Method of Accounting for Gains and Losses on Shares in Certain Money Market Funds; Broker Returns With Respect to Sales of Shares in Money Market Funds, 43694-43699 [2014-17689]
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Federal Register / Vol. 79, No. 144 / Monday, July 28, 2014 / Proposed Rules
Par. 3. Section 1.36B–3 is amended by
revising paragraph (g)(1) and adding
paragraph (m) to read as follows:
■
§ 1.36B–3 Computing the premium
assistance credit amount.
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(g) * * *
(1) [The text of the proposed
amendment to § 1.36B–3(g)(1) is the
same as the text of § 1.36B–3T(g)(1)
published elsewhere in this issue of the
Federal Register].
*
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(m) [The text of the proposed
amendment to § 1.36B–3(m) is the same
as the text of § 1.36B–3T(m) published
elsewhere in this issue of the Federal
Register].
■ Par. 4. Section 1.36B–4 is amended
by:
■ 1. Revising paragraph (a)(1)(ii).
■ 2. Adding paragraph (a)(3)(iii).
■ 3. In paragraph (a)(4), revising
Example 4 and adding Examples 10, 11,
12, 13, and 14.
■ 4. Revising paragraphs (b)(3) and
(b)(4).
■ 5. Removing paragraph (b)(5).
■ 6. Redesignating paragraph (b)(6) as
paragraph (b)(5), and revising Example
9, and adding Example 10 to newly
redesignated paragraph (b)(5).
■ 7. Adding paragraph (c).
same as the text of § 1.36B–4T(b)(4)
published elsewhere in this issue of the
Federal Register].
(5) Examples. * * *
[The text of the proposed amendment
to § 1.36B–4, Example 9 and Example
10 of paragraph (b)(5) is the same as the
text of § 1.36B–4T, Example 9 and
Example 10 of paragraph (b)(5)
published elsewhere in this issue of the
Federal Register].
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(c) [The text of the proposed
amendment to § 1.36B–4(c) is the same
as the text of § 1.36B–4T(c) published
elsewhere in this issue of the Federal
Register].
■ Par 5. Section 1.162(l)–1 is added to
read as follows:
§ 1.162(l)–1. Deduction for health
insurance costs of self-employed
individuals.
[The text of the proposed amendment
to § 1.162(l)–1(a) through (c) is the same
as the text of § 1.162(l)–1T(a) through (c)
published elsewhere in this issue of the
Federal Register].
John Dalrymple,
Deputy Commissioner for Services and
Enforcement.
[FR Doc. 2014–17696 Filed 7–24–14; 4:15 pm]
BILLING CODE 4830–01–P
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§ 1.36B–4 Reconciling the premium tax
credit with advance credit payments.
(a) * * *
(1) * * *
(ii) [The text of the proposed
amendment to § 1.36B–4(a)(1)(ii) is the
same as the text of § 1.36B–4T(a)(1)(ii)
published elsewhere in this issue of the
Federal Register].
*
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*
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(3) * * *
(iii) [The text of the proposed
amendment to § 1.36B–4(a)(3)(iii) is the
same as the text of § 1.36B–4T(a)(3)(iii)
published elsewhere in this issue of the
Federal Register].
(4) [The text of the proposed
amendment to § 1.36B–4, Example 4,
Example 10, Example 11, Example 12,
Example 13, and Example 14 of
paragraph (a)(4) is the same as the text
of § 1.36B–4T(a)(4), Example 4,
Example 10, Example 11, Example 12,
Example 13, and Example 14 published
elsewhere in this issue of the Federal
Register].
*
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(b) * * *
(3) [The text of the proposed
amendment to § 1.36B–4(b)(3) is the
same as the text of § 1.36B–4T(b)(3)
published elsewhere in this issue of the
Federal Register].
(4) [The text of the proposed
amendment to § 1.36B–4(b)(4) is the
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG–107012–14]
RIN 1545–BM04
Method of Accounting for Gains and
Losses on Shares in Certain Money
Market Funds; Broker Returns With
Respect to Sales of Shares in Money
Market Funds
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
AGENCY:
This document contains
proposed regulations that provide a
simplified method of accounting for
gains and losses on shares in money
market funds (MMFs) that distribute,
redeem, and repurchase their shares at
prices that reflect market-based
valuation of the MMFs’ portfolios and
more precise rounding than has been
required previously (floating net asset
value MMFs, or floating-NAV MMFs).
The proposed regulations also provide
guidance regarding information
reporting requirements for shares in
SUMMARY:
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MMFs. The proposed regulations
respond to Securities and Exchange
Commission (SEC) rules that change
how certain MMF shares are priced. The
proposed regulations affect floatingNAV MMFs and their shareholders.
This document also contains requests
for comments and provides notice of a
public hearing on these proposed
regulations.
DATES: Written or electronic comments
must be received by October 27, 2014.
Outlines of topics to be discussed at the
public hearing scheduled for November
19, 2014, must be received by October
27, 2014.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–107012–14), Room
5203, Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions
may be hand-delivered Monday through
Friday between the hours of 8 a.m. and
4 p.m. to CC:PA:LPD:PR (REG–107012–
14), Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue NW.,
Washington, DC, or sent electronically,
via the Federal eRulemaking portal at
www.regulations.gov (IRS REG–107012–
14). The public hearing will be held in
the IRS Auditorium, Internal Revenue
Building, 1111 Constitution Avenue
NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulations,
Grace E. Cho at (202) 317–6895;
concerning submissions of comments,
the hearing, and/or to be placed on the
building access list to attend the
hearing, Oluwafunmilayo (Funmi)
Taylor at (202) 317–6901 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to 26 CFR part 1 (Income
Tax Regulations) under sections 446 and
6045 of the Internal Revenue Code
(Code). These proposed regulations
provide a method of accounting for gain
or loss on shares in floating-NAV
MMFs. The proposed regulations are
intended to simplify tax compliance for
holders of shares in MMFs affected by
SEC regulations that change how certain
MMF shares are priced. See Money
Market Fund Reform; Amendments to
Form PF, Securities Act Release No. 33–
9616, Investment Advisers Act Release
No. IA–3879, Investment Company Act
Release No. IC–31166, Financial
Reporting Codification No. FR–84 (SEC
MMF Reform Rules).
An MMF is a type of investment
company registered under the
Investment Company Act of 1940 (1940
Act) and regulated as an MMF under
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Rule 2a–7 under the 1940 Act (17 CFR
270.2a–7). Unlike other types of mutual
funds, MMFs have historically sought to
keep stable (typically at $1.00) the
prices at which their shares are
distributed, redeemed, and repurchased.
To hold itself out to investors as an
MMF, an investment company must
meet the requirements specified in Rule
2a–7, which, among other things,
establishes limitations as to the
maturity, quality, diversification, and
liquidity of an MMF’s investments.
Generally, an MMF must hold a
diversified portfolio of short-term, lowrisk, liquid securities. The securities
that an MMF holds generally result in
no more than minimal fluctuations in
the MMF’s net asset value per share
(NAV).
Until the SEC MMF Reform Rules
change how certain MMFs price their
shares, Rule 2a–7 permits any MMF
meeting the other requirements of Rule
2a–7 to compute its price per share for
purposes of distribution, redemption,
and repurchase by using either or both
of (a) the amortized cost method of
valuation, and (b) the penny-rounding
method of pricing. Under the amortized
cost method, an MMF’s NAV is
determined by valuing the fund’s
portfolio securities at their acquisition
cost, adjusted for amortization of
premium or accretion of discount.
Under the penny-rounding method, an
MMF’s NAV is rounded to the nearest
one percent in computing the price per
share for purposes of distribution,
redemption, and repurchase. These
methods have enabled MMFs to
maintain constant share prices except in
situations in which the ‘‘deviation [of
the current net asset value per share
calculated using available market
quotations] from the money market
fund’s amortized cost price per share
exceeds 1⁄2 of 1 percent’’ (commonly
called ‘‘breaking the buck’’). 17 CFR
270.2a–7(c)(8)(ii)(B).
The perceived safety and simplicity of
MMFs have led to their widespread use
for cash management purposes. It is
therefore common for investors to
purchase and redeem MMF shares
frequently. An MMF is often used as an
account into which, or from which, cash
is automatically deposited, or
withdrawn, on a daily basis (commonly
referred to as a sweep arrangement).
