MTM worksheet public version 8

Here’s a link to the newest version of the MTM worksheet public version.

MTM worksheet

Below is the change log (also included in the worksheet).  Some of the changes relate to notes that you won’t see in the public version.  As a reminder, to download, chose “edit workbook” from the upper right hand corner, and chose edit in excel.   Enable content on the workbook to ensure that macros work.  If you have trouble, you can submit a comment below or email me if you’d like a direct copy.

Version 8 change log
(1) Minor cosmetic things.
(2) Added to note in T16 with respect to 1256(e) contracts talking about interaction with 475(f)(1)(a) and 1.446-4
(3) Split out D22 into a separate investment and hedge tab instead of squishing them together.
(4) Changed D25 to apply 1.446-4/1221 instead of going through all dealer elections since the presumption would be that the dealer has made a 1221 id
(5) Expanded note in T1 to address issue of whether 475(f) is entity-level or trade or business level election.
(6) Added link in note to T13 to ABA commentary, which argued that proposed regulations under 475(f) went further than the statute permitted.
(7) Whereever a partnership was made subject to 1236 in my spreadsheet, added a further tab to elicit that and change the treatment because the definition of security in 1236 does not include partnership interests/trusts (unlike 475)
(8) Moved notes to start in row 9 except for a couple of tabs for easy removal on public versions
(9) Color coded tabs for dealer, trader, investor
(10) Due to definition of securities held for investment in 1.475(b)-1(a)
-Added definition of investment in 1.475(b)-1(a) to notes in D22
-For D12 and D18, drew a link to investment identication as treasury                                               investment identification seems to include trading activity
-Deleted D12.1, D19, D19.1
-Added some discussion of 475(b)(1)(B) to investment tabs.
(11) Eliminated branch dealing with improper investment ID since it was on a path that assumed something was an investment. Kept the information in a footnote though.
(12) Added footnote adding 1.475(b)-1(d) to dealer tabs dealing with 475(b)(1)(C) hedging elections (for hedging another member’s consolidated group risk).
(13) Made a note on trader tabs that 475(b)(1)(C) doesn’t appear to apply to traders by its terms (it only makes 475(a) inapplicable and not 475(f)(1)(A)) and 475(f)(1)(D) doesn’t appear to drag it in either. Deleted tab D13, D13.1, T6 and T10 which linked to 475(b)(1)(C) election in the context of a 475(f) election.
(14) In D15 eliminated third option as that is dealt with in the next step anyway.

MTM Excel Workbook Sections 475, 1221, 1236, and 1256

Hi all,

I’ve been working on this excel workbook that walks one through the potential treatment under 475,1221,1236, and 1256.  Think of it as an active flowchart using hyperlinks.  Here’s a link to the file:

Workbook link

I believe that the way you get this to work for you is to click on the options in the upper right hand corner and choose to “edit in excel” and then it open it in your excel program. If you can’t get the link to work, you can put something in the comments or email me and I can email you the workbook.  Hopefully it’s self-explanatory but essentially you review the facts of the tab you are on and then choose the hyperlink of the fact that applies to your case.

I have tested this link myself and I do lose my “START” and “GO BACK” macros.  if you want a workbook with those macros, you might email me or put a note in the comments (at least until I figure out how to post a version where the macros work).

This is a free “beta” version of the sheet.  I’m testing this right now but also wondering if people would pay for the full version with annotations and notes as well as updates.   Something along the lines of an annual fee for the annotations as well as updates for the year.

Lastly, if I get any comment (other than style or grammar!) that leads me to correct an error or adds substance to the spreadsheet, you will of course get the full annotated version anyway.





Portfolio Loss Harvesting Strategy Part 5: Qualified Dividends

In prior posts, I indicated that the I triggered losses in my portfolio when the benefit (ie., reducing my already recognized gains) exceed the costs (ie., bid-ask spread, fees, etc.).  Another potential cost that you have to look out for when triggering gain to “early” is the potential for a dividend to lose its status as a “qualified dividend”.

Very generally, Section 1(h)(11) provides that a “qualified dividend income” will be treated as “net capital gain”.  Bottom-line, this means that qualified dividend income taxed at the capital gain rate rather than your marginal rate.

One of the more important criteria for a dividend to qualify is a 61-day holding period.  The rules require that one holds the stock for at least 61 days during a 121-day period that begins on the ex-dividend date.

