Daily Tax Update - June 22, 2011: IRS Issues Interim Guidance on Issues Relating to the Basis of Certain Stock under Section 1012

IRS issues interim guidance on issues relating to the basis of certain stock under Section 1012:  Today, the IRS issued Notice 2011-56, which provides interim guidance under section 1012 on the method of determining the basis of stock, qualification as a dividend reinvestment plan, and lot selection methods.  The notice addresses certain issues raised by final regulations that were issued by the IRS in October 2010 implementing recent amendments to section 1012. The IRS plans to issue proposed regulations addressing some of these issues.  Notice 2011-56 states that taxpayers may rely on the guidance provided in the notice pending publication of superseding guidance.

  • First, the Notice provides guidance for taxpayers that elect to change from a broker default average method to the cost basis method under Treas. Reg. § 1.1012-1(e)(9).  Taxpayers may use the average method to determine the basis of stock in a regulated investment company (RIC stock) or stock acquired in connection with a dividend reinvestment plan (DRP stock).  A taxpayer that does not use the average basis method determines the basis of stock under section 1012(a) by its cost.  Treas. Reg. § 1.1012-1(e)(2)(i) provides that, unless a taxpayer elects another method, the basis of RIC or DRP stock is determined by the broker’s default method.  A taxpayer may revoke its election in certain circumstances.  The Notice states that proposed regulations are expected to provide that, when a taxpayer elects to change from a broker default average method to the cost basis method, the stock’s basis reverts to the cost basis method if the taxpayer requests the change by the earlier of two events: (i) one year after the taxpayer had received notice of the broker’s default method, or (ii) the date of the first disposition of the stock. This is intended to provide consistency between the treatment of a taxpayer’s election to revoke of an average basis election and return to a broker default method and the treatment of a taxpayer’s election to change from a broker default average basis method to the cost method.
  • Second, the Notice addresses requirements for dividend reinvestment plans (DRPs). To qualify as a DRP, a plan must require that at least 10 percent of every dividend be reinvested in identical stock. The Notice clarifies that a DRP will not fail to be a DRP if it pays cash in lieu of fractional shares of stock when the amount of the dividend is not sufficient to acquire a full share of stock.
  • Finally, the Notice states that the proposed regulations are expected to clarify that the lot selection conventions, including first-in, first-out (FIFO), specific identification, and average basis, all apply on an account-by-account basis.
  • For additional information, contact Mark J. Silverman - msilverman@steptoe.com , Aaron P. Nocjar -   anocjar@steptoe.com or Gregory N. Kidder - gkidder@steptoe.com

CAMP:  MOVE U.S. TO TERRITORIAL TAX SYSTEM:  In remarks yesterday to a forum of chief financial officers, House Ways and Means Chairman Dave Camp said that he wants to move the United States to a territorial tax system.  Camp also encouraged the participants to inform their lawmakers that they want comprehensive tax reform and not short-term extenders. Camp said, "We need to have a business tax that is competitive, so hopefully that would mean moving to a territorial system in their minds and that they would communicate that."  Camp added that information connecting tax reform to job creation would be helpful for Congress, stating "[f]rankly, I think getting that information to us or any member of Congress—[Senate] Finance or Ways and Means or any member of the House or Senate—that would be very helpful and that could really help clear a way for us to take that approach."

  • On the issue of tax reform, Camp said, "Right now it looks like a long-term project, but we don't know that for certain.  I want to be ready in case things come together. I don't think the president want to go into election with the same message he had before, which was that 'if we do nothing, taxes will go up.'"
  • On the issue of repatriation, Camp said, "I’m for repatriation."  Camp added, "Some estimate well over a trillion dollars are stranded overseas. If it doesn’t get here it gets invested there."  However, the Chairman declined to offer support for the current repatriation proposals saying, "We did repatriation a few years ago, and here we are with the same problem."

WITNESS LIST FOR TOMORROW'S SELECT REVENUE MEASURES TAX REFORM HEARING RELEASED:  The witness list for Thursday's Select Revenue Measures Subcommittee hearing on tax reform and foreign investment in the United States has been announced.

The witnesses who will testify on the first panel are:

  1. Nancy L. McLernon, President and Chief Financial Officer, Organization for International Investment
  2. Alexander Spitzer, Senior Vice President – Tax, Nestle Holdings, Inc.
  3. Claude Draillard, Chief Financial Officer, Dassault Falcon Jet Corporation.
  4. Jeffrey DeBoer, President and Chief Executive Officer, The Real Estate Roundtable

The second panel will consist of:

  1. Gary Hufbauer, Peterson Institute for International Economics
  2. Robert Stricof, Tax Partner, Deloitte Tax LLP
  3. Bret Wells, Assistant Professor of Law, University of Houston Law Center
  • In conjunction with tomorrow’s hearing, the Joint Committee on Taxation released a report (JCX-37-11) providing data on foreign investment in the United States and describing the U.S. tax rules applicable to U.S. activities of foreign taxpayers.
  • The document can be accessed here


1.[112nd] H.R.2262: To amend the Internal Revenue Code of 1986 to exclude from gross income amounts distributed from tax-favored accounts during a period of unemployment.
Sponsor: Rep Paul, Ron [TX-14] (introduced 6/21/2011)   Cosponsors (None)
Committees: House Ways and Means
Latest Major Action: 6/21/2011 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

2. [112nd] H.R.2263: To amend the Internal Revenue Code of 1986 to exclude from Federal tax certain payments made in connection with reductions in force.
Sponsor: Rep Paul, Ron [TX-14] (introduced 6/21/2011)   Cosponsors (None)
Committees: House Ways and Means
Latest Major Action: 6/21/2011 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

3. [112nd] S.1237: A bill to amend the Internal Revenue Code of 1986 to allow manufacturing businesses to establish tax-free manufacturing reinvestment accounts to assist them in providing for new equipment and facilities and workforce training.
Sponsor: Sen Blumenthal, Richard [CT] (introduced 6/21/2011)   Cosponsors (2)
Committees: Senate Finance
Latest Major Action: 6/21/2011 Referred to Senate committee. Status: Read twice and referred to the Committee on Finance.

As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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