Trends & Developments - February 2013 - Partnerships and Corporations Must File Form 8949 and Schedule D

Effective for the 2012 tax reporting year, the IRS has issued new filing requirements for Schedule D and Form 8949, Sales and Acquisitions of Capital Assets, for partnerships and corporations. This mirrors the requirement already in place for 1040 filers. 

The entity Schedule D, similar to the individual schedule D, is now a summary of the results of Form 8949 that steps in as a detailed schedule for the sale of each security as reported by the broker, with dates of sale and acquisition and sales proceeds and cost where applicable.  The form also includes columns that will allow the taxpayer to identify, via codes, any differentials that might exist between the broker-reported amounts and the actual gain or loss recognized.

The instructions of Form 8949 refer taxpayers to companies that partner with the IRS to provide 8949 software, enabling taxpayers to import trades directly from brokerage firms to assist in basis tracking. It does not however, address concerns that are prevalent in the hedge fund or investment partnership industry.

It is not unusual for hedge funds to use multiple brokers to handle their trading.  The most common issue that arises is wash sale reporting.  The wash sale rules require taxpayers to adjust cost basis for wash sale loss disallowance based on activities in all trading accounts.  Taxpayers are also required to account for loss disallowance under the straddle rules and accelerated gain recognition under the constructive sale rules, among others.  All of these adjustments are identified by reviewing annual trading in all accounts on a combined basis with adjustments for any security on a lot-specific basis. The volume of trades and adjustments can be daunting.

For 1099 reporting purposes, brokers report basis adjustments for wash sales on an account-by-account basis, and do not account for any other possible tax adjustments mentioned earlier.  The dilemma faced by these taxpayers and their service providers is the reconciliation between the broker-supplied information and the actual results.  Form 8949 would require that each trade be listed, either on the form or as an attachment in the same format as the form, and identified for discrepancy. Again, the volume of trading involved makes this method difficult in application.

Trends & Developments - February 2013 Issue 

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