The collection of information contained in these final regulations related to the furnishing of information in connection with the transfer of securities has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number 1545-2186. The collection of information in these final regulations in §§1.6045-1(c)(3)(xi)(C) and 1.6045A-1 is necessary to allow brokers that effect sales of transferred covered securities to determine and report the adjusted basis of the securities and whether any gain or loss with respect to the securities is long-term or short-term in compliance with section 6045(g) of the Internal Revenue Code (Code). This collection of information is required to comply with the provisions of section 403 of the Energy Improvement and Extension Act of 2008, Division B of Public Law 110-343 (122 Stat. 3765, 3854 (2008)) (the Act).

In addition, the collection of information contained in §1.6045-1(n)(5) of these final regulations related to the furnishing of information in connection with the sale or transfer of a debt instrument that is a covered security is an increase in the total annual burden under control number 1545-2186. Under section 6045(g), a broker is required to determine and report the adjusted basis upon the sale or transfer of a debt instrument that is a covered security. If a sale has occurred, a broker must also determine and report whether any gain or loss with respect to the debt instrument is long-term or short-term in compliance with section 6045(g). The holder of a debt instrument is permitted to make a number of elections that affect how basis is computed. To minimize the need for reconciliation between information reported by a broker to both a customer and the IRS and the amounts reported on the customer’s tax return, a broker is required to take into account certain specified elections in reporting information to the customer. A customer, therefore, must provide certain information concerning an election to the broker in a written notification, which includes a writing in electronic format. The adjusted basis information will be used for audit and examination purposes. The likely respondents are recipients of Form 1099-B.

Estimated total annual reporting burden is 1,417 hours.

Estimated average annual burden per respondent is 0.12 hours.

Estimated average burden per response is 7 minutes.

Estimated number of respondents is 11,500.

Estimated total frequency of responses is 11,500.

This collection of information is required to comply with the provisions of section 403 of the Act.

The burden for the collection of information contained in the amendment to §1.1275-3 will be reflected in the burden on Form 8281, “Information Return for Publicly Offered Original Issue Discount Instruments,” when revised to request the additional information in the regulations. The burden for the collection of information contained in the other amendments to §1.6045-1 will be reflected in the burden on Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” when revised to request the additional information in the regulations. The burden for the collection of information contained in the amendments to §1.6045B-1 will be reflected in the burden on Form 8937, “Report of Organizational Actions Affecting Basis of Securities,” when revised to request the additional information in the regulations. The burden for the collection of information contained in §1.6049-9T will be reflected in the burdens on Form 1099-INT and Form 1099-OID when revised to request the additional information in the regulations. The information described in this paragraph is required to enable the IRS to verify that a taxpayer is reporting the correct amount of income or gain or claiming the correct amount of losses or deductions.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

This document contains amendments to the Income Tax Regulations (26 CFR part 1) relating to information reporting by brokers and others as required by section 6045 of the Code. This section was amended by section 403 of the Act to require the reporting of adjusted basis for a covered security and whether any gain or loss upon the sale of the security is long-term or short-term if gross proceeds reporting is required with respect to such security. The Act also requires the reporting of gross proceeds for an option that is a covered security. In addition, the Act added section 6045A, which requires certain information to be reported in connection with a transfer of a covered security to another broker, and section 6045B, which requires an issuer of a specified security to file a return relating to certain actions that affect the basis of the security. Final regulations under these provisions relating to stock were published in the Federal Register on October 18, 2010, in TD 9504 (the 2010 final regulations).

On November 25, 2011, the Treasury Department and the IRS published in the Federal Register (76 FR 72652) proposed regulations (REG-102988-11) relating to information reporting by brokers, transferors, and issuers of securities under sections 6045, 6045A, and 6045B for debt instruments and options. Written and electronic comments responding to the notice of proposed rulemaking were received and are available for public inspection at http://www.regulations.gov or upon request. A public hearing was held on March 16, 2012.

After considering the comments, the Treasury Department and the IRS adopt the proposed regulations as amended by this Treasury decision. The comments and revisions are discussed in this preamble.

The proposed regulations had a proposed effective date for both debt instruments and options of January 1, 2013. The Treasury Department and the IRS received numerous requests to delay the proposed effective dates for both debt instruments and options. Brokers and other interested parties maintained that the proposed effective date of January 1, 2013, did not provide them sufficient time to build and test the systems required to implement the reporting rules for debt instruments and options. In response to these requests, Notice 2012-34, 2012-21 I.R.B. 937, was issued to announce that the effective dates in the final regulations would be postponed to January 1, 2014.

A number of commenters also requested relief related to various aspects of reporting under sections 6045, 6045A, and 6045B. One commenter requested a 36-month general penalty relief period to allow brokers to test and refine their reporting systems.

In response to these comments, as was announced in Notice 2012-34, the effective date of these final regulations is postponed so that basis reporting is required for debt instruments and options no earlier than January 1, 2014. Moreover, these final regulations implement the reporting requirements for debt instruments in phases, as described in more detail later in this preamble. These final regulations also implement transfer reporting in phases. These features of the regulations are intended to give brokers ample time to develop and implement reporting systems.

Another commenter requested a safe harbor for good faith reliance upon debt instrument data that is provided by third-party vendors for purposes of both basis and transfer reporting. With respect to information from third-party vendors, §§1.6045-1(d)(2)(iv)(B) and 1.6045A-1(b)(8)(ii) of the 2010 final regulations provide that a broker is deemed to rely upon the information provided by a third party in good faith if the broker neither knows nor has reason to know that the information is incorrect (§1.6045A-1(b)(8)(ii) is redesignated in these final regulations as §1.6045A-1(b)(11)(ii)). Therefore, because the 2010 final regulations already address the concerns raised by these comments, no change on this issue is needed in these final regulations.

Several commenters requested a safe harbor for purposes of both basis and transfer reporting for good faith reliance upon information received on a section 6045A transfer statement. With respect to basis reporting, §1.6045-1(d)(2)(iv)(A) of the 2010 final regulations provides for penalty relief if a broker relies upon transferred information when preparing a return under section 6045. With respect to transfer reporting, §1.6045A-1(b)(8)(i) of the 2010 final regulations (redesignated in these final regulations as §1.6045A-1(b)(11)(i)) provides for penalty relief if a broker relies upon transferred information when preparing a transfer statement under section 6045A. Because the 2010 final regulations already address the concerns raised by these comments, no change on this issue is needed in these final regulations.

The proposed regulations required basis reporting for all debt instruments, other than a debt instrument subject to section 1272(a)(6) (in general, a debt instrument with principal subject to acceleration). Numerous commenters requested that the final regulations narrow the scope of basis reporting for debt instruments. Many commenters requested permanent exemptions from basis reporting for debt instruments that the commenters believe present data collection or computational difficulties, including convertible debt instruments, debt instruments denominated in non-U.S. dollar currencies, contingent payment debt instruments, variable rate debt instruments, municipal obligations, tax credit bonds, payment-in-kind (PIK) bonds, certificates of deposit, debt instruments issued by foreign persons, U.S. Treasury strips and other stripped debt instruments, inflation-indexed debt instruments, privately placed debt instruments, commercial paper, hybrid securities, investment units, debt instruments subject to put or call options, debt instruments with stepped interest rates, factored bonds, and short-term debt instruments. Alternatively, some commenters suggested that basis reporting be deferred for debt instruments until data is more readily available for some of the instruments described in the preceding sentence. One commenter renewed a request for exempting corporate trustees from basis reporting for registered debt instruments issued in a physical form. Some commenters asked for a permanent exemption or deferred reporting for debt instruments because, unlike the rules for equity, there are numerous rules in the Code and regulations, including holder elections, that affect the adjusted basis of a debt instrument, such as the rules relating to original issue discount (OID), bond premium, market discount, and acquisition premium.

Several commenters requested that the final regulations provide a specific list of the debt instruments subject to basis reporting rather than a list of the debt instruments not subject to basis reporting. Other commenters suggested limiting basis reporting to a debt instrument that has a fixed yield and fixed maturity date. One commenter indicated that fixed yield, fixed maturity date debt instruments comprise approximately 90% of the reportable debt instrument transactions.

Section 6045(g) by its terms requires basis reporting by brokers with respect to any note, bond, debenture, or other evidence of indebtedness that is a covered security. After consideration of the comments, however, the Treasury Department and the IRS appreciate that the proper implementation of broker basis reporting for debt instruments will require time to build and implement reporting systems, especially for debt instruments with more complex features. Thus, to facilitate an orderly transition to basis reporting for debt instruments, these final regulations implement basis reporting for debt instruments in phases.

