Beginning January 1, 2011, corporate transactions that affect shareholders’ stock basis are subject to new tax reporting rules. Generally, these new rules require public and private issuers to file an information return with the IRS within 45 days after the transaction, or sooner at year end. Issuers must also provide the information to shareholders. However, as explained in the last paragraph below, the IRS this week issued transitional penalty relief from the new filing requirements.
These new rules apply both to domestic and foreign corporations (and other entities treated as corporations for U.S. tax purposes) and to public or private companies. Specifically, they apply to issuers that engage in transactions such as stock splits, mergers, acquisitions, recapitalizations, and redemptions and distributions (other than those treated as dividends for income tax purposes) affecting tax basis in certain securities. For transactions occurring in 2011, the new rules apply only to securities that are treated as stock (including American Depositary Receipts).
The rules generally require issuers to file a form with the IRS that includes, among other things, the CUSIP number or other security identifier, the contact details of the issuer, the type or nature of the corporate action, the quantitative effect of the corporate action on the basis of the stock in the hands of a U.S. taxpayer as an adjustment per share or as a percentage of the old tax basis, together with a description of the calculation, the section of the Internal Revenue Code upon which the tax treatment is based, any other information necessary to implement the adjustment including the reportable tax year, and whether any resulting loss may be recognized.
The return must be filed on or before the 45th day following the corporate action or, if earlier, by January 15 of the year following the tax year of the corporate action. In many instances, the information return will be due before the issuer would otherwise have prepared its corporate income tax return for the year in which the corporate action occurred and determined the “quantitative effect” of such action. Corrected reporting is required whenever an issuer determines that the previously reported “quantitative effect” was incorrect.
Issuers are also generally required to furnish a written statement with the same information to each holder of stock or to the holder’s nominee on or before January 15 of the year following the calendar year in which the corporate action occurs.
An issuer is not required to file a return with the IRS or furnish information statements to its shareholders if by the due date otherwise required for filing the return, the issuer posts the return with the required information on its primary public website and keeps the return accessible on its website for 10 years. An issuer also is not required to file a return with the IRS if it reasonably determines that all of the holders of the security are exempt recipients, such as corporations, tax-exempt organizations and certain foreign holders. Nor is an issuer required to furnish an information statement to a shareholder or its nominee if the issuer determines that the shareholder is an exempt recipient.
Failure to comply with these new requirements is generally subject to failure to file and payee statement penalties which, beginning in 2011, range from $100 for each failure to a maximum of $1,500,000.
The IRS has not yet issued the form to be used for the filing of an issuer return. Accordingly, the IRS has issued guidance providing that although it “expects issuers to make a good-faith effort to comply,” it will not impose penalties for a failure to file an issuer return within 45 days of a transaction affecting stock basis taken in 2011, provided that the issuer files the issuer return (or posts the return on its website) by January 17, 2012.
NOTES: 1. In the case of regulated investment companies, the new rules do not apply until 2012. Beginning on January 1, 2013 (or such later date as may be prescribed), they will apply to notes, bonds, debentures, and other evidences of indebtedness as well as certain other financial instruments that may be designated by the Treasury Department. 2. Special rules apply to S corporations, regulated investment companies, and real estate investment trusts. 3. This transitional relief does not apply to regulated investment companies, which are not subject to the issuer reporting requirements until 2012. Nor does it apply to the requirement that an issuer make the relevant information available to shareholders or their nominees.