[Federal Register Volume 81, Number 131 (Friday, July 8, 2016)]
[Rules and Regulations]
[Pages 44508-44515]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-16149]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9774]
RIN 1545-BM04


Method of Accounting for Gains and Losses on Shares in Money 
Market Funds; Broker Returns With Respect to Sales of Shares in Money 
Market Funds

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that provide a 
simplified method of accounting for gains and losses on shares in money 
market funds (MMFs). The final regulations also provide guidance 
regarding information reporting requirements for shares in MMFs. The 
final regulations respond to Securities and Exchange Commission (SEC) 
rules that change the amount for which certain MMF shares are 
distributed, redeemed, and repurchased. The final regulations affect 
MMFs and their shareholders.

DATES: Effective date: These regulations are effective on July 8, 2016.
    Applicability dates: For the dates of applicability, see Sec. Sec.  
1.446-7(e) and 1.6045-1(c)(3)(vi)(B).

FOR FURTHER INFORMATION CONTACT: Grace Cho at (202) 317-6895 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to 26 CFR part 1 (Income Tax 
Regulations) under sections 446 and 6045 of the Internal Revenue Code 
(Code). The regulations provide a method of accounting for gain or loss 
on shares in MMFs and are intended to simplify tax compliance for 
holders of shares in MMFs affected by SEC regulations that impose 
liquidity fees or change how certain MMF shares are priced. See Money 
Market Fund Reform; Amendments to Form PF, Securities Act Release No. 
33-9616, Investment Advisers Act Release No. IA-3879, Investment 
Company Act Release No. IC-31166, Financial Reporting Codification No. 
FR-84 (August 14, 2014) (SEC MMF Reform Rules). The regulations also 
provide guidance regarding information reporting requirements for 
shares in MMFs.
    An MMF is a type of investment company registered under the 
Investment Company Act of 1940 (1940 Act) and regulated as an MMF under 
Rule 2a-7 under the 1940 Act (17 CFR 270.2a-7). MMFs have historically 
sought to keep stable the prices at which their shares are distributed, 
redeemed, and repurchased. The securities that Rule 2a-7 permits an MMF 
to hold generally result in no more than minimal fluctuations in the 
MMF's net asset value per share (NAV).\1\
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    \1\ Note that the term ``NAV'' is used throughout this document 
to indicate the per-share amount that may be described elsewhere as 
``NAV per share.''
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    MMFs meeting the requirements of Rule 2a-7 have been permitted to 
value their assets based on the assets' cost, with certain adjustments 
(amortized cost method), and to price their shares by rounding the 
resulting NAV to the nearest 1 percent (penny rounding). These methods 
have enabled MMFs to maintain constant share prices in almost all 
circumstances. Because most MMFs target a $1.00 share price, an MMF 
that fails to maintain a constant share price is said to ``break the 
buck.''
    The SEC MMF Reform Rules generally bar the use of the amortized 
cost method and penny rounding for certain MMFs (floating-NAV MMFs) and 
require a floating-NAV MMF to value its assets using market factors and 
to round its price per share to the nearest basis point (the fourth 
decimal place, in the case of a fund with a $1.0000 share price). 
Certain government-security-focused MMFs (government MMFs) and certain 
MMFs the beneficial owners of which are limited to natural persons 
(retail MMFs) may continue to use the amortized cost method and penny 
rounding. (A government MMF or retail MMF that continues to use the 
amortized cost method and penny rounding is called a stable-NAV MMF.)
    The SEC MMF Reform Rules also establish circumstances under which 
an MMF is permitted or required to impose a liquidity fee or is 
permitted to impose a redemption gate. When an MMF has a liquidity fee 
in effect, the liquidity fee reduces the proceeds received by all 
redeeming shareholders. A redemption gate is the temporary suspension 
of redemptions of shares in the MMF. Liquidity fees and redemption 
gates

[[Page 44509]]

may be imposed by both floating-NAV MMFs and stable-NAV MMFs. An MMF 
other than a government MMF is required to impose a liquidity fee in 
certain circumstances, unless the fund's board of directors determines 
that such a fee is not in the best interests of the fund.
    The Treasury Department and the IRS published a notice of proposed 
rulemaking and notice of public hearing (REG-107012-14) in the Federal 
Register on July 28, 2014 (79 FR 43694). The proposed regulations 
described a simplified method of accounting for gain or loss on shares 
in a floating-NAV MMF (the net asset value method, or NAV method). 
Under the NAV method, a taxpayer's gain or loss on shares in an MMF is 
based on the change in the aggregate value of the taxpayer's shares 
during a computation period selected by the taxpayer and on the net 
amount of the purchases and redemptions during the computation period. 
The proposed regulations also provided guidance regarding information 
reporting requirements for shares in MMFs.
    A request for a public hearing was received, and the hearing was 
held on November 19, 2014. The IRS received written comments responding 
to the proposed regulations regarding the method of accounting for 
gains and losses on shares in MMFs. The written comments are available 
for public inspection at http://www.regulations.gov or upon request. 
After considering the comments, the Treasury Department and the IRS 
adopt the proposed regulations regarding the method of accounting as 
final regulations with the modifications described in this Treasury 
decision. No comments were received on the portion of the proposed 
regulations that would revise Sec.  1.6045-1(c)(3)(vi) to clarify that 
the exceptions under sections 6045, 6045A, and 6045B continue to apply 
to all MMFs, including floating-NAV MMFs. The Treasury Department and 
the IRS adopt the proposed regulations revising Sec.  1.6045-
1(c)(3)(vi) as final regulations without substantive change.