For a debt instrument with less complex features, these final regulations require basis reporting by a broker if the debt instrument is acquired on or after January 1, 2014, consistent with Notice 2012-34. This category of less complex debt instruments includes a debt instrument that provides for a single fixed payment schedule for which a yield and maturity can be determined for the instrument under §1.1272-1(b), a debt instrument that provides for alternate payment schedules for which a yield and maturity can be determined for the instrument under §1.1272-1(c) (such as a debt instrument with an embedded put or call option), and a demand loan for which a yield can be determined under §1.1272-1(d). Commenters requested delayed reporting for any debt instrument with an embedded put or call option. The Treasury Department and the IRS believe that brokers should be able to implement reporting for a debt instrument with an embedded option that entitles the issuer to call or the holder to put the debt instrument prior to its scheduled maturity. Moreover, because an embedded put or call option is a common feature of debt instruments, delaying basis reporting for debt instruments with such a feature could delay basis reporting for an unduly large proportion of debt instruments.

Some debt instruments with a fixed yield and a fixed maturity date nevertheless pose challenges for information reporting. For these debt instruments and for more complex debt instruments that do not have a fixed yield and a fixed maturity date, these final regulations require basis reporting for debt instruments acquired on or after January 1, 2016. The Treasury Department and the IRS believe that brokers may need additional time to implement basis reporting for these debt instruments because of their more complex features or the lack of public information for the debt instruments. Fixed yield, fixed maturity debt instruments that are subject to reporting if they are acquired on or after January 1, 2016, include a debt instrument that provides for more than one rate of stated interest (such as a debt instrument with stepped interest rates), a convertible debt instrument, a stripped bond or coupon, a debt instrument that requires payment of either interest or principal in a non-U.S. dollar currency, certain tax credit bonds, a debt instrument that provides for a PIK feature, a debt instrument issued by a non-U.S. issuer, a debt instrument for which the terms of the instrument are not reasonably available to the broker within 90 days of the date the debt instrument was acquired by the customer, a debt instrument that is issued as part of an investment unit, and a debt instrument evidenced by a physical certificate unless such certificate is held (whether directly or through a nominee, agent, or subsidiary) by a securities depository or by a clearing organization described in §1.1471-1(b)(18). Other debt instruments that do not have a fixed yield and fixed maturity date but are subject to reporting if they are acquired on or after January 1, 2016, include a contingent payment debt instrument, a variable rate debt instrument, and an inflation-indexed debt instrument.

As noted earlier in this preamble, due to the difficulties in implementing basis reporting, the proposed regulations provided that a debt instrument described in section 1272(a)(6) (in general, a debt instrument with principal subject to acceleration) would not be subject to basis reporting. In response to favorable comments on this exception, these final regulations retain this exception from basis reporting.

A number of commenters requested delayed reporting or no basis reporting for short-term debt instruments (that is, debt instruments with a fixed maturity date not more than one year from the date of issue). One commenter argued that the application of the OID, bond premium, market discount, and acquisition premium rules to a short-term debt instrument, including the numerous elections applicable to short-term debt instruments, is complicated, that the effects on the basis of a short-term debt instrument would be marginal, and that basis reporting for short-term debt instruments may impose a significant burden on brokers and provide little benefit to taxpayers or the IRS. Because the Treasury Department and the IRS agree with this comment, these final regulations except short-term debt instruments from basis reporting.

Another commenter requested that the rules pertaining to short-term debt instruments be extended to all debt instruments that are acquired with a remaining term of one year or less. This exemption from information reporting would apply to a debt instrument originally issued with a term of greater than one year and acquired in a secondary market purchase when there is a remaining term of one year or less. The request to extend the short-term debt instrument rules to a long-term debt instrument with one year or less until maturity is not adopted because the rules that govern a debt instrument with a term over one year do not change when the maturity has declined to one year or less. While the potential for significant gain or loss on the debt instrument usually diminishes in the final year, the reporting is useful to the customer and the IRS, and all information required for reporting will be available to the broker.

One commenter requested that the final regulations exempt from reporting securities issued in connection with a bankruptcy restructuring because it is not always clear if a particular security is a debt instrument. After consideration of the comment, this request was not adopted because these final regulations provide that a security is treated as debt for reporting purposes only if the issuer has classified the security as debt or, if the issuer has not classified the security, if the broker knows that the security is reasonably classified as debt under general Federal tax principles.

A number of commenters raised concerns and suggestions about how to make reporting more consistent, both between transferring and receiving brokers and between brokers and customers. Many commenters expressed a strong desire to ensure that a customer who transfers a security from one broker to another will receive consistent reporting from the two brokers. Many commenters also asked for assistance in minimizing the amount of potential reconciliation between an amount reported by a broker to a customer and the IRS and the amount reported by that customer on a tax return.

The proposed regulations attempted to simplify reporting requirements by specifying the elections brokers were to assume to compute OID, market discount, bond premium, and acquisition premium reported to holders, and not permitting brokers to support alternative customer elections. A number of commenters, however, indicated a desire by brokers to support debt instrument elections made by their customers rather than rely on assumptions provided in the regulations. Some commenters stated that they already support some or all elections for debt as a service to their customers, and these commenters predict that similar customer service demands will eventually require all brokers to support customer elections, just as they support customer elections with respect to stock. Other commenters pointed out that the default assumptions in the proposed regulations might be preferred by most individual taxpayers, but other customers, such as trusts or partnerships, might not prefer the default assumptions. One commenter noted that the reporting rules provided in the proposed regulations would make computations by brokers simpler, but that educating customers about permissible elections, and the computations that each election would entail if an election is made, would become critical. This commenter recommended permitting a broker to support customer elections in the future as systems are upgraded.

However, other commenters indicated that some of the statutory defaults were generally simpler to apply and produced economic results that were only negligibly different than the defaults prescribed by the proposed regulations. For example, while the proposed regulations would have required reporting of market discount using a constant yield method, several commenters indicated a preference for reporting accrued market discount using a straight line method.

The Treasury Department and the IRS also received comments regarding the treatment of amortizable bond premium under section 171. One commenter requested that the section 171 election not be mandatory for reporting purposes because most taxpayers have not made the election, but suggested that a broker be required to support the section 171 election if a customer informs the broker that the election was or will be made.

After consideration of all the comments, the Treasury Department and the IRS have concluded that the best way to balance certainty and flexibility is to require brokers to report information using the default assumptions provided in the relevant statute and regulations, except in the case of the section 171 election, but to require brokers to accommodate elections by taxpayers that choose to depart from the defaults. Under these final regulations, upon written notification by a customer, a broker must take into account the following elections for basis reporting purposes: the election to accrue market discount using a constant yield; the election to include market discount in income currently; the election to treat all interest as OID; and the spot rate election for interest accruals with respect to a covered debt instrument denominated in a currency other than the U.S. dollar. The Treasury Department and the IRS do not anticipate that many taxpayers will make these elections. As a practical matter, by removing short-term debt instruments from the basis reporting rules, the number of elections available for a covered security has been reduced to a manageable number, and it is reasonable to require that the remaining debt instrument elections be supported.

These final regulations make an exception to the general rule requiring brokers to use the default elections provided in the statute and regulations in the case of bond premium. Section 171 generally requires taxpayers to affirmatively elect to amortize bond premium on taxable bonds, which then offsets interest income on the bond. Except in the rare case of a holder that prefers a capital loss, the election to amortize bond premium generally will benefit the holder of a debt instrument. Thus, consistent with the proposed regulations, these final regulations require brokers to assume that customers have made the election to amortize bond premium provided in section 171 when reporting basis, unless the customer has notified the broker otherwise.

The rules regarding basis reporting for bond premium in the proposed regulations prompted a number of commenters to request that the rules for reporting interest income associated with a bond acquired at a premium be conformed to the rules regarding basis reporting for these same debt instruments. In response to these commenters, this document contains temporary regulations addressing reporting of premium under section 6049. See Part H of this preamble for additional discussion of this issue.

