Transcript Title of External Presentation

May 12, 2010
Cost Basis Reporting
NASPP San Francisco Chapter
Presented by:
Jennifer Sponzilli – KPMG LLP
Andrew Schwartz – BNY Mellon
Table of Contents
Cost Basis Reporting Overview
2

What is Cost Basis?

Legislative History

What changed?

What does it mean for the securities industry?

Complexities around cost basis

Effects on employee plans

Issuer responsibilities

Q&A
What is Cost Basis?
• Definition: All costs incurred in purchasing a capital asset
• Example:
 You purchase 100 shares of Broadcom at $34 per share, on May 11, 2010
 You pay $25 in fees to purchase the shares
 Your cost basis = (100 * $34) = $3,400 + $25 = $3,425
• In the past, transfer agents and brokers were not obligated to:
 retain cost basis information
 or the purchase date
 or any adjustments due to corporate actions (stock splits)
 or transfer the information to a successor broker
 or report the basis on Form 1099-B when the shares are sold
• Starting in 2011, this will change…
(Continued)
3
Legislative History
• Historical responsibility for cost basis on taxpayers
• IRS study
• On October 3, 2008, the Emergency Economic Stabilization Act of 2008 became law
• Comment period
• Proposed Regulations - December 2009
• Second comment period
• Effective dates
> January 1, 2011: stock/equities
> January 1, 2012: mutual funds and Dividend Reinvestment Plans (DRIPs)
> January 1, 2013: other securities (debt securities and options)
• Awaiting final regulations
• Burden shifted to brokers (including TAs), custodians, issuers
4
What changed?
• Noncovered vs. covered securities
• Permissible “lot selection” methods
 FIFO
 Specific ID
 Average Cost (Mutual funds/DRP)
Example:
BUY
1/2/12
10 shares $50
$ 500
BUY
2/1/12
20 shares $40
$ 800
BUY
3/1/12
20 shares $10
$ 200
50 shares
$1500
Sell 10 shares FIFO: Basis is $50/share
Sell 10 shares Specific ID from Feb lot: Basis is $40/share
Sell 10 shares Avg Cost: Basis is $30/share, FIFO from Jan lot
(Continued)
5
What changed?
• S-Corp tracking & reporting
• IRS fines for non-compliance
 $100 per 1099-B
 $350,000 maximum per payor
 10% of reportable income for intentional neglect
• Transfer statements (6045A)
• Corporate action reporting (6045B)
(Continued)
6
What changed?
• Tracking adjustments to cost basis
 Wash sales
 Return of Capital
 Corporate Actions
 Fees
 Gifts
 Death
(Continued)
7
What changed?
• Additional information required and filing deadline changes for Form 1099-B
8
What does it mean for the securities industry?
• Massive investment
• System changes, delays other development
• Communication program
• Very short timeframe
• Remaining uncertainty
• Tracking of cost basis by smaller transfer agents
• Third-party vendors
• Reputational / Financial Statement Risk
(Continued)
9
Complexities of the legislation
• Wash sales
 De minimis effects
 Sublot accounting
• Bifurcating covered/uncovered in same account
• Transfers due to gifts, death, private sales
• TA-Broker transfers and adjustments
• Corporate actions
• Dividend reinvestment plans
(Continued)
10
Complexities of the legislation
Wash sale example:
• BUY 2/1/11
100 shares @ $50
=
$5,000
• SELL 3/31/11 100 shares @ $45
=
$4,500
=
$5,640
• Results in $500 loss
• BUY 4/3/11
120 shares @ $47
• Result:
 Disallowed loss added to basis of repurchased shares:
 Adjust holding period of repurchased shares
 Create sublots
• BUY 2/4/11
100 shares @ $52
=
$5,200
• BUY 4/3/11
20 shares @ $47
=
$ 940
(Continued)
11
Complexities of the legislation
Bifurcating accounts: Dividend Reinvestment Plans
• BUY 4/1/10
100 shares @ $40 (noncovered)
• BUY 2/1/11
50 shares @ $35 (uncovered purchase in DRP)
• BUY 3/2/11
