Wealth & Risk Management Blog

William Byrnes (Texas A&M) tax & compliance articles

Posts Tagged ‘Security (finance)’

IRS Quashes Conversion Treatment for Basket Option Contracts

Posted by William Byrnes on March 16, 2012


Long-term gains yield more favorable tax costs than short-term gains. Short-term gains carry an additional 20% tax cost over long-term gains, encouraging the manufacturing of transactions designed to convert short-term to long-term gains. Unfortunately, these transactions attract undue attention from the IRS and are often disregarded by the Service. The IRS recently considered the tax treatment of one of these gain-recharacterization schemes, a basket option contract, in a generic legal advice memorandum (AM 2010-005).

The IRS altered its categorization of  the contract, viewing it as if the investor purchased the securities in a margin account, paying cash equal to 10% of the value of the securities and borrowing 90% of the value from the investment bank. Just as was the case with the “option,” the investor had almost total control over investment of the securities and would reap all appreciation and income from the securities, less interest and brokerage fees.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For in-depth analysis of options, see Advisor’s Main Library: G—Options and Futures.

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FINRA Rule 45-30: Expansive new Complaint Report Requirements

Posted by William Byrnes on September 2, 2011


FINRA is digging deep into your customer comment box, and starting July 21, nothing will be off limits to the regulator.

Brokerages often expand beyond securities activities to diversify their income streams and broaden the scope of services they offer their clients. Keeping up with the assorted regulators and what are often cumbersome and confusing combinations of rules has always been a chore for those firms.

Not long ago, firms at least have been able to keep their professions separated, dealing, for instance, with securities and insurance regulators as isolated entities with little overlap in their bailiwicks. But increasingly, regulators like FINRA are erasing this dichotomy, peaking into all of a firm’s activities, even activities that are unrelated to the subject of the regulator’s jurisdiction.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of FINRA rulemaking in Advisor’s Journal, see FINRA Plans New Power Grab as SEC Falter (CC 11-67), Broker Bonus Arbitration Bottleneck Forces FINRA to Reconsider Arbitrator Qualification Standards (CC 11-08), and SEC Approves FINRA Suitability and Know-Your-Customer Rules (CC 11-17).

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1099s and Cost Basis Reporting

Posted by William Byrnes on December 1, 2010


Mutual fund

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The Energy Improvement and Extension Act of 2008 created new laws requiring most regulated securities transactions occurring after December 31, 2010 to be subject to cost basis reporting by securities brokers to the IRS. [1] Currently, brokers are required to report the gross proceeds from the sale of a security on Form 1099[2] The new law will add reporting of client’s adjusted basis of the security, and whether the gain is a short or long-term.  [3] Mutual fund cost basis reporting is to start a year after regulated securities reporting, and options and debt contracts are to follow a year after mutual funds.  The reports are to be filed on a Form 1099-B, Proceeds from Broker and Barter Exchange. [4]

Why is it important to know that the IRS will be receiving information about the values of securities of clients?  Read the entire article at AdvisorFYI.

 

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FATCA Act: Foreign Trusts

Posted by William Byrnes on November 25, 2010


President's Advisory Panel for Federal Tax Reform

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Use of Foreign Trust Property and Deemed Distributions

The new FATCA law expands 26 U.S.C. § 643(i) to provide that any use of trust property by a U.S. grantor or U.S. beneficiary, or any U.S. person related to a U.S. grantor or U.S. beneficiary, is treated as a distribution equal to the fair market value of the use of the property. [1]

“Thus, the rent free use of real estate, yacht, art work or other personal property (wherever located including the United States) or an interest-free or below-market loan of cash or uncompensated use of marketable securities will trigger a distribution equal to the FMV for the use of such property to the extent of distributable net income”. [2]

However, if the trust is paid the fair market value, within a reasonable period of time, for the use of property or the market rate of interest on a loan by the trust, the new law does not create a deemed distribution. [3] Read the entire article at AdvisorFYI.

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