MMFs generally declare dividends daily
and distribute them monthly. MMF
shareholders typically reinvest these
distributions automatically in the MMF.
In June 2013, the SEC proposed rules
that would change how certain MMF
shares are priced. See Money Market
Fund Reform; Amendments to Form PF,
Securities Act Release No. 33–9408,
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Investment Advisors Act Release No.
IA–3616, Investment Company Act
Release No. IC–30551, 78 FR 36834
(June 19, 2013) (SEC MMF Reform
Proposal). The SEC MMF Reform Rules
adopt the general approach of the SEC
MMF Reform Proposal, but include
various modifications in response to
comments and combine the two
principal reform alternatives. (These
alternatives were Floating Net Asset
Value and Standby Liquidity Fees and
Gates. See SEC MMF Reform Proposal at
36849 and 36878. The proposal
included a number of other possibilities,
including a combination of these two.)
The SEC MMF Reform Rules generally
bar the use of the amortized cost method
of valuation and the use of the pennyrounding method of pricing, except by
government MMFs and retail MMFs. A
government MMF is an MMF that
‘‘invests 99.5 percent or more of its total
assets in cash, government securities,
and/or repurchase agreements that are
collateralized fully.’’ SEC MMF Reform
Rules, § 270.2a–7(a)(16). A retail MMF
is an MMF that ‘‘has policies and
procedures reasonably designed to limit
all beneficial owners of the fund to
natural persons.’’ Id. § 270.2a–7(a)(25).
In the case of an MMF that is neither a
government MMF nor a retail MMF, the
SEC MMF Reform Rules require the
MMF to value its portfolio securities
using market-based factors and to
‘‘compute its price per share for
purposes of distribution, redemption
and repurchase by rounding the fund’s
current net asset value per share to a
minimum of the fourth decimal place in
the case of a fund with a $1.0000 share
price or an equivalent or more precise
level of accuracy for money market
funds with a different share price (e.g.
$10.000 per share, or $100.00 per
share).’’ Id. § 270.2a–7(c)(1)(ii). (This
method of computing the price per
share is referred to hereafter as ‘‘basis
point rounding.’’)
An MMF that uses market factors to
value its securities and uses basis point
rounding to price its shares for purposes
of distribution, redemption, and
repurchase has a share price that is
expected to change regularly, or ‘‘float.’’
(This fact explains the origin of the term
‘‘floating-NAV MMF.’’) Floating-NAV
MMFs therefore resemble in some
respects other mutual funds that are not
MMFs, but they remain subject to the
risk-limiting conditions in Rule 2a–7
and are expected to continue to fulfill
MMFs’ unique role. In the absence of
the simplified method of accounting
proposed in this document, current law
would require shareholders to compute
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gain or loss on every redemption of
shares in a floating-NAV MMF.
Stable share prices simplify the
taxation of transactions in MMF shares
because a shareholder does not realize
gain or loss when a share is redeemed
for an amount equal to its basis.
Shareholders typically will realize gain
or loss, however, on redemptions of
floating-NAV MMF shares. Comments
received by the SEC in response to the
SEC MMF Reform Proposal expressed
concern about tracking and reporting
gains and losses from shares in floatingNAV MMFs. The commenters observed
that the frequent purchase and
redemption of MMF shares combined
with relatively small changes in share
values could result in tax compliance
burdens that, in the opinion of these
commenters, would be disproportionate
to the amounts of gain or loss at issue.
Explanation of Provisions
1. Simplified Method of Accounting for
Floating-NAV MMF Shares (NAV
Method)
Section 446(b) provides that, if no
method of accounting has been regularly
used by the taxpayer, taxable income
shall be computed under a method that,
in the opinion of the Secretary, clearly
reflects income. The term ‘‘method of
accounting’’ includes a taxpayer’s
overall method of accounting and the
accounting treatment of any item.
§ 1.446–1(a)(1).
In response to concerns regarding the
tax compliance burdens associated with
frequent redemptions of shares in
floating-NAV MMFs, these proposed
regulations describe a permissible,
simplified method of accounting for
gain or loss on shares in a floating-NAV
MMF (the net asset value method, or
NAV method). The NAV method, in the
opinion of the Commissioner of Internal
Revenue, is a method of accounting that
clearly reflects income from gain or loss
on shares in floating-NAV MMFs. Under
this method, gain or loss is based on the
change in the aggregate value of the
shares in the floating-NAV MMF during
a computation period (which may be the
taxpayer’s taxable year or certain shorter
periods) and the net amount of the
purchases and redemptions during the
period. More specifically, the taxpayer’s
net gain or loss from shares in a floatingNAV MMF for a computation period
generally equals the value of the
taxpayer’s shares in the MMF at the end
of the period, minus the value of the
taxpayer’s shares in the MMF at the end
of the prior period, minus the taxpayer’s
net investment in the MMF during the
period. The NAV method does not
change the tax treatment of, or broker
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Federal Register / Vol. 79, No. 144 / Monday, July 28, 2014 / Proposed Rules
reporting requirements for, dividends
from floating-NAV MMFs.
The proposed method simplifies tax
computations by basing them on the
aggregate of all transactions in a period
and on aggregate fair market values.
Every floating-NAV MMF must compute
these fair market values for non-tax
purposes regardless of how—or even
whether—the MMF’s shareholders are
taxed on transactions in the MMF
shares. The NAV method takes into
account changes in value of floatingNAV MMF shares without regard to
realization.
Under the NAV method, the character
of a shareholder’s net gain or loss
depends on the character of the
underlying MMF shares in the
shareholder’s hands. If all of a
taxpayer’s floating-NAV MMF shares in
an account would yield capital (or
ordinary) gain or loss, then net gain or
loss under the NAV method is also
capital (or ordinary). When shareholders
recognize a net capital gain or loss
under the NAV method, the proposed
regulations provide that this gain or loss
is short term. This holding period
convention is necessary because the
aggregation that is part of the method
makes normal holding period
determinations impracticable.
Under the NAV method, any basis
adjustment imposed under internal
revenue law with respect to shares in
floating-NAV MMFs will generally give
rise to gain or loss in the year of the
adjustment. For example, if the basis of
shares in a floating-NAV MMF is
reduced under section 108(b)(2)(E) as a
result of a discharge of indebtedness or
under section 301(c)(2) as a result of
receipt of a distribution that, in whole
or in part, is not a dividend, then the
gain on the shares in the MMF would
be increased (or the loss would be
decreased) by the amount of the
adjustment. Comments are requested on
the appropriate treatment of these or
any other basis adjustments that might
be imposed under internal revenue law
with respect to shares in floating-NAV
MMFs.
Taxpayers may adopt the NAV
method pursuant to rules under § 1.446–
1(e) by use of the NAV method in the
Federal income tax return for the first
taxable year in which the taxpayer holds
shares in a floating-NAV MMF. See Rev.
Rul. 90–38 (1990–1 CB 57). Once a
taxpayer has adopted a method of
accounting for gains and losses on
shares in floating-NAV MMFs, any
change from that method (including a
change to or from the NAV method) is
a change in method of accounting to
which the provisions of section 446 and
the accompanying regulations apply.
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The proposed regulations provide that
the change is implemented on a cut-off
basis.
In addition to requiring some MMFs
to become floating-NAV MMFs, the SEC
MMF Reform Rules also provide that, in
appropriate circumstances, MMFs may
impose liquidity fees. When a liquidity
fee is in place, the proceeds received by
any shareholder that redeems shares are
reduced by the liquidity fee even though
the redeemed shares may be in an MMF
that uses penny-rounding to price its
shares (a stable-value MMF). Because
the cost of each stable-value MMF share
redeemed (generally $1.00) will exceed
the net amount of proceeds received for
that share ($1.00, minus the liquidity
fee), these redemptions would produce
recognized losses under standard tax
accounting. If the acquisition of other
shares causes a redemption to be a wash
sale under section 1091, then under
section 1091(d), the acquired shares will
have a basis greater than $1.00.
Because of the rarity of gains and
losses on the shares in stable-value
MMFs, both the MMFs themselves and
their shareholders may lack the systems
necessary to record the losses and to
track the basis of any shares whose basis
exceeds $1.00. In these circumstances, if
the NAV method were available to the
stable-value MMF shareholders, use of
that method would reduce the
shareholders’ tax compliance burden.
