Tax Gap: Proposals in the 110th Congress to Require Brokers to Report Basis on Publicly Traded Securities

th
Tax Gap: Proposals in the 110 Congress to
Require Brokers to Report Basis on Publicly
Traded Securities
Updated October 8, 2008
James M. Bickley
Specialist in Public Finance
Government and Finance Division



Tax Gap: Proposals in the 110 Congress to Require
Brokers to Report Basis on Publicly Traded Securities
Summary
Recent and projected large deficits and the need for revenue to offset spending
or tax reduction proposals generated congressional and executive branch interest in
reducing the tax gap. Proposals in the 110th Congress to require brokers to report
adjusted basis on publicly traded securities sold by individuals are examined in this
report because this is a source of revenue. Basis is the amount a taxpayer uses to
determine the cost of acquiring an asset, which is used to determine the asset’s
capital gain or loss. In order to calculate the appropriate “adjusted basis” for tax
calculations the original cost may have to be altered.
Proposals to report basis were included in the President’s FY2008 Budget and
FY2009 Budget and are initially discussed in this report. Then the Senate Finance
Committee’s draft proposal to report basis on publicly traded securities, which was
released on May 25, 2007, is examined. On June 29, 2007, the committee held a
hearing on this proposal. Written comments of representatives of private financial
associations are examined and legislative implications presented. Lastly, relevant
legislation in the 110th Congress is described, including P.L. 110-343.
The President’s FY2009 Budget proposes that information reporting to the IRS
be expanded to include requiring basis reporting on security sales. The Senate
Finance Committee drafted a proposal similar to the proposal in the President’s
Budget that brokers be required to report basis to the IRS and customers for publicly
traded securities. Witnesses at a committee hearing on reporting basis included
representatives from five financial associations. The written comments of these
witnesses provide useful insights. Numerous implications for drafting legislation to
report basis may be derived from their testimony.
Two bills had been introduced in the 110th Congress that would require broker
reporting of a customer’s adjusted basis in securities transactions. These bills, H.R.
878 and S. 601, have almost the exact same wording and the same title, the
Simplification Through Additional Reporting Tax Act of 2007. Nine other bills have
been introduced in the 110th Congress that include a section to raise revenue by
requiring broker reporting of customers’ basis to the Internal Revenue Service on the
sale of publicly traded securities. These bills are H.R. 2147 (Healthy Kids Act of

2007), H.R. 3395 (Responsible Fatherhood and Healthy Families Act of 2007), H.R.


3970 (Tax Reduction and Reform Act of 2007), H.R. 5720 (Housing Assistance Tax
Act of 2008), S. 1111 (Fair Flat Tax Act of 2007), S. 1626 (Responsible Fatherhood
and Healthy Families Act of 2007), S. 2362 (Property Tax Fairness Act of 2007), S.
3335 (The Jobs, Energy, Families, and Disaster Relief Act of 2008), and HR. 1424
(Emergency Economic Stabilization Act of 2008). On October 3, 2008, President
George W. Bush signed H.R. 1424 into law (P.L. 110-343), which included Section

403, “Broker Reporting of Customer’s Basis in Securities Transactions.”


This report will not be updated.



Contents
In troduction ......................................................1
President’s FY2008 Budget Proposal..................................3
President’s FY2009 Budget Proposal..................................4
Senate Finance Committee’s Proposal..................................5
Description ...................................................6
Legislative Implications of Witnesses’ Testimony....................6
Proposed Legislation in the 110th Congress..............................7
Emergency Economic Stabilization Act of 2008..........................9
Appendix. Views of Selective Witnesses on Senate Finance
Committee’s Proposal.........................................10
Investment Company Institute...............................10
Securities Industry and Financial Markets Association............11
The Clearing House.......................................12
American Bankers Association..............................13
National Association of Real Estate Investment Trusts............13



