Mar.IRS Hearing on Basis Reporting by Securities Brokers and Basis Determination for Debt Instruments and Options
At an Internal Revenue Service (IRS) hearing on basis reporting by Securities Brokers and Basis Determination for Debt Instruments and Options, witnesses for Wolters Kluwer and the Financial Information Forum (FIF), spoke on their concerns about the proposed regulations.
Representing the IRS and the Department of Treasury were: Alice Coopersmith, IRS Branch Chief in the Office of Chief Counsel for Financial Institutions and Products; William Blanchard, IRS Senior Technician Reviewer in the Office of Associate Chief Counsel for Financial Institutions and Products; Pamela Lew, IRS Attorney in the Office of Associate Chief Counsel for Financial Institutions and Products; Karl Walli, Treasury Senior Counsel in the Office of Tax Policy; and Michael Novey, Treasury Associate Tax Legislative Counsel in the Office of Tax Policy.
No opening statements were given by IRS and Treasury officials. At the end of the hearing Lew stated that she will accept additional comments to her e-mail address [email protected] and “get them into the record,” even though the comment period is closed.
Among the witnesses concerns, both groups expressed opposition to having to calculate original issue discount (OID) on a daily basis, supported creating uniform reporting requirements, and opposed the increase in compliance burdens on the industry.
Financial Information Forum
Brian Godfrey, Robert Linville, and Arsalan Shalid spoke about the Forum’s concerns with the proposed regulations. FIF requested that the IRS defer the effective date of the proposed regulations to January 1, 2014, from January 1, 2013.
Godfrey discussed the complexity and difficulty of calculating the adjusted cost basis, adding that it is “very complicated” to adjust basis through maturity. In addition, Godfrey said the breadth and complexity across debt securities will make it extremely difficult to calculate adjusted cost basis.
Godfrey also spoke about the additional education needed for both brokers and taxpayers as a result of the proposed regulations. “No matter how the regulations come out … a major education effort is needed.” He added that the proposed rules on debt instruments will make it even more difficult to reconcile taxpayer and broker reporting, adding “we see debt exacerbating this.”
Looking ahead, Gofrey said, “I simply don’t think it’s realistic” that the industry will be able to comply and sort out the different calculations and accounting metrics used by brokers by January 1, 2013. Godfrey suggested the IRS create carve-outs “to make implementation easier.” Specifically, Godfrey said debt with fixed maturity and interest rates gives the industry the best opportunity to comply as this would “likely cover” the vast majority of debt.
Linville spoke on OID reporting and transfer of basis issues. He said the current structure does not support calculations of OID on a daily basis, which is what the IRS has proposed. He added, doing calculations of this magnitude “would be a tremendous challenge” across the financial industry.
On transfer of basis issues, the proposed regulations require transfer of adjusted basis which “is consistent” with similar regulations on equities and other instruments, he said. However, “I don’t believe transfer adds any value” for the taxpayer or broker-dealer, Linville said. Brokers prefer to transfer original cost and perform calculations of adjusted basis by themselves. He added that just providing the yield used to perform the calculation does not provide enough information. Linville said the Forum recommends that the proposed regulations “simply allow us to transfer original cost and identifying information” for the debt instrument that both the delivering and receiving broker can calculate by themselves, before providing information to the taxpayer through the 1099 form.
Wolters Kluwer
Stevie Conlon and Steve Rosenthal presented their concerns to the IRS-Treasury panel. Before presenting a list of concerns, Conlon said Wolters Kluwer issued an outline for the testimony to the IRS and Treasury personnel and that it will be made part of the public record. Conlon also said interested individuals can also contact her for the outline.
Rosenthal and Conlon touched on four topics: 1) the need to delay the established date for debt reporting; 2) the scope of reporting; 3) the goal of trying to achieve consistency with broker and customer reporting; and 4) transfer issuer reporting.
Rosenthal suggested the IRS delay the effective date of basis reporting of debt instruments to January 1, 2014. He described how debt complexity far exceeds that of stocks and mutual funds. Looking back, Rosenthal said the IRS delayed stock and mutual fund reporting after acknowledging the difficulty of those rules, and urged the IRS to do the same for debt reporting. “We think it’s time for the IRS to announce a delay for the reporting of debt instruments,” adding a delay “is quite appropriate.” Debt is more complicated, has more issuances than stocks or mutual funds, and the fact that debt reporting is “new and novel” leads to greater burden on brokers to report.
