IRS Provides Relief for Reporting Corporate Transactions
The IRS has extended the time for public and private companies to begin reporting corporate actions that affect the basis of their securities occurring on or after January 1, 2011. In 2008, Congress added a new section to the Internal Revenue Code, Section 6045B, as part of The Energy Improvement and Extension Act of 2008, requiring a corporation or issuer to report corporate actions that affect the basis of any of its "specified securities" to its holders and the IRS. This reporting is required for any corporate action occurring on or after January 1, 2011 that affects the basis of any of its shares of stock and includes stock splits, mergers and acquisitions. The new rules apply to both publicly traded and private companies and both domestic and foreign companies. For 2011 and 2012, the IRS only includes stocks as "specified securities," but effective January 1, 2013, it will also require reporting for notes, bonds, debentures and other evidences of indebtedness.
When a Filing/Reporting Statement is Required
Under the general rule each issuer must file the required statement with the IRS by the earlier of 45 days following any covered transaction or January 15 of the following calendar year. In addition, the issuer must provide a separate written statement to each affected holder (or nominee) of record of the specified security on the transaction date no later than January 15 of the following calendar year. As an alternative to filing with the IRS and issuing statements to individual holders, the issuer can post the required information in a readily accessible format on its website, which must be accessible to the public for a period of ten years after the date of posting. The issuer must post this information by the date the statement would otherwise be due to the IRS.
Required Statement Content
These statements must include:
- the name and taxpayer identification number of the reporting issuer;
- the identifiers of each security involved in the transaction including the security's CUSIP number or other security identifier number, classification of the security (such as stock), account number, serial number, and ticker symbol, as well as descriptions of the class of security involved;
- the name, address, e-mail address, and telephone number of a contact person at the issuer;
- the type or nature of the transaction; and
- the quantitative effect of the transaction on the basis of the security in the hands of a U.S. taxpayer as an adjustment per share or as a percentage of the old basis, including a description of the calculation, the applicable Internal Revenue Code section and subsection upon which the tax treatment is based, the data supporting the calculation such as the market values of securities and valuation dates, any other information necessary to implement the adjustment including the reportable taxable year, and whether any resulting loss may be recognized.
The Effect of the IRS Relief
Under the rules described above, the earliest date the IRS required an issuer to file a statement was February 15, 2011 if the transaction took place on January 1, 2011. However, the IRS is still developing the required forms and therefore in Notice 2011-18 extended the time for compliance. Now, the IRS will not impose penalties on 2011 transactions if the issuer files an issuer statement or posts it on its website by January 17, 2012 (although the IRS "expects issuers to make a good-faith effort to comply"). This is the same date that statements are otherwise due to individual holders. The penalties for noncompliance could otherwise range from $100 per failure up to a maximum of $1,500,000.
Exempt Recipients
Under the regulations, no reporting is required for certain security holders, referred to as "exempt recipients," which include corporations, whether domestic or foreign, that are not S-corporations. Generally, an issuer may treat a holder as an exempt recipient if the issuer has actual knowledge that the recipient is exempt. Otherwise, an issuer may rely on certain factors listed in the regulations to determine if a holder is an exempt recipient. However, on or after January 1, 2012, for a corporate holder, the issuer must have actual knowledge of the status of the holder or must have a completed exemption certificate (W-9) from the corporate holder stating that it is not an S-corporation. If the issuer reasonably determines that all of the holders are exempt recipients, no reporting is required. Therefore, if all holders are C-corporations, then the IRS requires no reporting to it or the holders.
Special Rule for S-Corporations
An S-corporation satisfies the requirements if it reports the effect of the transaction on a timely filed Schedule K-1 (Form 1120s) for each stockholder and timely furnishes copies of the K-1s to such stockholders.
Any questions regarding this new reporting rule can be directed to Jay Harrelson.
IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any statements contained herein are not intended or written to be used, and cannot be used, by you or any other person, for the purpose of avoiding any penalties that may be imposed by federal tax law.
