The Emergency Economic Stabilization Act of 2008 (the Act) signed into law earlier this month contains provisions requiring investment companies to begin reporting cost basis of shares to investors acquired after Jan. 1, 2012. The Act also changes the date by which funds must furnish their investors and the Internal Revenue Service (IRS) with yearend tax information, extending it from Jan. 31 to Feb. 15.
Cost Basis Reporting. The Act requires that both open-end and closed-end funds report to their investors and the IRS the customer’s cost basis in fund shares sold or redeemed. The Act applies to fund shares that are acquired by the investor on or after Jan. 1, 2012 (the Effective Date). A mutual fund is responsible for providing its investors and the IRS with the cost basis information for only those fund shares acquired on and after the Effective Date; the fund has no obligation to provide any cost basis information for shares acquired before 2012, although it may voluntarily do so. The transitional period is intended to provide funds time to develop procedures to comply with the reporting requirement. Funds must also report the long-term or short-term nature of any gain or loss.
Unless the fund explicitly elects to treat all of an investor’s shares as being in one account, shares acquired before the Effective Date are treated as being in a “separate account” from those fund shares acquired on or after the Effective Date.
A fund may determine its cost basis for post-Effective Date shares under any classification that involves the identification of specific shares – for example, on an average cost basis or first-in/first-out basis. The cost basis method used is the fund’s choice unless the investor notifies the fund and elects to calculate the basis with another acceptable method under section 1012 of the Internal Revenue Code (Code).
New Code section 6045A, added by the Act, provides that if customers transfer their securities from one brokerage (or mutual fund) to another, the old broker must supply the new broker with the required cost basis information.
Year-End Tax Reporting. The Act also extends the date by which funds must furnish their investors with year-end tax information from Jan. 31 to Feb. 15. The extension applies to all shares held by an investor, whether or not the account includes a transaction for which cost basis reporting is required. The 15-day reporting extension applies to statements required to be furnished to investors after Dec. 31, 2008.
Other Tax-Related Provisions. The Act includes other provisions relevant to investment companies:
- Section 205 extends for two years the Pension Protection Act of 2006 provision that allows an income exclusion of up to $100,000 for qualifying distributions from IRAs paid to certain charitable organizations and made on or after the IRA owner reaches the age of 70 ½.
- Section 206 extends for two years the exemption from withholding taxes for interest and short-term capital gains paid by regulated investment companies to foreign shareholders under Code sections 871(k)(1) and (2). This applies to dividends with respect to taxable years of regulated investment companies beginning after Dec. 31, 2007.
- Section 207 extends for two years the application of Code section 2105(d), which provides that a portion of stock in certain regulated investments companies will not be deemed property within the United States for purposes of calculating the value of the estate of a nonresident who is not a citizen.
- Section 208 extends for two years to regulated investment companies certain REIT-related provisions of Code section 897.
A full copy of the Emergency Economic Stabilization Act of 2008 can be found at: http://financialservices.house.gov/essa/essabill.pdf.