Summary of Comments and Explanation of Revisions

1. Application of the NAV Method to Stable-NAV MMFs

    Under the proposed regulations, the NAV method would apply only to 
floating-NAV MMF shares. In the preamble to the proposed regulations, 
the Treasury Department and the IRS requested comments regarding 
whether the NAV method should be a permissible method of accounting for 
stable-NAV MMF shares.
    Although stable-NAV MMFs seek to maintain constant share prices, 
there are circumstances in which shares in a stable-NAV MMF will give 
rise to gain or loss. On rare occasions, shares in a stable-NAV MMF may 
be redeemed at a price other than the target price, such as when the 
MMF breaks the buck. In addition, a stable-NAV MMF may impose liquidity 
fees, which will generally result in the realization of a loss by a 
redeeming shareholder. If the acquisition of other shares causes such a 
redemption to be a wash sale under section 1091, section 1091(d) will 
generally cause the basis of the acquired shares to exceed the cost of 
the shares. Because the price of a stable-NAV MMF share rarely changes, 
any disposition of those acquired, higher-basis shares will likely 
result in another loss, which also may be deferred by the wash sale 
rules. Therefore, even if a liquidity fee is in effect for only one 
redemption by a shareholder and the share price of the MMF remains 
constant, that fee may cause a difference between the basis and value 
of the shareholder's MMF shares that persists indefinitely. Determining 
gain or loss and basis on each transaction in a stable-NAV MMF, taking 
into account the wash sale rules, would impose significant burdens on 
shareholders under these circumstances. To eliminate those burdens, a 
shareholder might need to terminate the shareholder's entire interest 
in the affected MMF (and not initiate a new position until after the 
end of the period described in section 1091(a)).
    Commenters recommended that the NAV method be applicable not only 
to shares in floating-NAV MMFs but also to shares in stable-NAV MMFs. 
The commenters added that many shareholders of stable-NAV MMFs may be 
retail shareholders (generally, individuals) who are likely to rely 
upon the cost basis reporting provided by funds or brokers for their 
other mutual funds. Those individuals are unlikely to have the systems 
necessary to record gains and losses and to track wash sales and the 
resulting basis adjustments.
    The NAV method would reduce the complexity, and any tax-based 
motivation to terminate investments in MMFs, that would result from the 
imposition of a liquidity fee by a stable-NAV MMF. Under the NAV 
method, any loss that resulted from the imposition of a liquidity fee 
by an MMF would be determined for a shareholder's entire interest in 
the MMF (or in an account) for the appropriate taxable year (or 
computation period) rather than for a single transaction. Therefore, 
the wash sale rules would not defer the loss. The NAV method also 
requires fewer and simpler computations than traditional accounting, 
even if there are no wash sales. For the years after an MMF breaks the 
buck or imposes a liquidity fee, the NAV method simplifies 
recordkeeping, because the gain or loss for each year is based on 
changes in the NAV during that year. Therefore, the final regulations 
permit taxpayers to apply the NAV method to shares in stable-NAV MMFs.

2. Consistency Requirement

    The proposed regulations would provide that if a taxpayer applies 
the NAV method to shares in any MMF for a taxable year, the taxpayer 
must apply the NAV method to its shares in all MMFs for which that 
method is permissible.
    Commenters requested that the final regulations permit taxpayers to 
apply different methods to shares in different MMFs or to shares in a 
single MMF held in different accounts. Commenters said that some 
taxpayers may receive sufficient information about their shares in 
certain MMFs to compute gain or loss realized on each transaction and 
that those taxpayers should be permitted to compute gain or loss 
realized on each transaction for those MMFs.
    Commenters also noted that taxpayers may hold shares in a single 
MMF through different kinds of accounts (for example, an account with a 
broker and an account with the MMF itself) and may receive different 
information for the different accounts. The commenters recommended 
that, because of that possibility, taxpayers should be permitted to use 
different accounting methods for shares held in different accounts. 
Commenters also noted that many MMF shareholders will be large 
institutional investors, which might hold shares in the same MMF 
through separate accounts controlled by different divisions.
    In response to these comments, the final regulations permit MMF 
shareholders to use different methods of accounting for shares in 
different MMFs or for shares in a single MMF held in different 
accounts.

3. Choosing NAV Method Computation Periods for RIC Excise Tax Purposes

    Under the NAV method, computation periods are the periods that a 
taxpayer selects for computing gain and loss for an MMF. The proposed 
regulations would provide that computation periods may be the 
taxpayer's taxable year or a shorter period, provided that (i) 
computation periods are of approximately equal duration, (ii) every day 
during the taxable year falls within one, and only one, computation 
period,

