Basis Reporting by Securities Brokers and Basis Determination for Stock, 67010-67044 [E9-29855]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 74, Number 241 (Thursday, December 17, 2009)]
[Proposed Rules]
[Pages 67010-67044]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-29855]



[[Page 67009]]

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Part II





Department of the Treasury





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Internal Revenue Service



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26 CFR Parts 1, 31 and 301



Basis Reporting by Securities Brokers and Basis Determination for 
Stock; Proposed Rule

Federal Register / Vol. 74, No. 241 / Thursday, December 17, 2009 / 
Proposed Rules

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 31, and 301

[REG-101896-09]
RIN 1545-BI66


Basis Reporting by Securities Brokers and Basis Determination for 
Stock

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations relating to 
reporting sales of securities by brokers and determining the basis of 
securities. The proposed regulations reflect changes in the law made by 
the Energy Improvement and Extension Act of 2008 that require brokers 
when reporting the sale of securities to the IRS to include the 
customer's adjusted basis in the sold securities and to classify any 
gain or loss as long-term or short-term. This document also contains 
proposed regulations reflecting changes in the law that alter how 
taxpayers compute basis when averaging the basis of shares acquired at 
different prices and that expand the ability of taxpayers to compute 
basis by averaging. The document also proposes regulations that provide 
brokers and others until February 15 to furnish certain information 
statements to customers. This document also contains proposed 
regulations that implement new reporting requirements imposed upon 
persons that transfer custody of stock and upon issuers of stock 
regarding organizational actions that affect the basis of the issued 
stock. This document also contains proposed regulations reflecting 
changes in the law that alter how brokers report short sales of 
securities. Finally, this document provides for a notice of a public 
hearing on these proposed regulations.

DATES: Written or electronic comments must be received by February 8, 
2010. Outlines of topics to be discussed at the public hearing 
scheduled for February 17, 2010 must be received by February 8, 2010.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-101896-09), room 
5203, Internal Revenue Service, PO 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-
101896-09), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at https://www.regulations.gov (IRS REG-101896-09). 
The public hearing will be held in the auditorium of the IRS New 
Carrollton Federal Building, 5000 Ellin Road, Lanham, Maryland 20706.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations 
under section 1012, Edward C. Schwartz of the Office of Associate Chief 
Counsel (Income Tax and Accounting) at (202) 622-4960; concerning the 
proposed regulations under sections 3406, 6045, 6045A, 6045B, 6721, and 
6722, Stephen Schaeffer of the Office of Associate Chief Counsel 
(Procedure and Administration) at (202) 622-4910; concerning 
submissions of comments, the public hearing, and/or to be placed on the 
building access list to attend the public hearing, Funmi Taylor of the 
Office of Associate Chief Counsel (Procedure and Administration) at 
(202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking related to the furnishing of information in connection with 
the transfer of securities has been submitted to the Office of 
Management and Budget in accordance with the Paperwork Reduction Act of 
1995 (44 U.S.C. 3507(d)). Comments on the collection of information 
should be sent to the Office of Management and Budget, Attn: Desk 
Officer for the Department of the Treasury, Office of Information and 
Regulatory Affairs, Washington, DC 20503, with copies to the Internal 
Revenue Service, Attn: IRS Reports Clearance Officer, 
SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Comments on the collection of 
information should be received by February 16, 2010. Comments are 
specifically requested concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the IRS, including whether the 
information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information;
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    The collection of information in these proposed regulations in 
Sec. Sec.  1.6045-1(c)(3)(xi)(C) and 1.6045A-1 concerning furnishing 
information in connection with a transfer of securities is necessary to 
allow brokers that effect sales of transferred covered securities to 
determine and report the adjusted basis of the securities and whether 
any gain or loss with respect to the securities is long-term or short-
term in compliance with section 6045(g) of the Internal Revenue Code 
(Code). The collection of information is required to comply with the 
provisions of section 403 of the Energy Improvement and Extension Act 
of 2008, Division B of Public Law 110-343 (122 Stat. 3765, 3854 
(2008)). The likely respondents are brokers of securities and issuers, 
transfer agents, and professional custodians of securities that do not 
effect sales.
    Estimated total annual reporting burden: 240,000 hours.
    Estimated average annual burden per respondent: 8 hours.
    Estimated average burden per response: 4 minutes.
    Estimated number of respondents: 30,000.
    Estimated frequency of responses: 4,000,000.
    The burden for the collection of information contained in proposed 
regulation Sec.  1.6045-1 except for Sec.  1.6045-1(c)(3)(xi)(C) will 
be reflected in the burden on Form 1099-B, ``Proceeds from Broker and 
Barter Exchange Transactions,'' when revised to request the additional 
information in that proposed regulation. The burden for the collection 
of information contained in proposed regulation Sec.  1.6045B-1 will be 
reflected in the burden on the form that the IRS will create to request 
the information in that proposed regulation.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.

Background

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1), the Regulations on Employment Tax and 
Collection of Income Tax at the Source (26 CFR part 31), and the 
Regulations on Procedure and Administration (26 CFR part 301) relating 
to information reporting by brokers and others as required by section 
6045. The document

[[Page 67011]]

also contains proposed amendments relating to the scope and computation 
of basis by the average basis method under section 1012 and to new 
information reporting requirements by brokers, custodians, and issuers 
of securities under sections 6045A and 6045B. These sections were 
amended or added by section 403 of the Energy Improvement and Extension 
Act of 2008, Division B of Public Law 110-343 (122 Stat. 3765, 3854 
(2008)) (the Act). These proposed regulations are proposed to be issued 
under the authority contained in sections 1012, 3406, 6045, 6045A, 
6045B, and 7805.