Rosenthal said it is “critical for basis reporting to be accomplished efficiently and effectively.” He urged the panel to announce a deferral on the reporting of debt as soon as possible as “we don’t really know where the regulations will end up.”
Conlon discussed the scope of reporting, and the significant number of calculations that are needed as there are a greater number of debt instruments than stock and different rules apply to different types of debt. She cautioned the panel from relying solely on yield-to-maturity as “no one can independently track the way you calculate it.” Conlon suggested Section 6045B be expanded to require issuers to make data available on how to do the calculations.
Conlon and Rosenthal also focused on the regulations’ attempt to create uniformity in the reporting of debt. Rosenthal said adding a new class of reconciliation for debt instruments is “going to be a challenge,” while Conlon noted that brokers use different maturities in their calculations. While the OID rules suggest simplifying the rules about calculating accruals, if brokers are not using the same maturity, then there is a gap in securities that get transferred. Rosenthal added that information returns providing different calculations with different assumptions creates “a recipe for disaster.”
On transfer and issuer reporting, Conlon said “we need to make sure we think about real-time information brokers have so they can make the right classifications and calculations.” She added that the IRS may find it difficult to access proprietary vendor data from brokers, but that Section 6045B is potentially a “neat trick to avoid this as you can make the data public.”
Conlon also suggested the IRS redesign Form 1099-B because short-term and long-term boxes “don’t work.” She added that revisions need to be made to the report design to accommodate not only short- and long-term, “but ordinary as well.”
Question and Answer
Asked by Kwalli whether Wolters Kluwer agrees with FIF’s request that the effective date occur on January 1, 2014, Rosenthal said “we wrote a date no lesser than one year,” while FIF and others suggested a date “no earlier than 18 months after finalization of the regulations.” However, “we’d be fine with this,” he said.
Coopersworth asked if the IRS were to limit debt securities to a fixed rate and term would Wolters Kluwer still request a deferral? Conlon said she would still request a deferral until January 1, 2014. She said current calculations do not cover all debt instruments and calculate on an annual basis, not daily as the IRS has proposed.
Coopersworth then asked whether Wolters Kluwer is also looking to defer the date for the reporting of options. Conlon said this is not as big of an issue as the reporting of debt, but noted that this feeling may vary across the industry.
Novey asked Rosenthal whether he thought the comment period should be reopened, to which he agreed.
Blanchard asked Conlon and Rosenthal whether the IRS has the statutory authority “to deal with bond premium?” Rosenthal told the panel he believed they did have the authority, but said he would get back to the panel.
In response to a question from Novey, Conlon said OID calculations and bond-premium calculations “are unique.” She added that the difference between broker calculations can be “fairly manageable.” She added that the proposed regulations require more sophisticated mathematical analysis which, while doable, is an additional burden. Calculating debt on a lot-by-lot basis creates a lot of complexity, she added. To calculate and record information on a day-to-day basis is “completely unmanageable.”
Linville stated that brokers would prefer to be able to figure out accrual periods and adjustments to basis from the original issue.
Ellen Bocina from Fidelity commented on current reporting methods and requirements on transfer statements when it comes to calculating the adjustments to the cost basis on a bond. Bocina mentioned how the client could “technically be unaware” of the different calculations in the adjustments used by different brokers.
Bocina described a hypothetical situation in which she calculates the adjustments on a bond for a number of years before transferring it to another broker. Apart from telling the audience she did not know “of any obligation that I have to tell the client what adjustments I have made,” she mentioned that the new broker could calculate the adjustments differently . The only reportable event, she said, “is what happens when the client sells it or it matures,” at which point the broker holding the bond on his or her books would be responsible on Form 1099 to give all the adjusting information.
Bocina mentioned how brokers that transfer and calculate basis on bonds today is strictly based on the original cost basis, and to require transferring of adjusted cost basis “would multiply the cost of debt reporting exponentially” beyond what the industry spent to build the Cost Basis Reporting Service (CBRS).
“We’ve allowed everyone to make their own interpretation and their own calculations on bonds, and we say we’re simply going to transfer the original cost basis” by using “our own calculations.” To require something different “would just add to the cost exponentially.”