th
Tax Gap: Proposals in the 110 Congress to
Require Brokers to Report Basis on Publicly
Traded Securities
Introduction
Recent and projected large deficits and the need for revenue to offset spending
or tax reduction proposals generated congressional and executive branch interest in
different proposals to reduce the tax gap; and consequently, raise additional revenue.1
Proposals in the 110th Congress to require brokers to report adjusted basis on
publicly traded securities sold by individuals are examined in this report. Basis
reporting can help clarify the actual amount of capital gains and thus the tax revenue
from such gains may rise if capital gains have been under reported. Basis is “the
amount a taxpayer uses to determine the cost of acquiring an asset, which is used to
determine the asset’s capital gain or loss.”2 The original cost may have to be altered
in order to calculate the appropriate “adjusted basis” for tax calculations. For
example, the original cost of a purchase of stock would be adjusted upwards to
account for brokerage fees.
The Internal Revenue Service (IRS) defines the tax gap “as the aggregate
amount of true tax liability imposed by law for a given tax year that is not paid
voluntarily and timely.”3 The IRS defines the true tax liability for any given taxpayer
as “the amount of tax that would be determined for the tax year in question if all
relevant aspects of the tax law were correctly applied to all of the relevant facts of
that taxpayer’s situation.”4 For the 2001 tax year, IRS estimated that the gross tax
gap was approximately $345 billion.5 After enforcement efforts and late payments,
this gross tax gap was reduced over several years by an estimated $55 billion to equal
a net tax gap of $290 billion as reported in 2007.6


1 The last section of this report describes the passage of P.L. 110-343 (Emergency Economic
Stabilization Act of 2008), which included Section 403 requiring brokers to report
customers’ adjusted gross basis for their securities transactions.
2 The Encyclopedia of Taxation and Tax Policy, edited by Joseph J. Cordes, Robert D. Ebel,
and Jane G. Gravelle (Washington, DC: The Urban Institute Press, 1999), pp. 22-23.
3 Internal Revenue Service, Reducing the Federal Tax Gap, A Report on Improving
Voluntary Compliance, Washington, Aug. 2, 2007, p. 6.
4 Ibid.
5 Ibid., p. 8.
6 Ibid.

Current law requires brokers to report annually the name, address, and gross
proceeds of each sale by a taxpayer to the IRS. Brokers are also required to report
this information to each customer.7 The term broker includes “a dealer, a barter
exchange, and any other person who (for a consideration) regularly acts as a
middleman with respect to property or services.”8 An individual taxpayer’s gain or
loss is the difference between the amount realized on the sale of property and the
adjusted basis. Because brokers are currently not required to report adjusted basis to
the IRS, there is no third-party reporting of adjusted basis; consequently, the ability
of the IRS to verify the amount of capital gains and losses reported by individuals is
limited. Brokers would incur significant costs in reporting adjusted basis, but
taxpayers would be relieved of the often substantial costs of calculating adjusted
basis to determine capital gains and losses from the sale of securities. According to
the IRS, third-party reporting increases voluntary tax compliance.9
For tax year 2001, the Government Accountability Office (GAO) found that an
estimated 8.4 million out of an estimated 21.9 million taxpayers (or 38%) with
securities transactions misreported their securities gains and losses.10 GAO
calculated that the most frequent reason for this misreporting of securities gains and
losses was the inaccurate reporting of basis of securities sold.11
The issue of reporting basis is complicated by the following current computation
rules:
If a taxpayer has acquired stock in a corporation on different dates or at different
prices and sells or transfers some of the shares of that stock, and the lot from
which the stock is sold or transferred is not adequately identified, the shares
deemed sold are the earliest acquired shares (the “first-in-first-out rule”). If a
taxpayer makes an adequate identification of shares of stock that it sells, the
shares of stock treated as sold are the shares that have been identified. A
taxpayer who owns shares in a regulated investment company (“RIC”) generally
is permitted to elect, in lieu of the specific identification or first-in-first-out
methods, to determine the basis of RIC shares sold under one of two average-12
cost-basis methods described in Treasury regulations.
A proposal to report basis was included in the President’s FY2008 Budget and
is discussed in this report. The Senate Finance Committee’s draft proposal to report
basis on publicly traded securities, which was released on May 25, 2007, is also