While special rules apply to reduce holding period when you have improperly hedged your position, I don’t really have to pay attention to these rules with my strategy since I don’t engage in hedges.  Therefore, I simply have to count the number of days I’ve held the stock to determine if I qualify.

In addition, there is a rule that provides that if the dividend related to an extraordinary dividend (very generally, a dividend that is at least 10% (5% in the case of preferred) of the fair value or basis of the stock), then any loss on the stock shall be treated as long-term capital loss to the extent of the dividend.  The purpose of this provision is to prevent someone from buying the stock, meeting the holding period, getting the dividend, and then selling the stock with a loss that, in part, results from the dividend.  While the dividend would qualify for the lower capital gain rate, this provision attempts to make any loss resulting from the sale of the stock to net against items that qualify for the capital gain rate (ie., no double benefit).

In terms of the cost benefit-analysis of my portfolio hedging strategy, I simply factor in the cost of the “extra” taxes I’d have to pay if selling the stock would cause me to fail to meet the holding period requirement.   Early on, I actually missed a couple of these because I was only aware of the dividend after it was paid, which could be long after the ex-dividend date, and long after I sold it (and didn’t meet the holding period requirement).

taylor swift stare down

Before I sell a stock now, I double-check to make sure that, unbeknownst to me, it hasn’t gone ex-dividend by checking on google/yahoo finance as well as cross-checking with a dividend calendar at

See also:  Portfolio Loss Harvesting Part 4:  Additional Sundries

Section 305 Proposed Regulations, Part 4:  Withholding Agents and Reporting

The proposed regulations make several changes in an attempt to ensure appropriate US source withholding is made with respect to deemed distributions to non-US holders.  These rules presumably are needed to clarify how withholding is to be done when there is no contemporaneous payment of the amount that is generating the withholding requirement.  While there are rules that currently deal with situations like this (e.g., cancellation of indebtedness), the application of withholding to deemed distributions under Section 305 (not to mention Section 871(m)) are far more prevalent.

Who are the withholding agents?  Very generally, under current regulation 1.1441-7(a)(1), any person that has control, receipt, custody, disposal, or payment of an item of income of a foreign person subject to withholding.  This makes pretty much everyone in the custodial chain a “withholding agent”.  For example, let’s say an Issuer issues a note and has a Paying Agent.  The note is purchased by an Investor, a foreign individual, through their Broker.  The note is actually held at a Custodian in the Broker’s account on behalf of the Investor.  Under 1.1441-7(a)(1), the Issuer, the Paying Agent, the Custodian, and the Broker are all withholding agents.  This, of course, does not mean that all of these parties will actually deduct a withholding amount and remit payment to the IRS.  In general, the rules are designed such that one of the above will be the “primary” withholding agent.  That is, all but one of the above will generally have an exception from the obligation to withhold.  For example, while not technically an exception, the requirement to withhold generally only applies to payments made to payees that are foreign persons.  1.1441-1T(b)(1).  Subject to certain exceptions, this rule generally makes the last U.S. person in the chain of custody the one who bears the primary responsibility for withholding since a payment to a U.S. intermediary is not subject to the general requirement to withhold.  Of course, any of the above withholding agents could ultimately still be responsible for the actual withholding depending on who in the custodial chain is or is not a U.S. person.

An important part of the “withholding agent” definition above is that it asks who has control and custody over items of income of a foreign person.  However, the issue with Section 305(c) is that it applies to so-called “deemed distributions”.  It is difficult, in the first instance, to see how someone has control, receipt, custody, disposal, or payment of something that is entirely a tax construct (e.g., it’s not “real” cash movement).  At least, not without getting into some really abstract form of thinking.

To avoid this, Prop. Reg. 1.1441-7(a)(4) simply states that any person that issues or holds directly or indirectly (e.g., through an account maintained for another intermediary) on behalf a beneficial owner, or a flow-through entity that owns directly or indirectly, a security upon which a deemed distribution or deemed payment is made has custody or control of the deemed distribution or deemed payment.  Therefore, no abstract thinking is required.

Deemed distributions are subject to withholding (subject to a new exception).  Unsurprisingly, the proposed regulations obligate a withholding agent to withhold on a deemed distribution subject to the general exemptions under 1.1441-4 as well as a new exception.  Prop. Reg. 1.1441-2(d)(4)(i).

The new exception provides that the withholding agent (other than the issuer) is not required to withhold if (1) the issuer has not satisfied its reporting requirements (which I discussed in Section 305 Proposed Regulations, Part 3:  Issuer Reporting), AND (2) the withholding agent does not have actual knowledge of the deemed distribution before the due date for filing a Form 1042 for the calendar year in which the deemed distribution or deemed payment occurred.