[[Page 44510]]

and (iii) each computation period contains days from only one taxable 
year.
    Most regulated investment companies (RICs) must pay an excise tax 
under section 4982 if they do not make the required distribution 
described in section 4982(b) for a calendar year. The required 
distribution is generally 98 percent of the RIC's ordinary income for 
the calendar year, plus 98.2 percent of the RIC's capital gain net 
income for the one-year period ending on October 31 of the calendar 
year. A commenter requested clarification that a RIC that holds MMF 
shares may use the NAV method for excise tax computations. That 
commenter also requested that the Treasury Department and the IRS 
confirm that a RIC that uses the NAV method is permitted to use the 
one-year period from November 1 to October 31 as its computation period 
for excise tax purposes. The commenter explained that RICs generally 
account for items that are marked to market using two different one-
year periods for income tax and excise tax purposes. The commenter 
explained that, under section 4982(e)(2)(A), the term ``capital gain 
net income'' when used in section 4982 is determined by treating the 
one-year period ending on October 31 of any calendar year as the 
company's taxable year.
    The Treasury Department and the IRS agree that the NAV method 
should be applicable for purposes of the computations required by 
section 4982 and that the taxable year for purposes of those 
computations should be the relevant period under section 4982(e). The 
final regulations adopt this change.
    The final regulations, however, require a RIC to be consistent in 
applying the NAV method to MMF shares for income tax and excise tax 
purposes. For each MMF in each account, the final regulations generally 
require a RIC to use the NAV method either for both income tax and 
excise tax computations or for neither computation. The final 
regulations also clarify how a RIC may change to or from the NAV 
method.
    The final regulations require a RIC to use the same computation 
periods for purposes of both excise tax and income tax computations. 
Therefore, under the final regulations, a RIC using the NAV method for 
its shares in an MMF generally treats the one-year period for which 
gain or loss from the MMF would be included in the amount determined 
under section 4982(e)(2) or (e)(6) (the section 4982 period) like a 
taxable year in applying the NAV method to determine the RIC's required 
distribution under section 4982(b).\2\ The RIC, however, may not use 
the section 4982 period as a computation period for excise tax purposes 
if the section 4982 period contains days from more than one income tax 
year.\3\ Instead, in this situation, the RIC must divide the section 
4982 period into at least two computation periods so that each 
computation period contains days from only one income tax year. 
Similarly, the RIC may not use its full income tax year as a 
computation period for income tax purposes if the year contains days 
from more than one section 4982 period. These consistency requirements 
simplify and clarify the interaction of sections 852(b) and 4982.
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    \2\ If a RIC has not made an election under section 4982(e)(4), 
the RIC's section 4982 period is the one-year period ending on 
October 31, because that is the period for determining capital gain 
net income under section 4982(e)(2) and (because the final 
regulations concerning the NAV method constitute a specified mark to 
market provision for purposes of section 4982(e)(6)(B)) ordinary 
income under 4982(e)(6)(A).
    \3\ The section 4982 period will contain days from only one 
income tax year if (i) the RIC has in effect a valid election under 
section 4982(e)(4) or (ii) the RIC's income tax year ends on October 
31.
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    The final regulations eliminate the requirement that computation 
periods be of approximately equal duration. The Treasury Department and 
the IRS do not believe that this requirement is essential to the 
operation of the NAV method, and eliminating the requirement will allow 
taxpayers more flexibility. In particular, permitting computation 
periods of unequal duration will reduce the burden on RICs of complying 
with the requirement of consistent computation periods for income and 
excise tax purposes. For example, a RIC that applies the NAV method to 
its shares in an MMF (held as a capital asset) and that has an income 
tax year ending on January 31 may meet the consistency requirements 
with two computation periods of unequal duration--one ending on January 
31 and the other on October 31. The RIC also may use additional 
computation periods ending on other dates, such as December 31.

4. Clarification of Certain Amounts

A. Fair Market Value of MMF Shares
    Under the proposed regulations, gain and loss under the NAV method 
would be determined by reference to the fair market value of MMF 
shares. Commenters requested that the Treasury Department and the IRS 
clarify that the fair market value of an MMF share for this purpose is 
the NAV reported by the MMF. One commenter suggested that the fair 
market value of a share in an MMF should be the published NAV as of the 
end of the relevant day (or the next trading day, if the day in 
question is not a trading day). A second commenter suggested that, 
because MMFs may strike several NAVs throughout the day, the fair 
market value should be the next published NAV after a transaction.
    In response to these comments, the final regulations clarify that 
the fair market value of a share in an MMF at the time of a transaction 
is presumed to be the published NAV (or other published amount for 
which the MMF would redeem the share, determined without regard to any 
liquidity fees (other redemption amount)). For purposes of computing 
the ending value for a computation period, the presumption applies to 
the last published NAV (or other redemption amount) in that computation 
period. For purposes of determining the fair market value of MMF shares 
surrendered or received in a redemption or exchange, the presumption 
generally applies to the NAV (or other redemption amount) used to 
determine the consideration received in the transaction, or if the 
consideration is not based on a published NAV (or other redemption 
amount), the first NAV (or other redemption amount) published for the 
MMF shares after the transaction. If no NAV (or other redemption 
amount) is published, or if facts and circumstances indicate that the 
NAV (or other redemption amount) does not represent the fair market 
value of a share in the MMF, the fair market value is determined on the 
basis of all the facts and circumstances.
B. Aggregate Amount Received
    Under the proposed regulations, a taxpayer's net investment in an 
MMF for a computation period would equal the aggregate cost of shares 
in the MMF purchased during the computation period, minus the aggregate 
amount received during the computation period in redemption of shares 
in the MMF, subject to certain adjustments. A commenter suggested that 
the final regulations clarify that the aggregate amount received is 
based on: (i) If cash is received, the cash proceeds, (ii) if shares in 
another MMF are received, the published NAV of the shares received as 
of the end of the day on which the redemption or exchange occurs (or 
the next trading day, if the day in question is not a trading day), or 
(iii) if other non-cash property is received, the NAV of the redeemed 
or exchanged shares as of the end of the day on which the redemption or 
exchange occurs (or the next trading day if the day in question is not 
a trading day or, if the fund will

