[Federal Register Volume 79, Number 144 (Monday, July 28, 2014)]
[Proposed Rules]
[Pages 43694-43699]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-17689]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-107012-14]
RIN 1545-BM04


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

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 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 
Securities and Exchange Commission (SEC) rules that change how certain 
MMF shares are priced. The proposed regulations affect floating-NAV 
MMFs and their shareholders. This document also contains requests for 
comments and provides notice of a public hearing on these proposed 
regulations.

DATES: Written or electronic comments must be received by October 27, 
2014. Outlines of topics to be discussed at the public hearing 
scheduled for November 19, 2014, must be received by October 27, 2014.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-107012-14), Room 
5203, Internal Revenue Service, P.O. 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-
107012-14), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC, or sent electronically, via the Federal 
eRulemaking portal at www.regulations.gov (IRS REG-107012-14). The 
public hearing will be held in the IRS Auditorium, Internal Revenue 
Building, 1111 Constitution Avenue NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Grace E. Cho at (202) 317-6895; concerning submissions of comments, the 
hearing, and/or to be placed on the building access list to attend the 
hearing, Oluwafunmilayo (Funmi) Taylor at (202) 317-6901 (not toll-free 
numbers).

SUPPLEMENTARY INFORMATION: 

Background

    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 SEC regulations that change how certain MMF 
shares are priced. See Money Market Fund Reform; Amendments to Form PF, 
Securities Act Release No. 33-9616, Investment Advisers Act Release No. 
IA-3879, Investment Company Act Release No. IC-31166, Financial 
Reporting Codification No. FR-84 (SEC MMF Reform Rules).
    An MMF is a type of investment company registered under the 
Investment Company Act of 1940 (1940 Act) and regulated as an MMF under

[[Page 43695]]

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 $1.00) the prices at which their shares are distributed, redeemed, 
and repurchased.
    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.
    In June 2013, the SEC proposed rules that would change how certain 
MMF shares are priced. See Money Market Fund Reform; Amendments to Form 
PF, Securities Act Release No. 33-9408, Investment Advisors Act Release 
No. IA-3616, Investment Company Act Release No. IC-30551, 78 FR 36834 
(June 19, 2013) (SEC MMF Reform Proposal). The SEC MMF Reform Rules 
adopt the general approach of the SEC MMF Reform Proposal, but include 
various modifications in response to comments and combine the two 
principal reform alternatives. (These alternatives were Floating Net 
Asset Value and Standby Liquidity Fees and Gates. See SEC MMF Reform 
Proposal at 36849 and 36878. The proposal included a number of other 
possibilities, including a combination of these two.) The SEC MMF 
Reform Rules generally bar the use of the amortized cost method of 
valuation and the use of the penny-rounding method of pricing, except 
by government MMFs and retail MMFs. A government MMF is an MMF that 
``invests 99.5 percent or more of its total assets in cash, government 
securities, and/or repurchase agreements that are collateralized 
fully.'' SEC MMF Reform Rules, Sec.  270.2a-7(a)(16). A retail MMF is 
an MMF that ``has policies and procedures reasonably designed to limit 
all beneficial owners of the fund to natural persons.'' Id. Sec.  
270.2a-7(a)(25). In the case of an MMF that is neither a government MMF 
nor a retail MMF, the SEC MMF Reform Rules require the MMF to value its 
portfolio securities using market-based factors and to ``compute its 
price per share for purposes of distribution, redemption and repurchase 
by rounding the fund's current net asset value per share to a minimum 
of the fourth decimal place in the case of a fund with a $1.0000 share 
price or an equivalent or more precise level of accuracy for money 
market funds with a different share price (e.g. $10.000 per share, or 
$100.00 per share).'' Id. Sec.  270.2a-7(c)(1)(ii). (This method of 
computing the price per share is referred to hereafter as ``basis point 
rounding.'')
    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 SEC in response to the SEC MMF Reform 
Proposal expressed concern about tracking and reporting gains and 
losses from shares in floating-NAV MMFs. The commenters observed that 
the frequent purchase and redemption of MMF shares combined with 
relatively small changes in share values could result in tax compliance 
burdens that, in the opinion of these commenters, would be 
disproportionate to the amounts of gain or loss at issue.

