26 CFR § 1.6045-2 - Furnishing statement required with respect to certain substitute payments.
(a) Requirement of furnishing statements—(1) In general. Any broker (as defined in paragraph (a)(4)(ii) of this section) that transfers securities (as defined in § 1.6045-1(a)(3)) of a customer (as defined in paragraph (a)(4)(iii) of this section) for use in a short sale and receives on behalf of the customer a substitute payment (as defined in paragraph (a)(4)(i)) shall, except as otherwise provided, furnish a statement to the customer identifying such payment as being a substitute payment.
(2) Special rule for transfers for broker's own use. Any broker that borrows securities of a customer for use in a short sale entered into for the broker's own account shall be deemed to have transferred the stock to itself and received on behalf of the customer any substitute payment made with respect to the transferred securities, and shall be required to furnish a statement with respect to such payments in accordance with paragraph (a)(1) of this section.
(3) Special rule for furnishing statements to individual customers with respect to payments in lieu of dividends—(i) In general. Except as otherwise provided in paragraph (a)(3)(ii) of this section, for taxable years beginning before January 1, 2003, a broker that receives a substitute payment in lieu of a dividend on behalf of a customer who is an individual (“individual customer”) need not furnish a statement to the customer.
(ii) Reporting for certain dividends. Any broker that receives on behalf of an individual customer a substitute payment in lieu of—
(A) An exempt-interest dividend (as defined in paragraph (a)(4)(vii) of this section);
(B) A capital gain dividend (as defined in paragraph (a)(4)(vi) of this section);
(C) A distribution treated as a return of capital under section 301(c)(2) or (c)(3); or
(D) An FTC dividend (as defined in paragraph (a)(4)(viii) of this section) shall furnish a statement to the individual customer identifying the payment as being a substitute payment as prescribed by this section, provided that the broker has reason to know not later than the record date of the dividend payment that the payment is a substitute payment in lieu of an exempt-interest dividend, a capital gain dividend, a distribution treated as a return of capital, or an FTC dividend.
(4) Meaning of terms. The following definitions apply for purposes of this section.
(i) The term substitute payment means a payment in lieu of—
(A) Tax-exempt interest, to the extent that interest has accrued on the obligation for the period during which the short sale is open;
(B) A dividend, the ex-dividend date for which occurs during the period after the transfer of stock for use in a short sale, and prior to the closing of the short sale; or
(C) Any other item specified in a rule-related notice published in the Federal Register (provided that such items shall be subject to the rules of this section only subsequent to the time of such publication).
(ii) The term broker means both a person described in § 1.6045-1(a)(1) and a person that, in the ordinary course of a trade or business during the calendar year, loans securities owned by others.
(iii) The term customer means, with respect to a transfer of securities for use in a short sale, the person that is the record owner of the securities so transferred.
(iv) The term dividend means a dividend (as defined in section 316) or a distribution that is treated as a return of capital under section 301(c)(2) or (c)(3).
(v) The term tax-exempt interest means interest to which the exception in section 6049 (b)(2)(B) applies.
(vi) The term capital gain dividend means a capital gain dividend as defined in section 852(b)(3)(C) or section 857(b)(3)(C).
(vii) The term exempt-interest dividend means an exempt-interest dividend as defined in section 852(b)(5)(A).
(viii) The term FTC dividend means a dividend with respect to which the recipient is entitled to claim a foreign tax credit under section 901 (but not by virtue of taxes deemed paid under section 902 or 960).
(5) Examples. The following examples illustrate the definition of a substitute payment in lieu of tax-exempt interest found in paragraph (a)(4)(i)(A) of this section.
(b) Exceptions—(1) Minimal payments. No statement is required to be furnished under section 6045(d) or this section to any customer if the aggregate amount of the substitute payments received by a broker on behalf of the customer during a calendar year for which a statement must be furnished is less than $10.
(2) Exempt recipients—(i) In general. A statement shall not be required to be furnished with respect to substitute payments made to a broker on behalf of—
(A) An organization exempt from taxation under section 501(a);
(B) An individual retirement plan;
(C) The United States, a possession of the United States, or an instrumentality or a political subdivision or a wholly-owned agency of the foregoing;
(D) A State, the District of Columbia, or a political subdivision or a wholly-owned agency or instrumentality of either of the foregoing;
(E) A foreign government or a political subdivision thereof;
(F) An international organization; or
(G) A foreign central bank of issue, as defined in § 1.6049-4(c)(1)(ii)(H), or the Bank for International Settlements.