7 U.S. Code, Title 26, Section 6045 (a) and (b).
8 U.S. Code, Title 26, Section 6045 (c).
9 For an overview of tax gap and tax enforcement issues, see CRS Report RL33882, Tax
Gap and Tax Enforcement, by James M. Bickley.
10 U.S. Government Accountability Office, Capital Gains Tax Gap: Requiring Brokers to
Report Securities Cost Basis Would Improve Compliance if Related Challenges Are
Addressed, GAO-06-603 (Washington: June 2006), p. 10.
11 Ibid., p. 14.
12 Senate Committee on Finance, Proposal to Impose Basis Reporting Requirements for
Publicly-Traded Securities, June 29, 2007, p. 1.

examined. On June 29, 2007, the committee held a hearing on this proposal. Written
comments of representatives of private financial associations are examined and
legislative implications presented. Lastly, relevant legislation in the 110th Congress
is described.
President’s FY2008 Budget Proposal
The President’s FY2008 Budget proposed that information reporting to the IRS13
be expanded to include basis reporting on security sales. The U.S. Treasury
described this proposal as follows:
Certain brokers (including brokerage houses, mutual funds, asset managers and
fiduciaries) would be required to report information regarding adjusted basis in
connection with the sale of certain publicly traded securities. The IRS and
Treasury Department would be granted regulatory authority to promulgate
specific rules, including exceptions, to implement this mandate. Brokers also
would be required to report acquisition or disposition dates for securities to
determine short-term or long-term gain or loss for taxpayers. To facilitate
accurate basis reporting if a customer transfers securities from an account with
one broker to an account with another, the transferor broker would be required
to provide the relevant information to the transferee. Under regulations, a broker
would be exempt from reporting items of information that the broker is unable
to obtain with reasonable efforts. Regulations may establish a regime under
which customers provide information to their brokers about customer
transactions that produce adjustments to basis and about the customers’ initial
basis in securities when the broker has no other way of knowing this information.
Information about basis adjustments that are applicable to all holders of
securities of a particular class would be available to brokers either directly from
the relevant issuer or indirectly from the issuer through a central repository of14
information.
This reporting proposal would apply to securities acquired after December 31,

2008; consequently, revenue estimates in the first year are not on a fiscal year basis.


The Treasury estimates that this reporting proposal would yield revenue of $1.035
billion for the period of January 1, 2009, through September 30, 2112, and $6.709
billion for the period of January 1, 2009, through September 30, 2017.15


13 U.S. Executive Office of the President, Office of Management and Budget, Analytical
Perspectives, Budget of the United States Government Fiscal Year 2008 (Washington: GPO,

2007), p. 262.


14 U.S. Treasury, General Explanations of the Administration’s Fiscal Year 2008 Revenue
Proposals, Washington, Feb. 2007, p. 64. This document is available at
[http://www.treas.gov/offices/tax-policy/library/bluebk07.pdf].
15 Ibid.

President’s FY2009 Budget Proposal
The President’s FY2009 Budget also proposed that information reporting to the16
IRS be expanded to include basis reporting on security sales. The Treasury’s
description of this proposal was the same as the same proposal in the President’s
FY2008 Budget with only a few changes in wording. The U.S. Treasury described
this FY2009 Budget proposal as follows:
Certain brokers (including brokerage houses, mutual funds, asset managers and
fiduciaries) would be required to report information regarding adjusted basis in
connection with the sale of certain securities. The IRS and Treasury Department
would be granted regulatory authority to promulgate specific rules, including
exceptions, to implement this mandate. Brokers also would be required to report
acquisition or disposition dates for securities to determine short-term or long-
term gain or loss for taxpayers. To facilitate accurate basis reporting if a
customer transfers securities from an account with one broker to an account with
another, the transferor broker would be required to provide the relevant
information to the transferee. Under regulations, a broker would not be
penalized for failure accurately to report items of information that the broker is
unable to obtain with reasonable efforts. Regulations may establish a regime
under which customers provide information to their brokers about customer
transactions that produce adjustments to basis and about the customers’ initial
basis in securities when the broker has no other way of knowing this information.
Information about basis adjustments that are applicable to all holders of
securities of a particular class would be available to brokers either directly from
the relevant issuer or indirectly from the issuer through a central repository of17
information.
This reporting proposal would apply to securities acquired after December 31,18
2009. The Treasury estimated that this reporting proposal would yield revenue of
$1.203 billion for the period of January 1, 2010, through September 30, 2013, and19
$7.480 for the period of January 1, 2010, through September 30, 2018.
The Joint Tax Committee (JCT) indicated that this proposal “is based on
findings that third-party reporting increases compliance.”20 Currently, brokers did
not report information to the IRS that allows the IRS to calculate gains or losses from
securities sales. JTC found that this proposal would reduce compliance costs of


