IRS Publishes Interim Guidance on Stock Basis Reporting


On June 22, the IRS issued interim guidance on issues relating to the basis of stock subject to broker reporting (Notice 2011-56). The guidance responds to stakeholder comments received in response to final regulations on the topic issued last year (T.D. 9504). The IRS says it plans to issue proposed regulations on the subject. (For previous coverage, see “IRS Issues Final Regulations on Stock Basis Reporting Requirements.”) The guidance relates to the average basis method used to determine the basis of stock in a regulated investment company (RIC) or a dividend reinvestment plan (DRP), the DRP 10% reinvestment requirement, and determining basis of stock on an account-by-account basis.

Under the notice, when a taxpayer changes from a broker’s default average basis method for RIC or DRP stock to the cost basis method, the basis of the stock reverts to the cost basis if the taxpayer requests the change by the earlier of (1) one year after receiving notice of the broker’s default method, or (2) the date of the first sale, transfer or other disposition of the stock. A broker may extend the one-year period, but not later than the date of the first sale, transfer or disposition of the stock.

To qualify as a DRP, a plan’s written documents must require that at least 10% of every dividend on any share of stock is reinvested in identical stock (Regs. Sec. 1.1012-1(e)(6)(i)). The notice specifies that a DRP does not fail the 10% reinvestment requirement if it pays cash in lieu of fractional shares when the amount of a dividend is insufficient for some shareholders to acquire stock.

The basis of securities sold after January 1, 2011, is determined on an account-by-account basis, but Regs. Sec. 1.1012-1(e) provides account-by-account rules only for averaged costs. The notice clarifies that lot selection methods, such as FIFO and specific identification, also apply on an account-by-account basis.

Taxpayers may rely on the interim guidance in the notice until superseding guidance is issued.

The IRS is requesting comments on the guidance in the notice. Comments should be sent on or before August 8, to Notice.Comments@irscounsel.treas.gov, with “Notice 2011-56” in the subject line.

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