40 shares @ $38 (covered-purchased at broker & tfr in)
• BUY 5/1/12
30 shares @ $42 (covered purchase in DRP)
• Shareholder elects average cost in June 2012
• Which lots are available to be included?
(Continued)
12
Complexities of the legislation
Gifts
• Transfers without reason assumed to be a gift
• Data required:
 Original acquisition date
 Adjusted cost basis
 Date of gift
 FMV on date of gift
• When FMV < Adjusted basis, then if:
• Sale price > Adjusted basis > FMV = Gain = Sales price - Adjusted basis
• Adjusted basis > Sale price > FMV = No gain or loss
• FMV > Sale Price < Adjusted basis = Loss = Sale price – FMV
• Gifts to multiple people = multiple lots per person
(Continued)
13
Complexities of the legislation
Death
• Assets transferred to estate or beneficiary
• 2009 rule: Step-up basis
 Acquisition date becomes date of death
 Basis = FMV on date of death or valuation date six months later
 All sales considered long-term
• 2010 rule: Carryover basis
• Uncertainty going forward
(Continued)
14
Complexities of the legislation
Private Sale
• Certificate sold from one individual to another
• Not reportable on 1099-B by transfer agent
• Must be informed that it is a private sale-otherwise gift
• Basis to purchaser is purchase price
• How will TA know?
(Continued)
15
Complexities of the legislation
Transfer adjustments
• TA only has to record original basis
• What if a sale in a TA account affects transferred shares?
• Who is responsible for updating adjusted basis?
• Is there a deadline for issuing corrected transfer statements?
• What if TA changes in interim?
• What if 1099-B has to be reissued?
(Continued)
16
Complexities of the legislation
Corporate Actions
• Stock split
• Reverse split
• Mergers
• Stock dividends
• Spin – offs
• Tender offers
• Return of capital
• ADRs
(Continued)
17
Complexities of the legislation
Dividend reinvestment plans
• Generally, shareholder can specifically identify securities up to settlement date
• Shareholder can elect average cost in a DRP account
 then revoke within a year or before first sale
 or can change with IRS permission
 creating two or more calculation methods in the same account
• What defines a DRP – 10% rule
(Continued)
18
And if that’s not enough…Effects on Employee Plans
• Basic definition:
 Cost Basis = Purchase price + ordinary income
 + Fees (if proceeds reported gross on Form 1099-B)
• Proposed regulation
 More guidance is coming on employee plans
 Report only purchase price until 2013 (at earliest)
> Will understate cost basis
> Will confuse participants
> STA comment letter
(Continued)
19
Effects on Employee Plans
• Necessity of issuer involvement
 Example: Restricted stock vesting
 Issuer administers plan in-house
 Shares move from TA reserve to broker
 Who is responsible for transferring cost basis?
• Option exercises
 Non-Qualified
 ISO
> Disq. Disp. - Basis not known until sale
(Continued)
20
Effects on Employee Plans
• Employee Stock Purchase Plans
 Non-Qualified
> DRP rules
 Qualified §423 plans
> Basis not known until sale
 Interplay with §6039 regulations
 Effects on individual lots
> Corporate actions
> Wash sales
> Transfers out of plan
 Purchase price, FMV at beginning and end of offering period all need to be
adjusted
(Continued)
21
Effects on Employee Plans
• How to prepare
 Understand the calculations
 Spot check the results
 Be prepared for employee inquiries
 Work closely with administrator, TA, broker
 Ask questions
(Continued)
22
Q&A
CONTACT INFORMATION
Jennifer Sponzilli
Principal
KPMG LLP
(212) 872-6660
[email protected]
Andrew L. Schwartz, CPA, CEP
Vice President
BNY Mellon Shareowner Services
(201) 680-3340
[email protected]