1. Returns of Brokers

    Section 6045(g) provides that every broker that is required to file 
a return with the IRS under section 6045(a) showing the gross proceeds 
from the sale of a covered security must include in the return the 
customer's adjusted basis in the security and whether any gain or loss 
with respect to the security is long-term or short-term. Thus, a broker 
that is currently subject to gross proceeds reporting under section 
6045(a) with respect to the sale of a covered security is also subject 
to the reporting of adjusted basis of that security and whether any 
gain or loss with respect to that security is long-term or short-term 
under section 6045(g).
    Section 1.6045-1(a)(1) provides that the term broker generally 
means any U.S. or foreign person that, in the ordinary course of a 
trade or business, stands ready to effect sales to be made by others. 
However, with respect to a sale (including a redemption or retirement) 
effected at an office outside the United States, a broker includes only 
a person described as a U.S. payor or U.S. middleman in Sec.  1.6049-
5(c)(5). Additionally, under Sec.  1.6045-1(g)(1), reporting is not 
required with respect to certain holders of securities that are exempt 
foreign persons. U.S. and foreign brokers that are subject to gross 
proceeds reporting under the existing rules will also be subject to 
reporting under the rules of section 6045(g).
a. Covered Security
    For purposes of reporting under section 6045(g), section 
6045(g)(3)(A) provides that a covered security is any specified 
security acquired on or after the applicable date if the security: (1) 
Was acquired through a transaction in the account in which the security 
was held; or (2) was transferred to that account from an account in 
which the security was a covered security, but only if the broker 
receiving custody of the security receives a statement under section 
6045A (described later in this preamble) with respect to the transfer.
b. Specified Security
    Section 6045(g)(3)(B) provides that a specified security is any: 
(1) Share of stock in a corporation; (2) note, bond, debenture, or 
other evidence of indebtedness; (3) commodity, or a contract or a 
derivative with respect to the commodity, if the Secretary determines 
that adjusted basis reporting is appropriate; and (4) other financial 
instrument with respect to which the Secretary determines that adjusted 
basis reporting is appropriate.
c. Applicable Date
    The applicable date of the reporting requirements under section 
6045(g) depends on the type of specified security that is sold. For 
stock in or of a corporation (other than stock in a regulated 
investment company (RIC) or stock acquired in connection with a 
dividend reinvestment plan (DRP)), section 6045(g)(3)(C)(i) provides 
that the applicable date is January 1, 2011. For stock in a RIC (RIC 
stock) or stock acquired in connection with a DRP (DRP stock) (for 
which additional rules are described later in this preamble), section 
6045(g)(3)(C)(ii) provides that the applicable date is January 1, 2012. 
For any other specified security, section 6045(g)(3)(C)(iii) provides 
that the applicable date is January 1, 2013, or a later date determined 
by the Secretary. The reporting rules related to options transactions 
apply only to options granted or acquired on or after January 1, 2013, 
as provided in section 6045(h)(3).
d. Reporting Method
    A broker must report a customer's adjusted basis under the 
following statutory rules. Under section 6045(g)(2)(B)(i)(I), a broker 
must report the adjusted basis of any security (other than RIC stock or 
DRP stock) using the first-in, first-out (FIFO) basis determination 
method unless the customer notifies the broker of the specific stock to 
be sold or transferred by means of making an adequate identification of 
the stock sold or transferred at the time of sale or transfer. Under 
section 6045(g)(2)(B)(i)(II), a broker must report the adjusted basis 
of RIC stock or DRP stock in accordance with the broker's default 
method under section 1012 unless the customer notifies the broker that 
the customer elects another permitted method.

2. Determination of Basis

a. In General
    For any sale, exchange, or other disposition of a specified 
security on or after the applicable date, section 1012(c) provides that 
the conventions prescribed by regulations under section 1012 for 
determining adjusted basis apply on an account by account basis.
b. RIC Stock
    Section 1012(c)(2) provides that RIC stock acquired before January 
1, 2012, is treated as held in a separate account from RIC stock 
acquired on or after that date. However, a RIC may elect (at the time 
and in the form and manner prescribed by the Secretary), on a 
stockholder by stockholder basis, to treat all stock in the RIC held by 
the stockholder as one account without regard to when the stock was 
acquired (single-account election). When this election applies, the 
average basis of a customer's stock is computed by averaging the basis 
of shares of identical stock acquired before, on, and after January 1, 
2012, and all the shares are treated as covered securities. If a broker 
holds RIC stock as a nominee of the beneficial owner of the shares, the 
broker makes the election.
c. DRP Stock
    If stock is acquired on or after January 1, 2011, in connection 
with a DRP, section 1012(d)(1) provides that the basis of that stock is 
determined under one of the basis computation methods permissible for 
RIC stock. Accordingly, the average basis method may be used for 
determining the basis of DRP stock. This special rule for DRP stock, 
however, applies only while the stock is held as part of the DRP. If 
the stock is transferred to another account, under section 1012(d)(2), 
each share of stock has a cost basis in that other account equal to its 
basis in the DRP immediately before the transfer (with adjustment for 
charges connected with the transfer).
    Section 1012(d)(4)(A) provides that a DRP is any arrangement under 
which dividends on stock are reinvested in stock identical to the stock 
on which the dividends are paid. Stock is treated as acquired in 
connection with a DRP if the stock is acquired pursuant to the DRP or 
if the dividends paid on the stock are subject to the DRP. Under 
section 1012(d)(3), in determining basis under this rule, the account 
by account rules of section 1012(c), including the single-account 
election available to RICs, apply.

[[Page 67012]]

3. Other Broker Reporting Provisions

a. Wash Sales
    Section 6045(g)(2)(B)(ii) provides that, unless the Secretary 
provides otherwise, a customer's adjusted basis in a covered security 
generally is determined for reporting purposes without taking into 
account the effect on basis of the wash sale rules of section 1091 
unless the purchase and sale transactions resulting in a wash sale 
occur in the same account and are in identical securities (rather than 
substantially identical securities as required by section 1091).
b. S Corporations
    Section 6045(g)(4) provides that, for purposes of section 6045, an 
S corporation (other than a financial institution) is treated in the 
same manner as a partnership. This rule applies to any sale of a 
covered security acquired by an S corporation (other than a financial 
institution) after December 31, 2011. When this rule takes effect, 
brokers generally will be required to report gross proceeds and basis 
information to customers that are S corporations for securities 
purchased on or after January 1, 2012.
c. Short Sales
    In the case of a short sale, section 6045(g)(5) provides that gross 
proceeds and basis reporting under section 6045 generally is required 
for the year in which the short sale is closed (rather than, as under 
the present rule for gross proceeds reporting, the year in which the 
short sale is entered into).
d. Options
    Section 6045(h)(1) provides that if a covered security is acquired 
or disposed of pursuant to the exercise of an option that was granted 
or acquired in the same account as the covered security, the amount 
received with respect to the grant or paid with respect to the 
acquisition of such option must be treated for reporting purposes as an 
adjustment to gross proceeds or as an adjustment to basis, as the case 
may be. Section 6045(h)(2) provides that gross proceeds and basis 
reporting is required when there is a lapse of, or a closing 
transaction with respect to, an option on a specified security or an 
exercise of a cash-settled option on a specified security. Section 
6045(h)(3) provides that section 6045(h)(1) and (h)(2) do not apply to 
any option granted or acquired before January 1, 2013.
e. Time for Furnishing Statements
    The Act amended section 6045(b) to extend the due date from January 
31 to February 15 for furnishing certain information statements to 
customers, effective for statements required to be furnished after 
December 31, 2008. Section 6045(b) provides that the statements to 
which the new February 15 due date applies are statements required 
under section 6045 and statements with respect to other reportable 
items that are furnished with these statements in a consolidated 
reporting statement (as defined in regulations under section 6045). See 
Notice 2009-11 (2009-5 IRB 420), providing that, with respect to 
reportable items from calendar year 2008, brokers had until February 
17, 2009, to report all items that they customarily reported on their 
annual composite form recipient statements. See Sec.  601.601(d)(2).