[[Page 44511]]

not publish a NAV on or after the end of the day on which the 
redemption or exchange occurs, the fund's last published NAV).
    The final regulations include provisions for determining the amount 
received for purposes of computing a taxpayer's net investment in an 
MMF for a computation period. If the consideration received in exchange 
for an MMF share consists only of cash, other MMF shares, or both, the 
amount received is the amount of any cash plus the fair market value of 
any MMF shares received. If the consideration includes any property 
other than cash or MMF shares, the amount received is determined by 
reference to the fair market value of the surrendered MMF shares.
    The same commenter recommended that a phrase in Sec.  1.446-
7(b)(5)(i)(B) of the proposed regulations, ``if the transaction is one 
in which gain or loss would be recognized,'' be clarified to indicate 
that it refers to recognition of gain or loss other than pursuant to 
the NAV method. The final regulations make this clarification.
C. Substituted Basis
    Under the proposed regulations, a taxpayer's net investment would 
increase if, during the computation period, the taxpayer acquired any 
shares in an MMF other than by purchase. In such cases, the net 
investment increases by the adjusted basis (for purposes of determining 
loss) of each such share immediately after its acquisition. The 
proposed regulations would also provide that if that adjusted basis 
would be determined by reference to the basis of one or more shares in 
an MMF that are being disposed of by the taxpayer in a transaction in 
which gain or loss is not recognized (exchanged basis), then the basis 
of each such disposed share is treated as being the fair market value 
of that share at the time of its disposition. A commenter noted that 
the proposed regulations do not address a situation in which the 
shareholder receives a transferred basis in MMF shares acquired from 
another person. The commenter suggested that, in that situation, if the 
person from whom the shareholder acquired the shares used the NAV 
method, then the adjusted basis of the acquired shares should be 
treated as the published NAV applicable to the acquisition date.
    The final regulations clarify the effect on net investment of a 
share acquired from another person with a transferred basis. Similar to 
the commenter's suggestion, the final regulations provide that, if a 
shareholder receives a transferred basis in one or more acquired MMF 
shares and the person from whom the shareholder acquired the shares 
used the NAV method, then the adjusted basis of the acquired shares 
will be their fair market value at the time of the acquisition, which 
value is presumed to be the next NAV (or other redemption amount) 
published by the MMF.

5. MMF Accounts With Shares of Mixed Character

    The proposed regulations would provide that if a taxpayer uses the 
NAV method for shares in an MMF and each of those shares otherwise 
would give rise to capital gain or loss if sold or exchanged in a 
computation period, then the gain or loss from the shares in the MMF is 
treated as capital gain or loss under the NAV method. Likewise, if each 
of the shares otherwise would give rise to ordinary gain or loss if 
sold or exchanged in a computation period, then the gain or loss is 
treated as ordinary gain or loss. If, however, the sale of all of the 
shares in the MMF would give rise to a combination of ordinary gain or 
loss and capital gain or loss if sold or exchanged in a computation 
period, then all gain or loss from the shares in the MMF is treated as 
capital gain or loss.
    A commenter noted that the proposed regulations do not explain why 
all gain or loss should be treated as capital in the case of an account 
containing MMF shares of mixed character. The commenter recommended 
that the character of gain or loss with respect to a mixed character 
account be bifurcated based on the portion of the shares that would 
generate gain or loss of each character.
    The Treasury Department and the IRS believe that it is rare for a 
shareholder to hold shares of a single MMF the disposition of which 
would produce a mix of ordinary income and capital gain. Under that 
circumstance, a taxpayer may use different accounts to preserve the 
character of the shares that would produce ordinary income and capital 
gain. The purpose of the NAV method is to provide an alternative to 
traditional accounting for taxpayers seeking simplicity. The rationale 
for offering a method solely for MMFs is that the value of MMFs 
fluctuates so little that simplicity is more important than tracking 
each individual gain or loss. A rule that bifurcates gain or loss based 
on the value of the shares in a single account, when those values may 
change during a computation period, would make the NAV method more 
complex. That additional complexity is not warranted in light of the 
rarity of the circumstance the proposed bifurcation would address and 
the ability of shareholders to prevent the treatment of all gain or 
loss as capital by using separate accounts. Therefore, the final 
regulations retain the simplifying rule for mixed-character accounts.

6. Other Requests and Comments

A. Wash Sale Rules Exemption for Stable-NAV MMFs
    Concurrently with the release of the proposed regulations, the 
Treasury Department and the IRS released Rev. Proc. 2014-45 (2014-34 
IRB 388), which provides that the wash sale rules in section 1091 will 
not be applied to redemptions of shares in floating-NAV MMFs. 
Commenters requested that the wash sale exemption, which is limited to 
floating-NAV MMFs, be extended to stable-NAV MMFs that impose liquidity 
fees.
    The final regulations permit shareholders of stable-NAV MMFs to use 
the NAV method. A shareholder who uses the NAV method would not require 
an exemption from the wash sale rules because under the NAV method, net 
gain or loss is determined for each computation period, and no gain or 
loss is determined for any particular redemption of a taxpayer's shares 
in an MMF. Without a determination of loss for a particular redemption, 
that redemption does not implicate the wash sale rules. Because 
taxpayers may use the NAV method to prevent wash sales, the Treasury 
Department and IRS are not extending the exemption in Rev. Proc. 2014-
45 to stable-NAV MMFs.
B. Other Requests
    A commenter requested that the Treasury Department and the IRS 
issue guidance regarding the tax treatment of an MMF's receipt of 
financial support from an investment adviser to raise the NAV of the 
MMF (determined without the amortized cost method or penny rounding) to 
$1.0000. In addition, the commenter requested guidance regarding the 
diversification requirements of section 817(h) for a segregated asset 
account that qualifies as, or invests in, a government MMF. On May 5, 
2016, the Treasury Department and the IRS released guidance related to 
both of these requests. See Rev. Proc. 2016-31 (2016-21 IRB 988); 
Notice 2016-32 (2016-21 IRB 878).
    The commenter also requested (and later withdrew its request) that 
the Treasury Department and the IRS issue guidance providing tax-free 
treatment for certain divisions of MMFs into retail and institutional 
MMFs. The Treasury Department and the IRS have