16 U.S. Executive Office of the President, Office of Management and Budget, Analytical
Perspectives, Budget of the United States Government, Fiscal Year 2009 (Washington:
GPO, 2008), p. 259.
17 U.S. Treasury, General Explanations of the Administration’s Fiscal Year 2009 Revenue
Proposals, Washington, Feb. 2008, p. 64. This document is available at
[http://www.treas.gov/offices/tax-policy/library/bluebk08.pdf].
18 Ibid., p. 64.
19 Ibid.
20 Joint Committee on Taxation, Description of Revenue Provisions Contained in the
President’s Fiscal Year 2009 Budget Proposal, committee print, 110th Cong., 2nd sess.,
JCS-1-08 (Washington: GPO, March 2008), p. 144.

some taxpayers, raise compliance costs of some brokers, and impose significant costs
on the Internal Revenue Service.21
“Under present law taxpayers must determine the effects of certain actions
undertaken by issuers of securities — spin-offs, recapitalization, mergers, and return
of capital distributions, for example — on the taxpayers’ basis in those securities.”22
The proposal would relieve some taxpayers from making these calculations
concerning basis because brokers would be required to provide this information to
customers when securities are sold.23
Some brokers, particularly brokers with large portfolios, currently provide
information about adjusted basis to customers. Other brokers provide partial
information or no information concerning basis to their customers. Some brokers
may incur additional expenses in meeting the proposal’s reporting requirements.24
The IRS would incur significant costs from altering or creating new forms,
processing data including matching data, and storing data.25
Because the proposal would only apply to publicly traded securities, if the cost
of compliance is passed onto taxpayers, some taxpayers may shift part of their assets
from publicly traded securities to other securities and assets. Some taxpayers may
prefer to acquire assets not subject to the requirement that brokers must report basis
information to the IRS.26 “The proposal provides few details about which taxpayers
and securities would be subject to reporting requirements.”27
Senate Finance Committee’s Proposal
The Senate Finance Committee drafted a proposal, which is almost the same as
the proposal in the President’s budget that brokers be required to report basis to the
IRS and customers for publicly traded securities. One of the advantages of analyzing
this draft proposal is the availability of extensive testimony and background
documents provided by witnesses at the committee’s hearing on the proposal.


21 As discussed later in this report, the JCT estimated that a provision in H.R. 3970 requiring
basis reporting by brokers would yield $4.27 billion over a 10-year period beginning with
stock acquired after Jan. 1, 2009.
22 Joint Committee on Taxation, Description of Revenue Provisions Contained in the
President’s Fiscal Year 2009 Budget Proposal, p. 144.
23 Ibid.
24 Ibid.
25 Ibid., p. 145.
26 Ibid.
27 Ibid.

Description
The Senate Finance Committee description of its draft proposal included the
following excerpts:
The proposal provides that in every case in which a broker is required under
section 6045(a) to file with the IRS a return reporting a customer’s gross
proceeds with respect to any applicable security, that broker is required to
include in the return the customer’s adjusted basis in each applicable security and
information necessary to determine the customer’s holding period in that
security. The broker also is required to include this information in the statement
required to be furnished to a customer under present-law section 6045(b).
Present-law penalties for failure to comply with the requirements of section
6045 also apply to failures to comply with the new basis and holding period
reporting requirements.
The proposal applies to applicable securities acquired by purchase or by28
other means such as gift or inheritance.
Under the proposal, every broker that transfers an applicable security to
another broker must furnish to that other broker a written statement with
information necessary to enable that other broker to comply with the new basis
and holding period reporting requirements.
The proposal imposes new reporting requirements when actions undertaken29
by issuers of applicable securities affect the basis of those securities.
The proposal applies to securities acquired after the date that is 18 months30
after the date of enactment.
Legislative Implications of Witnesses’ Testimony
Numerous implications for drafting legislation to report basis could be derived
from the testimony of witnesses from finance associations at the Senate Finance31
Committee hearing. Some issues were raised by more than one witness.
First, several witnesses stated that sufficient time should be allowed for brokers
to implement the requirements necessary to report adjusted basis. This time period
may be approximately two years after Treasury regulations have been written.
Witnesses emphasized that some financial intermediaries would have to develop new
systems to report basis and other intermediaries would have to reprogram existing


