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
Notice of proposed rulemaking and notice of public hearing.
CFR Part: "26 CFR Part 1"
RIN Number: "RIN 1545-BM04"
Citation: "79 FR 43694"
Document Number: "REG-107012-14"
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
EFFECTIVE DATE: Written or electronic comments must be received by
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-107012-14),
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
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
An MMF is a type of investment company registered under the Investment Company Act of 1940 (1940 Act) and regulated as an MMF under 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
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.
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
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.
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 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
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
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
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
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
Concurrently with these proposed regulations, the
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
These regulations concerning information reporting are proposed to apply to calendar years beginning on or after the date of publication in the
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
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
A public hearing has been scheduled for
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
The principal author of the proposed regulations is
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
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:
(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
(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.
(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
(d) Example. The provisions of this section may be illustrated by the following example:
(i) Fund is an MMF. Shareholder is a person whose taxable year is the calendar year. On
(ii) Shareholder adopts the NAV method with its taxable year as the computation period. Shareholder's net investment in
(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
Par. 3. Section 1.6045-1 is amended by revising paragraph (c)(3)(vi) to read as follows:
* * * * *
(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
* * * * *
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2014-17689 Filed 7-23-14;
BILLING CODE 4830-01-P
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