[[Page 44512]]

determined that this guidance does not appear essential to an orderly 
separation of different types of shareholders into different MMFs.
    The commenter also requested that the Treasury Department and the 
IRS issue guidance setting forth the proper tax treatment by an MMF of 
liquidity fees that the MMF imposes. In addition, the commenter 
requested guidance providing that, if an MMF imposes liquidity fees and 
subsequently distributes to shareholders amounts that correspond to 
amounts that the MMF retained as liquidity fees, the MMF will be deemed 
to have sufficient earnings and profits to treat the distribution as a 
dividend. These requests do not relate directly to the NAV method or to 
the information reporting provision in the proposed regulations and so 
are not addressed in these final regulations. The Treasury Department 
and the IRS may consider guidance on these questions in the future.

7. Accounting Method Changes

    As under the proposed regulations, a taxpayer may adopt the NAV 
method for shares in a floating-NAV MMF by use of the method in the 
Federal income tax return for the first taxable year in which both (1) 
the taxpayer holds shares in that MMF and (2) that MMF is a floating-
NAV MMF.
    The final regulations provide that a taxpayer seeking to change to 
or from the NAV method must secure the consent of the Commissioner in 
accordance with Sec.  1.446-1(e). Simultaneously with the publication 
of these regulations, the Treasury Department and the IRS are issuing 
Rev. Proc. 2016-39 (2016-30 IRB), which provides the procedures by 
which a taxpayer may obtain automatic consent to change to or from the 
NAV method for shares in an MMF.
    In certain circumstances, Rev. Proc. 2016-39 permits taxpayers to 
change to the NAV method on a federal tax return without filing a Form 
3115, ``Application for Change in Accounting Method.'' This simplified 
procedure applies to a taxpayer that holds shares in a stable-NAV MMF 
and wants to change to the NAV method for a taxable year if (1) the 
taxpayer has not used the NAV method for shares in the MMF for any 
taxable year prior to the year of change, and (2) prior to the 
beginning of the year of change, either (a) the taxpayer's basis in 
each share of the MMF has been at all times equal to the MMF's target 
share price, or (b) the taxpayer has not realized any gain or loss with 
respect to shares in the MMF.
    For certain other changes, Rev. Proc. 2016-39 provides automatic 
consent procedures that require a short Form 3115. For example, these 
automatic consent procedures apply to a taxpayer that (1) has adopted a 
realization method for shares in a floating-NAV MMF and wants to change 
to the NAV method for shares in that MMF, or (2) has adopted the NAV 
method for shares in a floating-NAV MMF and wants to change to a 
permissible realization method for shares in that MMF.

Effective/Applicability Dates

    The final regulations concerning the NAV method apply to taxable 
years ending on or after July 8, 2016. For taxable years ending on or 
after July 28, 2014, and beginning before July 8, 2016, however, 
shareholders of MMFs may rely either on the rules concerning the NAV 
method in the proposed regulations or on the final regulations.
    The final regulations concerning information reporting apply to 
sales of shares in calendar years beginning on or after July 8, 2016. 
Taxpayers and brokers (as defined in Sec.  1.6045-1(a)(1)), however, 
may rely on the rules in the regulations concerning information 
reporting for sales of shares in calendar years beginning before July 
8, 2016.

Statement of Availability for IRS Documents

    IRS Revenue Procedures cited in this preamble are published in the 
Internal Revenue Bulletin and are available from the Superintendent of 
Documents, U.S. Government Printing Office, Washington, DC 20402, or by 
visiting the IRS Web site at http://www.irs.gov.

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory impact assessment is 
not required. It has also been determined that section 553(b) of the 
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to 
these regulations, and because the regulations do not impose a 
collection of information on small entities, the Regulatory Flexibility 
Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of 
the Code, the proposed regulations preceding these final regulations 
were submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact on small businesses. No 
comments were received.

Drafting Information

    The principal author of the final regulations is Grace Cho, IRS 
Office of the Associate Chief Counsel (Financial Institutions and 
Products). However, other personnel from the Treasury Department and 
the IRS participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding an 
entry in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.446-7 also issued under 26 U.S.C. 446.


0
Par. 2. Section 1.446-7 is added to read as follows:


Sec.  1.446-7  Net asset value method for certain money market fund 
shares.