28 Senate Committee on Finance, Proposal to Impose Basis Reporting Requirements for
Publicly-Traded Securities, June 29, 2007, p. 3.
29 Ibid., p. 4.
30 Ibid., p. 5.
31 Views of selective witnesses before the Senate Finance Committee’s hearing are presented
in the Appendix.

systems. From Treasury’s perspective, additional time to implement the reporting
of basis would result in lost tax revenue.
Second, two witnesses maintained that the flexibility in the methods of reporting
basis should be maintained. Currently, a taxpayer may use the “first-in-first-out rule”
or the specific identification rule. A taxpayer who owns shares in a mutual fund may
use either of these rules or one of two average-cost-basis methods. Many mutual
funds report basis to their customers using an average cost method. From the IRS
perspective, requiring the use of one standard rule such as “first-in-first-out” would
expedite the use of cost basis data for IRS matching purposes.
Third, two witnesses believed that filing requirements should be prospective,
based on the date of purchase, or brokers should not be held accountable for errors
in data on current and prior reports of adjusted basis. Many brokers do not have
records concerning basis and must rely on customers or third parties for information.
Fourth, two witnesses expressed opposition to extending gross proceeds
reporting (and thus adjusted basis reporting) to corporate customers because the
Secretary of the Treasury already has the authority to extend gross proceeds reporting
to corporations, without legislative action if corporations are a significant source of
noncompliance.
Fifth, one witness stated that the volume of transfers of securities would
preclude a paper transfer system providing brokers with data to calculate adjusted
basis; hence, an electronic system would be necessary. Another witness maintained
that electronic transmission of transfer data should be allowed as an option.
Sixth, two witnesses argued that the Treasury should have broad authority to
implement legislation requiring the reporting of basis. These witnesses maintained
that the legislative language in the Senate Finance Committee’s draft proposal did not
address many issues such as the reporting of gifted and inherited securities and the
reporting of options transactions. Congress could specify many of these issues in
legislative language, which would result in congressional preference being
implemented and a reduced need for Treasury discretion in writing rules.
Seventh, two witnesses maintained that the deadline for filing 1099 statements
should be delayed by two weeks, which is addressed by S. 636, the Reduce Wasteful
Tax Forms Act of 2007. These witnesses argue that the Senate Finance Committee’s
proposal would cause such an enormous increase in the year-end processing costs for
brokers and custodians that the two week delay would be necessary.
Proposed Legislation in the 110th Congress
Two bills were introduced in the 110th Congress that focused on requiring
broker reporting of a customer’s adjusted basis in securities transactions. These bills,
H.R. 878 and S. 601, had almost the exact same wording and the same title. A third
bill, H.R. 3970, included a section requiring the broker reporting of customers’
adjusted basis in securities transactions.



