Cost Basis Reporting

1. May 12, 2010 Cost Basis Reporting NASPP San Francisco Chapter Presented by: Jennifer Sponzilli – KPMG LLP Andrew Schwartz – BNY Mellon

2. Table of Contents • Cost Basis Reporting Overview • What is Cost Basis? • Legislative History • What changed? • What does it mean for the securities industry? • Complexities around cost basis • Effects on employee plans • Issuer responsibilities • Q&A

3. What is Cost Basis? (Continued) • Definition: All costs incurred in purchasing a capital asset • Example: • You purchase 100 shares of Broadcom at $34 per share, on May 11, 2010 • You pay $25 in fees to purchase the shares • Your cost basis = (100 * $34) = $3,400 + $25 = $3,425 • In the past, transfer agents and brokers were not obligated to: • retain cost basis information • or the purchase date • or any adjustments due to corporate actions (stock splits) • or transfer the information to a successor broker • or report the basis on Form 1099-B when the shares are sold • Starting in 2011, this will change…

4. Legislative History • Historical responsibility for cost basis on taxpayers • IRS study • On October 3, 2008, the Emergency Economic Stabilization Act of 2008 became law • Comment period • Proposed Regulations - December 2009 • Second comment period • Effective dates • January 1, 2011: stock/equities • January 1, 2012: mutual funds and Dividend Reinvestment Plans (DRIPs) • January 1, 2013: other securities (debt securities and options) • Awaiting final regulations • Burden shifted to brokers (including TAs), custodians, issuers 4

5. What changed? (Continued) • Noncovered vs. covered securities • Permissible “lot selection” methods • FIFO • Specific ID • Average Cost (Mutual funds/DRP) • Example: • BUY 1/2/12 10 shares $50 $ 500 • BUY 2/1/12 20 shares $40 $ 800 • BUY 3/1/12 20 shares $10 $ 200 • 50 shares $1500 • Sell 10 shares FIFO: Basis is $50/share • Sell 10 shares Specific ID from Feb lot: Basis is $40/share • Sell 10 shares Avg Cost: Basis is $30/share, FIFO from Jan lot 5

6. What changed? (Continued) • S-Corp tracking & reporting • IRS fines for non-compliance • $100 per 1099-B • $350,000 maximum per payor • 10% of reportable income for intentional neglect • Transfer statements (6045A) • Corporate action reporting (6045B) 6

7. What changed? (Continued) • Tracking adjustments to cost basis • Wash sales • Return of Capital • Corporate Actions • Fees • Gifts • Death 7

8. What changed? • Additional information required and filing deadline changes for Form 1099-B 8

9. What does it mean for the securities industry? (Continued) • Massive investment • System changes, delays other development • Communication program • Very short timeframe • Remaining uncertainty • Tracking of cost basis by smaller transfer agents • Third-party vendors • Reputational / Financial Statement Risk

10. Complexities of the legislation (Continued) • Wash sales • De minimis effects • Sublot accounting • Bifurcating covered/uncovered in same account • Transfers due to gifts, death, private sales • TA-Broker transfers and adjustments • Corporate actions • Dividend reinvestment plans 10

11. Complexities of the legislation (Continued) Wash sale example: • BUY 2/1/11 100 shares @ $50 = $5,000 • SELL 3/31/11 100 shares @ $45 = $4,500 • Results in $500 loss • BUY 4/3/11 120 shares @ $47 = $5,640 • Result: • Disallowed loss added to basis of repurchased shares: • Adjust holding period of repurchased shares • Create sublots • BUY 2/4/11 100 shares @ $52 = $5,200 • BUY 4/3/11 20 shares @ $47 = $ 940 11

12. Complexities of the legislation (Continued) Bifurcating accounts: Dividend Reinvestment Plans • BUY 4/1/10 100 shares @ $40 (noncovered) • BUY 2/1/11 50 shares @ $35 (uncovered purchase in DRP) • BUY 3/2/11 40 shares @ $38 (covered-purchased at broker & tfr in) • BUY 5/1/12 30 shares @ $42 (covered purchase in DRP) • Shareholder elects average cost in June 2012 • Which lots are available to be included? 12

13. Complexities of the legislation (Continued) Gifts • Transfers without reason assumed to be a gift • Data required: • Original acquisition date • Adjusted cost basis • Date of gift • FMV on date of gift • When FMV < Adjusted basis, then if: • Sale price > Adjusted basis > FMV = Gain = Sales price - Adjusted basis • Adjusted basis > Sale price > FMV = No gain or loss • FMV > Sale Price < Adjusted basis = Loss = Sale price – FMV • Gifts to multiple people = multiple lots per person 13

14. Complexities of the legislation (Continued) Death • Assets transferred to estate or beneficiary • 2009 rule: Step-up basis • Acquisition date becomes date of death • Basis = FMV on date of death or valuation date six months later • All sales considered long-term • 2010 rule: Carryover basis • Uncertainty going forward 14

15. Complexities of the legislation (Continued) Private Sale • Certificate sold from one individual to another • Not reportable on 1099-B by transfer agent • Must be informed that it is a private sale-otherwise gift • Basis to purchaser is purchase price • How will TA know? 15

16. Complexities of the legislation (Continued) Transfer adjustments • TA only has to record original basis • What if a sale in a TA account affects transferred shares? • Who is responsible for updating adjusted basis? • Is there a deadline for issuing corrected transfer statements? • What if TA changes in interim? • What if 1099-B has to be reissued? 16

17. Complexities of the legislation (Continued) Corporate Actions • Stock split • Reverse split • Mergers • Stock dividends • Spin – offs • Tender offers • Return of capital • ADRs 17

18. Complexities of the legislation (Continued) Dividend reinvestment plans • Generally, shareholder can specifically identify securities up to settlement date • Shareholder can elect average cost in a DRP account • then revoke within a year or before first sale • or can change with IRS permission • creating two or more calculation methods in the same account • What defines a DRP – 10% rule 18

19. And if that’s not enough…Effects on Employee Plans (Continued) • Basic definition: • Cost Basis = Purchase price + ordinary income • + Fees (if proceeds reported gross on Form 1099-B) • Proposed regulation • More guidance is coming on employee plans • Report only purchase price until 2013 (at earliest) • Will understate cost basis • Will confuse participants • STA comment letter 19

20. Effects on Employee Plans (Continued) • Necessity of issuer involvement • Example: Restricted stock vesting • Issuer administers plan in-house • Shares move from TA reserve to broker • Who is responsible for transferring cost basis? • Option exercises • Non-Qualified • ISO • Disq. Disp. - Basis not known until sale 20

21. Effects on Employee Plans (Continued) • Employee Stock Purchase Plans • Non-Qualified • DRP rules • Qualified §423 plans • Basis not known until sale • Interplay with §6039 regulations • Effects on individual lots • Corporate actions • Wash sales • Transfers out of plan • Purchase price, FMV at beginning and end of offering period all need to be adjusted 21

22. Effects on Employee Plans (Continued) • How to prepare • Understand the calculations • Spot check the results • Be prepared for employee inquiries • Work closely with administrator, TA, broker • Ask questions 22

23. Q & A

24. CONTACT INFORMATION • Jennifer Sponzilli • Principal • KPMG LLP • (212) 872-6660 • jsponzilli@kpmg.com • Andrew L. Schwartz, CPA, CEP • Vice President • BNY Mellon Shareowner Services • (201) 680-3340 • andrew.schwartz@bnymellon.com