Final Broker-Reporting Regs Drop Certification Requirement

 DEPARTMENT OF THE TREASURY

 ACTION: Final regulations.

 SUMMARY: This document contains final regulations under section 6045 of the Internal Revenue Code of 1986 relating to information returns of brokers. The regulations affect brokers effecting certain spot or forward sales of agricultural commodities and provide them with guidance needed to comply with the law.

 DATES: The regulations are effective January 1, 1993. A transition rule is provided for sales effected before January 1, 1993.

 FOR FURTHER INFORMATION CONTACT: John P. Moriarty, 202-622-4950 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

BACKGROUND

This document contains an amendment to the Income Tax Regulations under section 6045 relating to an exception from the reporting requirements for certain sales of agricultural commodities. Section 6045(a) provides that all persons who conduct business as a broker shall file such information returns as may be required by regulation. Section 6045(c)(1) defines the term "broker" to include a dealer, a barter exchange, or any other person who (for a consideration) regularly acts as a middleman with respect to property or services.

 On March 3, 1983, the Service published in the Federal Register (48 FR 10304) regulations requiring reporting by brokers of sales of securities or commodities effected by them in the ordinary course of their business. These regulations generally define a broker to be a person that, in the ordinary course of business during the calendar year, stands ready to effect (as agent or principal) sales to be made by others. A commodity includes any type of personal property, or an interest therein, the trading of futures contracts in which has been approved by the Commodity Futures Trading Commission ("CFTC").

 On January 5, 1984, the Service published in the Federal Register (49 FR 646) proposed amendments to the regulations under section 6045 to clarify the definition of a commodity. A number of comments responding to that notice of proposed rulemaking suggested exemptions from the reporting requirement for sales of agricultural commodities. On February 19, 1991, the Service published Announcement 91-20, 1991-7 I.R.B. 31, providing that for 1990 and prior years reporting is not required under section 6045 for spot and forward sales of agricultural commodities and sales of negotiable commodity certificates issued by the Commodity Credit Corporation ("CCC Certificates"). The announcement did not provide an exception to the information reporting requirements for interests in agricultural commodities, such as regulated futures contracts or forward contracts. The rules of Announcement 91-20 were extended to sales made in 1991 by Announcement 91-177, 1991-48 I.R.B. 87.

 On March 6, 1992, the Service published in the Federal Register (57 FR 8098) proposed amendments to the regulations under section 6045 relating to information returns of brokers. These amendments were proposed to clarify the information reporting requirements for brokers effecting sales of agricultural commodities.

 Many comments responding to the notice of proposed rulemaking were received, and a public hearing was held on April 21, 1992. After consideration of all comments regarding the proposed amendments, those amendments are adopted as revised by this Treasury decision. The preamble to the proposed regulations describes those provisions common to both the proposed and final regulations.

PUBLIC COMMENTS

 The proposed regulations generally provide an exception to the reporting requirements of section 6045 for the spot or forward sale of an agricultural commodity if the customer certifies that the customer produced the commodity and the broker does not know that any information in the certificate is incorrect. This certification requirement was intended to ensure that only ordinary income transactions involving physical agricultural commodities would be excepted from information reporting.

 Many commentators indicated that there is no significant investment in, or trading of, physical agricultural commodities by persons who are not part of the ordinary chain for distributing commodities from producers to end-users. In the case of agricultural commodities (unlike other commodities), the futures markets appear to be the only significant investor markets because of the costs of storage and transportation and certain risks involved in owning physical agricultural commodities. As a result, for income tax purposes a person making a spot or forward sale of agricultural commodities typically does not report the result of that sale separately but instead combines that result with the results of other transactions. In addition, commentators generally indicated that the certification requirements of the proposed regulations would be burdensome because of the information that would need to be collected and the records that would need to be maintained.

 Accordingly, the Service has determined that the information reporting requirements of section 6045 generally should not apply to spot or forward sales of agricultural commodities regardless of whether the seller produced the commodities being sold. Under the final regulations, however, sales of agricultural commodities pursuant to regulated futures contracts and sales of derivative interests in agricultural commodities are not excepted from reporting. Sales involving a warehouse receipt issued by a designated warehouse often are associated with investments in the futures markets. Accordingly, the final regulations provide that these sales are not excepted from reporting. Consistent with CFTC regulations, a designated warehouse is defined as a warehouse, depository, or other similar entity, designated by a commodity exchange, in which or out of which a particular type of agricultural commodity is deliverable in satisfaction of a regulated futures contract.