On February 7, 2007, Representative Rahm Emanuel introduced H.R. 878,
Simplification Through Additional Reporting Tax Act of 2007, which would require
broker reporting of customers’ adjusted basis in securities transactions. The
Secretary of the Treasury would issue regulations in cases in which brokers do not
have sufficient information to report basis. These regulations could require other
information relating to basis to be reported and could exempt some brokers from any
reporting.
On February 14, 2007, Senator Evan Bayh introduced S. 601, Simplification
Through Additional Reporting Tax Act of 2007, which would require broker
reporting of customers’ adjusted basis in securities transactions to the IRS. The
contents of S. 601 are almost the same as H.R. 878.
On October 25, 2007, Representative Charles B. Rangel, Chairman of the House
Committee on Ways and Means, introduced H.R. 3970, Tax Reduction and Reform
Act of 2007. This comprehensive bill is revenue neutral and proposes to eliminate
the individual alternative minimum tax.32 This bill includes Section 1221 titled
“Broker Reporting of Customer’s Basis in Securities Transactions.” The House
Ways and Means Committee describes this section as follows:
The bill creates mandatory cost basis reporting by brokers for transactions
involving publicly traded securities. Covered securities are generally stock, debt,
commodities, derivatives and other items as specified by the Treasury Secretary,
which are acquired in the account or transferred to the account managed by the
broker. The provision applies to stock acquired after January 1, 2009, and after
January 1, 2011, for all other instruments. This proposal is estimated to raise33
$4.27 billion over 10 years.
In addition to the current requirement that brokers report the gross proceeds from the
sale of a covered security, brokers would be required to report the customer’s
adjusted basis and whether any gain or loss is long-term or short-term. Long-term
capital gains are taxed at a higher rate than short-term capital gains. Every broker
that transfers to another broker a covered security would be required to furnish to the
transferee broker a written statement that allows the transferee broker to satisfy the
proposal’s basis and holding period requirements. The bill would change to February
15, from the present-law January 31, the deadline for furnishing certain information
statements to customers including statements showing gross proceeds.34
Nine other bills were introduced in the 110th Congress that included a section
to raise revenue by requiring broker reporting of customers’ basis to the Internal


32 For an overview of the contents of this bill, see CRS Report RL34249, The Tax Reduction
and Reform Act of 2007: An Overview, Jane G. Gravelle.
33 U.S. Congress, House Ways and Means Committee, H.R. 3970, Tax Reduction and
Reform Act of 2007, Description of Provisions, Oct. 29, 2007, available at
[http://waysandmeans.house.gov/ ].
34 U.S. Congress, Joint Committee on Taxation, Description of the Chairman’s Amendment
in the Nature of a Substitute of H.R. 3996, The Temporary Tax Relief Act of 2007, Nov. 1,

2007, (JCX-106-07), pp. 123-125. Available at [http://www.house.gov/jct].



Revenue Service on the sale of publicly traded securities. These bills are H.R. 2147
(Healthy Kids Act of 2007), H.R. 3395 (Responsible Fatherhood and Healthy
Families Act of 2007), H.R. 5720 (Housing Assistance Tax Act of 2008), S. 1111
(Fair Flat Tax Act of 2007), S. 1626 (Responsible Fatherhood and Healthy Families
Act of 2007), S. 2362 (Property Tax Fairness Act of 2007), S. 3335 (The Jobs,
Energy, Families, and Disaster Relief Act of 2008), and H.R. 1424 (Emergency
Economic Stabilization Act of 2008).
Emergency Economic Stabilization Act of 2008
On October 3, 2008, President George W. Bush signed H.R. 1424, Emergency
Economic Stabilization Act of 2008, into law (P.L. 110-343). This act included
Section 403, “Broker Reporting of Customer’s Basis in Securities Transactions,”
which required brokers to report to the IRS customers’ adjusted gross basis and
whether any capital gain or loss is long-term or short-term for customers’ sales of
stock, debt, commodities, derivatives, and any other assets specified by the Treasury.
The Joint Committee on Taxation estimated that this reporting provision would raise
$6.67 billion in revenue through September 30, 2018.35 January 1, 2011, is the initial
applicable date of the reporting provision to customers’ sales of corporate stock.


35 Joint Committee on Taxation, Estimated Budget Effects of the Tax Provisions Contained
in An Amendment in the Nature of a Substitute to H.R. 1424, Scheduled for Consideration
on the Senate Floor on October 1, 2008, JCX-78-08, Oct. 1, 2008.