The Treasury Department and the IRS considered making broker support of debt instrument elections a permitted, but not required, activity, but the additional administrative problems that can arise if a transferring broker supports certain elections while the receiving broker does not support the same elections made a permissive approach problematic. For example, if the receiving broker did not support the same elections as the transferring broker, and the customer properly made one of the elections permitted with respect to a debt instrument and notified the transferring broker of the election, the information provided by the receiving broker on the relevant Form 1099 would not reflect the customer’s election, requiring the customer to provide a reconciliation on the customer’s income tax return. These administrative problems lead to the conclusion that brokers should be required to support either all of the permitted elections for debt instruments or none of them. Given the numerous requests to support customer elections, coupled with requests to reduce the need for a customer to reconcile tax return data to the data provided by a broker, the Treasury Department and the IRS decided that support for customer debt instrument elections would be beneficial to taxpayers and would not impose an undue burden on brokers. It should be noted that supporting customer elections will require additional transfer statement information to advise a receiving broker of any elections that were used to compute the information provided.

Several commenters pointed out that brokers do not necessarily use common terms or conventions for debt instrument computations. For example, 30 days per month/360 days per year, actual days per month/360 days per year, and actual days per month/365 days per year are possible interest computation day count conventions. Different brokers may use different amortization and accretion assumptions, different accrual periods, and different rounding conventions.

The proposed regulations prescribed conventions to determine the accrual period to be used for reporting purposes. These final regulations generally adopt the conventions in the proposed regulations. Under these final regulations, a broker must use the same accrual period that is used to report OID or stated interest to a customer under section 6049. In any other situation, a broker is required to use a semi-annual accrual period unless the debt instrument provides for scheduled payments of principal or interest at regular intervals of less than six months over its term, in which case a broker must use an accrual period equal in length to this shorter interval. In response to a comment, these final regulations use a semi-annual accrual period rather than an annual accrual period as the default accrual period.

These final regulations do not prescribe a particular day count convention brokers must use for basis reporting. Instead, these final regulations provide that a broker may use any reasonable day count convention. The terms of a debt instrument, however, generally include the day count convention that the issuer will use to compute interest payments. The Treasury Department and the IRS expect that a broker generally will choose to use this day count convention to determine the accruals of interest and OID on the debt instrument and the related basis adjustments, which will facilitate reconciliation of the accruals with the amount of cash received by a broker and distributed to a customer. These final regulations also do not prescribe a particular rounding convention.

Commenters also indicated disagreement on the effect of puts and calls on calculations associated with a debt instrument. One commenter asked for clarification about whether issuer choice or holder choice will govern the treatment of put and call dates and recommended amortizing all callable debt instruments to their maturity dates rather than call dates. Another commenter requested standardizing the deemed maturity date and limiting the application of the put/call rules to cases in which the broker has actual knowledge of payment terms that could result in a different maturity date if the put/call rules are applied.

These final regulations continue the approach taken in the proposed regulations. The basis reporting rules are not intended to, and do not, change the substantive rules applicable to debt instruments. Thus, when assessing the effect of an embedded put or call option on a debt instrument, a broker must apply the rules described in §1.1272-1(c)(5) or §1.171-3(c)(4), whichever is applicable, to determine the correct date to be used in accrual calculations. The rules described in §1.1272-1(c)(5) have been in effect since 1994 and the rules described in §1.171-3(c)(4) have been in effect since 1997. Both rules provide a clear and workable framework for determining the effect, if any, of an embedded put or call option on a debt instrument.

One commenter requested that, to the extent brokers are not required to report using a single set of assumptions and computation conventions, explicit language should be added to the regulations covering transfer statements to require transfer of all information needed for a receiving broker to compute adjustments in a manner consistent with the transferor broker, including payment terms and assumptions used by the transferor broker, as well as any taxpayer elections that were supported by the transferor broker. These final regulations adopt this comment by expanding the information that must be included in a transfer statement for a debt instrument.

One commenter stated that there could be problems tracking the adjustments for discount and premium if different measurement periods are used (for example, a daily period versus a period ending on payment dates), especially for a customer that has purchased debt from the same issue at a discount and at a premium. The commenter indicated that tracking OID, market discount, bond premium, and/or acquisition premium adjustments for multiple lots of a single issue will be complex.

One commenter, noting that reporting to the IRS and taxpayers is only required once a year, asked whether a duty exists to compute the debt instrument accruals and display them more frequently than once each year, such as for each accrual or payment period. Another commenter indicated that to facilitate the preparation of transfer statements at any time during a year, it may be necessary to compute all debt instrument accruals each day.

These final regulations generally continue the approach taken in the proposed regulations regarding computations that affect the basis of a debt instrument. In particular, these final regulations do not require a broker to compute debt instrument accruals more than once per year unless a transfer takes place during a tax year, in which case the transferring broker must provide a transfer statement to the receiving broker. If a broker’s systems generate more frequent computations to support transfer statements, the broker is permitted to compute the accruals more than once per tax year.

The proposed regulations require accrued market discount to be reported upon the sale of a debt instrument. One commenter asked whether accrued market discount should be reported at the time of a call or at maturity. The commenter also noted that two rules in the proposed regulations relating to market discount may have required the filing of a Form 1099-INT and a Form 1099-B to report accrued market discount. The commenter recommended that accrued market discount be reported only on a Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” and associated with a specific sale.

For purposes of section 6045, §1.6045-1(a)(9) defines a sale to include any disposition of a debt instrument, which includes a retirement of a debt instrument at or prior to its stated maturity. These final regulations do not change this definition of a sale with respect to a debt instrument; however, these final regulations clarify that a sale for purposes of section 6045 includes a partial principal payment. Moreover, under these final regulations, in the case of a sale, accrued market discount will be reported only on the Form 1099-B, which would associate the accrued market discount with a specific sale of a single security. In connection with this comment, these final regulations amend the rule in §1.6045-1(d)(3) for reporting accrued stated interest on a Form 1099-INT when a debt instrument is sold between interest payment dates to make it clear that the rule does not apply to accrued market discount.

A number of comments were received that address narrower issues. One commenter requested guidance about how to determine and translate interest income or expense (including OID) on certain non-functional currency debt. Rules regarding the determination and translation of interest income and expense on certain debt instruments denominated in a non-functional currency are explicitly addressed in the regulations under section 988. See, for example, §1.988-2(b).

During the preparation of these final regulations, the Treasury Department and the IRS reviewed the existing reporting requirements for short-term debt instruments. Based on this review, these final regulations exempt from gross proceeds reporting all short-term debt instruments. This exemption is consistent with the existing exemption from reporting for certain short-term debt instruments in §1.6045-1(c)(3)(vii)(C), and the provisions in these final regulations that exempt short-term debt instruments from basis reporting. Moreover, almost all income related to short-term debt instruments is captured through the income reporting rules under section 6049 and any capital gain or loss related to a short-term debt instrument is expected to be very small.

In general, under the proposed regulations, basis and gross proceeds reporting applied to the following options granted or acquired on or after January 1, 2013: an option on one or more specified securities, including an option on an index substantially all the components of which are specified securities; an option on financial attributes of specified securities, such as interest rates or dividend yields; and a warrant or a stock right on a specified security. The scope provisions in these final regulations are generally the same as the scope provisions in the proposed regulations, except that these final regulations explicitly exclude a compensatory option. As announced in Notice 2012-34, these final regulations generally apply to an option granted or acquired on or after January 1, 2014.

One commenter asked for clarification of the concept of “financial attributes” in the scope provision. After reviewing the proposed language, the Treasury Department and the IRS believe that the list of items provided in §1.6045-1(m)(2)(i)(B) provides adequate detail to describe the concept.

Commenters also requested that the regulations not apply to options that are subject to section 1256. As explained immediately below, this comment was not adopted in these final regulations.

Numerous comments were received related to nonequity options that are covered by section 1256(b)(1)(C) (“section 1256 options”), which includes a listed option on a stock index that is not a narrow-based security index. Several commenters noted that the substantive rules that apply to section 1256 options are different from the rules that apply to non-section 1256 options and asked for different reporting treatment for the two types of options. Some commenters requested an exemption from reporting for all section 1256 options. The commenters suggested that if a blanket exemption from reporting is not provided, the IRS should consider extending the reporting rules for regulated futures contracts described in §1.6045-1(c)(5) to section 1256 options. One commenter noted that although the current rules only require reporting for regulated futures contracts on Form 1099-B, some brokers may already be reporting section 1256 options in a similar manner.

The Treasury Department and the IRS agree that there should be different reporting rules for section 1256 options and non-section 1256 options. In general, an option is subject to reporting under section 6045 only if the option references one or more specified securities. For a nonequity option described in section 1256(b)(1)(C) on one or more specified securities, a broker will apply the reporting rules that apply to a regulated futures contract, which are described in §1.6045-1(c)(5). For an option on one or more specified securities that is not described in section 1256(b)(1)(C), a broker will report gross proceeds and basis in accordance with the rules in these final regulations for a non-section 1256 option, which are described later in this preamble.