Accordingly, comments are requested
regarding whether the NAV method
should be available to shareholders of a
stable-value MMF that has imposed a
liquidity fee.
2. Information Reporting for FloatingNAV MMF Shares
Sections 6045, 6045A, and 6045B
establish certain reporting requirements
relating to securities. Section 1.6045–
1(c)(3)(vi) provides an exception to the
broker reporting requirement under
section 6045 for shares in an MMF ‘‘that
computes its current price per share for
purposes of distributions, redemptions,
and purchases so as to stabilize the
price per share at a constant amount
that approximates its issue price or the
price at which it was originally sold to
the public.’’ Sections 1.6045A–1(a)(1)(v)
and 1.6045B–1(a)(5) cross-reference
§ 1.6045–1(c)(3)(vi) to provide similar
exceptions from the requirements of
sections 6045A and 6045B, respectively.
Comments received by the SEC in
response to the SEC MMF Reform
Proposal expressed concern that the
existing exception would not apply to
floating-NAV MMFs and suggested that
requiring transaction-by-transaction
information reporting would impose
significant new costs on floating-NAV
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MMFs and intermediaries. The Treasury
Department and the IRS believe that
imposing broker reporting requirements
on floating-NAV MMFs would result in
administrative burdens that are not
justified in light of the expected relative
stability of floating-NAV MMF share
prices. Therefore, the proposed
regulations revise § 1.6045–1(c)(3)(vi) to
clarify that the exceptions under
sections 6045, 6045A, and 6045B
continue to apply to all MMFs,
including floating-NAV MMFs.
3. Wash Sale Rules
When the SEC MMF Reform Proposal
was issued, commenters expressed
concern about the difficulty of applying
the wash sale rules of section 1091 to
floating-NAV MMFs, especially the
difficulty of tracking the basis under
section 1091(d) of acquired shares. Use
of the NAV method will eliminate those
difficulties. Under the NAV method, net
gain or loss is determined for each
computation period, and no gain or loss
is determined for any particular
redemption of a taxpayer’s shares in a
floating-NAV MMF. Without a
determination of loss, a particular
redemption does not implicate the wash
sale rules.
A shareholder of a floating-NAV MMF
that does not use the NAV method,
however, may experience frequent wash
sales. For a shareholder with a
substantial volume of transactions in
floating-NAV MMF shares, tracking
wash sales of MMF shares could present
significant practical challenges. On July
29, 2013, the IRS published Notice
2013–48 (2013–31 IRB 120) in response
to the SEC MMF Reform Proposal. The
notice proposed a revenue procedure
providing that the IRS would not treat
a loss realized upon a redemption of a
floating-NAV MMF share as subject to
the wash sale rules if the amount of the
loss was not more than one half of one
percent of the taxpayer’s basis in that
share. The IRS received comments
indicating that the proposed revenue
procedure would not significantly
reduce the tax compliance burdens
associated with applying the wash sale
rules to floating-NAV MMFs because
shareholders would still have to track
all wash sales to determine whether the
amount of any particular wash sale
exceeds the 0.5% de minimis test. The
comments requested that floating-NAV
MMFs be exempted entirely from the
wash sale rules in section 1091.
Concurrently with these proposed
regulations, the Treasury Department
and the IRS are releasing a final revenue
procedure providing that the wash sale
rules will not be applied to redemptions
of shares in floating-NAV MMFs. This
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revenue procedure will apply to
redemptions of shares in floating-NAV
MMFs on or after the effective date of
the SEC MMF Reform Rules (expected
to be 60 days after their publication in
the Federal Register).
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Proposed Effective/Applicability Dates
These regulations concerning the
NAV method are proposed to apply to
taxable years ending on or after the date
of publication in the Federal Register of
a Treasury decision adopting these
proposed regulations as final
regulations. Shareholders of floatingNAV MMFs, however, may rely on the
rules in the regulations concerning the
NAV method for taxable years ending
on or after July 28, 2014 and beginning
before the date of publication in the
Federal Register of a Treasury decision
adopting these proposed regulations as
final regulations.
These regulations concerning
information reporting are proposed to
apply to calendar years beginning on or
after the date of publication in the
Federal Register of a Treasury decision
adopting these proposed regulations as
final regulations. Taxpayers and brokers
(as defined in § 1.6045–1(a)(1)) may rely
upon the rules in the regulations
concerning information reporting for
calendar years beginning before the date
of publication in the Federal Register of
a Treasury decision adopting these
proposed regulations as final
regulations.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a
significant regulatory action as defined
in Executive Order 12866, as
supplemented by Executive Order
13563. Therefore, a regulatory
assessment is not required. It also has
been determined that section 553(b) of
the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
regulations, and because the regulations
do not impose a collection of
information on small entities, the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to
section 7805(f) of the Code, this notice
of proposed rulemaking has been
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comments on its
impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations,
consideration will be given to any
written (a signed original and eight (8)
copies) or electronic comments that are
submitted timely to the IRS as
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prescribed in this preamble under the
‘‘Addresses’’ heading. The Treasury
Department and the IRS request
comments on all aspects of the proposed
rules. Comments are specifically
requested on the appropriate treatment
of basis adjustments that might be
imposed under sections 108(b)(2)(E),
301(c)(2), or any other provision of
internal revenue law with respect to
shares in floating-NAV MMFs.
Comments are also requested regarding
whether the NAV method should be
available to shareholders of a nonfloating-NAV MMF that has imposed a
liquidity fee under § 270.2a–7(c)(2) of
the SEC MMF Reform Rules. All
comments will be available for public
inspection and copying at
www.regulations.gov or upon request.
A public hearing has been scheduled
for November 19, 2014, at 10:00 a.m., in
the IRS Auditorium, Internal Revenue
Service, 1111 Constitution Avenue NW.,
Washington, DC. Due to building
security procedures, visitors must enter
through the Constitution Avenue
entrance. In addition, all visitors must
present photo identification to enter the
building. Because of access restrictions,
visitors will not be admitted beyond the
immediate entrance area more than 30
minutes before the hearing starts. For
information about having your name
placed on the building access list to
attend the hearing, see the FOR FURTHER
INFORMATION CONTACT section of this
preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish
to present oral comments at the hearing
must submit written (signed original
and eight (8) copies) or electronic
comments and an outline of the topics
to be discussed and the time to be
devoted to each topic by October 27,
2014. A period of 10 minutes will be
allotted to each person for making
comments. An agenda showing the
scheduling of the speakers will be
prepared after the deadline for receiving
outlines has passed. Copies of the
agenda will be available free of charge
at the hearing.
Drafting Information
The principal author of the proposed
regulations is Grace E. Cho, IRS Office
of the Associate Chief Counsel
(Financial Institutions and Products).
However, other personnel from the
Treasury Department and the IRS
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
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Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by adding an entry
in numerical order to read in part as
follows:
■
Authority: 26 U.S.C. 7805 * * *
Section 1.446–7 also issued under 26
U.S.C. 446. * * *
Par. 2. Section 1.446–7 is added to
read as follows:
■
§ 1.446–7 Net asset value method for
certain money market fund shares.
(a) In general. This section provides a
permissible method of accounting for
gain or loss on shares in a floating-NAV
MMF (the net asset value method, or
NAV method).
(b) Definitions. For purposes of this
section—
(1) Computation period. The
computation period is the period that a
taxpayer selects for computing gain and
loss under the NAV method for a
floating-NAV MMF. The computation
period may be the taxpayer’s taxable
year or a shorter period, such as a
month, or a number of months, weeks,
or days, provided that—
(i) Computation periods must be of
approximately equal duration (except
for initial or final computation periods
in a taxable year);
(ii) Every day during the taxable year
must fall within one, and only one,
computation period; and
(iii) Each computation period must
contain days from only one taxable year.
(2) Ending value. The ending value of
a taxpayer’s shares in a floating-NAV
MMF for a computation period is the
aggregate fair market value of the
taxpayer’s shares at the end of that
computation period.
(3) Floating-NAV MMF. A floatingNAV MMF is an MMF that distributes,
redeems, and repurchases its shares at
prices that are computed by rounding
the MMF’s current net asset value per
share to a minimum of the fourth
decimal place in the case of an MMF
with a share price at or about $1.0000
or an equivalent or more precise level of
accuracy for an MMF with a different
share price.