This, of course, provides that withholding agents down the chain are not required to withhold if there isn’t sufficient information available for them to determine the amount of the deemed distribution (or even that a deemed distribution occurred); information that the issuer is required to either provide in a statement to withholding agents or through a public web site.

As I said in my previous post, I would expect issuers to publish most of this information through a web site so it will be up to withholding agents to ensure that they have systems capable of capturing all of this information.  It’s interesting that the government does not act as a central repository for this data since it could collect the returns and make them publicly available but I guess that’s wishful thinking and likely not in their budget. Instead, I suspect that some third party service will develop (assuming it doesn’t already exist) that will aggregate this data for withholding agents as it strikes me as very inefficient for each and every withholding agent to invest in systems to collect this data.

Another interesting question arises if an issuer doesn’t satisfy its reporting obligations under 1.6045B-1.  First, this apparently turns off every other withholding agent’s obligation to withhold down the chain assuming lack of actual knowledge of the deemed distribution.  But since it doesn’t turn off the issuer’s withholding obligation, does this make the issuer subject to liability for the withholding?  Not necessarily.  What if the next person in the chain of custody after the issuer is a U.S. person?  As I indicated above, withholding agents aren’t generally obligated to withhold on payments to U.S. persons (subject to exceptions).  If that’s the case for deemed distributions, the issuer may never directly face a non-U.S. person.  In fact, it’s likely that U.S. issuers will, more often than not, use U.S. paying agents.

Well, do the proposed regulations turn off the requirement that one does not have to generally withhold on payments to U.S. persons in respect of “deemed distributions” or “deemed payments”? That is, do the regulations get rid of the general rule that the last U.S. person in the chain is the one that is responsible for withholding?  Nothing really addresses this but one would have to think that they do not.  Otherwise, in situations where the issuer does report correctly, the new proposed regulations would create multiple obligations to withhold on the same deemed distribution (i.e., where several custodians downstream the “deemed distribution” to a U.S. person).  This could not be the intent of the proposed regulations.  Therefore, I think the issuer should be able to claim that they do not have to withhold if they directly face a U.S. person in the chain of custody.

But isn’t this weird?  If my analysis is correct (and I’m not entirely sure it is), then there is the potential that no withholding agent has any liability in the case the issuer fails to satisfy its reporting obligations.  The issuer’s sole liability may relate to failure to file a return as required under 6045B.

Of course, the intent here may be to make the issuer liable for all withholding tax due in all cases where they have failed to satisfy their obligations under 1.6045B-1 but would think that this needs to be clarified.

Time for withholding. Except as provided in 1.1441-5 (dealing with withholding by partnerships and trusts), a withholding agent must satisfy its withholding obligation by withholding at the earliest of:

  • the date on which a future cash payment is made with respect to the security;
  • the date on which the security is sold, exchanged, or otherwise disposed of (including a transfer of the security to another account not maintained by the withholding agent or a termination of the account relationship); or
  • the due date (not including extensions) for filing Form 1042 with respect to the calendar year in which the deemed distribution occurred.

Where the issuer has failed to report properly under 1.6045B-1, but the withholding agent has actual knowledge of the deemed distribution before the due date (not including extensions) for it to file Form 1042 for the calendar year, the obligation to withhold doesn’t arise until January 15 of the following calendar year.

The above is actually pretty interesting because “deemed distributions” make withholding fairly difficult in certain situations which the proposed regulations attempt to anticipate.  First, the proposed regulations anticipate that it’s possible that there may be insufficient future cash payments on the security before the requirement to withhold occurs.  To avoid penalties for under withholding, the proposed regulations modify 1.1461-2(b) to provide that the withholding agent can obtain contributions from the beneficial owner to satisfy these obligations.

The preamble for the proposed regulations amusingly notes that the client may have terminated its account relationship before the obligation to withhold arises and gently encourage the withholding agent to make arrangements before the client terminates its relationship with the withholding agent.  In the absence of such arrangements, I believe the IRS response will be “too bad, so sad”.


Another, perhaps more complicated, issue arises where the “primary” withholding agent is not at a point in the chain of custody where thy would have any real knowledge of who the holders actually are or when dispositions occur.  This generally doesn’t matter when withholding is keyed off an actual payment because, at some point, the payment will likely be made by a withholding agent to a recipient that they can actually identify as a party from whom they must withhold.  However, this doesn’t necessarily always work well with respect to dispositions and proceeds.