A number of comments focused on potential difficulties in distinguishing between an option on a broad-based index, which would be covered by section 1256, and an option on a narrow-based index, which would be treated in the same manner as an option on a single equity. Commenters requested guidance about how to determine whether an index is broad-based or narrow-based, and some commenters requested that the IRS annually publish a list of what constitutes a section 1256 option. Alternatively, the commenters requested complete exclusion of all stock index options. These final regulations do not provide substantive rules on index options. Rather, to determine whether an index substantially all the components of which are specified securities is a broad-based index under section 1256(g)(6)(B), a broker must look to rules established by the Securities Exchange Commission and the Commodities Futures Trading Commission that determine which regulator has jurisdiction over an option on the index. An option on a broad-based index is a nonequity option described in section 1256(b)(1)(C).

Several commenters requested broker penalty relief for good faith determinations of section 1256 status for index options. The Treasury Department and the IRS appreciate the difficulty in making determinations of section 1256 status. Therefore, these final regulations grant relief under sections 6721 and 6722 if a broker determines in good faith that an index is, or is not, a narrow-based index described in section 1256(g)(6) and reports in a manner consistent with that determination.

One commenter asked for an exemption from basis reporting for options on foreign currency and suggested that foreign currency be treated as a commodity. Because commodities and foreign currency are not specified securities, basis reporting by a broker for an option on foreign currency or an option on a commodity is not currently required under section 6045. Accordingly, no change is made in these final regulations in response to this comment.

A number of commenters asserted that neither the wash sale rules under section 1091 nor the short sale rules described in section 1233 should apply to a section 1256 option. One commenter asked for clarification about how holding period adjustments due to application of the wash sale provisions should be applied to section 1256 options. These comments have not been adopted because the changes requested are substantive in nature and outside the scope of the reporting rules.

Comments were also received on the rules in the proposed regulations relating to non-section 1256 options. Several commenters asserted that there are administrative issues involved in reporting over-the-counter (OTC) options and asked that OTC options be exempted from reporting. One commenter suggested that if exemptions were not granted, the IRS should create a “best efforts” safe harbor for OTC options. The Treasury Department and the IRS believe that it is reasonable to expect a broker to know the information required to report on an OTC option when it is entered into or when it is transferred into a customer’s account. Moreover, the regulations under section 6045A require the transferor of an OTC option to provide detailed information to a receiving broker sufficient to describe the option. This could include data about the underlying asset, contract size, non-standardized strike price, and expiration date. These final regulations therefore apply to any OTC option on a specified security.

For a cash settled non-section 1256 option, the proposed regulations required a broker to adjust gross proceeds related to an option transaction by increasing gross proceeds by the amount of any payments received for issuing the option and decreasing gross proceeds by the amount of any payments made on the option. A number of commenters requested that, instead of decreasing gross proceeds by amounts paid out, brokers be permitted to report gross amounts paid and received with respect to the option. Under this approach, the gross proceeds box on Form 1099-B would include all payments received, and the basis box on Form 1099-B would reflect any payments made. These commenters noted that some broker systems already deal with equity options this way. This suggestion has not been adopted because it is not consistent with the overall concept of gross proceeds and basis reporting, which applies to all covered securities. The rules in these final regulations for a cash settled option are based upon the basic idea that costs related to the acquisition of a position affect basis, while the costs related to the sale or closeout of a position affect gross proceeds. This is consistent with the changes to the definition of gross proceeds in the proposed regulations.

Under these final regulations, expenses related to the sale of an asset must be deducted from gross proceeds and may not be added to basis. For a purchased option, the basis in the option will include the premium paid as well as any commissions, fees, or other transaction costs related to the purchase. Gross proceeds on the cash settlement of the purchased option should be adjusted to account for any commissions, fees, or other transaction costs related to the cash settlement. In the case of a written option, a broker must determine the amount of reportable proceeds by subtracting from the amount of the premium received for writing the option any settlement payments, commissions, or other costs related to the close out or cash settlement. At the suggestion of several commenters, a clarification has been added that the basis under this scenario should be reported as $0.

One commenter requested that for cash-settled options, acquisition costs be treated as adjustments to gross proceeds and that no adjustments be made to basis for acquisition costs. This comment has not been adopted because it is contrary to the requirements of §1.263(a)-4(c), which require that acquisition costs be treated as part of basis.

One commenter requested that if multiple option contracts are bundled into a single investment vehicle and the components cannot be separately exercised, the investment will be treated as a single instrument with a single basis. These final regulations do not adopt this comment because the basis of each financial instrument is required to be accounted for separately.

Another commenter asked that the regulations explicitly address whether a broker must take into account the straddle rules under section 1092, including the qualified covered call rules in section 1092(c)(4). Consistent with the approach taken for broker basis reporting for stock, these final regulations explicitly provide that a broker will not take section 1092 into consideration when determining basis of an option that is a covered security.

Several comments were received asking for guidance in determining which options would be considered substantially identical for the purpose of applying the wash sale rules under section 1091. The 2010 final regulations only require a broker to apply the wash sale rules when the transaction involves covered securities with the same CUSIP number, and these final regulations do not change this rule.

The proposed regulations provided that a broker was permitted, but not required, to increase a customer’s initial basis in stock for income recognized upon the exercise of a compensatory option or the vesting or exercise of other equity-based compensation arrangement. The preamble to the proposed regulations also stated that the IRS might add a field to Form 1099-B to indicate when stock was acquired via the exercise of a compensatory option. In response, commenters asked that there be no change to the Form 1099-B to reflect compensation status or, alternatively, that using the indicator be permitted, but not required. These commenters indicated that compensation information is not accessible to most brokers, and extensive reprogramming for both the underlying database and the reporting process would be required. The commenters also expressed concerns that, in many situations, a broker would have to accept customer-provided information in order to track the compensation-related status.

After consideration of the comments, the Treasury Department and the IRS agree a compensation-related field should not be added to the Form 1099-B. The lack of a mechanism to communicate whether the basis of stock has been adjusted for the exercise of a compensatory option coupled with a system involving discretionary broker adjustments for compensatory options would, however, be unworkable. Therefore, these final regulations provide that brokers are not permitted to adjust basis to account for the exercise of a compensatory option that is granted or acquired on or after January 1, 2014. This approach will eliminate confusion and uncertainty for an employee who has exercised a compensatory option. Under the permissive adjustment rule in the proposed regulations, without an indicator on Form 1099-B, an employee would not necessarily know whether the basis of the stock acquired through the exercise of a compensatory option had been adjusted by a broker to account for any income recognized by the employee due to the option exercise. By prohibiting adjustment by a broker, an employee will know that the basis number reported by the broker only reflects the strike price paid for the stock and that a basis adjustment may be necessary to reflect the full amount paid by the employee.

One commenter asked for guidance on how to implement backup withholding for option transactions. In particular, the commenter asked for clarification about whether a rule similar to §31.3406(b)(3)-2(b)(4) applies, permitting a broker to withhold at either the time of sale or upon a closing transaction or lapse. The commenter also asked how to apply backup withholding to several situations involving physically settled options or when the taxpayer transfers an option or ends up closing out an option transaction at a loss. This comment is not adopted because backup withholding rules are outside the scope of these final regulations.

Several commenters requested that stock rights and warrants be excluded from basis reporting. Several other commenters addressed issues under sections 305 and 307. One commenter pointed out some administrative problems with the taxpayer election to allocate basis under section 307, including the fact that the election to allocate basis can be made after a broker’s Form 1099-B reporting window closes. This commenter recommended requiring basis adjustments to reflect the issuance of stock rights or warrants only when section 307 requires allocation of basis because the value of the stock right or warrant represents 15% or more of the fair market value of the old stock. Another commenter noted that distributions of stock rights or warrants representing 15% or more of the value of the old stock are uncommon and recommended that brokers should not make an adjustment for the effects of section 307.

One commenter requested a clarification of the rules for a stock right or warrant that terminates other than by exercise or actual sale, so that a closing transaction that results in $0 proceeds is not a sale subject to reporting on a Form 1099-B. The commenter was concerned that in many cases a broker would have to report a lapse of a stock right or warrant by reporting $0 as proceeds on the Form 1099-B, even in situations where there is no basis to report.