4. Transfer Statements

    The Act added section 6045A, which provides that a broker and any 
other person specified in Treasury regulations (applicable person) that 
transfers to a broker a security that is a covered security in the 
hands of the transferring person must furnish to the broker receiving 
custody of the security (receiving broker) a written statement that 
allows the receiving broker to satisfy the basis reporting requirements 
of section 6045(g). Section 6045A(c) provides that, unless the 
Secretary provides otherwise, the statement required by this rule must 
be furnished to the receiving broker not later than fifteen days after 
the transfer of the covered security.

5. Issuer Reporting

    The Act added section 6045B, which provides that an issuer of 
specified securities must file a return according to forms or 
regulations prescribed by the Secretary describing any organizational 
action (such as a stock split, merger, or acquisition) that affects the 
basis of the specified security, the quantitative effect on the basis 
of that specified security, and any other information the Secretary 
requires. Section 6045B(b) provides that this return must be filed 
within forty-five days after the date of the organizational action, 
unless the action occurs in December, in which case the return must be 
filed by January 15th of the following year.
    Section 6045B(c) provides that an issuer must furnish, according to 
forms or regulations prescribed by the Secretary, to each nominee with 
respect to that security (or to each certificate holder if there is no 
nominee) a written statement showing: (1) The name, address, and 
telephone number of the information contact of the person required to 
file the return; (2) the information required to be included on the 
return with respect to the security; and (3) any other information 
required by the Secretary. This statement must be furnished to the 
nominee or certificate holder on or before January 15th of the year 
following the calendar year in which the organizational action took 
place.
    Section 6045B(e) provides that the Secretary may waive the return 
filing and information statement requirements if the person to which 
the requirements apply makes publicly available, in the form and manner 
determined by the Secretary, the name, address, telephone number, and 
e-mail address of the information contact of that person, and the 
information about the organizational action and its effect on basis 
otherwise required to be included in the return.

6. Penalties

    The Act amended the list of returns and statements in section 
6724(d) for which sections 6721 and 6722 impose penalties for any 
failure to file or furnish complete and correct returns and statements. 
This section imposes a penalty on brokers for a failure to file returns 
or furnish complete and correct statements after a sale of securities 
as required by section 6045. Section 6724(d) now also imposes penalties 
with respect to the returns and statements required by sections 6045A 
and 6045B.

7. Request for Comments

    Notice 2009-17 (2009-8 IRB 575), published by the IRS on February 
23, 2009, invited public comments regarding guidance under the new 
reporting requirements in sections 6045, 6045A, and 6045B and for 
determining the basis of certain securities under section 1012. In 
particular, Notice 2009-17 requested comments on the applicability of 
the reporting requirements, basis method elections, DRPs, 
reconciliation with customer reporting, special rules and mechanical 
issues, transfer reporting, issuer reporting, and broker practices and 
procedures. Many comments were received in response to Notice 2009-17. 
The comments were considered in developing the proposed regulations. 
See Sec.  601.601(d)(2).

Explanation of the Provisions and Summary of Comments

    The proposed regulations provide rules for determining basis and 
for reporting adjusted basis and whether any gain or loss on a sale is 
long-term or short-term. The proposed regulations also address the new 
reporting requirements imposed upon persons

[[Page 67013]]

transferring custody of stock and upon issuers of stock.
    The proposed regulations do not address rules regarding reporting 
for options, compensatory options, or other equity-based compensation 
arrangements, or reporting of adjusted basis for indebtedness, because 
indebtedness is only subject to the requirements of section 6045(g) if 
acquired on or after January 1, 2013, and options are only subject to 
the requirements of section 6045(g) and (h) if granted or acquired on 
or after January 1, 2013. These rules are expected to be addressed in 
future guidance.
    The proposed regulations generally are limited to the amendments to 
the Internal Revenue Code (Code) under the Act in sections 1012, 6045, 
6045A, 6045B, and 6724 and do not address requests from commentators 
regarding changes to substantive rules in other areas such as the rules 
regarding allocation of a return of capital. The proposed regulations 
also do not address technical issues related to information reporting 
such as electronic delivery of returns by brokers to customers. These 
comments are outside the scope of the proposed regulations.