(ii) Determination of whether a person is described in paragraph (b)(2)(i) of this section. The determination of whether a person is described in paragraph (b)(2)(i) of this section shall be made in the manner provided in § 1.6045-1(c)(3)(i)(B).
(3) Exempt foreign persons. A statement shall not be required to be furnished with respect to substitute payments made to a broker on behalf of a person that is an exempt foreign person as described in § 1.6045-1(g)
(c) Form of statement. A broker shall furnish the statement required by paragraph (a) of this section on Form 1099. The statement must show the aggregate dollar amount of all substitute payments received by the broker on behalf of a customer (for which the broker is required to furnish a statement) during a calendar year, and such other information as may be required by Form 1099. A statement shall be considered to be furnished to a customer if it is mailed to the customer at the last address of the customer known to the broker. An IRS truncated taxpayer identifying number (TTIN) may be used as the identifying number of the customer in lieu of the identifying number appearing on the information return filed with the Internal Revenue Service. For provisions relating to the use of TTINs, see § 301.6109-4 of this chapter (Procedure and Administration Regulations).
(d) Time for furnishing statements—(1) General requirements. A broker must furnish the statements required by paragraph (a) of this section for each calendar year. The statements must be furnished after April 30th of the calendar year but in no case before the final substitute payment for the calendar year is made, and on or before February 15 of the following calendar year.
(2) Consolidated reporting.
(i) The term consolidated reporting statement means a grouping of statements the same broker furnishes to the same customer or group of customers on the same date for the same reporting year that includes a statement required under this section. A consolidated reporting statement is limited to statements based on the same relationship of broker to customer as the statement required to be furnished under this section.
(ii) A consolidated reporting statement must be furnished on or before February 15 of the year following the calendar year reported. Any statement that otherwise must be furnished on or before January 31 must be furnished on or before February 15 if it is furnished in the consolidated reporting statement.
(e) When substitute payment deemed received. A Broker is deemed to have received a substitute payment on behalf of a customer when the amount is paid or deemed paid to the broker (or as it accrues in the case of original issue discount deemed a payment in lieu of tax-exempt interest).
(f) Identification of customer and recordkeeping with respect to substitute payments—(1) Payments in lieu of tax-exempt interest and exempt-interest dividends. A broker that receives substitute payments in lieu of tax-exempt interest, exempt-interest dividends, or other items (to the extent specified in a rule-related notice published pursuant to paragraph (a)(4)(i)(C) of this section) on behalf of a customer and is required to furnish a statement under paragraph (a) of this section must determine the identity of the customer whose security was transferred and on whose behalf the broker received such substitute payments by specific identification of the record owner of the security so transferred. A broker must keep adequate records of the determination so made.
(2) Payments in lieu of dividends other than exempt-interest dividends—(i) Requirements and methods. A broker that receives substitute payments in lieu of dividends, other than exempt-interest dividends, on behalf of a customer and is required to furnish a statement under paragraph (a) of this section must make a determination of the identity of the customer whose stock was transferred and on whose behalf such broker receives substitute payments. Such determination must be made as of the record date with respect to the dividend distribution, and must be made in a consistent manner by the broker in accordance with any of the following methods:
(A) Specific identification of the record owner of the transferred stock;
(B) The method of allocation and selection specified in paragraph (f)(2)(ii) of this section; or
(C) Any other method, with the prior approval of the Commissioner.