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. Sec.  
1.446-1(a)(1).
    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

[[Page 43696]]

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 Sec.  
1.446-1(e) by use of the NAV method in the Federal income tax return 
for the first taxable year in which the taxpayer holds shares in a 
floating-NAV MMF. See Rev. Rul. 90-38 (1990-1 CB 57). Once a taxpayer 
has adopted a method of accounting for gains and losses on shares in 
floating-NAV MMFs, any change from that method (including 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. 
The proposed regulations provide that the change is implemented on a 
cut-off basis.
    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 $1.00) will 
exceed the net amount of proceeds received for that share ($1.00, minus 
the liquidity fee), these redemptions would produce recognized losses 
under standard tax accounting. If the acquisition of other shares 
causes a redemption to be a wash sale under section 1091, then under 
section 1091(d), the acquired shares will have a basis greater than 
$1.00.
    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 $1.00. In these circumstances, if the 
NAV method were available to the stable-value MMF shareholders, use of 
that method would reduce the shareholders' tax compliance burden. 
Accordingly, comments are requested regarding whether the NAV method 
should be available to shareholders of a stable-value MMF that has 
imposed a liquidity fee.

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 Sec.  1.6045-1(c)(3)(vi) to provide similar exceptions from 
the requirements of sections 6045A and 6045B, respectively. Comments 
received by the SEC in response to the SEC MMF Reform Proposal 
expressed concern that the existing exception would not apply to 
floating-NAV MMFs and suggested that requiring transaction-by-
transaction information reporting would impose significant new costs on 
floating-NAV MMFs and intermediaries. The Treasury Department and the 
IRS believe that imposing broker reporting requirements on floating-NAV 
MMFs would result in administrative burdens that are not justified in 
light of the expected relative stability of floating-NAV MMF share 
prices. Therefore, the proposed regulations revise Sec.  1.6045-
1(c)(3)(vi) to clarify that the exceptions under sections 6045, 6045A, 
and 6045B continue to apply to all MMFs, including floating-NAV MMFs.

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 July 29, 2013, the IRS published Notice 2013-48 (2013-31 
IRB 120) in response to the SEC MMF Reform Proposal. The notice 
proposed a revenue procedure providing that the IRS would not treat a 
loss realized upon a redemption of a floating-NAV MMF share as subject 
to the wash sale rules if the amount of the loss was not more than one 
half of one percent of the taxpayer's basis in that share. The IRS 
received comments indicating that the proposed revenue procedure would 
not significantly reduce the tax compliance burdens associated with 
applying the wash sale rules to floating-NAV MMFs because shareholders 
would still have to track all wash sales to determine whether the 
amount of any particular wash sale exceeds the 0.5% de minimis test. 
The comments requested that floating-NAV MMFs be exempted entirely from 
the wash sale rules in section 1091.
    Concurrently with these proposed regulations, the Treasury 
Department and the IRS are releasing a final revenue procedure 
providing that the wash sale rules will not be applied to redemptions 
of shares in floating-NAV MMFs. This

[[Page 43697]]

revenue procedure will apply to redemptions of shares in floating-NAV 
MMFs on or after the effective date of the SEC MMF Reform Rules 
(expected to be 60 days after their publication in the Federal 
Register).

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 
Federal Register of a Treasury decision adopting these proposed 
regulations as final regulations. Shareholders of floating-NAV MMFs, 
however, may rely on the rules in the regulations concerning the NAV 
method for taxable years ending on or after July 28, 2014 and beginning 
before the date of publication in the Federal Register of a Treasury 
decision adopting these proposed regulations as final regulations.
    These regulations concerning information reporting are proposed to 
apply to calendar years beginning on or after the date of publication 
in the Federal Register of a Treasury decision adopting these proposed 
regulations as final regulations. Taxpayers and brokers (as defined in 
Sec.  1.6045-1(a)(1)) may rely upon the rules in the regulations 
concerning information reporting for calendar years beginning before 
the date of publication in the Federal Register of a Treasury decision 
adopting these proposed regulations as final regulations.

Special Analyses

    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 Small Business 
Administration for comments on its impact on small business.