1. Returns of Brokers

    Section 1.6045-1(c) requires brokers to make a return of 
information with respect to each sale by a customer of the broker 
effected by the broker in the ordinary course of a trade or business in 
which the broker stands ready to effect sales to be made by others. 
Section 1.6045-1(d) sets forth the information that the broker must 
include on the return.
    The proposed regulations amend the definition of broker in Sec.  
1.6045-1(a)(1) to modify the exception for non-U.S. payors and non-U.S. 
middlemen. Under the revised rule, a non-U.S. payor or non-U.S. 
middleman would be a broker to the extent provided in a withholding 
agreement described in Sec.  1.1441-1(e)(5)(iii) between a qualified 
intermediary and the IRS or similar agreement with the IRS. The 
Treasury Department and IRS expect that such agreements generally will 
provide that the broker that is party to such agreement will be subject 
to the broker reporting requirements under section 6045 to the same 
extent as U.S. payors and U.S. middlemen. The Treasury Department and 
IRS request comments regarding the usefulness of information received 
from non-U.S. payors and non-U.S. middlemen, the costs to non-U.S. 
payors and non-U.S. middlemen of complying with such a requirement, and 
other potential effects of such a requirement in a withholding or 
reporting agreement with the IRS.
a. Form and Manner of New Broker Reporting Requirements
    The proposed regulations provide that brokers must report adjusted 
basis and whether any gain or loss with respect to the security is 
long-term or short-term on Form 1099-B, ``Proceeds from Broker and 
Barter Exchange Transactions,'' or any successor form under section 
6045(a) when reporting the sale of a covered security. They clarify 
that the basis reported by a broker is the total amount paid by a 
customer or credited against a customer's account as a result of the 
acquisition of securities adjusted for commissions and the effects of 
other transactions occurring within the account. The proposed 
regulations also require brokers to adjust the basis they report to 
take into account the information received on a transfer statement in 
connection with the transfer of a covered security (including transfers 
from a decedent and gift transfers) as well as information received 
from issuers of stock about the quantitative effect on basis from 
corporate actions. The proposed regulations generally do not require a 
broker to adjust the reported basis for transactions, elections, or 
events occurring outside the account. For example, with respect to wash 
sales (discussed in more detail later in this preamble), the proposed 
regulations require that a broker adjust the reported basis in 
accordance with section 1091 if both the purchase and sale transactions 
occur with respect to identical securities in the same account.
    Commentators suggested that brokers be required to report certain 
warnings or indicators to a customer about potential discrepancies 
between the broker-reported basis and the basis the customer must 
report on the customer's income tax return. For example, commentators 
suggested that a flag be added to the information return that would 
alert a customer that a foreign issuer may not have reported to the 
broker all issuer actions affecting basis. The proposed regulations do 
not adopt these suggestions but, as discussed with respect to wash 
sales later in this preamble, require a broker to report to customers 
engaging in wash sales the amount of any disallowed loss. Brokers may 
communicate additional information on other statements furnished to 
customers if desired. The Treasury Department and IRS request further 
comments regarding whether additional information items should be 
required on the information return. A draft of the 2011 Form 1099-B is 
available for viewing and comment on the IRS Web site at https://www.irs.gov/pub/irs-dft/f1099k-dft.pdf.
    For a sale of securities that were acquired on different dates or 
at different prices, some commentators requested that brokers be 
permitted to report the sale on a single information return. Other 
commentators asked that the proposed regulations require separate 
reporting of the sale of securities acquired on different dates or at 
different prices. The proposed regulations generally maintain the 
current requirement that brokers report a sale of securities within an 
account on one return, even if the sale involves multiple acquisitions, 
to limit the number of separate returns filed with the IRS and 
statements furnished to customers. However, because brokers must report 
whether any gain or loss on the sale of a covered security is short-
term or long-term, and because noncovered securities must be reported 
separately from covered securities to avoid treatment as covered 
securities, a single sale in an account could necessitate as many as 
three returns if the sale included covered securities held more than a 
year, covered securities held one year or less, and noncovered 
securities.
b. Scope of Covered Securities and Treatment of Noncovered Securities
    The proposed regulations clarify that a broker is not required to 
report adjusted basis and whether any gain or loss on a sale is long-
term or short-term for securities that are excepted from all reporting 
under section 6045 at the time of their acquisition. For example, the 
new basis reporting requirements do not apply to a security purchased 
by an organization that is tax-exempt even if the organization later 
loses its tax-exempt status and becomes subject to gross proceeds 
reporting on the sale of securities under section 6045(a).
    With respect to a security transferred into an account in a non-
sale transaction, the security is a covered security under the proposed 
regulations if it was a covered security prior to transfer and the 
broker receives the statement required under section 6045A for the 
transfer (the transfer statement, discussed in more detail later in 
this preamble) indicating that the security is a covered security. 
Conversely, a security is a noncovered security if the broker receives 
a transfer statement indicating that the security is a noncovered 
security. A transferred security will be presumed to be a covered 
security unless the transfer statement expressly states that the 
security is a noncovered security.

[[Page 67014]]

    If the receiving broker does not receive a transfer statement or 
receives a transfer statement that does not contain all of the required 
information, the proposed regulations permit the broker to treat the 
security as a noncovered security if, as suggested by commentators, the 
broker notifies the person that effected the transfer and requests a 
complete statement, and no complete statement is provided in response 
to this request before the broker reports the sale or subsequent 
transfer of the security. The proposed regulations do not require 
brokers to make this request more than once.
    If a broker receives the information required on the transfer 
statement after reporting the sale of the security, the proposed 
regulations require the broker to file a corrected Form 1099-B if the 
reporting was incorrect or incomplete. Similarly, if an issuer 
furnishes the return required by section 6045B concerning corporate 
organizational actions (the issuer statement, discussed in more detail 
later in this preamble) after the broker has reported the sale of the 
security, the proposed regulations require the broker to file a 
corrected Form 1099-B to report any adjustments to basis not reflected 
previously. Commentators requested that corrected reporting not be 
required for de minimis adjustments or for statements furnished beyond 
a specific period after the close of the calendar year. The proposed 
regulations do not adopt either suggestion. The Treasury Department and 
IRS request further comments regarding corrected reporting.
    Commentators expressed concern regarding the difficulty, in some 
cases, of determining whether a security is stock (for which basis must 
be reported for acquisitions beginning in January 2011 or January 2012) 
or indebtedness or another financial instrument (for which basis does 
not need to be reported for acquisitions in 2011 or 2012). Some 
commentators suggested that the proposed regulations classify each 
security or require issuers to file a classification report with the 
IRS to permit the IRS to publish a report identifying each security. 
The proposed regulations do not adopt this approach. Instead, the 
proposed regulations provide that, solely for purposes of determining 
the applicable date for basis reporting, any security an issuer 
classifies as stock is treated as stock. If no issuer classification 
has been made, the security is not treated as stock unless the broker 
knows, or has reason to know, that the security is reasonably 
classified as stock under general tax principles.
    Some commentators expressed a desire to report adjusted basis and 
whether any gain or loss on a sale is long-term or short-term for 
noncovered securities. Other commentators requested that the 
regulations prohibit such reporting on Form 1099-B and permit reporting 
only of adjusted basis and whether any gain or loss on a sale is long-
term or short-term to the customer on statements not filed with the 
IRS. In order to encourage more reporting of information and simplify 
reporting by taxpayers on their income tax returns, the proposed 
regulations allow brokers the option of reporting adjusted basis and 
whether any gain or loss on a sale is long-term or short-term for 
noncovered securities on a security by security basis. Therefore, a 
broker may choose to report this information for any given noncovered 
security. The proposed regulations also provide that a broker that 
chooses to report this information with respect to a noncovered 
security is not subject to penalties under section 6721 or 6722 for any 
failure to report such information correctly, provided that the broker 
indicates on Form 1099-B that the sale reported is a sale of a 
noncovered security. The instructions to the tax return will inform 
taxpayers of their duty to verify the information reported by brokers 
and to adjust the reported information when necessary to reflect the 
taxpayer's correct information. This duty applies equally to covered 
and noncovered securities.
c. Determination of Basis Required To Be Reported
    Section 6045(g)(2)(B)(i)(I) provides that, except for RIC stock or 
DRP stock, a broker must report using the FIFO basis determination 
method unless the customer notifies the broker of the specific security 
to be sold or transferred by means of making an adequate identification 
of the security sold or transferred at the time of sale or transfer. 
With respect to RIC stock or DRP stock, section 6045(g)(2)(B)(i)(II) 
provides that a broker must report adjusted basis in accordance with 
the broker's default method under section 1012 unless the customer 
notifies the broker that the customer elects another permitted method.
    The proposed regulations clarify that, when a customer sells less 
than the entire position of a security in an account, the selling 
broker must follow the customer's instruction, if any, adequately 
identifying the security sold or, when applicable, requesting that 
average basis be used to compute the basis of eligible stock. Thus, 
under the proposed regulations, a broker must report basis using any 
permitted lot identification and basis determination method the 
customer chooses when the customer provides a valid instruction 
(discussed in more detail later in this preamble). Absent a valid 
instruction from the customer, the proposed regulations clarify that a 
broker must report basis of a security (other than stock eligible for 
averaging) using the FIFO basis determination method when reporting the 
sale. The proposed regulations also clarify that, absent a valid 
instruction to use another method, a broker must report basis for stock 
eligible for averaging using the broker's default basis determination 
method.
    Commentators requested that brokers and customers be permitted to 
report basis by different methods and that brokers be permitted to 
report basis for all sales using only one of the permitted basis 
determination methods, for example, the average basis method. The 
proposed regulations do not adopt these requests because section 1012 
permits customers to report basis by a different permissible method 
than the default method selected by the broker and section 6045 
requires brokers to follow instructions from customers regarding this 
selection. The requested rules are inconsistent with the goal of 
conforming broker reporting with taxpayer basis determination method 
elections to facilitate and promote compliance in taxpayer reporting of 
income.