After consideration of the comments, these final regulations provide that a broker is permitted, but not required, to apply the rules of sections 305 and 307 when reporting the basis of a stock right or warrant or any stock related to a stock right or warrant. This rule will permit the industry to deploy its resources most efficiently. A broker who already supports adjustments under sections 305 and 307 will not need to reprogram its systems, while a broker who does not currently support the adjustments can decide to do so later, or not at all. Note that, under these final regulations, a stock right or a warrant purchased from the original recipient is treated as an option.

One commenter asked for an explicit exemption from reporting for single stock futures that fall under section 1234B or for guidance on how to apply section 1234B. This request was not adopted; instead, these final regulations add section 1234B contracts to the definitions of specified security and covered security. The Treasury Department and the IRS believe that there is no reason to exclude single stock futures on a specified security from information reporting when information reporting is generally required on stock, options on stock, and regulated futures contracts.

Numerous comments were received related to transfer reporting for debt instruments, as required by section 6045A. Many comments focused on the information that was to be included on the transfer statement. Some commenters argued for the transfer of original purchase information related to debt instruments because some brokers will recompute OID, market discount, bond premium, and acquisition premium through the transfer date and will use the recomputed numbers, instead of the numbers provided by the prior broker, to populate their data systems. Other commenters argued that only adjusted basis needs to be transferred to provide for subsequent accrual computations; these commenters point out that some adjustments, such as wash sale loss deferrals and holding period adjustments, will be reported accurately if adjusted basis is reported on a transfer statement, but may not be reflected if basis is recomputed based on original purchase information. Further, to the extent that a transferor broker might have used a computational method that is different from the method used by the receiving broker, as long as each broker is internally consistent in reporting income and adjusting basis, permitting the receiving broker to start from adjusted basis will help ensure that there is no duplication or omission of income and adjustments. Another commenter argued that the market discount, acquisition premium, and bond premium amounts should be implicit in the combination of adjusted issue price and adjusted cost basis, and transfer of the details is not needed. One commenter suggested treating each transfer as though it were a new purchase. This would entail comparing the reported adjusted basis to the adjusted issue price, determining new amounts of bond premium, market discount, or acquisition premium, and then basing all further accruals on these numbers.

After consideration of the comments, the Treasury Department and the IRS believe that brokers and customers are better served when all relevant information is provided when a security is transferred. These final regulations therefore generally require the information specified in the proposed regulations, and have expanded the list of information that must be provided to support the new requirement that a broker support customer debt instrument elections. It is not anticipated that a particular receiving broker will necessarily use all of the information received. For example, if a receiving broker’s systems are set up to recompute debt instrument accruals from the issue date, that broker may not find the data for adjusted issue price as of the transfer date to be useful.

Several commenters also expressed concerns about transferring data purchased from third-party vendors. One commenter suggested that communicating the CUSIP identifier for a debt instrument might be sufficient to enable a receiving broker to retrieve information that applies to all debt instruments in a particular issue, such that some of the data described in the proposed regulations might not be necessary. Another commenter argued that data specific to a customer, such as initial purchase price and date, and the CUSIP should provide a receiving broker with all information needed to properly compute debt instrument accruals.

These final regulations, like the proposed regulations, require that a transferor broker provide all information necessary to allow a receiving broker to comply with its information reporting obligations. Consistent with the comments, if providing a CUSIP number or similar security identifier is adequate to enable the receiving broker to obtain some of the required information, a transferring broker is permitted to supply the CUSIP number or security identifier as a substitute for that information. For example, data that applies to all debt instruments in an issue, such as issuer name, issue date, coupon rate, coupon payment dates, or issue price, might be data that could be derived from a CUSIP or other security identifier. However, under these final regulations, like the proposed regulations, a receiving broker may request to receive the information specified in the regulations from the transferor broker. Further, data specific to a customer, such as price paid by the customer, the acquisition date, or yield, must be transmitted separately as these data will be different for each customer and cannot be derived from the CUSIP number.

A few commenters focused specifically on the list of debt instrument-specific data that was included in proposed §1.6045A-1(b)(3). One commenter asked if the amount of acquisition premium already amortized should be added to the list, pointing out that accrued market discount and amortized bond premium are already reportable. One commenter asked that the date through which the transferor broker made adjustments be added to the list. These final regulations adopt these comments and add these data to the list of transfer statement items.

One commenter asked whether, when complying with the transfer statement rules under section 6045A for a section 1256 option, a broker may report the adjusted basis instead of the original basis for a position that has been marked to market. Section 1.6045A-1(b)(1)(vii) of the 2010 final regulations requires a broker to report the adjusted basis of a specified security. Therefore, no change is needed to address this comment.

One commenter asked for penalty relief for transfer reporting analogous to the relief that was provided for transfer reporting for stock in Notice 2010-67, 2010-43 I.R.B. 529. Under Notice 2010-67, although broker reporting for basis began for some stock acquired on or after January 1, 2011, transferring brokers were given penalty relief if they did not provide transfer statements for transfers occurring during 2011, and receiving brokers were instructed to treat a transfer during 2011 for which no transfer statement was received as the transfer of a noncovered security. Instead of penalty relief, the Treasury Department and the IRS believe that it is appropriate to provide additional time for brokers to phase in transfer reporting for transfers of debt instruments, options, and securities futures contracts, and the final regulations provide that transfer reporting for debt instruments, options, and securities futures contracts will be applicable no earlier than January 1, 2015.

A number of comments were received concerning returns relating to issuer actions affecting the basis of securities under section 6045B. Several commenters asked whether certain types of events would be reportable under section 6045B, including the issuance of a debt instrument, a reissuance of a debt instrument, and a reorganization in bankruptcy where new debt instruments are issued for old debt instruments. Section 6045B only applies to an issuer action that affects basis. The issuance of a debt instrument generally is not an issuer action affecting the basis of a debt instrument. Accordingly, in many cases, the issuance of a debt instrument is not subject to section 6045B. The legislative history, however, indicates that reorganizations, such as mergers and acquisitions, are among the organizational actions that can trigger reporting under section 6045B. Thus, for example, the issuance of a debt instrument in a recapitalization, including a recapitalization resulting from a significant modification or a bankruptcy reorganization, can be an issuer action affecting the basis of a debt instrument for purposes of section 6045B.

One commenter pointed out that a REMIC regular interest is excluded from being a covered security, but is not excluded from being a specified security. With respect to reporting under section 6045B, the commenter requested that if a specified security is not subject to basis reporting, issuer reporting under section 6045B should not be required. These final regulations clarify that a REMIC regular interest is not a specified security and, therefore, is not subject to reporting under section 6045B.

Section 1.6045B-1(a)(3) of the 2010 final regulations provides that an issuer may meet its reporting obligation under section 6045B by posting a copy of Form 8937 to its public website. One commenter renewed a request that the IRS permit an issuer to provide the information required by section 6045B on a website without posting a copy of Form 8937. The regulations do not adopt this suggestion because posting a copy of Form 8937 ensures consistent presentation of the reported information. Another commenter noted that posting a copy of Form 8937 could facilitate identity theft because the written signature of the certifying company official would be widely available. These final regulations allow an issuer to publicly post a Form 8937 with an electronic signature as an alternative to a written signature.

One commenter requested that a clearing organization involved in clearing exchange-traded options be treated as an issuer rather than a writer for purposes of section 6045B. Other commenters suggested language to clarify the identification of the party responsible for reporting in the case of an OTC option. In response to the commenters, these final regulations specify that a clearing organization that is the counterparty to an exchange-traded option is the issuer of the option for purposes of section 6045B, and the writer of an OTC option is the issuer for purposes of section 6045B.

One commenter pointed out that currently there is no safe harbor for modifications to non-debt instruments, so any modification of an option technically might result in a taxable event. The commenter recommended providing an assumption for brokers that changes to option terms do not result in a taxable event if section 1001 does not apply. This request is outside the scope of the current project and so no changes were made to these final regulations in response to this comment. It should be noted, however, that under these final regulations, an option issuer only needs to comply with §1.6045B-1 if the change in the underlying asset results in a different number of option contracts. If the terms of the option are changed to reflect a corporate event, but the number of option contracts does not change, a section 6045B event has not occurred.

One commenter requested that foreign entities that are not U.S. payors and are either qualified intermediaries or participating foreign financial institutions be excluded from basis reporting requirements. The Treasury Department and the IRS intend to issue future guidance coordinating the reporting requirements applicable to qualified intermediaries and participating foreign financial institutions under chapter 61 (including section 6045) with the applicable chapter 4 reporting requirements.