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At an Internal Revenue Service (IRS) hearing on basis reporting by Securities Brokers and Basis Determination for Debt Instruments and Options, witnesses for Wolters Kluwer and the Financial Information Forum (FIF), spoke on their concerns about the proposed regulations.
Representing the IRS and the Department of Treasury were: Alice Coopersmith, IRS Branch Chief in the Office of Chief Counsel for Financial Institutions and Products; William Blanchard, IRS Senior Technician Reviewer in the Office of Associate Chief Counsel for Financial Institutions and Products; Pamela Lew, IRS Attorney in the Office of Associate Chief Counsel for Financial Institutions and Products; Karl Walli, Treasury Senior Counsel in the Office of Tax Policy; and Michael Novey, Treasury Associate Tax Legislative Counsel in the Office of Tax Policy.
No opening statements were given by IRS and Treasury officials. At the end of the hearing Lew stated that she will accept additional comments to her e-mail address [email protected] and “get them into the record,” even though the comment period is closed.
Among the witnesses concerns, both groups expressed opposition to having to calculate original issue discount (OID) on a daily basis, supported creating uniform reporting requirements, and opposed the increase in compliance burdens on the industry.
Financial Information Forum
Brian Godfrey, Robert Linville, and Arsalan Shalid spoke about the Forum’s concerns with the proposed regulations. FIF requested that the IRS defer the effective date of the proposed regulations to January 1, 2014, from January 1, 2013.
Godfrey discussed the complexity and difficulty of calculating the adjusted cost basis, adding that it is “very complicated” to adjust basis through maturity. In addition, Godfrey said the breadth and complexity across debt securities will make it extremely difficult to calculate adjusted cost basis.
Godfrey also spoke about the additional education needed for both brokers and taxpayers as a result of the proposed regulations. “No matter how the regulations come out … a major education effort is needed.” He added that the proposed rules on debt instruments will make it even more difficult to reconcile taxpayer and broker reporting, adding “we see debt exacerbating this.”
Looking ahead, Gofrey said, “I simply don’t think it’s realistic” that the industry will be able to comply and sort out the different calculations and accounting metrics used by brokers by January 1, 2013. Godfrey suggested the IRS create carve-outs “to make implementation easier.” Specifically, Godfrey said debt with fixed maturity and interest rates gives the industry the best opportunity to comply as this would “likely cover” the vast majority of debt.
Linville spoke on OID reporting and transfer of basis issues. He said the current structure does not support calculations of OID on a daily basis, which is what the IRS has proposed. He added, doing calculations of this magnitude “would be a tremendous challenge” across the financial industry.
On transfer of basis issues, the proposed regulations require transfer of adjusted basis which “is consistent” with similar regulations on equities and other instruments, he said. However, “I don’t believe transfer adds any value” for the taxpayer or broker-dealer, Linville said. Brokers prefer to transfer original cost and perform calculations of adjusted basis by themselves. He added that just providing the yield used to perform the calculation does not provide enough information. Linville said the Forum recommends that the proposed regulations “simply allow us to transfer original cost and identifying information” for the debt instrument that both the delivering and receiving broker can calculate by themselves, before providing information to the taxpayer through the 1099 form.
Wolters Kluwer
Stevie Conlon and Steve Rosenthal presented their concerns to the IRS-Treasury panel. Before presenting a list of concerns, Conlon said Wolters Kluwer issued an outline for the testimony to the IRS and Treasury personnel and that it will be made part of the public record. Conlon also said interested individuals can also contact her for the outline.
Rosenthal and Conlon touched on four topics: 1) the need to delay the established date for debt reporting; 2) the scope of reporting; 3) the goal of trying to achieve consistency with broker and customer reporting; and 4) transfer issuer reporting.
Rosenthal suggested the IRS delay the effective date of basis reporting of debt instruments to January 1, 2014. He described how debt complexity far exceeds that of stocks and mutual funds. Looking back, Rosenthal said the IRS delayed stock and mutual fund reporting after acknowledging the difficulty of those rules, and urged the IRS to do the same for debt reporting. “We think it’s time for the IRS to announce a delay for the reporting of debt instruments,” adding a delay “is quite appropriate.” Debt is more complicated, has more issuances than stocks or mutual funds, and the fact that debt reporting is “new and novel” leads to greater burden on brokers to report.