2. Average Basis Method

    Section 1.1012-1(e) provides rules for computing the basis of RIC 
stock by averaging the cost of all shares in the account (the average 
basis method). Taxpayers may elect to use the average basis method for 
RIC stock acquired at different prices and maintained by a custodian or 
agent in an account for the periodic acquisition, redemption, sale, or 
other disposition of the stock.
    Consistent with section 1012(d)(1), the proposed regulations extend 
the average basis method to shares of stock acquired after December 31, 
2010, in connection with a DRP, and clarify that shares are eligible 
for averaging only if they are identical.
    Commentators suggested that stock should be eligible for averaging 
together if it has the same Committee on Uniform Security 
Identification Procedures (CUSIP) number. The proposed regulations 
adopt this suggestion and define identical shares of stock as stock 
with the same CUSIP number (or other security identifier number as 
permitted in additional guidance of general applicability, see Sec.  
601.601(d)(2)). However, for purposes of defining a DRP, the proposed 
regulations provide

[[Page 67015]]

that the stock of a successor entity or entities that result from 
certain corporate actions such as mergers, consolidations, split-offs, 
or spinoffs, is identical to the stock of the predecessor entity. Thus, 
corporate actions will not cause stock acquired in connection with a 
DRP to become ineligible for averaging because, for example, a dividend 
declared before the action and paid after the action is completed is 
not reinvested in stock with the same CUSIP number. The proposed 
regulations further provide, however, that shares of stock acquired in 
connection with a DRP are not identical to shares of stock with the 
same CUSIP number that are not acquired in connection with a DRP.

3. Broker's Default Basis Determination Method

    Consistent with section 6045(g)(2)(B)(i)(II), the proposed 
regulations provide that the basis of RIC stock and DRP stock is 
determined in accordance with a broker's default method, unless a 
taxpayer elects another permitted method.
a. Consistency in Use of Average Basis Method
    Commentators suggested that the proposed regulations should not 
require brokers to compute basis for a DRP using the average basis 
method for taxpayers electing this method. The proposed regulations do 
not adopt this recommendation because it is inconsistent with the 
statutory requirement that the average basis method be available to any 
taxpayer that desires to use it for a DRP, as well as with the goal of 
conforming broker reporting with taxpayer basis determination method 
elections to facilitate and promote compliance in taxpayer reporting of 
income. The proposed regulations specify that a broker must compute 
basis using the basis determination method the taxpayer elects. The 
proposed regulations also provide that the taxpayer must report gain or 
loss on its return using the method the taxpayer elects or, if the 
taxpayer fails to make an election, the broker's default method.
b. Default Method
    Commentators suggested that a broker should be allowed to determine 
a default basis determination method when a taxpayer fails to elect a 
method for determining the basis of RIC stock or DRP stock. Consistent 
with section 6045(g)(2)(B)(i)(II), the proposed regulations do not 
prescribe a broker default method, which each broker may determine.
c. Communicating Default Method to Taxpayers
    A commentator suggested that the proposed regulations should 
require that a broker notify a taxpayer of the broker's default method 
by the earlier of opening a new account or January 1 of the year the 
average basis method election is effective. Other commentators 
suggested, however, that the proposed regulations should not specify 
how brokers communicate their default basis determination method to 
taxpayers. The proposed regulations do not require a specific method or 
time for this communication.