As noted earlier in this preamble, a number of commenters requested that the rules for reporting interest income associated with a debt instrument acquired at a premium be conformed to the rules regarding basis reporting for these same debt instruments. Under the current information reporting rules under section 6049, interest income is reported without adjustment for bond premium or acquisition premium.

Under section 171(e) (which was added to the Code in 1988) and §1.171-1 (which was amended in 1997 to reflect the addition of section 171(e)), amortized bond premium offsets stated interest payments. As a result, only the portion of a stated interest payment that is not offset by the amortized premium is treated as interest for federal income tax purposes. Under section 6049(a), the Secretary can prescribe regulations to implement the reporting of interest payments, which includes the determination of the amount of a payment that is reportable interest. Similarly, notwithstanding section 6049(d)(6)(A)(i), under section 6049(a), the Secretary can prescribe regulations to implement the reporting of OID, which includes the determination of the amount reportable as OID (interest).

The Treasury Department and the IRS believe that the income reporting and basis reporting rules should be consistent. Therefore, to improve consistency between income reporting and basis reporting and to provide immediate guidance to brokers and investors, this document adds temporary regulations under section 6049 to require broker reporting of interest (OID) income to reflect amounts of amortized bond premium or acquisition premium for a covered debt instrument.

Under the temporary regulations, for purposes of section 6049, a broker will assume that a customer has elected to amortize bond premium unless the broker has been notified that the customer has not made the election. It should be noted that this change applies only to the information reported by the broker to its customer. Thus, a customer that does not prefer to make the section 171 election can report interest on the customer’s income tax return unadjusted for bond premium because the information reporting rules do not change the substantive rules affecting bond premium (or any of the other rules pertaining to OID, market discount, or acquisition premium). Moreover, a customer can notify a broker that the customer has not made or has revoked a section 171 election, and the broker is required to reflect this fact on the Form 1099-INT and the Form 1099-B. If a broker is required to report amounts reflecting amortization of bond premium, the temporary regulations allow a broker to report either a gross amount for both stated interest and amortized bond premium or a net amount of stated interest that reflects the offset of the stated interest payment by the amount of amortized bond premium allocable to the payment.

In addition, under the temporary regulations, for purposes of section 6049, a broker must report OID adjusted for acquisition premium in accordance with §1.1272-2 by assuming that a customer has not elected to amortize acquisition premium based on a constant yield. However, if the broker has been notified that the customer has made an election to amortize acquisition premium based on a constant yield, the broker is required to reflect this fact on the Form 1099-OID and the Form 1099-B. The temporary regulations allow a broker to report either a gross amount for both OID and 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.

Under §1.1275-3(c) of the current final regulations, an issuer of a publicly offered debt instrument issued with OID must file a Form 8281, “Information Return for Publicly Offered Original Issue Discount Instruments,” within 30 days after the issue date of the debt instrument. The information from Form 8281 is used to develop the tables of OID information that are part of Publication 1212, “Guide to Original Issue Discount (OID) Instruments.” To be publicly offered, a debt instrument generally must be registered with the Securities and Exchange Commission as of the instrument’s issue date. In many instances, a debt instrument issued in a private placement is registered with the Securities and Exchange Commission after the issue date. As a result, a Form 8281 is not required to be filed with the IRS and, therefore, the OID information generally does not appear in the Publication 1212 tables. A number of commenters on the proposed regulations asked that OID information on more debt instruments be provided in the tables to Publication 1212. In response to these comments, the regulations under §1.1275-3(c) are amended to require the filing of a Form 8281 for a debt instrument that is part of an issue the offering of which is registered with the Securities and Exchange Commission after the issue date of the debt instrument. The Form 8281 is required to be filed within 30 days of the date the offering is registered with the Securities and Exchange Commission.

A number of commenters indicated that compliance with basis reporting requirements and the use of basis and other information reported by brokers will require considerable resources and effort on the part of return preparers and information recipients. The Treasury Department and the IRS are continuing to review all aspects of the information reporting process and are exploring ways to reduce the compliance burden for both brokers and for information recipients.

These regulations are effective when published in the Federal Register as final regulations. In general, the regulations regarding reporting of basis and whether any gain or loss on a sale is long-term or short-term under section 6045(g) apply to certain debt instruments acquired on or after January 1, 2014. See §1.6045-1(n)(2). In general, for all other debt instruments, the regulations apply to debt instruments acquired on or after January 1, 2016. See §1.6045-1(n)(3). The regulations regarding reporting of gross proceeds, basis, and whether gain or loss on a sale is long-term or short-term under section 6045(h) apply to options granted or acquired on or after January 1, 2014. The regulations regarding reporting of basis and whether any gain or loss on a sale is long-term or short-term apply to securities futures contracts entered into on or after January 1, 2014. In general, the regulations regarding transfer reporting for certain debt instruments, options, and securities futures contracts apply to transfers occurring on or after January 1, 2015. The regulations regarding transfer reporting for more complex debt instruments apply to transfers occurring on or after January 1, 2017. See §1.6045A-1(d). The regulations regarding reporting for issuer actions that affect the basis of certain debt instruments, options, and securities futures contracts apply to issuer actions occurring on or after January 1, 2014. The regulations regarding reporting for issuer actions that affect the basis of more complex debt instruments apply to issuer actions occurring on or after January 1, 2016. See §1.6045B-1(j). The final regulations regarding the filing of Form 8281 apply to a debt instrument that is part of an issue the offering of which is registered with the Securities and Exchange Commission on or after January 1, 2014. The temporary regulations under section 6049 relating to the reporting of premium apply to covered securities acquired on or after January 1, 2014.

It has been determined that this rulemaking is not a significant regulatory action as defined in Executive Order 12866, as supplemented by Executive Order 13563. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the temporary regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply to the temporary regulations.

Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that the final regulations in this document will not have a significant economic impact on a substantial number of small entities. Any effect on small entities by the rules in the final regulations flows directly from section 403 of the Act.

Section 403(a) of the Act modifies section 6045 to require that, when reporting the sale of a covered security, brokers report the adjusted basis of the security and whether any gain or loss with respect to the security is long-term or short-term. The Act also requires gross proceeds reporting for options. It is anticipated that these statutory requirements will fall only on financial services firms with annual receipts greater than $7 million and, therefore, on no small entities. Further, in implementing the statutory requirements, the final regulations generally limit reporting to information required under the Act.

Section 403(a) of the Act requires a broker to report the adjusted basis of a debt instrument that is a covered security. The holder of a debt instrument is permitted to make a number of elections that affect how basis is computed. To minimize the need for reconciliation between information reported by a broker to both a customer and the IRS and the amounts reported on the customer’s tax return, the final regulations require a broker to take into account certain specified elections in reporting information to the customer. Therefore, under the final regulations, a customer must provide certain information concerning an election to the broker in a written notification, which includes a writing in electronic format. It is anticipated that this collection of information will not fall on a substantial number of small entities. Further, the final regulations generally implement the statutory requirements for reporting adjusted basis. Moreover, any economic impact is expected to be minimal because it should take a customer no more than seven minutes to satisfy the information-sharing requirement in these final regulations.

Section 403(c) of the Act added section 6045A, which requires applicable persons to furnish a transfer statement in connection with the transfer of custody of a covered security. The modifications to §1.6045A-1 effectuate the Act by giving the broker who receives the transfer statement the information necessary to determine and report adjusted basis and whether any gain or loss with respect to a debt instrument or option is long-term or short-term as required by section 6045 when the security is subsequently sold. Consequently, the final regulations do not add to the impact on small entities imposed by the statutory scheme. Instead, it limits the information to be reported to only those items necessary to effectuate the statutory scheme.

Section 403(d) of the Act added section 6045B, which requires issuer reporting by all issuers of specified securities regardless of size and even when the securities are not publicly offered. The modifications to §1.6045B-1 limit reporting to the additional information for debt instruments and options necessary to meet the Act’s requirements. Additionally, the final regulations, as modified, retain the rule that permits an issuer to report each action publicly instead of filing a return and furnishing each nominee or holder a statement about the action. The final regulations therefore do not add to the statutory impact on small entities but instead eases this impact to the extent the statute permits.

Therefore, because the final regulations in this document will not have a significant economic impact on a substantial number of small entities, a regulatory flexibility analysis is not required.