For example, let’s say a U.S. issuer uses a U.S. paying agent.  A U.S. investor purchases the security using a non-U.S. broker (for whatever reason) and the note is held by a U.S. custodian in a global account for the non-U.S. broker.  Assume in this case that the non-U.S. broker is not a qualified intermediary and is otherwise not required to withhold.  Now, let’s say the U.S. investor sells the security to a non-U.S. investor that uses the same non-U.S. broker.  We’ll stop here but we could assume many sales or dispositions could take place.

In this case, let’s assume the “primary” withholding agent would be the U.S. custodian.  However, while sales and dispositions are occurring, the non-U.S. broker may be holding the securities in a global account.  While the non-U.S. broker would itself note that the beneficiary has changed, I’m guessing that a U.S. custodian may not have any knowledge of those transactions.  I could be wrong about this but I could also be right (wouldn’t it be great if i was right?  I like being right).  Assuming I’m right, this is problematic and the regulations don’t address this very well.  I would imagine this is why tax regimes such as FIRPTA (or capital gains withholding taxes in some non-U.S. jurisdictions) have special rules that deal with sales and dispositions.  Ultimately, you have to build a very tricky mousetrap to make this work properly.

In this case, assuming the regulations aren’t amended to provide exceptions (perhaps withholding rules relating to OID are something to piggyback off of?), I imagine that U.S. custodians will need to require information of downstream sales or dispositions to move upstream back to the U.S. custodian.  I would think that some sort of contractual arrangements will need to be made to ensure proper transfer of information and, assuming the absence of that information, the proper placement of the risk and liability of withholding.

Extended to substitute payments.  I won’t go into this too much but the regulations extend the concept of deemed payments to stock lending, modifying 1.861-3(a)(6) to make it clear that substitute dividend payments include deemed distributions.  The same general rules apply here including that the withholding agent is generally off the hook if they issuer has failed to satisfy its reporting obligations and the withholding agent doesn’t otherwise have actual knowledge of the distribution.  Of course, this exception does not apply to the issuer, potentially making the issuer subject to all withholding liability for substitute payments on stock loans if they don’t report accurately (subject to my general comments above regarding technical issues).  Amusing.

Foreign qualified intermediary.  Withholding agents facing non-U.S. persons that do the withholding have to send the foreign withholding agents the issuer statements showing the issuer’s calculation of the deemed distribution (assuming the issuer didn’t take publish the information on a public website).

U.S. reporting.  The regulations seem to have punted on this.  They do provide for issuer reporting of the deemed distribution under 1.6045B-1 with respect to basis adjustments and state that they expect similar principles to apply for section 6042 dividend (e.g., 1099-DIV) but then ask for commentary on implementation.  I’m not sure what they expect in the meantime but suspect that brokers should take whatever information that they have available to them, either through issuer reporting under 1.6045B-1 or otherwise, and report dividends on U.S. tax forms even in the absence of further guidance.

Effective date.  All of this stuff is generally effective when the regulations go final but they may rely on proposed regulations with respect to deemed distributions or deemed payments after January 1, 2016 until the finalization of the regulations.  They state that no inference is made as to application of current law by permitting reliance.

See also:  Section 305 Proposed Regulations, Part 3:  Issuer Reporting

Section 305 Proposed Regulations, Part 3: Issuer Reporting

I decided to addressing the issuer reporting provisions of the Section 305 proposed regulations before addressing the withholding agents’ reporting and withholding responsibilities.  In this context, the withholding agent’s duties would be near impossible without appropriate issuer reporting requirements.  Because this regime causes a “deemed” distribution, there is no cash payment moving through the system that’s contemporaneous with the adjustment.  Therefore, the withholding agents would need to rely on other mechanisms to ensure that they capture the adjustment correctly.

Much of the broker reporting is keyed off the issuer reporting requirements under Section 6045B and 1.6045B-1.  These provisions set forth rules that require issuers to file tax returns or issue statements or public notices when an organizational action would affect the basis of a security as well as ensuring that sufficient information is provided therein.

Specifically, under the current rules, the issuer must (1) file an issuer return (Form 8937, Report of Organizational Actions Affecting Basis of Securities) with the IRS by the earlier of 45 days after the organizational action or January 15 of the following calendar year, AND (2) must send a written statement to each holder of record of the security or the holder’s nominee by January 15 of the following calendar year.