4. Definition of Dividend Reinvestment Plan

a. Issuer and Non-Issuer Plans
    A commentator requested that the proposed regulations broadly 
define dividend reinvestment plan to include both broker administered 
plans and issuer, or corporate, administered plans. Other commentators 
suggested, however, that if brokers are required to use the average 
basis method, the definition should include only issuer-administered 
plans. The proposed regulations define dividend reinvestment plan to 
include a written arrangement, plan, or program administered by an 
issuer or non-issuer of stock. Neither the statute nor the legislative 
history indicates any Congressional intent to limit the average basis 
method to issuer-administered plans.
b. Reinvestment of Dividends
    A commentator suggested that a plan requiring reinvestment of only 
a portion of the dividends paid should qualify as a DRP under the 
proposed regulations. The proposed regulations provide that a plan 
qualifies as a DRP if the plan documents require that at least 10 
percent of any dividend paid be reinvested in identical stock. Assuming 
this 10 percent requirement is met, a plan may reinvest different 
percentages of dividends in different stocks.
    A commentator opined that a plan should not be considered a DRP if 
the stock is not paying dividends when the issuer offers the plan. 
Another commentator verbally stated that the proposed regulations 
should provide that a plan may qualify as a DRP even if the stock has 
never issued dividends or ceases to pay dividends. This commentator 
noted that the stock of a start-up company may be included in a DRP in 
the expectation of paying dividends in the future, and that a company 
that traditionally pays dividends may be required to temporarily 
suspend dividends, for example in the case of bankruptcy 
reorganization. The proposed regulations provide that a stock may be 
held in a DRP even if no dividends have ever been declared or paid or 
the issuer has ceased paying dividends.
    A commentator suggested that the term dividends should include all 
income from stock for purposes of a DRP. The proposed regulations do 
not define dividends. Specific comments are requested on whether and 
how the regulations should define dividends, such as whether the 
regulations should define the term by reference to section 316, or more 
broadly to include any payment or distribution from stock, including 
ordinary dividends, capital gains dividends or distributions, non-
taxable returns of capital, and cash dividends in lieu of fractional 
shares. Comments may address industry practices that relate to this 
definition.
c. Acquired in Connection With a DRP
    Commentators suggested that subsequent additions to a DRP, such as 
purchases or transfers of stock, be eligible for the average basis 
method. A commentator recommended that subsequent additions be 
separated into separate averaging pools. Another commentator suggested 
that a single averaging pool should be allowed for all post-effective 
date identical stock. One commentator stated that brokers have 
difficulty distinguishing non-DRP purchases of stock from purchases of 
stock with the same CUSIP number in a DRP, and therefore brokers should 
be allowed to apply the same basis determination method to all stock 
with the same CUSIP number in an account.
    Consistent with section 1012(d)(4), the proposed regulations 
provide that stock is acquired in connection with a DRP if the stock is 
acquired under the DRP or the dividends paid are subject to the DRP. 
Stock acquired in connection with a DRP includes the initial purchase 
of stock in the DRP, subsequent transfers of identical stock into the 
DRP, additional periodic purchases of identical stock through the DRP, 
and all identical stock acquired through reinvestment of dividends paid 
under the DRP.
d. Withdrawal From or Termination of a DRP
    A commentator asked about the consequences if a DRP is terminated 
or a taxpayer transfers shares from a DRP at one broker to a broker 
that does not offer a DRP. The proposed regulations provide that, if a 
taxpayer withdraws from a DRP or the plan administrator terminates the 
DRP, shares of identical

[[Page 67016]]

stock acquired after the withdrawal or termination are not acquired in 
connection with a DRP. After the withdrawal or termination, the 
taxpayer may no longer use the average basis method for the stock, but 
the basis of each share of stock immediately after the change is the 
same as the basis immediately before the change.

5. Computing Average Basis

a. Elimination of Double-Category Method
    Under Sec.  1.1012-1(e)(3) and (4), taxpayers compute average basis 
using either a double-category method, which divides stock by holding 
period and averages long-term shares separately from short-term shares, 
or a single-category method, which averages all shares together 
regardless of holding period.
    Commentators suggested that the proposed regulations eliminate the 
double-category method and noted that it is not widely used. One 
commentator stated that problems may occur when shares are transferred 
between accounts that use different methods. The proposed regulations 
adopt this suggestion and eliminate the double-category method. The 
proposed regulations provide that average basis is computed by 
averaging the basis of all identical stock in an account regardless of 
holding period and include a transition rule that requires taxpayers 
using the double-category method to average the basis of all identical 
stock in an account on the date of publication of final regulations. 
Specific comments are requested on whether the double-category method 
should be retained.
    Section 1.1012-1(e)(4)(iii) provides that the single-category 
method may not be used if it appears that the taxpayer's purpose is to 
convert long-term gain or loss into short-term gain or loss, or vice 
versa. Consistent with the elimination of the double-category method, 
the proposed regulations remove this provision. The proposed 
regulations include ordering rules that specify that the holding period 
of stock to which the average basis method applies is determined on a 
FIFO basis.
b. Wash Sales
    Section 1.1012-1(e)(4)(iv) provides that section 1091(d) and the 
associated regulations apply to wash sales of stock from an account 
using the single-category method of computing average basis. 
Commentators suggested that brokers should not be required to apply 
these rules to stock held in separate accounts.
    Section 6045(g)(2)(B)(ii) provides that, for purposes of reporting, 
brokers must apply the wash sale rules only to acquisition and sale 
transactions in the same account and for identical securities. The 
rules for brokers are discussed later in this preamble.
    For a taxpayer using the average basis method, the proposed 
regulations provide that the taxpayer must apply section 1091 and the 
associated regulations (dealing with wash sales of substantially 
identical securities) in computing average basis regardless of whether 
the stock or security sold or otherwise disposed of and the stock 
acquired are in the same account or in different accounts.
c. Basis After Change From Average Basis Method
    The proposed regulations provide that, except for a revocation of 
the average basis method election (discussed later in this preamble), 
if a taxpayer changes from the average basis method to another basis 
determination method for any reason, the basis of each share of stock 
immediately after the change is the same as the basis immediately 
before the change.