(4) Money market fund (MMF). A
money market fund (MMF) is a
regulated investment company that is
permitted to hold itself out to investors
as a money market fund under Rule 2a–
7 under the Investment Company Act of
1940.
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(5) Net investment—(i) In general. The
net investment in an MMF for a
computation period may be a positive
amount, a negative amount, or zero, and
is equal to—
(A) The aggregate cost of shares in the
MMF purchased during the
computation period (including
purchases through reinvestment of
dividends); minus
(B) The aggregate amount received
during the computation period in
redemption of (or otherwise in exchange
for) shares in the MMF if the transaction
is one in which gain or loss would be
recognized.
(ii) Adjustments—(A) Dispositions in
which gain or loss is not recognized. If,
during the computation period, any
shares in an MMF are disposed of in
transactions in which gain or loss would
not be recognized, the net investment in
the MMF for the computation period is
decreased by the fair market value of
each such share at the time of its
disposition.
(B) Acquisitions other than by
purchase. If, during the computation
period, any shares in an MMF are
acquired other than by purchase, the net
investment in the MMF for the
computation period is increased by the
adjusted basis (for purposes of
determining loss) of each such share
immediately after its acquisition. If the
adjusted basis referred to in the
preceding sentence would be
determined by reference to the basis of
one or more shares in an MMF that are
being disposed of by the taxpayer in a
transaction that is governed by
paragraph (b)(5)(ii)(A) of this section,
then the basis of each such disposed
share is treated as being the fair market
value of that share at the time of its
disposition.
(6) Starting basis. The starting basis of
a taxpayer’s shares in a floating-NAV
MMF for a computation period is—
(i) Except as provided in paragraph
(b)(6)(ii) of this section, the ending
value of the taxpayer’s shares for the
immediately preceding computation
period.
(ii) For the first computation period in
a taxable year, if the taxpayer did not
use the NAV method for the
immediately preceding taxable year, the
aggregate adjusted basis of the
taxpayer’s shares in the floating-NAV
MMF at the end of the immediately
preceding taxable year.
(c) NAV method—(1) Scope. A
taxpayer may use the NAV method
described in this section to determine
the gain or loss for the taxable year on
the taxpayer’s shares in each MMF that,
at any time during the taxable year, was
a floating-NAV MMF at a time when the
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taxpayer owned shares in the MMF. If
a taxpayer uses the NAV method for
shares in any floating-NAV MMF for a
taxable year, the taxpayer must use the
NAV method for that taxable year for
the shares in every floating-NAV MMF
in which the taxpayer holds shares. See
paragraph (c)(6) of this section for rules
applicable to accounting method
changes.
(2) Net gain or loss for a taxable
year—(i) Determination for each
computation period. Subject to any
adjustment under paragraph (c)(2)(ii) of
this section, the net gain or loss for each
computation period on the shares in a
floating-NAV MMF to which the NAV
method applies equals the ending value,
minus the starting basis, minus the net
investment in the floating-NAV MMF
for the computation period. If the
computation produces a result that is
greater than zero, the taxpayer has a
gain for the computation period with
respect to shares in the MMF; if the
computation produces a result that is
less than zero, the taxpayer has a loss
for the computation period on shares in
the MMF; and if the computation
produces a result that is equal to zero,
the taxpayer has no gain or loss for the
computation period on shares in the
MMF.
(ii) Adjustment of gain or loss to
reflect any basis adjustments. If, during
a computation period, there is any
downward (or upward) adjustment to
the taxpayer’s basis in the shares in the
floating-NAV MMF under any provision
of internal revenue law, then the net
gain or loss for the computation period
on shares in the floating-NAV MMF
determined under paragraph (c)(2)(i) of
this section is increased (or decreased)
by the amount of the adjustment.
(iii) Determination of net gain or loss
for each taxable year. The taxpayer’s net
gain or loss for a taxable year on shares
in a floating-NAV MMF is the sum of
the net gains or losses on shares in the
floating-NAV MMF for the computation
period (or computation periods) that
comprise the taxable year.
(3) Character—(i) In general. If a
taxpayer uses the NAV method for
shares in a floating-NAV MMF and each
of those shares otherwise would give
rise to capital gain or loss if sold or
exchanged in a computation period,
then the gain or loss from the shares in
the MMF is treated as capital. If a
taxpayer uses the NAV method for
shares in a floating-NAV MMF and each
of those shares otherwise would give
rise to ordinary gain or loss if sold or
exchanged in a computation period,
then the gain or loss from the shares in
the MMF is treated as ordinary.
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(ii) Mixed character. If a taxpayer uses
the NAV method for shares in a floatingNAV MMF and those shares would
otherwise give rise to both ordinary gain
or loss and capital gain or loss if sold
or exchanged in a computation period,
then all gain or loss from the shares in
this MMF is treated as capital gain or
loss.
(iii) Multiple accounts. See paragraph
(c)(5) of this section for the treatment of
multiple accounts.
(4) Holding period. Capital gains and
losses determined under the NAV
method are treated as short-term capital
gains and losses.
(5) More than one account. If a
taxpayer holds shares in a floating-NAV
MMF through more than one brokerage
account, the taxpayer must treat its
holdings in each account as a separate
floating-NAV MMF for purposes of the
NAV method and must separately apply
the method to each such account.
(6) Accounting method changes. A
change to or from the NAV method is
a change in method of accounting to
which the provisions of section 446 and
the accompanying regulations apply. A
taxpayer seeking to change to or from
the NAV method must secure the
consent of the Commissioner in
accordance with § 1.446–1(e) and follow
the administrative procedures issued
under § 1.446–1(e)(3)(ii) for obtaining
the Commissioner’s consent to change
the taxpayer’s accounting method. Any
such change will be made on a cut-off
basis. Because there will be no
duplication or omission of amounts as
a result of such a change to or from the
NAV method, no adjustment under
section 481(a) is required or permitted.
(d) Example. The provisions of this
section may be illustrated by the
following example:
Example. (i) Fund is an MMF. Shareholder
is a person whose taxable year is the calendar
year. On January 1 of Year 1, Shareholder
owns 5,000,000 shares in Fund in a single
account with an adjusted basis of
$5,000,000.00. On that date, Fund prices its
shares using penny rounding under Rule 2a–
7(c) under the Investment Company Act of
1940. On February 1 of Year 1, Fund becomes
a floating-NAV MMF. During Year 1,
Shareholder receives $32,158.23 in taxable
dividends from Fund and makes 120
purchases of additional shares in Fund
(including purchases through the
reinvestment of those dividends) totaling
$1,253,256.37 and 28 redemptions totaling
$1,124,591.71. The fair market value of
Shareholder’s shares in Fund at the end of
Year 1 is $5,129,750.00. All of Shareholder’s
shares in Fund are held as capital assets.
There is no adjustment to the basis in
Shareholder’s shares in Fund under any
provision of internal revenue law during
Year 1.
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(ii) Shareholder adopts the NAV method
with its taxable year as the computation
period. Shareholder’s net investment in Fund
for Year 1 equals $128,664.66 (the
$1,253,256.37 in purchases, minus the
$1,124,591.71 in redemptions). Shareholder’s
gain therefore is $1,085.34, which is the
ending value of Shareholder’s shares
($5,129,750.00), minus the starting basis of
Shareholder’s shares ($5,000,000.00), minus
Shareholder’s net investment in the fund for
the taxable year ($128,664.66). The gain of
$1,085.34 is treated as short-term capital
gain. Shareholder’s starting basis for Year 2
is $5,129,750.00. Shareholder must also
include the $32,158.23 in dividends in its
income for Year 1 in the same manner as if
Shareholder did not use the NAV method.
(iii) If Shareholder had instead adopted the
calendar month as its computation period, it
would have used the NAV method for
January of Year 1, even though Fund was not
yet a floating-NAV MMF.
(e) Effective/applicability date. This
section applies to taxable years ending
on or after the date of publication in the
Federal Register of a Treasury decision
adopting these proposed regulations as
final regulations. Taxpayers may rely on
this section for taxable years ending on
or after July 28, 2014 and beginning
before the date of publication in the
Federal Register of a Treasury decision
adopting these proposed regulations as
final regulations.