Appendix. Views of Selective Witnesses on Senate
Finance Committee’s Proposal
Witnesses at the Senate Finance Committee’s hearing on June 28, 2007,
included representatives from five financial associations. The written comments of
these witnesses provide useful insights. The reader may want to refer to the actual
written testimony for details. Numerous implications for drafting legislation to report
basis may be derived from their testimony.
Investment Company Institute.36 The Investment Company Institute (ICI)
emphasized three points concerning reporting of basis:
First, a mandatory basis-reporting regime will be costly, and the cost
ultimately will be borne by fund investors. Second, sufficient time must be
provided to ensure that necessary programming and systems challenges are
addressed effectively. Finally, the flexibility the current law provides to mutual
funds and their shareholders to compute cost basis under any available method
(first-in, first-out (“FIFO”), specific identification, and average cost, in the case
of fund shareholders) must be maintained. We recognize that allowing this
flexibility will limit the use of cost basis information for Internal Revenue37
Service (“IRS”) matching purposes.
The ICI indicated that many mutual funds currently provide average cost basis
information to a substantial portion of their shareholders, but some funds
(particularly smaller funds) do not provide any cost basis information.38 No mutual
fund provides cost basis information to all of its shareholders because the fund
managers do not have or cannot have access to the necessary information or are not39
confident that the information is accurate. The ICI maintains that mutual funds
would “need sufficient lead time to program their systems to provide cost basis40
information to all of their shareholders in all circumstances.” The date applicable
to basis reporting should be the later of “December 31 of the calendar year that ends
more than 18 months after the date of enactment or December 31 of the first calendar
year that ends at least twelve months after the issuance of final regulations by the


36 The ICI is the national association of American mutual funds. As of July 1, 2007, the
ICI’s members included 8,766 open-ended investment companies (mutual funds), 670
closed-end investment companies, 440 exchange-traded funds, and four sponsors of unit
investment trusts. Mutual fund members of the ICI have total assets of approximately
$11.242 trillion (representing 98% of all assets of U.S. mutual funds; these funds serve
approximately 93.9 million shareholders in more than 53.8 million households. Source:
ICI’s website at [http://www.ici.org/about_ici.html].
37 Senate Finance Committee, Investment Company Institute Comments at hearing on
Proposed Legislation Requiring Basis Reporting Requirement for Publicly Tradedthst
Securities, 110 Cong., 1 sess., June 28, 2007, p. 2.
38 Ibid.
39 Ibid., pp. 2-3.
40 Ibid., p. 5.

Secretary.”41 The ICI maintained that filing requirements should be prospective
based on the date of purchase if the fund has not reported cost basis data. If a fund
wishes to try and reconstruct basis using “good faith efforts” then the mutual fund
would have reasonable cause for any errors.42 The internal transfer of shares in
mutual funds results in complex recording issues.43 The ICI recommends that the
written statement requirement for data on the transfer of stock may also be met using
electronic transmittal.44
Securities Industry and Financial Markets Association. The Securities
Industry and Financial Markets Association (SIFMA) represents the interests of more45
than 650 securities firms, banks, and asset managers. SIFMA made five major
recommendations.
(1) SIFMA strongly opposes the proposal to extend gross proceeds reporting (and
thus adjusted basis reporting) to corporate customers and recommends this
proposal be dropped. The Secretary of the Treasury already has the authority to
extend gross proceeds reporting to corporations and can exercise this authority
without legislative action if corporations are a significant source of
noncompliance.
(2) The Secretary of the Treasury should be granted broad regulatory authority
to implement the new reporting requirements and to provide safe harbors,
uniform adjusted basis calculation rules, simplifying assumptions, and limited
exceptions if justified.
(3) The new reporting regulations should be effective for securities acquired 18
months after Treasury regulations are finalized (rather than 18 months after date
of enactment). Brokers cannot develop or modify their basis reporting systems
if they do not know the rules they must follow.
(4) The definition of “applicable security” should be clarified.
(5) S. 636, the Reduce Wasteful Tax Forms Act of 2007 ... should be46
incorporated into the proposal. The new reporting requirements will greatly
increase year-end processing for brokers and custodians, thus increasing the
number of corrected 1099 and cost basis statements that will have to be issued


41 Ibid., p. 6.
42 Ibid., p. 9.
43 Ibid., pp. 9-11.
44 Ibid., p. 17.
45 Securities Industry and Financial Markets Association, Comments to Senate Finance
Committee on Proposed Legislation Requiring Basis Reporting Requirement for Publicly
Traded Securities, July 17, 2007, p. 1.
46 S. 636, Reduce Wasteful Tax Forms Act of 2007, was introduced by Senator Schumer and
referred to the Senate Committee on Finance on Feb. 15, 2007.

