Today the IRS and the Treasury Department released final regulations (TD 9750), relating to information reporting by brokers for transactions involving debt instruments and options, including the reporting of original issue discount (OID) on tax-exempt obligations, the treatment of certain holder elections for reporting a taxpayer’s adjusted basis in a debt instrument, and transfer reporting for section 1256 options and debt instruments. The final regulations generally adopt the provisions of temporary regulations released on April 18, 2013 (T.D. 9616) and March 13, 2015 (T.D. 9713).
Specifically, the final regulations provide that for a debt instrument acquired on or after January 1, 2015, brokers are required to assume that a customer has elected to determine accrued market discount using a constant yield method unless the customer notifies the broker otherwise. A customer that does not want to use a constant yield method to determine accrued market discount must, by the end of the calendar year in which the customer acquired the debt instrument in an account with the broker, notify the broker in writing that the customer wants the broker to use the ratable method to determine accrued market discount. Additionally, the final regulations permit, but do not require, a broker to apply the default constant yield method to a debt instrument acquired on or after January 1, 2014, and before January 1, 2015, provided the broker was not informed that the customer had made a section 1278(b) election and there were no principal payments on the debt instrument during the 2014 calendar year.
The final regulations also require a transferring broker to provide a transfer statement upon the transfer of a section 1256 option that occurs on or after January 1, 2016 to ensure that the receiving broker has all of the information required for purposes of section 6045. Additionally, to coordinate the reporting of OID under section 6049 with the reporting of basis for tax-exempt obligations under section 6045, the final regulations provide that a payor must report under section 6049 the daily portions of OID on a tax-exempt obligation acquired on or after January 1, 2017, and must also report amortized acquisition premium (which offsets OID) on such tax-exempt obligation. A broker may 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.
Lastly, the final regulations provide that a debt instrument issued by a non-U.S. issuer or a tax-exempt obligation issued before January 1, 2014, is treated as a noncovered security (and, therefore, is not subject to basis reporting under section 6045) if the terms of the debt instrument are not reasonably available to the broker within 90 days of the date the debt instrument was acquired by the customer. The Treasury Department and the IRS agreed with commenters that a broker may not always be able to obtain the information required to be reported for such debt instruments.