    (a) In general. This section provides a permissible method of 
accounting (the net asset value method, or NAV method) for gain or loss 
on shares in a money market fund (or MMF).
    (b) Definitions. For purposes of this section--
    (1) Computation period. Computation periods are the periods (of 
either equal or varying length) that a taxpayer selects for computing 
gain and loss under the NAV method for shares in an MMF. Computation 
periods must possess all of the following attributes:
    (i) Every day during the taxable year falls within one, and only 
one, computation period;
    (ii) Each computation period contains days from only one taxable 
year; and
    (iii) If the taxpayer is a regulated investment company (RIC) that 
is not described in section 4982(f)--
    (A) The same computation periods are used for purposes of both 
income tax accounting under chapter 1 and excise tax computations under 
section 4982; and
    (B) The requirements in paragraphs (b)(1)(i) and (ii) of this 
section are also satisfied if applied by substituting the RIC's section 
4982 period for the RIC's taxable year.
    (2) Ending value. The ending value of a taxpayer's shares in an MMF 
for a computation period is the aggregate fair market value of the 
taxpayer's shares at the end of that computation period.
    (3) Fair market value. The fair market value of a share in an MMF 
is determined as follows:

[[Page 44513]]

    (i) Presumption based on applicable published redemption amount. 
For purposes of this section, the fair market value of a share in an 
MMF is presumed to be the applicable published redemption amount for 
the share.
    (ii) Published redemption amount. The published redemption amount 
for a share in an MMF is the published amount for which the MMF would 
redeem the share (usually, the net asset value per share (NAV)), taking 
into account any corrections and not taking into account any liquidity 
fee described in Rule 2a-7(c)(2) under the Investment Company Act of 
1940 (17 CFR 270.2a-7(c)(2)).
    (iii) Applicable published redemption amount. The applicable 
published redemption amount is--
    (A) For purposes of determining the ending value of a taxpayer's 
shares in an MMF for a computation period under paragraph (b)(2) of 
this section, the last published redemption amount on the last day of 
that computation period;
    (B) For purposes of determining the value of MMF shares received in 
a redemption or exchange described in paragraph (b)(5)(ii)(A) of this 
section, the published redemption amount for such MMF shares used to 
determine the consideration received in the redemption or exchange, or 
if the consideration received is not based on a published redemption 
amount, the first published redemption amount for such MMF shares after 
the redemption or exchange;
    (C) For purposes of determining the amount received in a redemption 
or exchange described in paragraph (b)(5)(ii)(B) of this section in 
which the consideration received is based on a published redemption 
amount for the redeemed shares, that published redemption amount; and
    (D) For purposes of determining the amount received in an exchange 
described in paragraph (b)(5)(ii)(B) of this section that is not 
described in paragraph (b)(3)(iii)(C) of this section, or the amount of 
any adjustment resulting from a disposition transaction described in 
paragraph (b)(5)(iii) of this section, the first published redemption 
amount for the exchanged or disposed of MMF shares after the exchange 
or other transaction.
    (iv) Facts and circumstances determination. If there is no 
applicable published redemption amount or if circumstances indicate 
that the amount does not represent the fair market value of a share in 
the MMF, the fair market value is determined on the basis of all of the 
facts and circumstances.
    (4) Money market fund (or MMF). An MMF is a regulated investment 
company that is permitted to hold itself out to investors as a money 
market fund under Rule 2a-7 under the Investment Company Act of 1940 
(17 CFR 270.2a-7). See paragraph (c)(5) of this section for the 
treatment of shares in a single MMF held in more than one account.
    (5) Net investment--(i) In general. The net investment in an MMF 
for a computation period may be a positive amount, a negative amount, 
or zero. Except as provided in paragraph (b)(5)(iii) of this section, 
the net investment is equal to--
    (A) The aggregate cost of shares in the MMF purchased during the 
computation period (including purchases through reinvestment of 
dividends); minus
    (B) The aggregate amount received during the computation period in 
redemption of (or otherwise in exchange for) shares in the MMF in 
transactions in which gain or loss would be recognized if the taxpayer 
did not apply the NAV method to the shares.
    (ii) Aggregate amount received. For purposes of paragraph 
(b)(5)(i)(B) of this section, the amount received in a redemption or 
exchange of an MMF share is--
    (A) If no property other than cash and shares in one or more other 
MMFs is received, the amount of any cash plus the fair market value of 
any MMF shares received; or
    (B) If any property other than cash or shares in one or more other 
MMFs is received, the fair market value of the redeemed MMF share.
    (iii) Adjustments--(A) Dispositions in which gain or loss is not 
recognized. If, during the computation period, any shares in an MMF are 
disposed of in transactions in which gain or loss would not be 
recognized if the taxpayer did not apply the NAV method to the shares, 
the net investment in the MMF for the computation period is decreased 
by the fair market value of each such share at the time of its 
disposition.
    (B) Acquisitions other than by purchase. If, during the computation 
period, any shares in an MMF are acquired other than by purchase, the 
net investment in the MMF for the computation period is increased by 
the adjusted basis (for purposes of determining loss) of each such 
share immediately after its acquisition. If the adjusted basis of an 
acquired share would be determined by reference to the basis of a share 
or shares in an MMF that are being disposed of by the taxpayer in a 
transaction that is governed by paragraph (b)(5)(iii)(A) of this 
section, then the adjusted basis of each such disposed share is treated 
for purposes of this section as being the fair market value of that 
share at the time of its disposition. If the adjusted basis of an 
acquired share would be determined by reference to the basis of that 
share in the hands of the person from whom the share is acquired and 
that person was applying the NAV method to the share at the time of the 
transaction, then the adjusted basis of the share in the hands of the 
person from whom the share is acquired is treated for purposes of this 
section as being the fair market value of that share at the time of the 
transaction.
    (6) Section 4982 period. If a taxpayer using the NAV method is a 
RIC to which section 4982 applies, the section 4982 period is the one-
year period with respect to which gain or loss is determined for 
purposes of section 4982(e)(2) and (e)(6). The preceding sentence is 
applied taking into account the application of section 4982(e)(4). See 
paragraph (c)(8) of this section regarding the application of section 
4982(e)(6).
    (7) Starting basis. The starting basis of a taxpayer's shares in an 
MMF for a computation period is--
    (i) Except as provided in paragraph (b)(7)(ii) of this section, the 
ending value of the taxpayer's shares in the MMF for the immediately 
preceding computation period; or
    (ii) For the first computation period in a taxable year, if the 
taxpayer did not use the NAV method for shares in the MMF for the 
immediately preceding taxable year, the aggregate adjusted basis of the 
taxpayer's shares in the MMF at the end of the immediately preceding 
taxable year.
    (c) NAV method--(1) Scope. A taxpayer may use the NAV method 
described in this section to determine the gain or loss for a taxable 
year on the taxpayer's shares in an MMF. A taxpayer may have different 
methods of accounting, different computation periods, and gains or 
losses of differing character, for its shares in different MMFs. See 
paragraph (c)(5) of this section for the treatment of shares in a 
single MMF held in more than one account. See paragraph (c)(6) of this 
section for rules applicable to RICs to which section 4982 applies. See 
paragraph (c)(8) of this section for rules applicable to accounting 
method changes.
    (2) Net gain or loss for a taxable year--(i) Determination for each 
computation period. Subject to any adjustment under paragraph 
(c)(2)(ii) of this section, the net gain or loss for each computation 
period with respect to the 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

