November 3, 1992
TO: TAX MEMBERS NO. 71-92
ACCOUNTING/TREASURERS MEMBERS NO. 39-92
OPERATIONS MEMBERS NO. 44-92
SEC RULES MEMBERS NO. 57-92
CLOSED-END FUND MEMBERS NO. 42-92
TRANSFER AGENT ADVISORY COMMITTEE NO. 67-92
BROKER/DEALER ADVISORY COMMITTEE NO. 34-92
RE: YEAR-END TAX INFORMATION REPORTING FOR 1992 RETURNS
__________________________________________________________
At a recent meeting of the Broker/Dealer Advisory
Committee, a representative of the brokerage industry stated that
funds must provide brokers with all year-end tax information for
inclusion on IRS Forms 1099 mailed in January 1993 no later than
Friday, January 8, 1993. Representatives of the fund industry
then observed that it may not be in a shareholder’s best interest
for fund accountants to be given only one week to properly
calculate year-end tax information and report that information to
brokers. Nevertheless, the Institute urges funds to make every
effort to meet this January 8 deadline since (i) information
received by brokers after that date would presumably not be
included on 1099s mailed by brokers in January 1993 and (ii)
shareholder relations issues may arise when brokers send amended
1099s thereafter, as they are now clearly required to do in
accordance with the recently clarified information reporting
penalty regulations.
Recent Deadlines for Providing Year-End Tax Information
As you may know, in recent years the deadline for providing
brokers with year-end tax information has been pushed to earlier
and earlier dates in January. In 1989, for example,
representatives of the fund and brokerage industries met and
agreed to split January in half, with the funds providing year-
end tax information to brokers by January 15 of each following
year. Thus, the deadline for providing 1989 tax information to
brokers was Monday, January 15, 1990. At a meeting in 1990 to
discuss the January 1991 tax reporting season, however, the
brokers maintained that they would need three weekends in January
to process year-end tax information and that the new deadline
would be the Friday before the first of the final three weekends.
Thus, the 1990 tax information reporting deadline was Friday,
11/ Among the problems confronted by funds (which have been
discussed at earlier meetings with brokers and described in
earlier memoranda regarding year-end reporting deadlines) are (i)
capital gain reclassifications arising from foreign currency
gains or losses, (ii) short-term to long-term and long-term to
short-term gain reclassifications for funds with loss deferrals
from straddles and mark-to-market gains and losses from section
1256 futures contracts, (iii) application of the wash sale rules,
and (iv) the 1989 statutory change requiring funds to accrue
dividends to be received on the ex-dividend date.
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January 11, 1991 and the 1991 tax information reporting deadline
was Friday, January 10, 1992. As noted above, the deadline for
providing 1992 tax information to brokers will be Friday, January
8, 1993 rather than Friday, January 15, 1993, which would be the
deadline if the three-weekend rule were followed.
Year-End Tax Reporting Difficulties
At least three major problems exist with reporting year-end
tax information to broker-sold accounts by January 31. First,
the funds confront numerous complexities in properly calculating
the tax information, some of which cannot be resolved by mid-
January.1/1 Second, brokers face time constraints in processing
and reporting fund information by January 31 along with tax
information for their clients’ other securities positions.
Third, logistical difficulties result from funds having to report
tax information to numerous brokers and from brokers having to
collect the data from a large number of funds.
Shareholder/Client Relations
Reporting to shareholders as corrections all dividend
reclassifications received after close of business on January 8
presents potentially serious shareholder and client relations
problems. For example, if a fund reclassifies its dividends for
1992 on January 11, 1993, it will be unable to have the revised
information included on the shareholders’ 1099 DIVs mailed by
January 31. Shareholders receiving corrected information after
having filed their tax returns can be expected to complain to
their brokers, who can in turn be expected to deflect
responsibility to the funds for not being "timely" in providing
the information. Funds, in turn, may be expected to respond to
inquiries that such information was available to brokers on a
timely basis.
Obligation to Amend 1099 Tax Information
In earlier years, it may have been unclear whether brokers
had any obligation to inform their customers of "corrected" tax
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information received from funds after the January deadline for
providing information to brokers. We understand that in at least
some cases, brokers forwarded to their clients "Dear Shareholder"
22/ Under the regulations, submissions will be considered
regular only if made at intervals of 30 days or less.
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letters prepared by funds to explain why the revised tax
information was not included in the 1099s sent in January. It is
uncertain the extent to which amended 1099s were sent to
shareholders and whether in all cases tax information provided to
shareholders matched tax information provided to the IRS.
Any remaining uncertainty regarding a broker’s obligation
to send amended 1099s was removed by the final information
reporting penalty regulations issued on December 30, 1991; these
regulations provide a detailed definition of the standard of care
necessary to avoid the imposition of penalties for failures to
provide correct information on, among other things, IRS Forms
1099 sent to shareholders. Pursuant to these regulations, a
broker will not be penalized for failure to include correct tax
information on 1099s mailed to customers by January 31, where
such information must be obtained from another person (such as a
mutual fund, some of whose shares the broker holds in street
name), so long as the broker sends the customers amended 1099s
reflecting the correct information within 30 days after receipt
of the correct information or on the earliest date thereafter on
which a regular submission2/2 of corrections is made. Treas. Reg.
Sec. 301.6724-1(d)(1)(ii)(D).
Conclusion
It is clear that both the broker and the mutual fund
industries must continue to work together to provide accurate and
timely information to shareholders. The issuance of significant
numbers of amended 1099s to brokers’ customers is not in the best
interest of either the shareholders, the funds or the brokers.
A "take it or leave it" position by brokers that funds must
provide all tax information by January 8, 1993 does not advance
the "common cause." The position by the broker community that
the last weekend in January (January 30-31, 1993) must be
reserved to process their clients’ ordinary monthly statements is
totally unacceptable. Broker customers can be told in advance
that their January statements will be slightly delayed due to the
production of tax information. Everyone should understand and
accept this explanation.
Finally, in a time period where great emphasis is being
placed on quality service by brokers and funds, no benefits will
come from reporting incorrect tax information to shareholders.
It is costly and inefficient for brokers to impose such overly
stringent reporting deadlines on funds that incomplete or
inaccurate information is provided. When the information is
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corrected, shareholders may become confused or annoyed,
especially if their tax returns have already been filed. If the
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inaccurate information is not corrected, brokers will be subject
to information reporting penalties and investors will be at risk
if they are audited by IRS.
* * * *
We will continue to discuss year-end information reporting
procedures with the brokers and keep you informed of any
developments. In the meantime, fund groups are urged to make
every effort to provide brokers with timely tax information;
whenever possible, that information should be provided by January
8, 1993.
Donald E. O’Connor
Vice President - Operations