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GainsKeeper Blog

Technical Corrections Legislation Introduced in House Would Fix Glitches in Cost Basis Reporting for Dividend Reinvestment Plans
December 3, 2009

On Wednesday, December 2, 2009, House Ways & Means Committee Chair Rangel (NY) and Ranking Minority Member Camp (MI) introduced H.R. 4169, the Tax Technical Corrections Act of 2009 (the “Act”). The Act would make technical corrections to tax law provisions enacted under eight different prior pieces of legislation, including a few tweaks to the cost basis reporting law enacted last year.

The Act would replace a few references in Internal Revenue Code (IRC) Section 1012 from “fund” to “regulated investment company” to clarify that the cost basis reporting rules for lot relief method selection and averaging apply to open-end, closed-end mutual funds as well as exchange traded funds (ETFs) that qualify for federal income tax purposes as regulated investment companies. Application of these new cost basis reporting rules to all of these types of funds had seemed clear so this clarification is no surprise.

The Act would also push back the starting date for eligibility for averaging cost basis for dividend reinvestment plans (DRIPs) from starting after December 31, 2010 to December 31, 2011 under IRC Sec. 1012. This proposed change would bring the effective date for DRIP share averaging in line with the effective date for broker cost basis reporting for DRIP shares already set forth in the law (shares acquired after December 31, 2011). The December 31, 2010 date had seemed out of place and likely a result of a failure to update it to reflect revisions to the proposed effective dates that occurred as the legislation moved through Congress. The proposed update in the Act would simply fix this apparent glitch. The Act also includes a provision that would clarify that if a broker makes a single account election to average both pre- and post-effective date acquired shares, the pre-effective date DRIP shares would be eligible for averaging. This proposed change seems helpful given that the tax law does not generally permit the use of average basis for regular stock (including DRIP shares prior to the enactment of the cost basis reporting law).

Finally, the Act would clarify that brokers would not need to report the cost basis of pre-effective date DRIP shares on Form 1099-B unless they elected to do so.

Remember that this is merely proposed legislation and that it is unclear when or whether it will be enacted or what other possible amendments relating to cost basis reporting might ultimately be enacted.


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