[[Page 44514]]

computation period. If the computation produces a result that is 
greater than zero, the taxpayer has a gain for the computation period 
with respect to the shares in the MMF; if the computation produces a 
result that is less than zero, the taxpayer has a loss for the 
computation period with respect to the shares in the MMF; and if the 
computation produces a result that is equal to zero, the taxpayer has 
no gain or loss for the computation period with respect to the shares 
in the MMF.
    (ii) Adjustment of gain or loss to reflect any basis adjustments. 
If, during a computation period, there is any downward (or upward) 
adjustment to the taxpayer's basis in the shares in the MMF under any 
provision of internal revenue law, then the net gain or loss for the 
computation period on shares in the MMF determined under paragraph 
(c)(2)(i) of this section is increased (or decreased) by the amount of 
the adjustment.
    (iii) Timing of gains and losses. Gain or loss determined under the 
NAV method with respect to a taxpayer's shares in an MMF during a 
computation period is treated as arising on the last day of the 
computation period.
    (iv) Determination of net gain or loss for each taxable year. The 
taxpayer's net gain or loss for a taxable 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 computation periods) that comprise the taxable 
year.
    (3) Character--(i) In the case of a taxpayer that applies the NAV 
method to shares in an MMF, the gain or loss with respect to those 
shares for a computation period is treated as gain or loss from a sale 
or exchange of a capital asset provided the sale or exchange of one or 
more of those shares during the computation period would give rise to 
capital gain or loss if the taxpayer did not apply the NAV method to 
the shares.
    (ii) In the case of a taxpayer that applies the NAV method to 
shares in an MMF, the gain or loss with respect to those shares for a 
computation period is treated as ordinary gain or loss provided the 
sale or exchange of every one of those shares during the computation 
period would give rise to ordinary gain or loss if the taxpayer did not 
apply the NAV method to the shares.
    (iii) See paragraph (c)(5) of this section for the treatment of 
shares in a single MMF held in more than one account.
    (4) Holding period. Capital gains and losses determined under the 
NAV method are treated as short-term capital gains and losses.
    (5) More than one account. If a taxpayer holds shares in an MMF 
through more than one account, the taxpayer must treat its holdings in 
each account as a separate MMF for purposes of this section. A taxpayer 
therefore may have different methods of accounting, different 
computation periods, and gains or losses of differing character, for 
its shares of a single MMF held in different accounts.
    (6) Consistency requirement for MMF shareholders that are RICs. If 
the taxpayer is a RIC that is not described in section 4982(f) (and 
therefore is subject to the section 4982 excise tax), then, for each 
MMF, the taxpayer must use the NAV method for both income tax and 
excise tax computations or for neither computation. See paragraph 
(c)(5) of this section for the treatment of shares in a single MMF held 
in more than one account. See paragraph (c)(8)(ii) of this section for 
changes to or from the NAV method by a RIC.
    (7) Treatment of ordinary gains and losses under section 
4982(e)(6). Under section 4982(e)(6)(B), this section is a specified 
mark to market provision, and therefore any ordinary gains and losses 
determined under the NAV method are governed by section 4982(e)(6)(A).
    (8) Accounting method changes--(i) In general. A change to or from 
the NAV method is a change in method of accounting to which the 
provisions of section 446 and the accompanying regulations apply. A 
taxpayer seeking to change to or from the NAV method must secure the 
consent of the Commissioner in accordance with Sec.  1.446-1(e) and 
follow the administrative procedures issued under Sec.  1.446-
1(e)(3)(ii) for obtaining the Commissioner's consent to change the 
taxpayer's accounting method. Any such change will be made on a cut-off 
basis. Because there will be no duplication or omission of amounts as a 
result of such a change to or from the NAV method, no adjustment under 
section 481(a) will be required or permitted.
    (ii) RICs--(A) In general. A RIC that is subject to the excise tax 
under section 4982 and that changes to or from the NAV method for its 
shares in an MMF for income tax purposes must apply the new method for 
excise tax purposes starting with the first day of the RIC's income tax 
year of change. If that first day is not the first day of the RIC's 
section 4982 period that ends in or with the RIC's income tax year, 
then solely for purposes of applying the NAV method to compute the 
RIC's required distribution for the calendar year that ends with or 
within the RIC's income tax year of change, the section 4982 period is 
bifurcated into two portions, each of which is treated as a separate 
taxable year. The first portion begins on the first day of the section 
4982 period and ends on the last day of the RIC's income tax year that 
precedes the year of change. The second portion begins on the first day 
of the income tax year of change and ends on the last day of the 
section 4982 period.
    (B) Example. If a RIC that holds MMF shares as capital assets 
changes from a realization method to the NAV method for its income tax 
year ending January 31, 2019, the section 4982 period is bifurcated 
into two portions that are treated as separate taxable years solely for 
purposes of applying this section. For the portion starting on November 
1, 2017, and ending on January 31, 2018, the RIC applies its 
realization method for excise tax purposes. For the portion starting on 
February 1, 2018, and ending on October 31, 2018, the RIC applies the 
NAV method for excise tax purposes, treating February 1, 2018, as the 
first day of the RIC's tax year for purposes of paragraphs (b)(1) and 
(6) of this section. The RIC's net gain or loss for this later portion 
is determined under paragraph (c)(2)(iii) of this section. This net 
gain or loss and any gains and losses for the earlier portion 
determined under the realization method are taken into account in 
determining the RIC's capital gain net income for the full one-year 
period described in section 4982(b)(1)(B).
    (d) Example. The provisions of this section may be illustrated by 
the following example:

