form 8937 on their public website in an area dedicated to this purpose within 45 days of the organizational action (or by Jan. 15 of the following year if earlier) and maintaining the posting for 10 years in a readily accessible format.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
