Fiscal-Year-Taxpayer Reporting Requirements for JGTRRA Capital Gain Changes

Ann. 2003-56 apprises certain entities with fiscal years beginning in 2002 and ending after May 5, 2003, of the additional reporting requirements mandated by the Jobs and Growth Tax Relief Reconciliation Act of 2003s (JGTRRAs) changes in the capital gain tax rates.

Background

The JGTRRA amended Sec. 1(h) to change the capital gain tax rates; thus, the reporting requirements for certain 2002 forms filed by entities with 20022003 fiscal years ending after May 5, 2003, have changed, as follows:

• Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains, for regulated investment companies (RICs) and real estate investment trusts (REITs); and

• Schedules K and K-1 for partnerships and S corporations, and Schedule K-1 for estates.

In addition, the tax computation using maximum capital gain rates (for both regular and alternative minimum tax (AMT)) affects individuals and estates with 20022003 fiscal years ending after May 5, 2003. Dividends received in a tax year beginning in 2002 and ending in 2003 are not qualified dividends subject to capital gain rates, even if  received in 2003.

Thus, individuals and estates with 20022003 fiscal years cannot have any qualified dividends for that tax year. Partnerships, S corporations and estates with 20022003 fiscal years have no qualified dividends to pass through to their partners, shareholders or beneficiaries, respectively.

Form 2439

RICs and REITs filing 2002 Form 2439 for fiscal years ending after May 5, 2003, must provide additional information with their notices to shareholders. Such notification includes providing shareholders with the amount of post-May 5, 2003 undistributed long-term capital gains and indicating that this amount must be reported on Schedule D (Form 1040 or 1041, U.S. Income Tax Return for Estates and Trusts). Ann. 2003-56 states that this information should not be reported on 2002 Forms 2439 filed with the Service. In addition, the amount reported as qualified five-year gain must be computed by taking into account only the pre-May 6, 2003 portion of the tax year.

Fiscal-Year Estates and Individuals

Estates and individuals with 20022003 fiscal years ending after May 5, 2003, and affected by the new capital gain tax rates, must attach to their 2002 Form 1040 or 1041 a computation similar to that shown in Part IV of 2003 Schedule D (Form 1040 or 1041). These estates and individuals may use 2003 Schedule D to figure their 2002 tax if they modify the computation to reflect the use of the applicable 2002 tax rate schedules or tax table. In addition, the new capital gain rates also affect the computation of AMT. The above-mentioned filers should attach a computation similar to that shown in Part IV of 2003 Form 6251, Alternative Minimum TaxIndividuals. Further, estates must continue to report each beneficiarys share of the net short-term and net long-term capital gain for the entire tax year on Schedule K-1.

Forms 1065 and 1120S

Partnerships and S corporations completing 2002 Forms 1065, U.S. Return of Partnership Income, and 1120S, U.S. Income Tax Return for an S Corporation, must report the following information for the portion of the tax year after May 5, 2003:

• Net short-term capital gain or loss;

• Net long-term capital gain or loss; and

• Net Sec. 1231 gain or loss.

In addition, such partnerships and S corporations must continue to report qualified five-year gain, but only for the portion of the tax year before May 6, 2003. They must report the following information for the entire tax year:

• The net short-term capital gain or loss, on line 4d of Schedules K and K-1 (Form 1065 or 1120S);

• The net long-term capital gain or loss, on line 4e(1) of Schedules K and K-1 (Form 1065 or 1120S);

• The 28% rate gain or loss, on line 4e(2) of Schedules K and K-1 (Form 1065 or 1120S);

• The net gain or loss under Sec. 1231 (other than due to casualty or theft), on line 6 of Schedules K and K-1 of Form 1065 (line 5 of Schedules K and K-1 of Form 1120S); and

• Other income, on line 7 of Schedules K and K-1 of Form 1065 (line 6 of Schedules K and K-1 of Form 1120S).

Conclusion

The announcement sets forth additional requirements that certain fiscal-year taxpayers must meet to properly take into account the JGTRRA changes to the capital gain tax rates. The general effective date of these changes is tax years ending after May 5, 2003. Because certain forms will not be available for the 2002 tax year, fiscal-year taxpayers will have to adapt the 2003 forms. The IRSs website (www.irs.gov) should be monitored regularly for the issuance of new forms.

From Marc Levy, Washington, DC