    Example.  (i) Fund is an MMF. Shareholder is a person whose 
taxable year is the calendar year. On January 1 of Year 1, 
Shareholder owns 5,000,000 shares in Fund with an adjusted basis of 
$5,000,000.00. The price of Fund shares has not varied from $1.00 
from the date Shareholder acquired the shares through January 1 of 
Year 1. During that period, Shareholder has engaged in multiple 
purchases and redemptions of Fund shares, but Shareholder has 
reported no gains or losses with respect to the shares because 
Shareholder realized an amount in each redemption equal to 
Shareholder's basis in the redeemed shares. During Year 1, the price 
of Fund shares begins to float. During Year 1, Shareholder receives 
$32,158.23 in taxable dividends from Fund and makes 120 purchases of 
additional shares in Fund (including purchases through the 
reinvestment of those dividends) totaling $1,253,256.37 and 28 
redemptions totaling $1,124,591.71. The fair market value of 
Shareholder's shares in Fund at the end of Year 1 is $5,129,750.00. 
All of Shareholder's shares in Fund are held in a single account and 
as capital assets. There is no adjustment to the basis in 
Shareholder's shares in Fund under any provision of internal revenue 
law during Year 1.
    (ii) Prior to Year 1, Shareholder has had no gains or losses to 
report with respect to the

[[Page 44515]]

Fund shares under a realization method and no changes in fair market 
value that would have been reported under the NAV method. Therefore, 
Shareholder may use the NAV method for the shares in Fund for Year 
1. Shareholder uses the NAV method for the shares with its taxable 
year as the computation period. Shareholder's net investment in Fund 
for Year 1 equals $128,664.66 (the $1,253,256.37 in purchases, minus 
the $1,124,591.71 in redemptions). Shareholder's Year 1 gain 
therefore is $1,085.34, which is the ending value of Shareholder's 
shares ($5,129,750.00), minus the starting basis of Shareholder's 
shares ($5,000,000.00), minus Shareholder's net investment in the 
fund for the taxable year ($128,664.66). The gain of $1,085.34 is 
treated as short-term capital gain. Shareholder's starting basis for 
Year 2 is $5,129,750.00. Shareholder also must include the 
$32,158.23 in dividends in its income for Year 1 in the same manner 
as if Shareholder did not use the NAV method.
    (iii) If Shareholder had instead adopted the calendar month as 
its computation period, it would have used the NAV method for every 
month of Year 1, even though prices of Fund shares may have been 
fixed for some months.

    (e) Effective/applicability date. Except as provided in the 
following sentence, this section applies to taxable years ending on or 
after July 8, 2016. For taxable years ending on or after July 28, 2014, 
and beginning before July 8, 2016, however, shareholders of MMFs may 
rely either on this section or on Sec.  1.446-7 of the 2014 proposed 
regulations REG-107012-14 (79 FR 43694).

0
Par. 3. Section 1.6045-1 is amended by revising paragraph (c)(3)(vi) to 
read as follows:


Sec.  1.6045-1  Returns of information of brokers and barter exchanges.

* * * * *
    (c) * * *
    (3) * * *
    (vi) Money market funds--(A) In general. No return of information 
is required with respect to a sale of shares in a regulated investment 
company that is permitted to hold itself out to investors as a money 
market fund under Rule 2a-7 under the Investment Company Act of 1940 
(17 CFR 270.2a-7).
    (B) Effective/applicability date. Paragraph (c)(3)(vi)(A) of this 
section applies to sales of shares in calendar years beginning on or 
after July 8, 2016. Taxpayers and brokers (as defined in Sec.  1.6045-
1(a)(1)), however, may rely on paragraph (c)(3)(vi)(A) of this section 
for sales of shares in calendar years beginning before July 8, 2016.
* * * * *

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: June 15, 2016.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2016-16149 Filed 7-7-16; 8:45 am]
 BILLING CODE 4830-01-P