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GainsKeeper Blog

IRS Releases Final Cost Basis Regulations With No Change in Effective Dates But Provides Penalty Relief That Effectively Delays Most Transfer Reporting for One Year

WALTHAM, Mass. – Oct. 15, 2010 – On October 12, 2010, the IRS issued the final cost basis reporting regulations (TD 9504) and related Notice 2010-67 (the Final Regs and the Notice—both documents are available at Brokers and other financial services firms affected by cost basis reporting will likely be disappointed because the Final Regs do not delay any of the effective dates relating to cost basis reporting and almost all of the key aspects of the proposed rules that create compliance complexities for brokers and cost basis systems were retained in the Final Regs. The Final Regs are 137 pages and brokers, transfer agents, other financial service firms, vendors and tax advisors will be closely examining the Final Regs to assess the impact on preparations to implement cost basis reporting systems with particular focus on all of the changes from the proposed rules released in December, 2009. Because the effective dates have not changed, brokers will be rushing to revise their preparations for January 1, 2011 to take into account the Final Regs.

Notice 2010-67, however, provides much welcomed penalty relief relating to one important aspect of the new cost basis reporting law—transfer reporting. Under the Notice, the IRS indicates that it will not assert payee statement penalties under Internal Revenue Code Section 6722 for failing to provide transfer statements for any transfer of stock in 2011 unless the transfer of stock is “...incidental to the stock’s purchase or sale as described in Treas. Reg. Sec. 1.6045A-1(a)(1)(ii).” Thus, the Notice means that failing to provide transfer statements for transfers of stock occurring during 2011 will not result in tax penalties. As a result, the Notice practically permits brokers, transfer agents and others subject to transfer reporting under the new cost basis reporting law to delay transfer reporting until 2012. In addition, the Notice provides that stock transferred in 2011 for which a transfer statement is not provided is treated as a noncovered security. Thus, the receiving broker will not be required to provide cost basis reporting when any such transferred stock is subsequently sold or transferred away.

The Notice does not provide blanket relief from transfer reporting for transfers of stock occurring during 2011. As noted, penalty relief does not apply for a transfer of stock that is incidental to the stock’s purchase or sale as described in Treas. Reg. Sec. 1.6045A-1(a)(1)(ii). Thus, brokers, transfer agents and others subject to transfer reporting will need to assess whether they participate in transfers that are incidental to such purchases and sales. If so, penalty relief does not apply and they will need to have their transfer reporting systems up and running for these limited types of transfers as early as January 16, 2011 (transfer reporting is required 15 days after a transfer occurring on or after January 1, 2011).

The Final Regs do not change any of the key effective dates relating to cost basis reporting such as the January 1, 2011 effective date for stock and the January 1, 2012 effective date for mutual fund shares and dividend reinvestment plan (DRP) stock relating to covered securities subject to cost basis reporting. The Final Regs are generally effective on October 18, 2010 and generally apply to tax years beginning after that date.

We will provide additional commentary relating to the Final Regs and other aspects of the cost basis reporting law at later dates.


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