Rosenthal said it is “critical for basis reporting to be accomplished efficiently and effectively.” He urged the panel to announce a deferral on the reporting of debt as soon as possible as “we don’t really know where the regulations will end up.”
Conlon discussed the scope of reporting, and the significant number of calculations that are needed as there are a greater number of debt instruments than stock and different rules apply to different types of debt. She cautioned the panel from relying solely on yield-to-maturity as “no one can independently track the way you calculate it.” Conlon suggested Section 6045B be expanded to require issuers to make data available on how to do the calculations.
Conlon and Rosenthal also focused on the regulations’ attempt to create uniformity in the reporting of debt. Rosenthal said adding a new class of reconciliation for debt instruments is “going to be a challenge,” while Conlon noted that brokers use different maturities in their calculations. While the OID rules suggest simplifying the rules about calculating accruals, if brokers are not using the same maturity, then there is a gap in securities that get transferred. Rosenthal added that information returns providing different calculations with different assumptions creates “a recipe for disaster.”
On transfer and issuer reporting, Conlon said “we need to make sure we think about real-time information brokers have so they can make the right classifications and calculations.” She added that the IRS may find it difficult to access proprietary vendor data from brokers, but that Section 6045B is potentially a “neat trick to avoid this as you can make the data public.”
Conlon also suggested the IRS redesign Form 1099-B because short-term and long-term boxes “don’t work.” She added that revisions need to be made to the report design to accommodate not only short- and long-term, “but ordinary as well.”
Question and Answer
Asked by Kwalli whether Wolters Kluwer agrees with FIF’s request that the effective date occur on January 1, 2014, Rosenthal said “we wrote a date no lesser than one year,” while FIF and others suggested a date “no earlier than 18 months after finalization of the regulations.” However, “we’d be fine with this,” he said.
Coopersworth asked if the IRS were to limit debt securities to a fixed rate and term would Wolters Kluwer still request a deferral? Conlon said she would still request a deferral until January 1, 2014. She said current calculations do not cover all debt instruments and calculate on an annual basis, not daily as the IRS has proposed.
Coopersworth then asked whether Wolters Kluwer is also looking to defer the date for the reporting of options. Conlon said this is not as big of an issue as the reporting of debt, but noted that this feeling may vary across the industry.
Novey asked Rosenthal whether he thought the comment period should be reopened, to which he agreed.
Blanchard asked Conlon and Rosenthal whether the IRS has the statutory authority “to deal with bond premium?” Rosenthal told the panel he believed they did have the authority, but said he would get back to the panel.
In response to a question from Novey, Conlon said OID calculations and bond-premium calculations “are unique.” She added that the difference between broker calculations can be “fairly manageable.” She added that the proposed regulations require more sophisticated mathematical analysis which, while doable, is an additional burden. Calculating debt on a lot-by-lot basis creates a lot of complexity, she added. To calculate and record information on a day-to-day basis is “completely unmanageable.”
Linville stated that brokers would prefer to be able to figure out accrual periods and adjustments to basis from the original issue.
Ellen Bocina from Fidelity commented on current reporting methods and requirements on transfer statements when it comes to calculating the adjustments to the cost basis on a bond. Bocina mentioned how the client could “technically be unaware” of the different calculations in the adjustments used by different brokers.
Bocina described a hypothetical situation in which she calculates the adjustments on a bond for a number of years before transferring it to another broker. Apart from telling the audience she did not know “of any obligation that I have to tell the client what adjustments I have made,” she mentioned that the new broker could calculate the adjustments differently . The only reportable event, she said, “is what happens when the client sells it or it matures,” at which point the broker holding the bond on his or her books would be responsible on Form 1099 to give all the adjusting information.
Bocina mentioned how brokers that transfer and calculate basis on bonds today is strictly based on the original cost basis, and to require transferring of adjusted cost basis “would multiply the cost of debt reporting exponentially” beyond what the industry spent to build the Cost Basis Reporting Service (CBRS).
“We’ve allowed everyone to make their own interpretation and their own calculations on bonds, and we say we’re simply going to transfer the original cost basis” by using “our own calculations.” To require something different “would just add to the cost exponentially.”