6. Time and Manner of Making the Average Basis Method Election

    Section 1.1012-1(e)(6) provides that a taxpayer elects to use the 
average basis method on an income tax return for the first taxable year 
the taxpayer wants the election to apply.
a. Manner of Making the Average Basis Method Election
    Under the proposed regulations, a taxpayer elects the average basis 
method for covered securities by notifying the custodian or other agent 
for the taxpayer's account in writing. The taxpayer makes a separate 
election for each account holding stock for which the average basis 
method is permissible. A taxpayer uses the procedures under the current 
regulations to elect the average basis method for noncovered 
securities.
    Commentators requested that the proposed regulations provide 
guidance on how taxpayers must inform brokers of their basis 
determination method. Commentators suggested that brokers may obtain 
this information through documents provided to a taxpayer opening an 
account and urged that the rules be flexible and allow electronic 
communication. The proposed regulations require that a taxpayer must 
notify a custodian or agent in writing of an average basis method 
election, but otherwise do not specify how a taxpayer must communicate 
a basis determination method.
b. Time for Making the Average Basis Method Election
    Some commentators suggested that taxpayers should be allowed or 
required to choose a basis determination method when opening an account 
or when acquiring stock for which the average basis method is 
permitted. Other commentators stated that taxpayers should choose a 
method by the date of a sale. The proposed regulations provide that 
taxpayers may elect the average basis method at any time, effective for 
sales after the date of the election.
c. Revocation of Average Basis Method Election
    A commentator asked for clarification on how long brokers must 
retain basis information. Another commentator suggested that any 
revocation period should end by the earlier of the date of first sale, 
the end of the calendar year, or one year from the first purchase of 
stock.
    In order to minimize broker recordkeeping requirements, the 
proposed regulations provide that a taxpayer may revoke the average 
basis method election by the earlier of one year from the date of 
making the election or the first sale or other disposition of the stock 
following the election. A broker may extend the one-year period but no 
longer than the first sale. A revocation applies to all identical stock 
in an account and is effective when the taxpayer notifies the broker or 
other custodian of the revocation. If a taxpayer revokes the election, 
the basis of each share of stock in the account is determined using 
another permissible method.
d. Change From Average Basis Method
    Section 1.1012-1(e)(6)(ii) provides that a taxpayer that elects to 
use the average basis method may not revoke the election without the 
consent of the Commissioner. Under Rev. Proc. 2008-52 (2008-36 IRB 
587), Section 30 of the Appendix, a taxpayer within the scope of Rev. 
Proc. 2008-52 uses the automatic consent procedures to change to the 
basis determination method described in Sec.  1.1012-1(c)(1) (FIFO or 
specific identification, discussed later in this preamble). The revenue 
procedure provides that the automatic consent procedures do not apply 
to RIC stock or to a change from FIFO to specific identification or 
vice versa, which is not a change in method of accounting. See Sec.  
601.601(d)(2).
    A commentator recommended that taxpayers should not be able to 
change

[[Page 67017]]

from the average basis method except by opening a new account. Other 
commentators opined that taxpayers should have broad discretion to 
change from the average basis method. Several commentators suggested 
that brokers should not be required to recreate a stock's original 
basis if a taxpayer changes from the average basis method.
    The proposed regulations provide that a taxpayer may change from 
the average basis method to another permissible method at any time. A 
taxpayer's change in basis determination method applies to stock 
acquired on or after January 1, 2012, in a different manner than to 
stock acquired before January 1, 2012. Consistent with the account by 
account rules, discussed later in this preamble, a change in basis 
determination method applies to identical stock a taxpayer acquires on 
or after January 1, 2012, that the taxpayer holds in the same account. 
By contrast, a taxpayer's change in basis determination method applies 
to all identical stock the taxpayer acquires before January 1, 2012, 
that the taxpayer holds in any account. Unless the taxpayer revokes the 
average basis method election, discussed earlier in this preamble, the 
taxpayer must change from the average basis method prospectively. Thus, 
the basis of each share of stock to which the change applies is the 
basis immediately before the change.
    A commentator requested clarification on how often a taxpayer may 
change a basis method election. Commentators suggested that changes 
should be limited, for example to once per year. The proposed 
regulations do not limit the number of times or frequency a taxpayer 
may change basis determination methods.
    A commentator suggested that the proposed regulations should 
require taxpayers to obtain the Commissioner's permission to change 
basis determination methods. Another commentator recommended that 
taxpayers be allowed to change from the average basis method without 
the Commissioner's permission. The proposed regulations clarify that a 
change in basis determination method is a change in method of 
accounting to which the provisions of sections 446 and 481 and the 
associated regulations apply. A taxpayer may change its basis 
determination method by obtaining the consent of the Commissioner under 
applicable administrative procedures. The IRS may publish additional 
guidance of general applicability, see Sec.  601.601(d)(2), that 
provides broad consent for taxpayers to change basis determination 
methods.

7. Applying Average Basis Method Account by Account

    Section 1.1012-1(e)(2) provides that a taxpayer must use the same 
basis determination method for all of the taxpayer's accounts in the 
same RIC. Section 1.1012-1(e)(6)(ii) provides that a taxpayer must 
apply an average basis method election to all shares (except certain 
gift shares) of a particular RIC that the taxpayer holds in any 
account.
a. Definition of Account
    Commentators requested that the proposed regulations define the 
term ``account.'' Commentators noted that each fund of a RIC is treated 
as a single account, while a broker may hold other securities with 
different CUSIP numbers in a single account. Commentators suggested 
that accounts should be treated as separate accounts if they have 
different account numbers, and that subaccounts such as cash and margin 
accounts should not be treated as separate accounts.
    The proposed regulations do not define the term account. Instead, 
the proposed regulations provide rules prescribing when stock must be 
treated as held in separate accounts and the result of that treatment.
b. Basis Determination Methods Applied Account by Account
    Commentators suggested that the proposed regulations allow a 
taxpayer to make separate basis calculations for the same stock held in 
two separate accounts, even if held by the same broker. The proposed 
regulations adopt this suggestion. Consistent with section 1012(c), the 
proposed regulations provide that the average basis method election 
applies to all identical RIC stock or DRP stock in an account. For 
sales or other dispositions of stock after 2011, a taxpayer may use 
different basis determination methods for identical stock held in two 
separate accounts, even if held by the same broker. A taxpayer also may 
use different basis determination methods for shares of stock held in 
the same account that are not identical.
    For sales or other dispositions before 2012 of RIC stock or DRP 
stock for which a taxpayer has used the average basis method, the 
proposed regulations retain the rules requiring that the taxpayer use 
the average basis method for identical stock held in separate accounts. 
However, a taxpayer may use different basis determination methods for 
shares of stock held in the same account that are not identical.
c. Separate Accounts
    Consistent with section 1012(c)(2)(A), the proposed regulations 
provide that, absent a single-account election (explained later in this 
preamble), RIC stock or DRP stock that a taxpayer acquires before 
January 1, 2012, is treated as held in a separate account from any 
stock acquired on or after that date. The proposed regulations further 
provide that any stock that is a covered security (within the meaning 
of section 6045(g)(3)) is treated as held in a separate account from 
any stock that is a noncovered security regardless of when acquired, as 
is consistent with Congressional intent. The proposed regulations 
include an example in which a security acquired on or after January 1, 
2012, is a noncovered security.