 The final regulations adopt without substantive change the exception from the section 6045 reporting requirements for sales of Commodity Credit Corporation certificates.

 The regulations will apply to sales effected on or after January 1, 1993. A transition rule, which extends the rules of Announcement 91-20, is provided for sales effected before January 1, 1993.

SPECIAL ANALYSES

 It has been determined that these rules are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required. It has also been determined that section 553 (b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a final Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

DRAFTING INFORMATION

 The principal author of these regulations is John P. Moriarty of the Office of Assistant Chief Counsel (Income Tax and Accounting), Internal Revenue Service. However, personnel from other offices of the Internal Revenue Service and Treasury Department participated in developing the regulations, on matters of both substance and style.

LIST OF SUBJECTS

26 CFR 1.6031-1 through 1.6060-1

 Income taxes, Reporting and recordkeeping requirements.

Treasury Decision 8445

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR part 1 is amended as set forth below:

PART 1 -- INCOME TAX; TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1953

Paragraph. 1. The authority citation for part 1 is amended by adding the following authority citation:

Authority: 26 U.S.C. 7805 * * * Section 1.6045-1 also issued under 26 U.S.C. 6045 * * *

Par. 2. Section 1.6045-1 is amended by revising Paragraph (c)(3) and adding paragraph (c)(7) to read as follows:

SECTION 1.6045-1 RETURNS OF INFORMATION OF BROKERS AND BARTER EXCHANGES.

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(c) * * *

(3) EXCEPTIONS. The exceptions set forth in paragraph (c)(3) of section 5f.6045-1 of this chapter apply to sales effected on or after May 29, 1984. For an exception for certain sales of agricultural commodities and certificates issued by the Commodity Credit Corporation after January 1, 1993, see paragraph (c)(7) of this section. With respect to sales effected before May 29, 1984, the exceptions provided in section 1.6045-1(c)(3)(as contained in the CFR edition revised as of April 1, 1984) apply.

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(7) EXCEPTION FOR CERTAIN SALES OF AGRICULTURAL COMMODITIES AND COMMODITY CERTIFICATES -- (i) AGRICULTURAL COMMODITIES. No return of information is required under section 6045 for a spot or forward sale of an agricultural commodity. This paragraph (c)(7)(i) does not except from reporting sales of agricultural commodities pursuant to regulated futures contracts, sales of derivative interests in agricultural commodities, or sales described in paragraph (c)(7)(iii) of this section.

(ii) COMMODITY CREDIT CORPORATION CERTIFICATES. Except as otherwise provided in a revenue ruling or revenue procedure, no return of information is required under section 6045 with respect to a sale of a commodity certificate issued by the Commodity Credit Corporation under 7 CFR 1470.4 (1990).

(iii) SALES INVOLVING DESIGNATED WAREHOUSES. Paragraph (c)(7)(i) of this section does not apply to any sale involving a warehouse receipt for an agricultural commodity issued by a designated warehouse for an agricultural commodity of the type for which the warehouse is a designated warehouse.

(iv) DEFINITIONS. For purposes of this paragraph (c)(7):

(A) AGRICULTURAL COMMODITY. An "agricultural commodity" includes, but is not limited to, a commodity within the meaning of paragraph (a)(5) of this section that is a grain, feed, livestock, meat, oil seed, timber, or fiber.

(B) SPOT SALE. A spot sale is a sale that results in the substantially contemporaneous delivery of a commodity.

(C) FORWARD SALE. A forward sale is a sale pursuant to a forward contract within the meaning of paragraph (a)(7) of this section.

(D) DESIGNATED WAREHOUSE. A designated warehouse is a warehouse, depository, or other similar entity, designated by a commodity exchange under 7 CFR 1.43 (1992), in which or out of which a particular type of agricultural commodity is deliverable in satisfaction of a regulated futures contract.

(v) EFFECTIVE DATES. Paragraph (c)(7) of this section applies to sales effected on or after January 1, 1993. For sales effected before January 1, 1993, the following transactions are excepted from the information reporting requirements of section 6045:

(A) Spot or forward sales of agricultural products or commodities (but not sales of interests in agricultural products or commodities, such as sales of regulated futures contracts or forward contracts), effected by any person regardless of whether that person takes title to the agricultural products or commodities; and

(B) Sales of negotiable commodity certificates issued by the Commodity Credit Corporation.

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