Pursuant to section 7805(f) of the Code, the proposed regulations preceding the final regulations in this document were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business, and no comments were received. In addition, the proposed regulations accompanying the section 6049 temporary regulations in this document have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

* * * * *

Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.6049-9T also issued under 26 U.S.C. 6049(a). * * *

Par. 2. Section 1.1271-0(b) is amended by adding an entry for §1.1275-3(c)(4) to read as follows:

Par. 8. The authority citation for part 602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 9. In §602.101, paragraph (b) is amended by adding the following entry in numerical order to the table to read as follows:

The collection of information contained in this notice of proposed rulemaking has been submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the collection of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, SE:CAR:MP:T:T:SP, Washington, DC 20224. Comments on the collection of information should be received by May 7, 2013. Comments are specifically requested concerning:

Whether the proposed collection of information is necessary for the proper performance of the Internal Revenue Service, including whether the information will have practical utility;

The accuracy of the estimated burden associated with the proposed collection of information or of the certification contained under the heading “Special Analyses”;

How the quality, utility, and clarity of the information to be collected may be enhanced;

How the burden of complying with the proposed collection of information may be minimized; and

Estimates of capital or start-up costs and costs of operation, maintenance, and purchases of service to provide information.

The collection of information in this proposed regulation is in §301.6708-1(c)(3)(ii). This information is required for the IRS to determine whether good cause exists to allow a person affected by these regulations an extension of the legislatively established 20-business-day period to furnish a lawfully requested list to the IRS. The collection of information is voluntary to obtain a benefit. The likely respondents are persons (individuals and entities) who qualify as material advisors, as defined in section 6111, who are unable to respond to a valid and statutorily authorized section 6112 list request within the statutory period of time provided by section 6708.

Estimated total annual reporting burden: 200 hours.

Estimated average annual burden hours per respondent: 8 hours.

Estimated number of respondents: 25.

Estimated annual frequency of responses: on occasion.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

This document contains proposed amendments to 26 CFR part 301 relating to the section 6708 penalty for failing to make available, as required by section 6112, lists of advisees with respect to reportable transactions. Section 6112 requires material advisors to maintain lists of advisees and other information with respect to reportable transactions and to make that information available to the Secretary upon written request.

Section 6708 was added to the Internal Revenue Code by the Deficit Reduction Act of 1984 (Public Law 98-369, 98 Stat. 680). At that time, section 6708 imposed a penalty on each organizer or seller of a potentially abusive tax shelter who failed to meet the requirements of section 6112 unless the person showed that the failure occurred as a result of reasonable cause and not as a result of willful neglect. The amount of the penalty was $50 for each person who was sold an interest in a tax shelter and whose name (or other required information) was not listed or maintained pursuant to the requirements of section 6112. The maximum penalty imposed was $50,000 for each tax shelter for a calendar year. Treasury Reg. §301.6708-1T was issued shortly after section 6708 became law. Subsequently, the Tax Reform Act of 1986 (Public Law 99-514, 100 Stat. 2090) increased the maximum calendar year penalty to $100,000.

The American Jobs Creation Act of 2004, Public Law 108-357, 118 Stat. 1418 (AJCA), was enacted on October 22, 2004. AJCA section 817 amended section 6708, significantly increasing the amount of the penalty and eliminating the maximum calendar-year limit on the penalty. As amended by the AJCA, section 6708 imposes a penalty on a person required to maintain a list under section 6112 (a “material advisor”) who fails to make the list available to the IRS upon written request. Under section 6708(a)(1), if a material advisor fails to comply with a written request for the section 6112 list within 20 business days after the request is made, the material advisor is subject to a penalty in the amount of $10,000 for each day of the failure after the 20th business day. Under section 6708(a)(2), the penalty will not be imposed on any day that the failure is due to reasonable cause. There is no statutory limitation to the amount of the penalty that can be imposed under section 6708. Section 6708(b) provides that the penalty imposed under section 6708(a) shall be in addition to any other penalty provided by law. Section 6708, as amended, is effective for requests made after October 22, 2004, and it encompasses requests made for lists required to be maintained under section 6112 before section 6112 was amended by the AJCA.

To implement the pertinent provisions of the AJCA, the Treasury Department and IRS issued Notice 2004-80, 2004-2 C.B. 963 (see §601.601(d)(2)(ii)(b)), which provided interim guidance relating to section 6708, as well as section 6112. With respect to section 6708, Notice 2004-80 provides that the 20-business-day period within which a person must provide the list required to be maintained under section 6112 shall begin on the first business day following the earlier of the date that the IRS: (1) mails a request for the list by certified or registered mail to the last known address of the material advisor required to maintain the list; or (2) hand-delivers the written request in person. The Treasury Department and IRS also issued interim guidance relating to section 6112 in Notice 2005-17, 2005-1 C.B. 606; Notice 2005-22, 2005-1 C.B. 756; and Notice 2006-6, 2006-1 C.B. 385. On July 31, 2007, the Treasury Department and IRS issued final regulations under section 6112 (TD 9352) replacing the interim guidance relating to section 6112. The Treasury Department and IRS have received various comments and questions regarding the application of section 6708 as amended by the AJCA. Consequently, after consideration of these comments and questions, the Treasury Department and IRS are publishing proposed rules reflecting the AJCA amendments to section 6708.

Proposed §301.6708-1(a) provides that, in general, section 6708 imposes a penalty of $10,000 per day for the failure of a person required to maintain a list under section 6112 to furnish the list to the IRS, upon written request, within 20 business days after the date of the request, absent reasonable cause.

Proposed §301.6708-1(b) provides that the 20-business-day period begins on the first business day following the earlier of the date that the IRS: (1) mails the request for the section 6112 list by certified or registered mail to the person required to maintain the list; (2) hand delivers the request for the section 6112 list directly to the person; or (3) leaves the request for the section 6112 list at the last and usual place of abode or usual place of business of the person. Proposed §301.6708-1(c) provides that the person may make the requested list available to the IRS as required by section 6112 by delivering it to the IRS by either hand delivery, the U.S. mail, a private delivery service, or by arranging with the IRS to produce the list by another agreed-upon method within the 20-business-day period following the list request.

The Treasury Department and the IRS believe that there are situations in which it is necessary to permit an extension of the 20-business-day response period. Proposed §301.6708-1(c)(3) permits the IRS to grant an extension, at its discretion, if prior to the expiration of the 20-business-day period, the person establishes that the person cannot reasonably meet the 20-business-day deadline despite diligent efforts to maintain the materials constituting a list and to make that list available to the IRS in the time and manner required by the Secretary under section 6112. The proposed regulations explain how to request an extension and discuss the various factors that the IRS will consider in determining whether to grant the person’s extension request. The IRS may, in its discretion, grant the person’s extension request in full or in part. The failure of the IRS to grant the person’s extension request in full or in part may not be reviewed in any judicial proceeding.

The conference report accompanying the enactment of the AJCA amendments to section 6708 describes the penalty as a “time-sensitive penalty,” and, accordingly, no extensions will be granted where the IRS determines that a significant reason for the extension request is to delay production of the list. See H.R. Rep. No. 108-755, 108th Cong., 2d Sess., at 597. In this regard, §301.6708-1(c)(3)(ii) of the proposed regulations requires persons seeking extensions to affirmatively state that the extension request is not made for purposes of avoiding the person’s list maintenance obligations imposed by section 6112 and its corresponding regulations. The Treasury Department and IRS believe that the time-sensitive nature of the penalty, in addition to the IRS’s need for the section 6112 information in a timely manner, supports the position that extensions, when granted, will generally be granted for a short time period. Persons who are required to maintain a list under section 6112 are required and expected to maintain the list in a readily accessible form. See Treas. Reg. §301.6112-1(d). Accordingly, the Treasury Department and the IRS do not expect that extensions should be routinely requested or granted. The grant of an extension of the 20-business-day response period will be warranted only in situations when the person requesting the extension establishes to the satisfaction of the IRS good cause for why the deadline cannot be reasonably met despite diligent efforts to comply with section 6112. The IRS will adhere to the guidance in these proposed regulations regarding extensions pending the publication of final regulations addressing the matter.