8. Single-Account Election

    Section 1012(c)(2) provides that, with respect to RIC stock, a RIC 
may elect (at the time and in the form and manner prescribed by the 
Secretary), on a stockholder by stockholder basis, to treat all stock 
in the RIC held by the stockholder as one account without regard to 
when the stock was acquired (single-account election). Section 
1012(d)(3) provides that the account by account rules of section 
1012(c), including the single-account election available to RICs, also 
apply to DRP stock.
a. Application and Scope of Election
    The proposed regulations provide that a RIC or DRP may make a 
single-account election to treat identical RIC stock or identical DRP 
stock held in separate accounts for which the taxpayer has elected to 
use the average basis method as held in a single account. If a broker 
holds the stock as a nominee, the broker, and not the RIC or DRP, makes 
the election. The single-account election is irrevocable. Commentators 
opined that a single-account election should not encompass stock a 
taxpayer acquires before January 1, 2012, if the basis information is 
unreliable. A commentator requested that the proposed regulations 
include a standard of reliability or, alternatively, allow brokers to 
exclude stock for which reliable basis information is not available 
from the single-account election. Another commentator requested penalty 
relief if reliable basis information is not available for pre-effective 
date shares.
    The proposed regulations provide that a RIC, DRP, or broker may 
make a single-account election only for stock for which it has accurate 
basis

[[Page 67018]]

information. A RIC, DRP, or broker has accurate basis information if 
the RIC, DRP, or broker neither knows nor has reason to know that the 
basis information is inaccurate. See also section 6724 and the 
regulations thereunder regarding standards for relief from information 
reporting penalties. Stock for which accurate basis information is 
unavailable may not be included in the single-account election and must 
be treated as held in a separate account.
    The proposed regulations provide that, once the single-account 
election is made, it applies to all identical stock that is a covered 
security a taxpayer later acquires in an account. If a taxpayer 
acquires identical stock that is a noncovered security in an account, a 
RIC, DRP, or broker may make another single-account election if the 
RIC, DRP, or broker has accurate basis information. In addition to 
allowing a RIC, DRP, or broker to make a single-account election for 
some taxpayers and not others, consistent with section 1012(c)(2)(B), 
the proposed regulations allow a RIC, DRP, or broker to make the 
election for some identical stocks held for a taxpayer and not for 
other stocks.
b. Time and Manner for Making the Single-Account Election
    The proposed regulations provide that a RIC, DRP, or broker makes 
the single-account election by clearly noting it on its books and 
records. The books and records must reflect the date of the election; 
the taxpayer's name, account number, and taxpayer identification 
number; the stock subject to the election; and the taxpayer's basis in 
the stock. The books and records reflecting the election must be 
provided to the taxpayer upon request. The proposed regulations provide 
that the single-account election may be made at any time and more than 
once for a specific stock.
    The proposed regulations require a RIC, DRP, or broker to use 
reasonable means to notify a taxpayer of a single-account election. 
Reasonable means include mailings, circulars, and electronic mail. The 
notification may be sent separately to the taxpayer or included with 
the taxpayer's account statement, or by other means calculated to 
provide actual notice. The notice must identify the securities subject 
to the election and advise the taxpayer that the stock will be treated 
as covered securities without regard to the date acquired.

9. FIFO and Specific Identification Methods

    Section 1.1012-1(c)(1) provides that if a taxpayer acquires shares 
of stock on different dates or at different prices and sells or 
transfers some of those shares, and does not adequately identify the 
lot from which the shares are sold or transferred, the shares deemed 
sold or transferred are the earliest acquired shares (the FIFO rule). 
If a taxpayer makes an adequate identification of the shares sold under 
Sec.  1.1012-1(c)(2), (3), or (4), the shares treated as sold are the 
shares the taxpayer identified.
a. FIFO Rule
    A commentator verbally requested that the proposed regulations 
clarify how the FIFO rule of Sec.  1.1012-1(c)(1) applies to stock 
splits. The commentator asked whether shares acquired from the split 
are treated as acquired on the date of the purchase of the original 
shares or on the date of the split. In general, the shares that are 
first acquired are the shares with the longest holding period. 
Therefore, this question is addressed by rules under sections 307 and 
1223 and the associated regulations and is outside the scope of these 
regulations.
    A commentator requested clarification on whether the FIFO rule 
applies to stock that is part of a stock certificate that includes 
multiple lots. In response to this comment, the proposed regulations 
clarify that the FIFO rule also applies to multiple lots represented by 
a single stock certificate.
b. Timing of Lot Selection
    Commentators suggested that taxpayers that wish to identify a 
specific lot of stock to be sold should be required to do so at the 
time of trade. Some commentators recommended that taxpayers should be 
allowed to wait to identify stock until the settlement date or until 
the end of the year. Other commentators opined that post-sale changes 
to specific identification of stock should not be allowed.
    Rev. Rul. 67-436 (1967-2 CB 266) holds that an identification of 
stock by the time of delivery, which was within four days of the sale 
date, complied with the requirement to identify stock at the time of 
the sale or transfer. Consistent with Rev. Rul. 67-436, the proposed 
regulations provide that a taxpayer makes an adequate identification of 
stock at the time of sale, transfer, delivery, or distribution if the 
taxpayer identifies the stock no later than the earlier of the 
settlement date or the time for settlement under Securities and 
Exchange Commission regulations. Rev. Rul. 67-436 will be obsoleted 
when these regulations are published as final regulations. See Sec.  
601.601(d)(2).
c. Standing Lot Selection Orders
    Several commentators recommended that the proposed regulations 
allow taxpayers to specify a lot selection method to their brokers 
through standing orders such as last-in-first-out or highest-in-first-
out. In response to these comments, the proposed regulations clarify 
that taxpayers may establish a lot selection method by standing order.
d. Method of Communicating Lot Selection
    To provide maximum flexibility, the proposed regulations do not 
designate how taxpayers must communicate lot selection to brokers. Any 
reasonable method of communication, including electronic and oral 
communication, is permissible.
e. Confirmation of Sales
    Section 1.1012-1(c)(3)(i)(b) and (ii)(b) requires a broker or agent 
to provide written confirmation of the sale of stock a taxpayer has 
specifically identified within a reasonable time after sale. 
Commentators suggested that the broker or agent should determine 
whether to provide a confirmation and its form, and that current 
technology renders the confirmation requirement obsolete. Another 
commentator suggested that the proposed regulations allow brokers to 
provide lot information to taxpayers either by trade confirmation, 
monthly statements, or year-end reports. The proposed regulations do