■ Par. 3. Section 1.6045–1 is amended
by revising paragraph (c)(3)(vi) to read
as follows:
§ 1.6045–1 Returns of information of
brokers and barter exchanges.
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*
*
*
*
*
(c) * * *
(3) * * *
(vi) Money market funds—(A) In
general. No return of information is
required with respect to a sale of shares
in a regulated investment company that
is permitted to hold itself out to
investors as a money market fund under
Rule 2a–7 under the Investment
Company Act of 1940.
(B) Effective/applicability date.
Paragraph (c)(3)(vi)(A) of this section
applies to sales of shares in calendar
years beginning on or after the date of
publication in the Federal Register of a
Treasury decision adopting these
proposed regulations as final
regulations. Taxpayers and brokers,
however, may rely on paragraph
(c)(3)(vi)(A) of this section for sales of
shares in calendar years beginning
before the date of publication in the
Federal Register of a Treasury decision
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adopting these proposed regulations as
final regulations.
*
*
*
*
*
John Dalrymple,
Deputy Commissioner for Services and
Enforcement.
[FR Doc. 2014–17689 Filed 7–23–14; 4:15 pm]
BILLING CODE 4830–01–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 51
[REG–123286–14]
RIN 1545–BM26
Branded Prescription Drug Fee
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary
regulations.
AGENCY:
In the Rules and Regulations
section of this issue of the Federal
Register, the IRS is issuing temporary
regulations relating to the branded
prescription drug fee. This fee was
enacted by section 9008 of the Patient
Protection and Affordable Care Act, as
amended by section 1404 of the Health
Care and Education Reconciliation Act
of 2010, and the Health Care and
Reconciliation Act of 2010 (collectively
the ACA). The proposed regulations
modify the definition of controlled
group for purposes of the branded
prescription drug fee. The proposed
regulations affect persons engaged in the
business of manufacturing or importing
certain branded prescription drugs. The
text of the temporary regulations also
serves as the text of the proposed
regulations.
DATES: Comments and requests for a
public hearing must be received by
October 27, 2014.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–123286–14), Room
5205, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be handdelivered to: CC:PA:LPD:PR Monday
through Friday between the hours of 8
a.m. and 4 p.m. to: CC:PA:LPD:PR
(REG–123286–14), Courier’s Desk,
Internal Revenue Service, 1111
Constitution Avenue NW., Washington,
DC, or sent electronically via the
Federal eRulemaking Portal at
www.regulations.gov (IRS REG–123286–
14).
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulations,
SUMMARY:
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43699
Celia Gabrysh, (202) 317–6855;
concerning submissions of comments
and request for a hearing,
Oluwafunmilayo Taylor, (202) 317–6901
(not toll-free calls).
SUPPLEMENTARY INFORMATION:
Background
Temporary regulations in the Rules
and Regulations section of this issue of
the Federal Register amend §§ 51.2(e)(3)
and 51.11(c) of the Branded Prescription
Drug Fee Regulations, 26 CFR Part 51.
The text of those regulations also serves
as the text of these proposed
regulations. The preamble to the
temporary regulations explains the
amendment.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a
significant regulatory action as defined
in Executive Order 12866, as
supplemented by Executive Order
13563. Therefore, a regulatory flexibility
assessment is not required. It also has
been determined that section 553(b) of
the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
regulations. Because these regulations
do not impose a collection of
information on small entities, a
Regulatory Flexibility Analysis under
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. Pursuant to
section 7805(f) of the Internal Revenue
Code, this notice of proposed
rulemaking has been submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment
on its impact on small business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations,
consideration will be given to any
comments that are submitted timely to
the IRS as prescribed in this preamble
under the ‘‘Addresses’’ heading.
Comments are requested on all aspects
of the proposed regulations. All
comments will be available at
www.regulations.gov or upon request. A
public hearing may be scheduled if
requested in writing by any person that
timely submits written comments. If a
public hearing is scheduled, notice of
the date, time, and place for the hearing
will be published in the Federal
Register.
Drafting Information
The principal author of these
regulations is Celia Gabrysh, Office of
Associate Chief Counsel (Passthroughs
and Special Industries). However, other
personnel from the IRS and the Treasury
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]]>Agencies
[Federal Register Volume 79, Number 144 (Monday, July 28, 2014)]
[Proposed Rules]
[Pages 43694-43699]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-17689]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-107012-14]
RIN 1545-BM04
Method of Accounting for Gains and Losses on Shares in Certain
Money Market Funds; Broker Returns With Respect to Sales of Shares in
Money Market Funds
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
-----------------------------------------------------------------------
SUMMARY: This document contains proposed regulations that provide a
simplified method of accounting for gains and losses on shares in money
market funds (MMFs) that distribute, redeem, and repurchase their
shares at prices that reflect market-based valuation of the MMFs'
portfolios and more precise rounding than has been required previously
(floating net asset value MMFs, or floating-NAV MMFs). The proposed
regulations also provide guidance regarding information reporting
requirements for shares in MMFs. The proposed regulations respond to
Securities and Exchange Commission (SEC) rules that change how certain
MMF shares are priced. The proposed regulations affect floating-NAV
MMFs and their shareholders. This document also contains requests for
comments and provides notice of a public hearing on these proposed
regulations.
DATES: Written or electronic comments must be received by October 27,
2014. Outlines of topics to be discussed at the public hearing
scheduled for November 19, 2014, must be received by October 27, 2014.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-107012-14), Room
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
107012-14), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW., Washington, DC, or sent electronically, via the Federal
eRulemaking portal at www.regulations.gov (IRS REG-107012-14). The
public hearing will be held in the IRS Auditorium, Internal Revenue
Building, 1111 Constitution Avenue NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Grace E. Cho at (202) 317-6895; concerning submissions of comments, the
hearing, and/or to be placed on the building access list to attend the
hearing, Oluwafunmilayo (Funmi) Taylor at (202) 317-6901 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to 26 CFR part 1 (Income
Tax Regulations) under sections 446 and 6045 of the Internal Revenue
Code (Code). These proposed regulations provide a method of accounting
for gain or loss on shares in floating-NAV MMFs. The proposed
regulations are intended to simplify tax compliance for holders of
shares in MMFs affected by SEC regulations that change how certain MMF
shares are priced. See Money Market Fund Reform; Amendments to Form PF,
Securities Act Release No. 33-9616, Investment Advisers Act Release No.
IA-3879, Investment Company Act Release No. IC-31166, Financial
Reporting Codification No. FR-84 (SEC MMF Reform Rules).
An MMF is a type of investment company registered under the
Investment Company Act of 1940 (1940 Act) and regulated as an MMF under
[[Page 43695]]
Rule 2a-7 under the 1940 Act (17 CFR 270.2a-7). Unlike other types of
mutual funds, MMFs have historically sought to keep stable (typically
at $1.00) the prices at which their shares are distributed, redeemed,
and repurchased.
To hold itself out to investors as an MMF, an investment company
must meet the requirements specified in Rule 2a-7, which, among other
things, establishes limitations as to the maturity, quality,
diversification, and liquidity of an MMF's investments. Generally, an
MMF must hold a diversified portfolio of short-term, low-risk, liquid
securities. The securities that an MMF holds generally result in no
more than minimal fluctuations in the MMF's net asset value per share
(NAV).
Until the SEC MMF Reform Rules change how certain MMFs price their
shares, Rule 2a-7 permits any MMF meeting the other requirements of
Rule 2a-7 to compute its price per share for purposes of distribution,
redemption, and repurchase by using either or both of (a) the amortized
cost method of valuation, and (b) the penny-rounding method of pricing.
Under the amortized cost method, an MMF's NAV is determined by valuing
the fund's portfolio securities at their acquisition cost, adjusted for
amortization of premium or accretion of discount. Under the penny-
rounding method, an MMF's NAV is rounded to the nearest one percent in
computing the price per share for purposes of distribution, redemption,
and repurchase. These methods have enabled MMFs to maintain constant
share prices except in situations in which the ``deviation [of the
current net asset value per share calculated using available market
quotations] from the money market fund's amortized cost price per share
exceeds \1/2\ of 1 percent'' (commonly called ``breaking the buck'').