to taxpayers and the IRS. S. 636 would delay the filing deadline for 109947
statements by two weeks, from January 31 to February 15.
The Clearing House. The Clearing House Association L.L.C. (The Clearing
House), an association of major commercial banks, presented its concerns about the48
Senate Finance Committee’s Basis Reporting Proposal.
The Clearing House states that “the Proposal requires financial institutions to
report gross proceeds with respect to securities sold by corporate customers.”49 The
Clearing House states that corporate customers of brokers and financial institutions
have generally been exempt from gross proceeds reporting requirements. The reason
is that timing and accounting differences would result in mismatches in gross figures
being reported to corporate customers and the IRS.50 Hence, the Clearing House
states that “the cost to implement gross proceeds and basis reporting on payments to
corporations will ... be prohibitive with no foreseeable benefit to the Internal Revenue51
Service or the corporate customers.” The Clearing House maintains that financial
institutions and brokers would be unable to report adjusted basis and holding period
information for certain securities such as foreign securities and securities purchased
as part of a dividend reinvestment program.52 The Clearing House argues that the
proposal’s requirement that persons transferring securities to a broker provide that
broker with a written statement which includes data to calculate adjusted basis “is53
inefficient, burdensome, unmanageable and susceptible to error.” The Clearing
House believes that the volume of transfers of securities would preclude a paper54
transfer system and necessitate an electronic system.
The Clearing House represents large banks that do not collect and send basis or
holding period data to their customers; hence, these large banks would have to
develop necessary information systems, which would be time consuming. In
addition, large banks are currently integrating multiple information reporting systems.
Consequently, the Clearing House advocates an effective date for compliance with
the proposal of either three years after the date of the passage of the law or two years55


after the finalization of relevant Treasury regulations.
47 Securities Industry and Financial Markets Association, Comments to Senate Finance
Committee on Proposed Legislation Requiring Basis Reporting Requirement for Publicly
Traded Securities, June 28, 2007, pp. 1-3.
48 The Clearing House Association L.L.C., Comments to Senate Finance Committee on
Proposed Legislation Requiring Basis Reporting Requirements for Publicly Traded
Securities, June 29, 2007, p. 1.
49 Ibid.
50 Ibid.
51 Ibid., p. 2.
52 Ibid.
53 Ibid.
54 Ibid.
55 Ibid., p. 3.

American Bankers Association. A representative of the American
Bankers Association (ABA) provided written comments that stated that the Finance
Committee’s proposal raised significant issues among its members. The ABA
indicated that while banks serving in fiduciary and related capacities were required
to meet Section 6045 filing requirements, they may not be directly involved in either
the purchase or sale of securities; hence, they do not have direct access to the
necessary information concerning basis or have access only through third-party
reporting.56 The ABA maintains that the proposal should require that banks receive
information from the party that files Form 1099-B, and banks should be able to rely
on the accuracy of information from third parties, particularly clients, without57
penalty. The ABA argues that the proposal should be effective prospectively and
allow sufficient time to implement after regulations have been established.58 The
ABA maintains that taxpayers should be allowed to continue to select the method of
accounting for gains and losses on securities sold.59 Finally, the ABA states that the
IRS should be provided with broad authority to provide exceptions or safe harbors
where determining adjusted basis is difficult or impossible.60
National Association of Real Estate Investment Trusts. The National
Association of Real Estate Investment Trusts (NAREIT) represents U.S. real estate
investment trusts (REITs) and publicly traded real estate companies worldwide.61
The NAREIT made only one specific comment: “that brokers and mutual funds be
provided with an additional two weeks — until February 15th — to report dividend
income to taxpayers on IRS Form 1099-DIV.”62


56 American Bankers Association, Comments to Senate Finance Committee on Proposed
Legislation Requiring Basis Reporting Requirement for Publicly Traded Securities, June 29,

2007, p. 2.


57 Ibid.
58 Ibid., p. 3.
59 Ibid., pp. 3-4.
60 Ibid.
61 National Association of Real Estate Investment Trusts, Comments to Senate Finance
Committee on Proposed Legislation Requiring Basis Reporting Requirement for Publicly
Traded Securities, p. 1.
62 Ibid.