ICI Urges Critical Amendments to Cost-Basis Reporting Legislation Washington, DC, December 7, 2007 - ICI sent a letter urging the Senate to accept, with critical amendments, the tax-basis reporting provisions of H.R. 3996, the "Tax Reduction and Reform Act of 2007." The legislation would ensure a cost-basis reporting system for securities transactions that is workable for brokers and funds, shareholders, and the government. Background
The House of Representatives passed H.R. 3996, the "Tax Reduction and Reform Act of 2007," on November 9. Section 622 of the House bill would, among other things, amend section 6045 of the Internal Revenue Code to require brokers, including mutual funds, to report to customers and the IRS the customers' cost basis in securities (including mutual fund shares) sold or redeemed. Brokers also would be required to report whether any gain or loss with respect to those securities is long-term or short-term. Cost-basis reporting would apply, generally, to fund shares acquired after December 31, 2008. More recently, a bill passed by the House of Representatives on December 6, 2007 (H.R. 6) includes a provision requiring brokers (including mutual funds) to report cost-basis information, but contains two important differences from H.R. 3996. One, H.R. 6 would extend the information reporting deadline from January 31 until February 15, but only for calendar years 2010 and beyond. For calendar years before 2010, the January 31 deadline would continue to apply. The bill also requires the Treasury Department to study the effect and feasibility of delaying the date for furnishing information statements and report its findings to Congress no later than six months after the date of enactment. Second, H.R. 6 would require brokers to report basis information on sales of shares held by S corporations (other than financial institutions). Over the past 15 years, a substantial portion of the mutual fund industry has voluntarily provided basis information to a significant, and growing, portion of its shareholders. ICI has participated actively in cost basis reporting discussions since a legislative initiative on cost-basis reporting was raised in 1990. Since January 2006, ICI has also spent considerable time with industry tax and operations experts examining the remaining operational impediments to mandatory cost basis reporting on all fund share purchases. Industry views have evolved as ICI members have focused intently on some of the thorniest operational issues. Mutual fund shareholders may calculate cost basis using one of three methods: first-in, first-out (FIFO), specific identification, or average cost. Once a shareholder elects to compute basis under the average cost method, this method must be utilized for all shares in the shareholder's account. ICI Position
In a December 6 letter to Senate Finance Committee Chairman Max Baucus and Committee Ranking Minority Member Charles E. Grassley, ICI emphasized the importance of maintaining a provision in the House bill that would extend the reporting deadline from January 31 to February 15. The Institute also recommended that any cost-basis reporting provision address situations in which a cost-basis statement must be amended months or years after it has been sent to taxpayers because of certain transactions or events that take place after the fund shares are sold. The most prominent example, involving so-called "returns of capital," would "cause shareholder confusion and outrage" by necessitating millions of cost-basis statements to be amended many months after individuals file their tax returns. The Institute recommended a solution to the return of capital issue that would avoid the unnecessary confusion, costs, and burdens without affecting the intent of the Internal Revenue Code. The Institute also urged several other technical amendments to ensure the proposed legislation's effectiveness. Related Links
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