17 CFR 270.2a-7(c)(8)(ii)(B).
The perceived safety and simplicity of MMFs have led to their
widespread use for cash management purposes. It is therefore common for
investors to purchase and redeem MMF shares frequently. An MMF is often
used as an account into which, or from which, cash is automatically
deposited, or withdrawn, on a daily basis (commonly referred to as a
sweep arrangement). MMFs generally declare dividends daily and
distribute them monthly. MMF shareholders typically reinvest these
distributions automatically in the MMF.
In June 2013, the SEC proposed rules that would change how certain
MMF shares are priced. See Money Market Fund Reform; Amendments to Form
PF, Securities Act Release No. 33-9408, Investment Advisors Act Release
No. IA-3616, Investment Company Act Release No. IC-30551, 78 FR 36834
(June 19, 2013) (SEC MMF Reform Proposal). The SEC MMF Reform Rules
adopt the general approach of the SEC MMF Reform Proposal, but include
various modifications in response to comments and combine the two
principal reform alternatives. (These alternatives were Floating Net
Asset Value and Standby Liquidity Fees and Gates. See SEC MMF Reform
Proposal at 36849 and 36878. The proposal included a number of other
possibilities, including a combination of these two.) The SEC MMF
Reform Rules generally bar the use of the amortized cost method of
valuation and the use of the penny-rounding method of pricing, except
by government MMFs and retail MMFs. A government MMF is an MMF that
``invests 99.5 percent or more of its total assets in cash, government
securities, and/or repurchase agreements that are collateralized
fully.'' SEC MMF Reform Rules, Sec. 270.2a-7(a)(16). A retail MMF is
an MMF that ``has policies and procedures reasonably designed to limit
all beneficial owners of the fund to natural persons.'' Id. Sec.
270.2a-7(a)(25). In the case of an MMF that is neither a government MMF
nor a retail MMF, the SEC MMF Reform Rules require the MMF to value its
portfolio securities using market-based factors and to ``compute its
price per share for purposes of distribution, redemption and repurchase
by rounding the fund's current net asset value per share to a minimum
of the fourth decimal place in the case of a fund with a $1.0000 share
price or an equivalent or more precise level of accuracy for money
market funds with a different share price (e.g. $10.000 per share, or
$100.00 per share).'' Id. Sec. 270.2a-7(c)(1)(ii). (This method of
computing the price per share is referred to hereafter as ``basis point
rounding.'')
An MMF that uses market factors to value its securities and uses
basis point rounding to price its shares for purposes of distribution,
redemption, and repurchase has a share price that is expected to change
regularly, or ``float.'' (This fact explains the origin of the term
``floating-NAV MMF.'') Floating-NAV MMFs therefore resemble in some
respects other mutual funds that are not MMFs, but they remain subject
to the risk-limiting conditions in Rule 2a-7 and are expected to
continue to fulfill MMFs' unique role. In the absence of the simplified
method of accounting proposed in this document, current law would
require shareholders to compute gain or loss on every redemption of
shares in a floating-NAV MMF.
Stable share prices simplify the taxation of transactions in MMF
shares because a shareholder does not realize gain or loss when a share
is redeemed for an amount equal to its basis. Shareholders typically
will realize gain or loss, however, on redemptions of floating-NAV MMF
shares. Comments received by the SEC in response to the SEC MMF Reform
Proposal expressed concern about tracking and reporting gains and
losses from shares in floating-NAV MMFs. The commenters observed that
the frequent purchase and redemption of MMF shares combined with
relatively small changes in share values could result in tax compliance
burdens that, in the opinion of these commenters, would be
disproportionate to the amounts of gain or loss at issue.
Explanation of Provisions
1. Simplified Method of Accounting for Floating-NAV MMF Shares (NAV
Method)
Section 446(b) provides that, if no method of accounting has been
regularly used by the taxpayer, taxable income shall be computed under
a method that, in the opinion of the Secretary, clearly reflects
income. The term ``method of accounting'' includes a taxpayer's overall
method of accounting and the accounting treatment of any item. Sec.
1.446-1(a)(1).
In response to concerns regarding the tax compliance burdens
associated with frequent redemptions of shares in floating-NAV MMFs,
these proposed regulations describe a permissible, simplified method of
accounting for gain or loss on shares in a floating-NAV MMF (the net
asset value method, or NAV method). The NAV method, in the opinion of
the Commissioner of Internal Revenue, is a method of accounting that
clearly reflects income from gain or loss on shares in floating-NAV
MMFs. Under this method, gain or loss is based on the change in the
aggregate value of the shares in the floating-NAV MMF during a
computation period (which may be the taxpayer's taxable year or certain
shorter periods) and the net amount of the purchases and redemptions
during the period. More specifically, the taxpayer's net gain or loss
from shares in a floating-NAV MMF for a computation period generally
equals the value of the taxpayer's shares in the MMF at the end of the
period, minus the value of the taxpayer's shares in the MMF at the end
of the prior period, minus the taxpayer's net investment in the MMF
during the period. The NAV method does not change the tax treatment of,
or broker
[[Page 43696]]
reporting requirements for, dividends from floating-NAV MMFs.
The proposed method simplifies tax computations by basing them on
the aggregate of all transactions in a period and on aggregate fair
market values. Every floating-NAV MMF must compute these fair market
values for non-tax purposes regardless of how--or even whether--the
MMF's shareholders are taxed on transactions in the MMF shares. The NAV
method takes into account changes in value of floating-NAV MMF shares
without regard to realization.
Under the NAV method, the character of a shareholder's net gain or
loss depends on the character of the underlying MMF shares in the
shareholder's hands. If all of a taxpayer's floating-NAV MMF shares in
an account would yield capital (or ordinary) gain or loss, then net
gain or loss under the NAV method is also capital (or ordinary). When
shareholders recognize a net capital gain or loss under the NAV method,
the proposed regulations provide that this gain or loss is short term.
This holding period convention is necessary because the aggregation
that is part of the method makes normal holding period determinations
impracticable.
Under the NAV method, any basis adjustment imposed under internal
revenue law with respect to shares in floating-NAV MMFs will generally
give rise to gain or loss in the year of the adjustment. For example,
if the basis of shares in a floating-NAV MMF is reduced under section
108(b)(2)(E) as a result of a discharge of indebtedness or under
section 301(c)(2) as a result of receipt of a distribution that, in
whole or in part, is not a dividend, then the gain on the shares in the
MMF would be increased (or the loss would be decreased) by the amount
of the adjustment. Comments are requested on the appropriate treatment
of these or any other basis adjustments that might be imposed under
internal revenue law with respect to shares in floating-NAV MMFs.
Taxpayers may adopt the NAV method pursuant to rules under Sec.
1.446-1(e) by use of the NAV method in the Federal income tax return
for the first taxable year in which the taxpayer holds shares in a
floating-NAV MMF. See Rev. Rul. 90-38 (1990-1 CB 57). Once a taxpayer
has adopted a method of accounting for gains and losses on shares in
floating-NAV MMFs, any change from that method (including a change to
or from the NAV method) is a change in method of accounting to which
the provisions of section 446 and the accompanying regulations apply.
The proposed regulations provide that the change is implemented on a
cut-off basis.
In addition to requiring some MMFs to become floating-NAV MMFs, the
SEC MMF Reform Rules also provide that, in appropriate circumstances,
MMFs may impose liquidity fees. When a liquidity fee is in place, the
proceeds received by any shareholder that redeems shares are reduced by
the liquidity fee even though the redeemed shares may be in an MMF that
uses penny-rounding to price its shares (a stable-value MMF). Because
the cost of each stable-value MMF share redeemed (generally $1.00) will
exceed the net amount of proceeds received for that share ($1.00, minus
the liquidity fee), these redemptions would produce recognized losses
under standard tax accounting. If the acquisition of other shares
causes a redemption to be a wash sale under section 1091, then under
section 1091(d), the acquired shares will have a basis greater than
$1.00.
Because of the rarity of gains and losses on the shares in stable-
value MMFs, both the MMFs themselves and their shareholders may lack
the systems necessary to record the losses and to track the basis of
any shares whose basis exceeds $1.00. In these circumstances, if the
NAV method were available to the stable-value MMF shareholders, use of
that method would reduce the shareholders' tax compliance burden.
Accordingly, comments are requested regarding whether the NAV method
should be available to shareholders of a stable-value MMF that has
imposed a liquidity fee.