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 IRS 
as prescribed in this preamble under the ``Addresses'' heading. The 
Treasury Department and the IRS request comments on all aspects of the 
proposed rules. Comments are specifically requested on the appropriate 
treatment of basis adjustments that might be imposed under sections 
108(b)(2)(E), 301(c)(2), or any other provision of internal revenue law 
with respect to shares in floating-NAV MMFs. Comments are also 
requested regarding whether the NAV method should be available to 
shareholders of a non-floating-NAV MMF that has imposed a liquidity fee 
under Sec.  270.2a-7(c)(2) of the SEC MMF Reform Rules. All comments 
will be available for public inspection and copying at 
www.regulations.gov or upon request.
    A public hearing has been scheduled for November 19, 2014, at 10:00 
a.m., in the IRS Auditorium, Internal Revenue Service, 1111 
Constitution Avenue NW., Washington, DC. Due to building security 
procedures, visitors must enter through the Constitution Avenue 
entrance. In addition, all visitors must present photo identification 
to enter the building. Because of access restrictions, visitors will 
not be admitted beyond the immediate entrance area more than 30 minutes 
before the hearing starts. For information about having your name 
placed on the building access list to attend the hearing, see the FOR 
FURTHER INFORMATION CONTACT section of this preamble.
    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 October 27, 2014. A period of 10 minutes will be allotted 
to each person for making comments. An agenda showing the scheduling of 
the speakers will be prepared after the deadline for receiving outlines 
has passed. Copies of the agenda will be available free of charge at 
the hearing.

Drafting Information

    The principal author of the proposed regulations is Grace E. Cho, 
IRS Office of the Associate Chief Counsel (Financial Institutions and 
Products). However, other personnel from the Treasury Department and 
the IRS participated in their development.

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

0
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. * * *

0
Par. 2. Section 1.446-7 is added to read as follows:


Sec.  1.446-7  Net asset value method for certain money market fund 
shares.

    (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 $1.0000 or an equivalent or more precise level of 
accuracy for an MMF with a different share price.
    (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.

[[Page 43698]]

    (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 Sec.  1.446-1(e) and follow the 
administrative procedures issued under Sec.  1.446-1(e)(3)(ii) for 
obtaining the Commissioner's consent to change the taxpayer's 
accounting method. Any such change will be made on a cut-off basis. 
Because there will be no duplication or omission of amounts as a result 
of such a change to or from the NAV method, no adjustment under section 
481(a) is required or permitted.
    (d) Example. The provisions of this section may be illustrated by 
the following example:

    Example.  (i) Fund is an MMF. Shareholder is a person whose 
taxable year is the calendar year. On January 1 of Year 1, 
Shareholder owns 5,000,000 shares in Fund in a single account with 
an adjusted basis of $5,000,000.00. On that date, Fund prices its 
shares using penny rounding under Rule 2a-7(c) under the Investment 
Company Act of 1940. On February 1 of Year 1, Fund becomes a 
floating-NAV MMF. During Year 1, Shareholder receives $32,158.23 in 
taxable dividends from Fund and makes 120 purchases of additional 
shares in Fund (including purchases through the reinvestment of 
those dividends) totaling $1,253,256.37 and 28 redemptions totaling 
$1,124,591.71. The fair market value of Shareholder's shares in Fund 
at the end of Year 1 is $5,129,750.00. All of Shareholder's shares 
in Fund are held as capital assets. There is no adjustment to the 
basis in Shareholder's shares in Fund under any provision of 
internal revenue law during Year 1.

[[Page 43699]]

    (ii) Shareholder adopts the NAV method with its taxable year as 
the computation period. Shareholder's net investment in Fund for 
Year 1 equals $128,664.66 (the $1,253,256.37 in purchases, minus the 
$1,124,591.71 in redemptions). Shareholder's gain therefore is 
$1,085.34, which is the ending value of Shareholder's shares 
($5,129,750.00), minus the starting basis of Shareholder's shares 
($5,000,000.00), minus Shareholder's net investment in the fund for 
the taxable year ($128,664.66). The gain of $1,085.34 is treated as 
short-term capital gain. Shareholder's starting basis for Year 2 is 
$5,129,750.00. Shareholder must also include the $32,158.23 in 
dividends in its income for Year 1 in the same manner as if 
Shareholder did not use the NAV method.
    (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 Federal 
Register of a Treasury decision adopting these proposed regulations as 
final regulations. Taxpayers may rely on this section for taxable years 
ending on or after July 28, 2014 and beginning before the date of 
publication in the Federal Register of a Treasury decision adopting 
these proposed regulations as final regulations.
0
Par. 3. Section 1.6045-1 is amended by revising paragraph (c)(3)(vi) to 
read as follows:


Sec.  1.6045-1  Returns of information of brokers and barter exchanges.

* * * * *
    (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 Federal Register of a Treasury 
decision adopting these proposed regulations as final regulations. 
Taxpayers and brokers, however, may rely on paragraph (c)(3)(vi)(A) of 
this section for sales of shares in calendar years beginning before the 
date of publication in the Federal Register of a Treasury decision 
adopting these proposed regulations as final regulations.
* * * * *

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2014-17689 Filed 7-23-14; 4:15 pm]
BILLING CODE 4830-01-P