IRS Rules Murky on Options Sales
QUESTION: You recently discussed how the Internal Revenue Service depends on Form 1099 reports from stockbrokers to keep track of stock sales by taxpayers. My broker does file those forms for my stock sales, but he does not report my dealings in stock options. Does this mean that the IRS has no record of these trades?--G. B.
ANSWER: Yes, so it would appear. But just because the IRS doesn’t require brokers to report options trades, this doesn’t relieve you of your responsibility to report these transactions on your income tax return.
According to our experts, the issue you raise is one of the many murky areas--one Wall Street attorney called it a “quirky quagmire”--in the tax codes that has defied all attempts at clarification. And until the IRS issues new guidelines, most brokerage houses are not reporting stock option sales.
Here’s some background: Internal Revenue Code Section 60.45 and accompanying regulations 1.6045-1(a) 9, do not include options among the types of assets whose sale must be reported to the IRS. The reason, brokers say, is that the IRS recognizes that it is often next to impossible to isolate the profits and losses generated by a single options trade since it is often made as part of another transaction.
Further, since all reporting is now handled by computer, any reporting system would require an easily completed form. The problem is that such a form would probably not accommodate the complex transactions that option sales usually involve.
“It’s difficult to come up with workable reporting systems,” says one securities attorney. But another attorney jokes: “The IRS is smart enough to know that no one ever really makes any money on options.”
The IRS says only that its current regulations do not cover option trades and that, while it is always possible that the agency will issue new regulations, no revisions in this area are in the works.
Q: I think I have lost two Series EE bonds. How do I find out for sure? Can they be replaced?--J. C. C.
A: Your local branch of the Federal Reserve Bank can help you. The tracing service, which covers all Series E, EE and HH bonds, is free and takes about a month.
The process is easiest if you have the serial numbers of the bonds that you believe are lost. You probably do not have these serial numbers. Don’t worry. Help is still available.
You must provide the name and address of the bondholder, the Social Security number under which the bonds are held, the denomination of the bonds and, if possible, the month and year of their issuance. Researchers will trace the bonds by the Social Security number of the holder and provide you with the serial numbers of the bonds that have already been redeemed and those still outstanding. You may also ask for photocopies of all bonds issued to you.
To get duplicate bonds, ask your local Federal Reserve Bank for a “lost bond claim” form. Complete it and return it to the enclosed address. You will shortly receive a duplicate.
In Los Angeles, the Federal Reserve Bank is located at 950 S. Grand Ave. Address all correspondence to the bank to P.O. Box 2077, Terminal Annex, Los Angeles, Calif. 90051. Savings bond inquires should be directed to the “savings” office.
Q: I am 56 years old and am taking early retirement from my job. If I receive a lump-sum distribution from my pension plan and immediately roll it over into an individual retirement account, may I immediately begin drawing an annual disbursement without penalty, just as if I were age 59 1/2?--W. C.
A: Yes, you may. The Internal Revenue Service will waive the 10% early withdrawal penalty from IRAs under one circumstance: The amount of the disbursements you take must be calculated according to the life expectancy tables for your age--56 in your case--not that of a 59 1/2-year-old, the age at which withdrawals are otherwise allowed to begin.
According to the latest tables, the life expectancy of a 56-year-old person is 27.7 years; for a 59 1/2-year-old, it’s 25 years. To calculate your annual disbursement, divide the total balance in all of your IRA accounts by your life expectancy--or, if you want, your life expectancy and that of the beneficiary, or beneficiaries, of your IRA accounts. Once you reach age 59 1/2, you may withdraw more funds from your IRA accounts without penalty--but never less than the life expectancy amount.
Q: I was forced to close my 10-year-old dry cleaning and Laundromat business because the building where I was renting was severely damaged during the October, 1987, earthquake in Los Angeles. The building is still uninhabitable, but it may eventually be brought up to code. My equipment was not damaged by the quake, but best estimates are that the boiler will not function after such a long period of non-use. The rest of my equipment is so old that it has no sale value. I have virtually abandoned my business and have had to find other employment. Is there anything I can do on my taxes?--J. T. W.
A: Our experts studied the facts you provided and concluded that you have little, if any, recourse with the Internal Revenue Service.
To begin with, your ability to deduct losses stemming from the earthquake is limited to any actual physical losses you suffered, such as damaged or destroyed equipment. And your deductions are further limited by the extent to which you have already depreciated this equipment. By your own account, the equipment was not actually damaged. Further, even it it had been damaged, given its age, you may already have fully depreciated it.
You might think that you would be allowed to claim the loss of the “goodwill”--the value of a business above and beyond its actual assets--that your business built up over the years. However, unless you bought the business from someone else and actually paid for this goodwill, the IRS does not recognize it as an asset that can be damaged.
By the way, if you did have deductable losses, the time to claim them was last year. Now you would have to file an amended return for 1987, the year in which the earthquake occurred.
Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.