2. Information Reporting for Floating-NAV MMF Shares
Sections 6045, 6045A, and 6045B establish certain reporting
requirements relating to securities. Section 1.6045-1(c)(3)(vi)
provides an exception to the broker reporting requirement under section
6045 for shares in an MMF ``that computes its current price per share
for purposes of distributions, redemptions, and purchases so as to
stabilize the price per share at a constant amount that approximates
its issue price or the price at which it was originally sold to the
public.'' Sections 1.6045A-1(a)(1)(v) and 1.6045B-1(a)(5) cross-
reference Sec. 1.6045-1(c)(3)(vi) to provide similar exceptions from
the requirements of sections 6045A and 6045B, respectively. Comments
received by the SEC in response to the SEC MMF Reform Proposal
expressed concern that the existing exception would not apply to
floating-NAV MMFs and suggested that requiring transaction-by-
transaction information reporting would impose significant new costs on
floating-NAV MMFs and intermediaries. The Treasury Department and the
IRS believe that imposing broker reporting requirements on floating-NAV
MMFs would result in administrative burdens that are not justified in
light of the expected relative stability of floating-NAV MMF share
prices. Therefore, the proposed regulations revise Sec. 1.6045-
1(c)(3)(vi) to clarify that the exceptions under sections 6045, 6045A,
and 6045B continue to apply to all MMFs, including floating-NAV MMFs.
3. Wash Sale Rules
When the SEC MMF Reform Proposal was issued, commenters expressed
concern about the difficulty of applying the wash sale rules of section
1091 to floating-NAV MMFs, especially the difficulty of tracking the
basis under section 1091(d) of acquired shares. Use of the NAV method
will eliminate those difficulties. Under the NAV method, net gain or
loss is determined for each computation period, and no gain or loss is
determined for any particular redemption of a taxpayer's shares in a
floating-NAV MMF. Without a determination of loss, a particular
redemption does not implicate the wash sale rules.
A shareholder of a floating-NAV MMF that does not use the NAV
method, however, may experience frequent wash sales. For a shareholder
with a substantial volume of transactions in floating-NAV MMF shares,
tracking wash sales of MMF shares could present significant practical
challenges. On July 29, 2013, the IRS published Notice 2013-48 (2013-31
IRB 120) in response to the SEC MMF Reform Proposal. The notice
proposed a revenue procedure providing that the IRS would not treat a
loss realized upon a redemption of a floating-NAV MMF share as subject
to the wash sale rules if the amount of the loss was not more than one
half of one percent of the taxpayer's basis in that share. The IRS
received comments indicating that the proposed revenue procedure would
not significantly reduce the tax compliance burdens associated with
applying the wash sale rules to floating-NAV MMFs because shareholders
would still have to track all wash sales to determine whether the
amount of any particular wash sale exceeds the 0.5% de minimis test.
The comments requested that floating-NAV MMFs be exempted entirely from
the wash sale rules in section 1091.
Concurrently with these proposed regulations, the Treasury
Department and the IRS are releasing a final revenue procedure
providing that the wash sale rules will not be applied to redemptions
of shares in floating-NAV MMFs. This
[[Page 43697]]
revenue procedure will apply to redemptions of shares in floating-NAV
MMFs on or after the effective date of the SEC MMF Reform Rules
(expected to be 60 days after their publication in the Federal
Register).
Proposed Effective/Applicability Dates
These regulations concerning the NAV method are proposed to apply
to taxable years ending on or after the date of publication in the
Federal Register of a Treasury decision adopting these proposed
regulations as final regulations. Shareholders of floating-NAV MMFs,
however, may rely on the rules in the regulations concerning the NAV
method for taxable years ending on or after July 28, 2014 and beginning
before the date of publication in the Federal Register of a Treasury
decision adopting these proposed regulations as final regulations.
These regulations concerning information reporting are proposed to
apply to calendar years beginning on or after the date of publication
in the Federal Register of a Treasury decision adopting these proposed
regulations as final regulations. Taxpayers and brokers (as defined in
Sec. 1.6045-1(a)(1)) may rely upon the rules in the regulations
concerning information reporting for calendar years beginning before
the date of publication in the Federal Register of a Treasury decision
adopting these proposed regulations as final regulations.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866, as supplemented by Executive Order 13563. Therefore, a
regulatory assessment is not required. It also has been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
does not apply to these regulations, and because the regulations do not
impose a collection of information on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to
section 7805(f) of the Code, this notice of proposed rulemaking has
been submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comments on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written (a signed original and eight
(8) copies) or electronic comments that are submitted timely to the IRS
as prescribed in this preamble under the ``Addresses'' heading. The
Treasury Department and the IRS request comments on all aspects of the
proposed rules. Comments are specifically requested on the appropriate
treatment of basis adjustments that might be imposed under sections
108(b)(2)(E), 301(c)(2), or any other provision of internal revenue law
with respect to shares in floating-NAV MMFs. Comments are also
requested regarding whether the NAV method should be available to
shareholders of a non-floating-NAV MMF that has imposed a liquidity fee
under Sec. 270.2a-7(c)(2) of the SEC MMF Reform Rules. All comments
will be available for public inspection and copying at
www.regulations.gov or upon request.
A public hearing has been scheduled for November 19, 2014, at 10:00
a.m., in the IRS Auditorium, Internal Revenue Service, 1111
Constitution Avenue NW., Washington, DC. Due to building security
procedures, visitors must enter through the Constitution Avenue
entrance. In addition, all visitors must present photo identification
to enter the building. Because of access restrictions, visitors will
not be admitted beyond the immediate entrance area more than 30 minutes
before the hearing starts. For information about having your name
placed on the building access list to attend the hearing, see the FOR
FURTHER INFORMATION CONTACT section of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit written
(signed original and eight (8) copies) or electronic comments and an
outline of the topics to be discussed and the time to be devoted to
each topic by October 27, 2014. A period of 10 minutes will be allotted
to each person for making comments. An agenda showing the scheduling of
the speakers will be prepared after the deadline for receiving outlines
has passed. Copies of the agenda will be available free of charge at
the hearing.
Drafting Information
The principal author of the proposed regulations is Grace E. Cho,
IRS Office of the Associate Chief Counsel (Financial Institutions and
Products). However, other personnel from the Treasury Department and
the IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding an
entry in numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.446-7 also issued under 26 U.S.C. 446. * * *
0
Par. 2. Section 1.446-7 is added to read as follows:
Sec. 1.446-7 Net asset value method for certain money market fund
shares.
(a) In general. This section provides a permissible method of
accounting for gain or loss on shares in a floating-NAV MMF (the net
asset value method, or NAV method).
(b) Definitions. For purposes of this section--
(1) Computation period. The computation period is the period that a
taxpayer selects for computing gain and loss under the NAV method for a
floating-NAV MMF. The computation period may be the taxpayer's taxable
year or a shorter period, such as a month, or a number of months,
weeks, or days, provided that--
(i) Computation periods must be of approximately equal duration
(except for initial or final computation periods in a taxable year);
(ii) Every day during the taxable year must fall within one, and
only one, computation period; and
(iii) Each computation period must contain days from only one
taxable year.
(2) Ending value. The ending value of a taxpayer's shares in a
floating-NAV MMF for a computation period is the aggregate fair market
value of the taxpayer's shares at the end of that computation period.
(3) Floating-NAV MMF. A floating-NAV MMF is an MMF that
distributes, redeems, and repurchases its shares at prices that are
computed by rounding the MMF's current net asset value per share to a
minimum of the fourth decimal place in the case of an MMF with a share
price at or about $1.0000 or an equivalent or more precise level of
accuracy for an MMF with a different share price.
(4) Money market fund (MMF). A money market fund (MMF) is a
regulated investment company that is permitted to hold itself out to
investors as a money market fund under Rule 2a-7 under the Investment
Company Act of 1940.
[[Page 43698]]
(5) Net investment--(i) In general. The net investment in an MMF
for a computation period may be a positive amount, a negative amount,
or zero, and is equal to--
(A) The aggregate cost of shares in the MMF purchased during the
computation period (including purchases through reinvestment of
dividends); minus
(B) The aggregate amount received during the computation period in
redemption of (or otherwise in exchange for) shares in the MMF if the
transaction is one in which gain or loss would be recognized.
