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Cost Basis Reporting Legislation One Step Closer: Passed by U.S. House in May 2008
May 20, 2008

Cost basis reporting appears even closer to becoming law. On Thursday, May 8, the U.S. House passed cost basis reporting (the May 2008 version of cost basis reporting) as part of the American Housing Rescue and Foreclosure Prevention Act of 2008 (H.R. 3221). The vote was 322 in favor and 94 against.

Cost basis reporting had been included as a revenue raiser in the Housing Assistance Tax Act of 2008 previously approved by the House Ways and Means Committee in April (H.R. 5720). It was added as an amendment to an earlier House bill (H.R. 3221) that had already been amended by the Senate and then passed by the House. The amended bill will now be considered by the Senate. The president has indicated that he would veto the House’s Housing Bill, which means the likelihood of this particular bill and the inclusion of cost basis reporting becoming law as part of it is unclear at best.

Despite the uncertainty of this bill, the fact that the cost basis reporting proposal has been included in a bill passed by the House in 2008 is extremely significant. As previously noted, cost basis reporting was also included in two separate bills that were passed by the House last year (but died at the close of last year’s legislative session). It was also included and then later dropped from conferee discussions on the Farm Bill in April of this year. And on May 9, a key legislative staffer indicated that the chances for passage of cost basis reporting in 2008 are highly likely. It has been suggested that cost basis reporting could be included in other congressional bills if it is not made law as part of the Housing Bill.

The details of the May 2008 version of cost basis reporting generally tracks the details discussed in February 2008. One key difference is that the proposed effective dates for the proposal are different—under the May 2008 version, cost basis reporting would be effective for stocks acquired on or after January 1, 2010; for shares eligible for averaging (such as open-end mutual fund and DRIP shares) it would apply to shares acquired on or after January 1, 2011, and for debt, options and other instruments it would apply for such securities acquired on or after January 1, 2012.

The May 2008 version of cost basis reporting includes several other changes. The most important change relates to stock that provides for a dividend reinvestment plan (DRIP). A DRIP is defined under the proposal as “…any arrangement under which dividends on any stock are reinvested in stock identical to the stock with respect to which the dividends are paid.” Under the revised proposal, stock that is part of a DRIP is eligible for averaging, according to the rules available under the provision for open-end mutual fund shares. This is a significant expansion of the availability of cost basis averaging and addresses broker concerns regarding the potential difficulties of computing the specific basis of additional purchases of shares under a DRIP. In general, the special DRIP averaging provision applies to shares acquired after December 31, 2010. Like the open-end fund averaging provisions, brokers decide whether to elect to use averaging (on a stock-by-stock and taxpayer-by-taxpayer basis) unless the customer notifies the broker that he or she has selected another method. As is the case with open-end mutual fund shares, the broker can elect to include pre-January 1, 2011 shares in averaging computations. The provision also clarifies that the averaging pool includes the initial shares purchased, as well as the subsequent shares acquired when dividends are reinvested.

Given the passage by the U.S. House of Representatives of the May 2008 version of cost basis reporting, its inclusion in conference discussions of the 2008 Farm Bill and statements of several key legislative staffers and administration tax officials, the likely enactment of cost basis reporting seems better than ever.


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