Form 1099-B required for cash settlement but not physical delivery

Plain-English summary

A dealer entered into forward contracts under which customers paid for the right to receive property later. A customer could take delivery of the property originally set aside, take delivery of substituted property, or receive cash equal to the property’s value when the contract expired. The IRS ruled that the first two outcomes did not involve a customer disposition for cash and therefore were not sales reportable on Form 1099-B under section 6045. Cash settlement did involve a disposition of the forward contract for cash, so the dealer had to report that sale on Form 1099-B. The ruling approved the dealer’s requested treatment for all three scenarios.

Ruling snapshot

• Question: When must a dealer report settlement of customer forward contracts on Form 1099-B?
• Outcome: approved, no reporting for physical delivery in scenarios 1 and 2, but reporting required for cash settlement in scenario 3
• Key authorities: IRC § 6045; Treas. Reg. § 1.6045-1(a)(9), (a)(10), and (c)(2)

Full text (IRS public release)

Internal Revenue Service                                        Department of the Treasury
                                                                Washington, DC 20224

Number: 202004009                                               Third Party Communication: None
Release Date: 1/24/2020                                         Date of Communication: Not Applicable
Index Number: 6045.00-00
                                                                Person To Contact:
-----------------------------------------------------           --------------------, ID No. ----------------
---------------------------                                     Telephone Number:
--------------------------                                      --------------------
                                                                Refer Reply To:
In Re: ---------------------------------------------------- CC:PA:02
-----                                                       PLR-126637-18
                                                                Date:
                                                                July 24, 2019




Legend

Entity = -----------------------------------------------------

Services =-------------------------

Property = ------------------------------------------------------------------------------------------------------
           ------------------------------------------------------------------------------------------------------
           -------------------------------------------------------------------

Customer = ----------------------------------------------------------------------------------------------------
           --------------

Dear -----------------:

This letter responds to the letter dated August 30, 2018, submitted on behalf of Entity,
requesting rulings regarding Entity’s obligation to report transactions under § 6045 of
the Internal Revenue Code and Treasury Regulations § 1.6045-1 on Forms 1099-B,
Proceeds From Broker and Barter Exchange Transactions, in three different scenarios.
For the reasons set forth below, we conclude that Entity is not obligated to report in
scenarios 1 and 2, and is obligated to report in scenario 3.

                                                        Facts

Entity is a dealer that provides Service for its Customers with respect to certain
Property. Entity enters into a forward contract, under which Customer pays Entity for
the right to acquire Property in the future. Entity sets aside and stores Property for
future delivery to Customer. Three scenarios may occur with regard to these forward
contracts:
PLR-126637-18                                 2

    1. At the contract’s expiration, Customer takes delivery of the Property that Entity
      set aside for Customer;
    2. Prior to the contract’s expiration, pursuant to the contract, Entity substitutes the
      Property that was set aside for Customer with different Property that Entity sets
      aside for Customer. At the contract’s expiration, Customer takes delivery of the
      second Property that Entity set aside for Customer;
    3. At the contract’s expiration, Customer receives United States Dollars equal to the
      value of the Property.

Entity requested rulings that under § 6045 and Treas. Reg. § 1.6045-1, it is not required
to report the transactions in scenarios 1 and 2 on Forms 1099-B, and it is required to
report the transactions in scenario 3. .

                                     Law & Analysis

Under § 6045 and Treas. Reg. § 1.6045-1(c)(2), brokers are required to make a return
of information for each sale by a customer of the broker if, in the ordinary course of a
trade or business in which the broker stands ready to effect sales to be made by others,
the broker effects the sale. This reporting is done on Forms 1099-B. Under Treas.
Reg. § 1.6045-1(a)(9), for the purposes of reporting under section 6045, a sale is
defined as a disposition, but only to the extent the disposition is conducted for cash.

In scenarios 1 and 2 above, at the time of the contract’s expiration, there is no
disposition by the customer for cash, and thus there is no sale within the meaning of
§ 6045 and Treas. Reg. § 1.6045-1(c)(2). Therefore, Entity is not required to report the
transactions described in these two scenarios on Forms 1099-B. In scenario 3, at the
time of the contract’s expiration, there is a disposition of the forward contract for cash,
which is considered a sale under Treas. Reg. § 1.6045-1(a)(9). Entity effects the
customer’s sale within the meaning of Treas. Reg. § 1.6045-1(a)(10). Therefore, Entity
is required to report the sales that occur under scenario 3 on Forms 1099-B.

                                       Conclusion

Based solely on the information provided and representations made, we conclude that
Entity is not required to file Forms 1099-B to report customers’ sales in scenarios 1 and
2, above, and is required to file Forms 1099-B to report customers’ sales in scenario 3,
above.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.
PLR-126637-18                                  3


In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

The rulings contained in this letter are based upon information and representations
submitted by Entity and accompanied by a penalty of perjury statement executed by an
appropriate party. While this office has not verified any of the material submitted in
support of the request for rulings, it is subject to verification on examination.

                                       Sincerely,




                                       Adrienne Griffin
                                       Branch Chief, Branch 2
                                       (Procedure & Administration)



Enclosures: (1) Copy of letter for section 6110 purposes
            (2) Notice of Intention to Disclose, Notice 437