Final Regulations Govern Sec. 6045 Reporting of Debt Instruments by Brokers

In T.D. 9750, the IRS issued final regulations on the Sec. 6045 information-reporting rules for brokers to report transactions involving debt instruments and options, including the reporting of original issue discount (OID) on tax-exempt obligations, the treatment of certain elections a holder can make for reporting the holder’s adjusted basis in a debt instrument, and the rules for reporting transfers of Sec. 1256 options and debt instruments. These regulations finalize temporary and proposed rules issued last year with some changes made in response to comments (T.D. 9713, REG-143040-14).

Under Sec. 6045, a broker is required to report gross proceeds on the sale of a security, its adjusted basis, and whether the gain or loss is long-term or short-term. Sec. 6045A requires certain information to be reported when a security is transferred to another broker, and Sec. 6045B requires an issuer of a specified security to file a return relating to certain actions that affect the basis of the security. Finally, Sec. 6049 requires interest payments (including accruals of OID treated as payments) to be reported.

One change that is kept in the final regulations is to the election to accrue market discount using the constant yield method rather than the ratable method. Regulations issued in 2013 had required brokers to assume that customers had not elected the constant yield method, but, because the rule is taxpayer-favorable and in the interest of consistency, the temporary rules issued last year required brokers to assume that customers have made the election, and the final regulations retain that rule. A customer that does not want to use that method must notify the broker in writing by the end of the calendar year in which the customer acquired the debt instrument in the broker’s account, that it wants to use the ratable method instead.

Under the temporary regulations, the deemed election of the constant yield method applied to debt instruments acquired after Jan. 1, 2015. The IRS received comments requesting that brokers be allowed to apply the election to debt instruments acquired on or after Jan. 1, 2014, the first date they were required to report accrued market discount under Sec. 6045, provided they had not reported to customers using the ratable method. In response, the final regulations permit brokers to use that method for debt instruments acquired on or after Jan. 1, 2014, and before Jan. 1, 2015, as long as the broker was not informed that the customer had made a Sec. 1278(b) election to include market discount in income as it accrues, there were no principal payments on the debt instrument during the 2014 calendar year, and the broker therefore had not reported accrued market discount to the customer for the 2014 calendar year using the ratable method.

The second part of the temporary regulations was finalized without substantive change. Temp. Regs. Sec. 1.6045A-1T(e) required a transferring broker to provide a transfer statement to the receiving broker when a Sec. 1256 option is transferred so the receiving broker has the information required to report under Sec. 6045. This rule was new in the temporary regulations, so it applied prospectively to transfers occurring on or after Jan. 1, 2016. The only comment the IRS received was an assertion that the fair market value need not be included in these statements, but the IRS disagreed with this comment and adopted the rules without changes.

The third part of the regulations addresses reporting OID for a tax-exempt obligation. Under the temporary regulations, for tax-exempt obligations acquired on or after Jan. 1, 2017, a broker would be allowed to report either a gross amount for both OID and amortized acquisition premium or a net amount of OID that reflects the offset of the OID by the amount of amortized acquisition premium allocable to the OID. Commenters pointed out that customers may be confused by the different reporting requirements that apply to reporting OID only after Jan. 1, 2017. In response, for tax years beginning after Dec. 31, 2016, the final rules allow brokers to report OID and acquisition discount for a tax-exempt obligation acquired before Jan. 1, 2017.

Finally, the final regulations make a significant change to the original reporting rules that were to apply to debt instruments acquired after Jan. 1, 2016. Regs. Sec. 1.6045-1(n)(3) requires reporting a contingent payment debt instrument, a debt instrument that is not issued by a U.S. issuer, and a debt instrument the terms of which are not reasonably available to a broker, within 90 days of the customer’s acquisition of the debt instrument.

In response to comments that this information could be difficult to obtain, new Regs. Sec. 1.6045-1(n)(12) provides an exception from the reporting requirements for a debt instrument issued by a non-U.S issuer or a tax-exempt obligation issued before Jan. 1, 2014. It is treated as a noncovered security not subject to Sec. 6045 basis reporting if the terms of the debt instrument are not reasonably available to the broker within 90 days of the date the customer acquired the debt instrument.

The regulations apply to debt instruments acquired on or after Jan. 1, 2015, except for the rule in Regs. Sec. 1.6045-1(n)(12), which applies to a debt instrument acquired on or after Feb. 18, 2016, but may be applied earlier.

—Sally P. Schreiber (sschreiber@aicpa.org) is a Tax Adviser senior editor.