Forward contracts require Form 1099-B only when cash-settled

Plain-English summary

This ruling modifies and supersedes an earlier letter concerning a broker's reporting duties for customer forward contracts involving specified property. If the customer takes delivery of the original property at closing, no Form 1099-B is required. The same result applies if the broker substitutes different property before closing and the customer then takes delivery. If the contract instead closes with the customer receiving cash equal to the property's value, the forward contract is disposed of for cash and the broker must report the sale on Form 1099-B. The modifications also correct terminology in the earlier letter without changing those three reporting outcomes.

Ruling snapshot

• Question: Which physical-delivery and cash-settlement forward-contract outcomes require broker reporting?
• Outcome: Mixed: no reporting for physical delivery, but Form 1099-B is required for cash settlement.
• 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: 202118005 Third Party Communication: None
Release Date: 5/7/2021 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-118041-20
Date:
February 05, 2021

Legend

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

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

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

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

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

This letter is being sent to modify our private letter ruling (202004009) dated July
24, 2019 (the PLR). We are modifying the PLR to amend certain language used
under the headings “Facts” and “Law & Analysis.” The PLR contains a ruling that
Entity is not obligated to report in scenarios 1 and 2 and is obligated to report in
scenario 3. This ruling modifies and supersedes the PLR.

We make the following modifications to the PLR:

In the first sentence under the heading “Facts” – the term “dealer” is changed to
“broker” and the word “Service” is changed to “Services.”

In the numbered paragraphs under the heading “Facts” – the phrase “contract’s
expiration” is changed to “contract’s closing transaction” each time it is used.

After the last sentence under the heading “Facts” – an extra period is deleted.
PLR-118041-20 2

In the second paragraph under the heading “Law & Analysis” – the phrase
“contract’s expiration” is changed to “contracts closing transaction” both times it is
used.

The PLR, as modified, reads as follows:

                                      Facts

Entity is a broker that provides Services 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:

1. At the contract’s closing transaction, Customer takes delivery of the Property that
   Entity set aside for Customer;
2. Prior to the contract’s closing transaction, 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 closing transaction,
   Customer takes delivery of the second Property that Entity set aside for
   Customer;
3. At the contract’s closing transaction, 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 closing transaction, 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 closing transaction, 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
PLR-118041-20 3

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.

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

cc: