[Federal Register Volume 79, Number 144 (Monday, July 28, 2014)]
[Proposed Rules]
[Pages 43694-43699]
From the Federal Register Online via the Government Publishing 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