Financial Services Group Comments on Interim Guidance on Stripping Transactions for Qualified Tax Credit Bonds

The following comments are being made by Steven Neiss¹ in behalf of Broadridge Financial Solutions Inc.² Tax Information Reporting Services³ in regard to Notice 2010-28 describing rules for Stripping Transactions for Qualified Tax Credit Bonds.

New Information Return -- Form 1097-BTC

It is our opinion that there is no need for the new information return 1097-BTC as the filing of this form is in addition to Forms 1099-INT and 1099-OID. The Forms 1099-INT and OID are sufficient as broker-dealers provide backup detail to their beneficial owners for the amounts reported on these forms. The backup detail will provide the interest payments and tax credit amounts on the customers' consolidated tax reporting statement. The use of the new additional form will create potential duplications of income reported on the taxpayers' Schedule 1040 and potentially duplicate reporting to the Internal Revenue Service ("IRS"). However if the IRS determines that there is a need to specifically identify such data, we suggest that Forms 1099-INT and OID be amended to provide a new box for the tax credit amounts.

Quarterly Reporting

The regulations state that starting in 2011 responsible persons under section 6049 will be required to send Form 1097-BTC to the credit recipient quarterly. We are hopeful that you will concur with our suggestions above to not require the new form, however if you do not agree, we suggest that you do not implement a quarterly requirement. Broker-dealers do not currently have any quarterly information reporting requirements. We believe that adding this complexity is unnecessary. The backup detail as described above should be sufficient to provide the taxpayer with the quarterly tax credit amounts. The issue of quarterly reporting had come up previously in the processing of Real Estate Mortgage Investment Conduit (REMIC) securities. As a result of conversations with the IRS, the IRS agreed it was unnecessary for brokers to provide quarterly reporting. However, the issuer was required to provide the quarterly information. Since broker-dealers have never had a requirement to provide quarterly tax information to either the taxpayer or the IRS we suggest that this requirement be deleted from the regulations.

Tax Return -- Form 8912

We believe it is unnecessary for the taxpayer to include both the CUSIP number and tax identification number of the issuer of the tax credit bond. Broker dealers use CUSIP numbers to identify issuances and do not utilize the issuers' EIN identifying numbers. This requirement adds an additional complexity that is unnecessary. This same issue came up previously with Widely Held Fixed Investment Trusts (WHFIT) whose regulations were effective last year. The issuer was required to provide both the CUSIP number and EIN however after discussing this with the IRS, the IRS agreed that is was not necessary for broker-dealers to provide both numbers on the Trust Interest Holders statement or Form 1099. The CUSIP was sufficient as the identifying number. Since broker-dealers have never been required to provide the issuers' EIN we suggest that the taxpayers' form 8912 not be amended to reflect it.

New Issuer Return -- Form 8038-TC

We suggest that the new Form 8038-TC be utilized by the IRS for two functions: the issuers' file of information returns with the IRS and the issuers' consent to a publication of important information regarding their new issuance. The Form should have a negative consent election that automatically authorizes the IRS to publish the name and address, description of the tax credit bond including issue date and maturity date, identifying the issue as strippable, the CUSIP number, and any other material information. If the issuer does not wish to make the information public, the IRS may provide a check box and the issuer can indicate "no", otherwise the information will be public and available.

Based on the information received from issuers, the IRS should publish an IRS directory, publication or web location that provides CUSIP numbers, security descriptions and trustee contact information similar to Pub 938, Real Estate Mortgage Investment Conduits (REMIC) Reporting Information and include in Publication 1212, Guide to Original Issue Discount (OID) Instruments, all the pertinent information for proper IRS reporting. In this way brokers would have the information necessary to contact issuers or their agents and have the necessary data elements and accretion amounts to compute the applicable OID accretions for these instruments. The data would be readily available to the financial community and the accrual interest would be processed accurately. We also suggest that this procedure be extended to all tax credit bonds. Tax credit bonds that are publically traded need to provide the date of the initial tax credit and rate per $1000. If the amount is short (less than 3 months from the initial credit allowance date) that should be disclosed.

Entity Type Exemptions from Information Reporting

The regulations state that 6049(b)(B)(i) and 6049(b)(4) generally exempt from information reporting interest that is paid to certain entities (e.g., corporations, dealers in securities, etc.). However, 6049(d)(9)(B) makes the exemption inapplicable for interest on qualified tax credit bonds and requires reporting. Many broker-dealer tax systems exempt on an account level and can not manage distribution based exemptions. We therefore recommend that the IRS amend these regulations to conform to exemptions by entity level. If that is not possible, we suggest that the Service delay the implementation date for reporting these entities and waive penalties to allow the systems development of these provisions.

Aggregation

If a purchaser on a single date purchases more than one component in a single transaction or series of transactions that has been subject to stripping, the taxpayer must treat the components as a single debt instrument, newly issued on the purchase date. None of the payments are qualified stated interest and each component is subject to OID reporting. Yet, if the taxpayer purchases all of the stripped components, then the debt instrument is treated as of the purchase date as if it was not subject to a previous stripping transaction and payments are qualified stated interest. The components are treated as re-bundled into a single security holding. However broker dealers generally do not combine CUSIPs for tax reporting and the reporting would be provided based on each individual CUSIP. Brokers can not easily identify such combinations, of transactions and therefore would report OID for each component and not as qualified stated interest. We therefore recommend that the IRS revisit this provision and amend it to fit the brokers' operations' capabilities.

We wish to thank the Service for the opportunity to comment on the Tax Credit Bond regulations. Hopefully the IRS will consider our points and amend the regulations to reflect the compatibility with the brokers' processing capabilities. In addition the Service may wish to consider delaying the effective date until all new forms and instructions have been published and all concerns have been resolved. Generally, it makes most sense for regulations to be effective at the start of the new calendar year. If you have any questions, please do not hesitate in contacting me at (201) 714-3401 or steve.neiss@broadridge.com.

² Broadridge Financial Solutions, Inc., formerly ADP Brokerage Services Group, with over $2.0 billion in revenues and more than 40 years of experience, is a leading global provider of technology-based outsourcing solutions to the financial services industry. Broadridge's integrated systems and services include investor communication, securities processing, and clearing and outsourcing solutions. Broadridge offers advanced, integrated systems and services that are dependable, scalable and cost-efficient. Their systems help reduce the need for clients to make significant capital investments in operations infrastructure, thereby allowing them to increase their focus on core business activities.

³ Broadridge launched its Tax Information Reporting Service (TIRS) in 2005 to support the year-end information reporting needs of brokerage firms and banks. Its solutions provide comprehensive tax information reporting services through the development and maintenance of a database and processing that provides a platform for tax calculations and reporting in order to meet tax reporting requirements for IRS Forms 1099, 1042-S and Schedule K-1's. The service includes processing for debt instruments with Original Issue Discount (OID); real estate mortgage investment conduits (REMICs) and other collateralized debt obligations (CDOs); widely held fixed investment trusts (WHFITs), real estate investment trusts (REITs) and mutual funds, unit investment trusts (UITs) and Master Limited Partnerships (MLPs).