Final Regulations Provide Simplified Net Asset Value Accounting Method for Gains and Losses on Money Market Fund Shares; Automatic Consent Allowed for Method Change (T.D. 9774; Rev. Proc. 2016-39)

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The IRS has issued final regulations that provide a simplified method of accounting called the net asset value (NAV) method for determining gains or losses on shares in money market funds (MMF). The regulations also cover information reporting requirements for MMF shares.

Under securities rules, MMFs are registered investment companies that generally keep their share prices stable and hold securities that result in minimal fluctuations in the MMF’s net asset value per share. Floating-NAV MMFs are MMFs that use market factors to value their securities and use basis point rounding when pricing their shares. Stable-NAV MMFs, which include government MMFs and retail MMFs, are allowed under the securities rules to use the amortized cost method and less precise penny rounding.

Under the NAV method, gain or loss on shares in an MMF is computed based on aggregate transactions and aggregate fair market values during a computation period, rather than on a transaction-by-transaction basis. Unlike the proposed regulations (NPRM REG-107012-14, I.R.B. 2014-33, 371), which only allowed floating-NAV MMFs to use the NAV method, the final rules allow stable-NAV MMFs to use the NAV method as well.

Generally, under the NAV method, the net gain or loss for each computation period with respect to shares in an MMF to which the NAV method applies equals the ending value, minus the starting basis, minus the net investment in the MMF for the computation period. The net gain or loss for a tax year on shares in an MMF is the sum of the net gains or losses on shares in the MMF for the computation period or periods that make up the tax year. Although the proposed regulations required computation periods to be of approximately equal duration, the final rules allow computation periods to be of equal or varying length. Regulated investment companies (RICs) that must pay an excise tax for failure to make required distributions under Code Sec. 4982 must be consistent in applying the NAV method to MMF shares for income tax and excise tax purposes.

The character of the gain or loss determined under the NAV method depends on the character of the underlying shares in the MMF. If each of the shares in the MMF would otherwise give rise to capital gain or loss if sold or exchanged during the computation period, then the gain or loss from the shares in the MMF is treated as capital gain or loss under the NAV method. If each of the shares in the MMF would otherwise give rise to ordinary gain or loss if sold or exchanged during the computation period, then the gain or loss from the shares in the MMF is treated as ordinary gain or loss under the NAV method.

The final regulations on the NAV method apply to tax years ending on or after July 8, 2016. For tax years ending on or after July 28, 2014, and beginning before July 8, 2016, MMF shareholders can rely on the rules in the proposed regulations or the rules in the final regulations.

Information returns.

Under final regulations, no information return is required for a sale of shares in a regulated investment company that is permitted to hold itself out to investors as a money market fund. The final regulations on information reporting apply to sales of shares in calendar years beginning on or after July 8, 2016. However, taxpayers and brokers can rely on the rules for sales of shares in calendar years beginning before July 8, 2016.

Automatic Change to or from NAV Method

The IRS has issued procedures that taxpayers can follow to receive automatic consent for a change to or from the NAV method for gains and losses on MMF shares. Taxpayers who want to change to or from the NAV method should follow the automatic consent procedures in Rev. Proc. 2015-13, I.R.B. 2015-5, 419, and Rev. Proc. 2016-29, I.R.B. 2016-21, 880. Specifically, the automatic consent procedures apply to a change in accounting for gain or loss on MMF shares from a realization method to the NAV method or from the NAV method to a realization method.

Under the automatic consent procedures, taxpayers make the change to or from the NAV method on a cut-off basis. A taxpayer making the change to or from the NAV method should apply the new method to the computation of gain or loss on the shares beginning with the year of change and should not compute a Code Sec. 481(a) adjustment.

In general, a taxpayer changing from a realization method to the NAV method or from the NAV method to a realization method can file a short Form 3115, Application for Change in Accounting Method, that only requires limited information to be provided. Taxpayers changing to the NAV method for shares in a stable NAV MMF do not need to file a Form 3115 if certain requirements are satisfied, including that prior to the year of change, either the taxpayer’s basis in each share of the MMF has been at all times equal to the MMF’s target share price or the taxpayer has not realized any gain or loss from the MMF shares. Taxpayers making multiple changes involving the NAV method for the same year of change under the automatic consent procedures can file one short Form 3115.

Rev. Proc. 2016-39 modifies Rev. Proc. 2016-29, I.R.B. 2016-21, 880, as modified by Notice 2016-36, I.R.B. 2016-25, 1029.

T.D. 9774, 2016FED ¶47,034

Rev. Proc. 2016-39, 2016FED ¶46,367

Other References:

Code Sec. 446

CCH Reference – 2016FED ¶20,620.285

CCH Reference – 2016FED ¶20,637

Code Sec. 6051

CCH Reference – 2016FED ¶35,923

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