IRS Issues Final Regulations on New Basis Reporting Requirement

The IRS released a new press release with final regulations for a new law that requires brokers and mutual fund firms to report the tax basis and other information by stock brokers and mutual fund companies. The law will affect all stock purchased in 2012 and later years. The reporting will be to investors and the IRS.

The press release states:

This additional reporting will be optional for stock purchased prior to these dates.

“This important reporting change means investors will now receive the information they need to more easily and accurately report their gains and losses,” said IRS Commissioner Doug Shulman. “We will continue to work closely with stakeholder groups to ensure a smooth implementation of the new requirement, which reduces the recordkeeping and paperwork burden for millions of taxpayers.”

These regulations, posted today in the Federal Register, implement a provision in the Energy Improvement and Extension Act of 2008. Among other things, the regulations describe who is subject to this reporting requirement, which transactions are reportable and what information needs to be reported. Besides providing numerous examples, they also adopt a number of comments and suggestions received since the proposed regulations were issued last December.

Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, long used to report sales prices, will be expanded in 2011 to include the cost or other basis of stock and mutual fund shares sold or exchanged during the year. Stock brokers and mutual fund companies will use this form to make these expanded year-end reports.

The expanded form will also be used to report whether gain or loss realized on these transactions is long-term (held more than one year) or short-term (held one year or less), a key factor affecting the tax treatment of gain or loss. The expanded form, to be first used for calendar-year 2011 sales, must be filed with the IRS and furnished to investors in early 2012.

The IRS today also announced penalty relief for brokers and custodians for reporting certain transfers of stock in 2011.

IRS loses in case over Prudential, others’ payouts

From BostonHerald.com Business Today:

“It took seven years, but Charles Ulrich did something many people dream about, but few succeed at: he beat the IRS in a tax dispute.

Not only that, but tax experts say potentially millions of other taxpayers could benefit from his victory. The case potentially involves payouts from a wide range of insurers, including Prudential.

The accountant challenged the method the IRS has used for more than 20 years to tax shares and cash distributed by mutual life insurance firms to their policyholders when they reorganize as public companies.

A federal court recently agreed with his interpretation.

‘There’s a tremendous amount of money at stake,’ said Robert Willens, a New York City-based tax analyst at Robert Willens LLC. “Tens of thousands of people could be in line for a refund.”

Don Alexander, an IRS commissioner in the 1970s and now a tax attorney in Washington, said while it’s not unusual for individuals to take on the agency, ‘most of them lose.’

Alexander called it ‘quite a significant case.’

The dispute arose when more than 30 mutual life insurance companies became publicly traded corporations in the late 1990s and earlier this decade, in a process known as demutualization.

Mutual companies are owned by their policyholders, so the companies provided stock and cash to compensate them for the loss of their ownership interests when they went public.

All told, roughly 30 million policyholders received distributions, Ulrich estimates. MetLife Inc. provided over $7 billion of stock to about 11 million policyholders when it went public in 2000, while Prudential distributed $12.5 billion in stock to another 11 million.

The IRS held that the recipients hadn’t paid anything for the shares and owed taxes on the full amount when the shares were sold. Cash distributions also were fully taxable, the IRS said.

That didn’t sound right to Ulrich, 72, an accountant for 49 years. He began researching the issue in 2001, when he received shares from two companies, Prudential and Indianapolis Life.

Ulrich concluded that policyholders had paid for their ownership rights through their premiums so the distributions should have been tax-free.

That could make a significant difference in what a taxpayer owes. If a company distributed shares worth $30 and a recipient subsequently sold them at $32, under the IRS’ view they would pay taxes on all $32. Under Ulrich’s interpretation, they would owe taxes only on the $2 per share gain.

In 2003, Ulrich publicized his views by contacting tax and insurance experts and setting up a Web site.

‘Largely I was regarded as a lunatic,’ he said, who ‘would never prevail against the IRS.’”

Mutual Fund Taxes To Break Records

According to CNN Money, major mutual fund companies have begun estimating this year’s taxable distributions and the taxes are set to break records yet again. Last year their tax bills totaled $23.8 billion, which was the largest since 2000, but this year’s total is expected to be over $24 billion. One reason for the ever-growing tax bill is the past years "wild market," with plunging stocks and a soft housing market.