(ii) Method of allocation and selection—(A) Allocation to borrowed shares and individual and nonindividual pools. With respect to each substitute payment in lieu of a dividend received by a broker, the broker must allocate the transferred shares (i.e., the shares giving rise to the substitute payment) among all shares of stock of the same class and issue as the transferred shares which were (1) borrowed by the broker, and (2) which the broker holds (or has transferred in a transaction described in paragraph (a)(1) of this section) and is authorized by its customers to transfer (including shares of stock of the same class and issue held for the broker's own account) (“loanable shares”). The broker may first allocate the transferred shares to any borrowed shares. Then to the extent that the number of transferred shares exceeds the number of borrowed shares (or if the broker does not allocate to the borrowed shares first), the broker must allocate the transferred shares between two pools, one consisting of the loanable shares of all individual customers (the “individual pool”) and the other consisting of the loanable shares of all nonindividual customers (the “nonindividual pool”). The transferred shares must be allocated to the individual pool in the same proportion that the number of loanable shares held by individual customers bears to the total number of loanable shares available to the broker. Similarly, the transferred shares must be allocated to the nonindividual pool in the same proportion that the number of loanable shares held by nonindividual customers bears to the total number of loanable shares available to the broker.
(B) Selection of deemed transferred shares within the nonindividual pool. The broker must select which shares within the nonindividual pool are deemed transferred for use in a short sale (the “deemed transferred shares”). Selection of deemed transferred shares may be made either by purely random lottery or on a first-in-first-out (“FIFO”) basis.
(C) Selection of deemed transferred shares within the individual pool. The broker must select which shares within the individual pool are deemed transferred shares (in the manner described in the preceding paragraph) only with respect to substitute payments as to which a statement is required to be furnished under paragraph (a)(2)(ii) of this section.
(3) Examples. The following examples illustrate the identification of customer rules of paragraph (f)(2):
(g) Reporting by brokers—(1) Requirement of reporting. Any broker required to furnish a statement under paragraph (a) of this section shall report on Form 1096 showing such information as may be required by Form 1096, in the form, manner, and number of copies required by Form 1096. With respect to each customer for which a broker is required to furnish a statement, the broker shall make a return of information on Form 1099, in the form, manner and number of copies required by Form 1099.
(2) Reporting in electronic form. For information returns filed after December 31, 1996, see § 301.6011-2 of this chapter for rules relating to filing information returns in electronic form and for rules relating to waivers granted for undue hardship. A broker or barter exchange that fails to file a Form 1099 electronically, when required, may be subject to a penalty under section 6721 for each such failure. See paragraph (g)(4) of this section.
(3) Time and place of filing. The returns required under this paragraph (g) for any calendar year shall be filed after September 30 of such year, but not before the final substitute payment for the year is received by the broker, and on or before February 28 (March 31 if filed electronically) of the following year with any of the Internal Revenue Service Centers, the addresses of which are listed in the instructions for Form 1096.
(4) Cross-reference to penalties. For provisions relating to the penalty provided for failure to file timely a correct information return required under section 6045(d) and § 1.6045-2(g)(1), including a failure to file on magnetic media, see § 301.6721-1 of this chapter. For provisions relating to the penalty provided for failure to furnish timely a correct payee statement required under section 6045(d) and § 1.6045-2(a), see § 301.6722-1 of this chapter. See § 301.6724-1 of this chapter for the waiver of a penalty if the failure is due to reasonable cause and is not due to willful neglect.
(h) Coordination with section 6042. In cases in which reporting is required by both sections 6042 and 6045(d) with respect to the same substitute payment in lieu of a dividend, the provisions of section 6045(d) control, and no report or statement under section 6042 need be made. If reporting is not required under section 6045(d) with respect to a substitute payment in lieu of a dividend, a report under section 6042 must be made if required in accordance with the rules of section 6042 and the regulations thereunder. Thus, if a broker receives a substitute payment in lieu of a dividend on behalf of an individual customer and the broker does not have reason to know by the record date of the payment that the payment is in lieu of a dividend of a type described in paragraphs (a)(3)(ii)(A) through (D) of this section, the broker must report with respect to the substitute payment if required in accordance with section 6042 and the regulations thereunder.
(i) Applicability date. This section applies to substitute payments received by a broker after December 31, 1984. Section 1.6045-2(c) (as contained in 26 CFR part 1, revised July 15, 2014) applies to payee statements due after December 31, 2014. For payee statements due before January 1, 2015, § 1.6045-2(c) (as contained in 26 CFR part 1, revised April 2013) applies. Paragraph (g)(2) of this section applies to information returns required to be filed during calendar years beginning after December 31, 2023.