Under current 1.6045B-1, however, in the case of (1), the issuer is not required to file a return if the issuer reasonably determines that all holders are exempt recipients, and (2) an issuer is not required to send a statement to exempt recipients.  Exempt recipients are identified in 1.6045-1(c)(3)(i)(B) and include, among other things, corporations, tax-exempt organizations, foreign governments, financial institutions, and securities dealers.   It also includes a foreign holder if the issuer has reliable documentation upon which the issuer can rely in order to treat the payments to the holder as made to a foreign beneficial owner.

In lieu of all of the foregoing, the issuer can, by the due date for filing the tax return, post the return with the required information in a readily accessible format in a readily accessible format in an area of its primary public Web site dedicated to this purpose and keep the return accessible for ten years to the public on this Web site or the primary public Web site of any successor.

These provisions were applicable at different times depending on the type of instrument, but, most convertible instruments that would be subject to Section 305(c) have been phased in:

  • Convertible date: Applies to organizational actions after 12/31/15. 1.6045B-1(j)(4).
  • Warrants: Applies to organizational actions after 12/31/13.  1.6045B-1(j)(5).
  • Stock (e.g., convertible preferred): Applies to organizational actions after 12/31/10.  1.6045B-1(j)(1) (with an exception for RIC stock, which pushed the date to 12/31/11.  1.6045B–1(j)(2)).

The current rules (and the reliance on them) raise three questions with regard to disseminating information to brokers/beneficial owners relating to organizational actions in the context of Section 305(c): (1) assuming the issuer did not issue a public statement, the exempt recipients carve-out from providing written statements could obviously create problems for withholding agents since the issuer has an exemption for foreign holders, (2) assuming the information is in these written statements or public notices, how does a broker go about gathering and reporting this information, and (3) what information was a broker supposed to rely on before the phase-in of the reporting above?

The proposed regulations only directly address the first point.  The proposed regulations specifically require issuers to send written statements to holders of record (or their nominees) regardless of their status as exempt recipients.  PR 1.6045B-1(i)(2).  In addition, the proposed regulations make it clear that the issuer must provide the date and the amount of the deemed distribution.  PR 1.6045B-1(i)(3).  This reporting requirement goes effective when the regulations are finalized.

Obviously, this goes beyond the original scope of the Section 6045B (basis reporting for organizational actions), but Treasury seems intent on piggybacking on these rules in order to get deemed dividend information to brokers for purposes other than holder basis adjustments.  Somewhat kluge, but practically expedient I guess.


Of course, the above problem needed to be addressed, but I would have guessed that most issuers would not actually choose to issue written statements with their holders, but instead, would rather put a statement on a public web site.  In that case, they wouldn’t have to worry about being precise about getting the information into the correct hands.  It’s simply there for the world to see.

This would consequently push the onus on the brokers to retrieve that decentralized information or perhaps some third party service could actively aggregate and centralize this information.  In any event, I’m already starting to creep into the reporting and withholding agent duties so I’ll stop here.

See also:  Section 305 Proposed Regulations, Part 2:  The Timing of the Deemed Dividend

Section 305 Proposed Regulations, Part 2:  The Timing of the Deemed Dividend

The proposed rules relating to the timing of the deemed dividend are relatively straightforward.  Pursuant to Prop. Reg. 1.305-7(c)(5), when an applicable adjustment is a deemed distribution under 1.305-7(c)(1) or (2), the deemed distribution occurs at earlier of (x) the time of the adjustment in accordance with the terms of the instrument setting forth the rights to acquire the stock, or (y) the date of the distribution of the cash or property that resulted in the deemed distribution.

There are special rules for when the instrument does not set forth the time of the applicable adjustment.  In the case of publicly traded stock, the deemed distribution occurs immediately prior to the opening of business on the ex-dividend date for the distribution of the cash or property that resulted in the deemed distribution.  In the case of non-publicly traded stock, the deemed distribution occurs on the date that a holder is legally entitled to the distribution of cash or property that results in the deemed distribution.

While these rules make substantive sense, they do have implications for reporting and withholding.  Most reporting and withholding systems are based on capturing cash movements and are generally not based on deemed events.  Therefore, the reporting and withholding rules will have to take those concepts into account (at least in order to be helpful to the withholding agents and the taxpayers).

Also see:  Section 305 Proposed Regulations, Part 1:  The Amount of Deemed Distributions and New Proposed Regulations under Section 305