(ii) Adjustments--(A) Dispositions in which gain or loss is not
recognized. If, during the computation period, any shares in an MMF are
disposed of in transactions in which gain or loss would not be
recognized, the net investment in the MMF for the computation period is
decreased by the fair market value of each such share at the time of
its disposition.
(B) Acquisitions other than by purchase. If, during the computation
period, any shares in an MMF are acquired other than by purchase, the
net investment in the MMF for the computation period is increased by
the adjusted basis (for purposes of determining loss) of each such
share immediately after its acquisition. If the adjusted basis referred
to in the preceding sentence would be determined by reference to the
basis of one or more shares in an MMF that are being disposed of by the
taxpayer in a transaction that is governed by paragraph (b)(5)(ii)(A)
of this section, then the basis of each such disposed share is treated
as being the fair market value of that share at the time of its
disposition.
(6) Starting basis. The starting basis of a taxpayer's shares in a
floating-NAV MMF for a computation period is--
(i) Except as provided in paragraph (b)(6)(ii) of this section, the
ending value of the taxpayer's shares for the immediately preceding
computation period.
(ii) For the first computation period in a taxable year, if the
taxpayer did not use the NAV method for the immediately preceding
taxable year, the aggregate adjusted basis of the taxpayer's shares in
the floating-NAV MMF at the end of the immediately preceding taxable
year.
(c) NAV method--(1) Scope. A taxpayer may use the NAV method
described in this section to determine the gain or loss for the taxable
year on the taxpayer's shares in each MMF that, at any time during the
taxable year, was a floating-NAV MMF at a time when the taxpayer owned
shares in the MMF. If a taxpayer uses the NAV method for shares in any
floating-NAV MMF for a taxable year, the taxpayer must use the NAV
method for that taxable year for the shares in every floating-NAV MMF
in which the taxpayer holds shares. See paragraph (c)(6) of this
section for rules applicable to accounting method changes.
(2) Net gain or loss for a taxable year--(i) Determination for each
computation period. Subject to any adjustment under paragraph
(c)(2)(ii) of this section, the net gain or loss for each computation
period on the shares in a floating-NAV MMF to which the NAV method
applies equals the ending value, minus the starting basis, minus the
net investment in the floating-NAV MMF for the computation period. If
the computation produces a result that is greater than zero, the
taxpayer has a gain for the computation period with respect to shares
in the MMF; if the computation produces a result that is less than
zero, the taxpayer has a loss for the computation period on shares in
the MMF; and if the computation produces a result that is equal to
zero, the taxpayer has no gain or loss for the computation period on
shares in the MMF.
(ii) Adjustment of gain or loss to reflect any basis adjustments.
If, during a computation period, there is any downward (or upward)
adjustment to the taxpayer's basis in the shares in the floating-NAV
MMF under any provision of internal revenue law, then the net gain or
loss for the computation period on shares in the floating-NAV MMF
determined under paragraph (c)(2)(i) of this section is increased (or
decreased) by the amount of the adjustment.
(iii) Determination of net gain or loss for each taxable year. The
taxpayer's net gain or loss for a taxable year on shares in a floating-
NAV MMF is the sum of the net gains or losses on shares in the
floating-NAV MMF for the computation period (or computation periods)
that comprise the taxable year.
(3) Character--(i) In general. If a taxpayer uses the NAV method
for shares in a floating-NAV MMF and each of those shares otherwise
would give rise to capital gain or loss if sold or exchanged in a
computation period, then the gain or loss from the shares in the MMF is
treated as capital. If a taxpayer uses the NAV method for shares in a
floating-NAV MMF and each of those shares otherwise would give rise to
ordinary gain or loss if sold or exchanged in a computation period,
then the gain or loss from the shares in the MMF is treated as
ordinary.
(ii) Mixed character. If a taxpayer uses the NAV method for shares
in a floating-NAV MMF and those shares would otherwise give rise to
both ordinary gain or loss and capital gain or loss if sold or
exchanged in a computation period, then all gain or loss from the
shares in this MMF is treated as capital gain or loss.
(iii) Multiple accounts. See paragraph (c)(5) of this section for
the treatment of multiple accounts.
(4) Holding period. Capital gains and losses determined under the
NAV method are treated as short-term capital gains and losses.
(5) More than one account. If a taxpayer holds shares in a
floating-NAV MMF through more than one brokerage account, the taxpayer
must treat its holdings in each account as a separate floating-NAV MMF
for purposes of the NAV method and must separately apply the method to
each such account.
(6) Accounting method changes. A change to or from the NAV method
is a change in method of accounting to which the provisions of section
446 and the accompanying regulations apply. A taxpayer seeking to
change to or from the NAV method must secure the consent of the
Commissioner in accordance with Sec. 1.446-1(e) and follow the
administrative procedures issued under Sec. 1.446-1(e)(3)(ii) for
obtaining the Commissioner's consent to change the taxpayer's
accounting method. Any such change will be made on a cut-off basis.
Because there will be no duplication or omission of amounts as a result
of such a change to or from the NAV method, no adjustment under section
481(a) is required or permitted.
(d) Example. The provisions of this section may be illustrated by
the following example:
Example. (i) Fund is an MMF. Shareholder is a person whose
taxable year is the calendar year. On January 1 of Year 1,
Shareholder owns 5,000,000 shares in Fund in a single account with
an adjusted basis of $5,000,000.00. On that date, Fund prices its
shares using penny rounding under Rule 2a-7(c) under the Investment
Company Act of 1940. On February 1 of Year 1, Fund becomes a
floating-NAV MMF. During Year 1, Shareholder receives $32,158.23 in
taxable dividends from Fund and makes 120 purchases of additional
shares in Fund (including purchases through the reinvestment of
those dividends) totaling $1,253,256.37 and 28 redemptions totaling
$1,124,591.71. The fair market value of Shareholder's shares in Fund
at the end of Year 1 is $5,129,750.00. All of Shareholder's shares
in Fund are held as capital assets. There is no adjustment to the
basis in Shareholder's shares in Fund under any provision of
internal revenue law during Year 1.
[[Page 43699]]
(ii) Shareholder adopts the NAV method with its taxable year as
the computation period. Shareholder's net investment in Fund for
Year 1 equals $128,664.66 (the $1,253,256.37 in purchases, minus the
$1,124,591.71 in redemptions). Shareholder's gain therefore is
$1,085.34, which is the ending value of Shareholder's shares
($5,129,750.00), minus the starting basis of Shareholder's shares
($5,000,000.00), minus Shareholder's net investment in the fund for
the taxable year ($128,664.66). The gain of $1,085.34 is treated as
short-term capital gain. Shareholder's starting basis for Year 2 is
$5,129,750.00. Shareholder must also include the $32,158.23 in
dividends in its income for Year 1 in the same manner as if
Shareholder did not use the NAV method.
(iii) If Shareholder had instead adopted the calendar month as
its computation period, it would have used the NAV method for
January of Year 1, even though Fund was not yet a floating-NAV MMF.
(e) Effective/applicability date. This section applies to taxable
years ending on or after the date of publication in the Federal
Register of a Treasury decision adopting these proposed regulations as
final regulations. Taxpayers may rely on this section for taxable years
ending on or after July 28, 2014 and beginning before the date of
publication in the Federal Register of a Treasury decision adopting
these proposed regulations as final regulations.
0
Par. 3. Section 1.6045-1 is amended by revising paragraph (c)(3)(vi) to
read as follows:
Sec. 1.6045-1 Returns of information of brokers and barter exchanges.
* * * * *
(c) * * *
(3) * * *
(vi) Money market funds--(A) In general. No return of information
is required with respect to a sale of shares in a regulated investment
company that is permitted to hold itself out to investors as a money
market fund under Rule 2a-7 under the Investment Company Act of 1940.
(B) Effective/applicability date. Paragraph (c)(3)(vi)(A) of this
section applies to sales of shares in calendar years beginning on or
after the date of publication in the Federal Register of a Treasury
decision adopting these proposed regulations as final regulations.
Taxpayers and brokers, however, may rely on paragraph (c)(3)(vi)(A) of
this section for sales of shares in calendar years beginning before the
date of publication in the Federal Register of a Treasury decision
adopting these proposed regulations as final regulations.
* * * * *
John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2014-17689 Filed 7-23-14; 4:15 pm]
BILLING CODE 4830-01-P
