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Cost Basis Reporting: Corporate Issuers Take Notice

14 Jul 2011

In today's complex business environment, it is increasingly difficult for individuals to maintain the proper records and navigate the confusing maze of corporate transactions in order to correctly calculate their cost basis in a stock and subsequently the resulting tax liability. Congress recently implemented new cost basis reporting rules for securities, which essentially shift the cost basis tracking chores from individual taxpayers to brokers and corporate issuers. Taxand US looks at these changes.

The new requirements have often been referred to as the new "broker rules." While it is true that much of the responsibilities landed on brokers, corporate issuers also have many new required tasks that have been overshadowed by the broker requirements. Companies should not overlook these rules and assume their brokers have this covered. The new corporate issuer requirements will demand resources from numerous departments within a company as well as a coordinated approach across the organisation.

To review the changes to the new rules and the full report, please click here.

Taxand's Take

Although the new rules greatly affect brokers, several critical responsibilities will affect tax departments, investor relations departments and other departments of corporations:
  • if a company is also considered a broker, it needs to ensure that its systems are in place to capture the necessary information for compliance. The rules are extensive and cross many functional teams at a company, so coordination across the organisation is key
  • companies should check to be sure that all of their service providers are communicating. This process involves numerous third parties, such as transfer agents, stock plan administrators, brokers, etc., so it is easy for a disconnect to occur
  • it isworthwhile for companies to look at their broker arrangements and the associated fees. These new requirements have required significant system upgrades and additional costs to brokers, which will probably be passed on to issuers and individuals in some manner
  • prior to contemplating any organisational actions, companies should have a coordinated team dedicated to the cost basis implications of the transaction. This team should include representatives from tax, finance, accounting, treasury, human resources, investor relations and others
  • companies should talk to their brokers about how they will handle the cost basis reporting and communication around employee equity awards, including the inclusion or exclusion of the compensation component of equity awards as well as non-covered equity awards
  • HR, tax and finance/accounting departments need to be ready to address questions posed by confused employees because of the inconsistent treatment for covered and non-covered securities, as well as the compensation component of the covered equity awards. Communication efforts should begin prior to the 2012 tax season to minimise any confusion before it is out of control.

Your Taxand contacts for further queries are:
Greg Gunderson
T. +1 214 438 8410

J.D. Ivy
T. +1 214 438 1028

Taxand's Take Author