The conference report accompanying the AJCA modifications to the section 6708 penalty provides that the “penalty applies to a person who fails to maintain a list, maintains an incomplete list, or has in fact maintained a list but does not make the list available to the Secretary.” H.R. Rep. No. 108-755, 108th Cong., 2d Sess., at 598. Consistent with the legislative history of the AJCA, a failure to furnish the list that triggers the imposition of the section 6708 penalty may take various forms. Proposed §301.6708-1(d) provides that a failure for purposes of section 6708 includes the failure to furnish a list in a timely manner and in the form required under section 6112 and its corresponding regulations. Regarding the determination of whether the list is furnished in the form required under section 6112 and its corresponding regulations, the Treasury Department and the IRS recognize that they have issued several regulations under section 6112 and that the description of the required contents of a list maintained under section 6112 has varied over time. The Treasury Department and the IRS intend that the description of the contents of the list that is used for purposes of this penalty is the description required by section 6112 (and any corresponding regulations) that was in effect on the date the material advisor’s list preparation and maintenance requirement arose with respect to the reportable transaction.

The IRS will make reasonable efforts to review responses submitted under section 6112 and inform the person of any potential or identified failures in the person’s response on a timely basis. If the person’s response is determined to be incomplete, or untimely, the IRS may impose the section 6708 penalty on a daily basis, consistent with section 6708(a) and proposed §301.6708-1(e). Proposed §301.6708-1(e) provides that the section 6708 penalty accrues on a daily basis, absent reasonable cause, beginning on the first calendar day after the expiration of the 20-business-day period following a written list request, and continues for each calendar day until, and including, the day the person furnishes a list that complies with the requirements of section 6112 and its corresponding regulations. If the IRS grants an extension of the 20-business-day period, proposed §301.6708-1(e)(2) provides that the section 6708 penalty accrues on a daily basis, absent reasonable cause, beginning on the first calendar day after the expiration of the extension period, and continues each calendar day thereafter until, and including, the day the person furnishes a list that complies with the requirements of section 6112 and its corresponding regulations.

Proposed §301.6708-1(e)(3) provides guidance on the obligations of, and assessment of penalties against, a material advisor when more than one material advisor provided advice on a particular transaction and the material advisors are parties to a designation agreement pursuant to section 6112 and its corresponding regulations.

The section 6708 penalty will not be imposed for any day for which the material advisor establishes that there was reasonable cause for the failure to make the list available. Proposed §§301.6708-1(g) and (h) describe reasonable cause for purposes of the section 6708 penalty. Reasonable cause is determined on a day-by-day and case-by-case basis, taking into account all the relevant facts and circumstances. The material advisor against whom the penalty is imposed has the burden of proving that reasonable cause exists for a specific day or days. Facts and circumstances relevant to a material advisor’s reasonable cause for failing to provide the list on a specific day include facts and circumstances arising subsequent to the request for the list and the material advisor’s response to the request. Thus, if the material advisor establishes reasonable cause, the IRS will abate the penalty completely or for the period to which the established reasonable cause relates, which may be for a specific day, days, or the entire period. Proposed §301.6708-1(g)(6) provides examples involving reasonable cause.

Because reasonable cause can be shown to exist in situations involving a variety of facts and circumstances, the proposed regulations include a nonexclusive list of categories of reasonable cause factors that the IRS will consider. Pursuant to proposed §301.6708-1(g)(2), the most important factors in a reasonable cause analysis are those that reflect the extent of the material advisor’s good-faith efforts to timely and fully comply with section 6112. Proposed §301.6708-1(g)(3) provides that the exercise of ordinary business care by a material advisor may constitute reasonable cause, but only where the material advisor shows that it took immediate steps to correct any failure upon its discovery. A material advisor’s failure to take immediate steps to correct a failure shall be a factor weighing against a finding that the material advisor exercised ordinary business care.

Proposed §301.6708-1(g)(4) provides that reasonable cause may exist if a failure is due solely to a supervening event, such as illness, theft, fire, flood, storm, or other similar, unexpected event that is beyond the material advisor’s control and that prevents the material advisor from making the list available pursuant to the requirements of section 6112.

Proposed §301.6708-1(g)(5) provides that reasonable cause may be established if the material advisor relied on the advice of an “independent tax professional” as defined in the proposed regulations. The proposed regulations explain that the reliance on an independent tax professional’s advice must be reasonable and in good faith, and will be viewed in light of all the relevant facts and circumstances. In addition to other factors described in the regulations, the advice must be received by the person prior to the time that the list is required to be furnished to the IRS. If the person received advice from an independent tax professional, the person’s reliance on that advice will be considered reasonable only if the independent tax professional expressed a reasonable belief that it is more likely than not that the person is compliant with section 6112 or does not have an obligation imposed by section 6112. Advice from a nonindependent tax professional may be considered in conjunction with all other relevant facts and circumstances but by itself is not sufficient to establish reasonable cause.

Proposed §301.6708-1(h) describes additional reasonable cause factors that are applicable in limited factual circumstances. Proposed §301.6708-1(h)(1) provides that if a material advisor dissolves, is liquidated, or is otherwise no longer in existence, the IRS will consider facts surrounding the winding up of the business of the material advisor as well as any efforts made by the material advisor to comply with section 6112 prior to its dissolution or liquidation when considering whether a successor material advisor has reasonable cause for any failure.

If the material advisor establishes that it acted in good faith (within the meaning of proposed §301.6708-1(g)(2)) in its efforts to fully comply with the requirements of section 6112, the material advisor will have reasonable cause for the days between when the material advisor provided the list to the IRS and when the IRS reviews the list. If the material advisor does not establish that it acted in good faith, the IRS will not consider the time taken by the IRS to review a list or inform a material advisor of identified failures as a factor in determining whether the material advisor has reasonable cause for that period.

Proposed §301.6708-1(h)(3) provides examples to illustrate when a material advisor has acted in good faith.

The regulations, as proposed, apply to all written requests made after the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register for lists required to be maintained under section 6112, including lists persons were required to maintain under section 6112(a) as in effect before October 22, 2004, the date of enactment of the AJCA. The rules in these proposed regulations may be relied upon by persons required to maintain a list under section 6112 regarding list requests made before the publication of the Treasury decision.

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866, as amended by Executive Order 13563. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. It is hereby certified that the collection of information in these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that the collection of information described above under the heading “Paperwork Reduction Act” only affects persons who qualify as material advisors as defined in section 6111, who are statutorily required by section 6112 to maintain and furnish the underlying documents and information upon which the collection of information is based, and who are unable to meet the section 6708 statutorily provided period of time for furnishing these documents and information. Moreover, requiring those persons to report the information described above imposes only a minimal burden in time or expense. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Internal Revenue Code, this regulation will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The Treasury Department and IRS specifically request comments on the clarity of the proposed regulations and on how they can be made easier to understand. All comments submitted by the public will be made available for public inspection and copying.

A public hearing has been scheduled for July 2, 2013, beginning at 10:00 A.M. in the Auditorium (7^th Floor) of the Internal Revenue Building, 1111 Constitution Avenue, N.W., Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the “FOR FURTHER INFORMATION CONTACT” section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit electronic or written comments by June 6, 2013 and an outline of the topics to be discussed and the time to be devoted to each topic (signed original and eight (8) copies) by June 10, 2013. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the schedule of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

Paragraph 1. The authority citation for part 301 is amended by adding an entry in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Section 301.6708-1 also issued under 26 U.S.C. 6708 * * *

Par. 2. Section 301.6708-1 is added to read as follows:

Temporary regulations in this issue of the Bulletin amend the Income Tax Regulations (26 CFR part 1) relating to section 6049. The temporary regulations set forth information reporting requirements related to bond premium and acquisition premium. The text of the temporary regulations also serves as the text of these proposed regulations.

A number of commenters have indicated that compliance with basis reporting requirements and the use of basis and other information reported by brokers will require considerable resources and effort on the part of return preparers and information recipients. The Treasury Department and the IRS are continuing to review all aspects of the information reporting process and are exploring ways to reduce the compliance burden for both brokers and for information recipients.

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866, as supplemented by Executive Order 13563. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply.

Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small businesses.

Before these proposed regulations are adopted as final regulations, consideration will be given to any written (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS as prescribed in the preamble under the “Addresses” heading. The Treasury Department and the IRS welcome comments on the clarity of the proposed rules and how they can be made easier to understand. All comments will be available at www.regulations.gov for public inspection and copying. A public hearing may be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for a public hearing will be published in the Federal Register.

The principal author of these regulations is Pamela Lew, Office of Associate Chief Counsel (Financial Institutions and Products). However, other personnel from the IRS and the Treasury Department participated in their development.

* * * * *

Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.6049-9 also issued under 26 U.S.C. 6049(a). * * *

Par. 2. Section 1.6049-9 is added to read as follows: