Corporations Required to Report Transactions Affecting Stock Basis: IRS Issues New Form and Instructions

IRS Issues New Form and Instructions

January 12, 2012

Last week, the IRS issued a new Form 8937 (and accompanying instructions) that corporations must use to report information relating to certain transactions that affect the stock basis of their shareholders.

The new form was issued pursuant to tax reporting rules that became effective Jan. 1, 2011. Under these rules, a corporation engaging in a transaction that affects shareholders’ stock basis must generally file Form 8937 with the IRS on or before the 45th day following the transaction or, if earlier, Jan. 15 of the year following the calendar year in which the transaction occurs. The corporation must also provide the information to its shareholders.

In Feb. 2011, the IRS issued transitional relief that effectively postponed the due date for reporting 2011 transactions until Jan. 17, 2012. This transitional relief was considered appropriate while the IRS was still developing the proper “form and manner of issuer return.” By reason of the expiration of the transitional relief, transactions entered into during 2011 must be reported to the IRS on or before Jan. 17, 2012. For our prior release containing additional information regarding the new rules for reporting transactions affecting stock basis click here.

Corporations should carefully consider which transactions are subject to these new tax reporting requirements. In addition to more obvious transactions such as spin-offs or recapitalizations, other transactions reportable on Form 8937 would, for example, include distributions that constitute a return of basis (by reason of not being supported by earnings and profits).

The new rules apply to both public and private, and to domestic and foreign, corporations. They apply only when a corporate transaction affects the basis of all holders of the corporation’s stock or all holders of a class of stock (including certain securities). An S corporation can satisfy the reporting requirements by including the effect of the corporate action on a timely filed Schedule K-1 that is given to all proper parties.

Importantly, issuers are not required to file a Form 8937 with the IRS or furnish information statements to shareholders if, by the due date for the filing of the Form 8937, the issuer posts “a completed Form 8937 in a readily accessible format in an area of [its] primary public website” and keeps it accessible there for 10 years. An issuer is also not required to file the return or furnish information statements to shareholders if it determines that all of the shareholders are exempt recipients, such as C corporations, charitable organizations and certain foreign holders.

In general, a corporation that fails to comply with these reporting requirements will be subject to penalties. There is a $100 penalty per information return (with a maximum per year penalty of $1.5 million) and a separate $100 penalty per shareholder statement (with a maximum per year penalty of $1.5 million).