In general, any corporation, whether domestic or foreign and whether public or private, that (i) has one or more U.S. persons as a shareholder and (ii) engages in a corporate action that affects the tax basis of a “specified security,”1 is now required to report certain information to the IRS on Form 8937, Report of Organizational Actions Affecting Basis of Securities. The purpose of the reporting of the basis is to permit brokers to report the taxable gain on sale transactions, not just the gross proceeds. This requirement was added by Section 6045B and is applicable to organizational actions occurring after December 31, 2010.2
General Due Date
Form 8937 typically must be filed with the IRS on or before the earlier of (i) the 45th day following the organizational action or (ii) January 15 of the year following the calendar year of the organizational action.
As the IRS did not release Form 8937 until January 5, 2012, Notice 2011-18 provided transitional relief to waive penalties for corporate actions taken during 2011 if the Form 8937 is filed with the IRS (or posted on the issuer’s Web site as described below) by January 17, 2012.
In Notice 2012-11, the IRS announced on January 13, 2012 that, due to its late release of the required form, it will not impose penalties on issuers of stock who report incorrect 2011 information as long as they make a good-faith effort to timely comply with the requirements. The IRS said in Notice 2012-11 that it “recognizes that the release date provides a very limited timeframe remaining before the due date of the form.” The IRS, therefore, will not impose penalties on issuers that reported incorrect information, provided they make good-faith efforts to timely post Form 8937 (or the required information) on their Web site or file accurate Forms 8937 and furnish corresponding issuer statements. Importantly, the IRS says this relief applies only to organizational actions occurring in 2011.
The instructions provide that only corporate issuers of stock or interests treated as stock, such as American Depository Receipts, are required to file Form 8937. The instructions to Form 8937 provide that reporting is required only when an organizational action affects the basis of all holders of a security or all holders of a class of securities.3 This significantly narrows the statutory and regulatory definition of specified securities. The Code and regulations, however, require reporting of organizational actions affecting the basis of specified security holders on “an information return.” As the IRS has not provided an information return on which issuers may report organizational actions affecting the basis of securities other than stock, it seems that no reporting is currently required for these other securities. It is unclear whether the IRS will revise the instructions to require reporting of any of the other types of securities included in the definition of “specified security” in Section 6045(g)(3)(B).
Both foreign and domestic corporations are covered by the reporting requirements. No reporting is required, however, by the issuer with respect to certain exempt security holders. No reporting is required with respect to a security held by C corporations, charitable organizations, IRAs, Archer MSAs, health savings accounts (HSAs), the United States, a state, or political subdivisions. The issuer also does not have to report as to a security holder if the issuer, prior to the transaction, associates such holder with documentation upon which the issuer may rely in order to treat payments to the holder as made to a foreign beneficial owner in accordance with the documentation for withholding exemptions or as made to a foreign payee.4 It is unclear, however, whether a foreign issuer has a reporting obligation when the issuer is not required to receive any U.S. withholding certificates because there would have been no U.S. withholding obligations.
Special rules exist for reporting to security holders that are S corporations and for certain regulated investment companies (RICs) and real estate investment trusts (REITs).
Examples of Common Organizational Actions that Require Reporting
The IRS has provided limited guidance as to what corporate actions are deemed to be “organizational actions that affect basis.” The Regulations provide three examples of some of the common organizational actions that affect a shareholders’ basis in a company’s shares and require reporting on Form 8937:
- a stock split
- a payment of a stock dividend to shareholders, and
- a cash distribution treated as a return of capital (distribution exceeds current and accumulated earnings and profits (E&P)).5
One issue practitioners are dealing with is that Form 8937 instructions require that the issuer file a Form 8937 for a distribution of property to all shareholders if it knows that the distribution is not taxable. The instructions then state that taxpayers do not need to report a distribution on Form 8937 if the distribution is reportable as a dividend on Form 1099-DIV. What happens if a distribution is a partial dividend because E&P is less than the distribution amount with the remainder being a return of basis? There would be a 1009-DIV filed in that case, but it wouldn’t report all of the distribution as a dividend. Taxpayers may want to use caution at this point and file the Form even if redundant information is reported to the IRS as brokers may still need the information for their reporting requirements.
Although the definition of organizational action is vague at this point, the reporting requirement may apply to other types of transactions, such as:
- tax-free spin-offs
- non-pro rata split-offs involving a distribution to all holders of a class of securities6
- taxable recapitalizations treated as a return of capital pro rata redemptions of a class to the extent treated as a return of capital, and
- non-arm’s length asset transfers among affiliates in which a distribution and contribution is deemed to occur under the principles of Section 482.7
The application of the filing requirements to several types of transactions remains unclear at this time. For example, certain tax-free reorganizations where stock is merely exchanged for new stock and basis is carried over to the new shares, as this has no real effect on basis and there is a split among practitioners as to whether these rules apply. It is also unclear whether the adjustments to basis required by the controlled foreign corporation (CFC) and passive foreign investment corporation (PFIC) regimes must be reported on Form 8937. There are also many transactions that do not involve an actual exchange or change in investment under standard business law. These transactions, however, may be considered a deemed recognition event for U.S. federal income tax purposes, such as a non-arm’s length transfer among affiliates under Section 482. For these transactions, it is unclear as to whether the deemed transfer triggers a filing. Until the IRS issues further guidance, taxpayers are advised to use prudence in applying these rules to corporate transactions.
The instructions and regulations provide that initial public offerings are exempt from the reporting rules. It is unclear, however, whether similar transactions are also exempt, such as private placements for a new class of stock and all issuances of stock in which only cash is contributed or secondary offerings.
Treas. Reg. Section 1.6045B-1(e) requires that an acquiring or successor entity of an issuer must satisfy these reporting obligations if applicable. Importantly, if neither the issuer nor the acquiring or successor entity satisfies these reporting obligations, both parties are jointly and severally liable for any applicable penalties. Neither the Treasury Regulation nor the instructions define or refer to the definition of acquirer. Thus, the broad definition may catch more transactions than expected. For example, a partnership that acquires shares of a public company may have a reporting requirement responsibility if the corporation files to comply as they may be considered an “acquirer” under the literal reading of the regulation.
Interplay with the Relatively New Broker Cost Basis Reporting Regime
Section 6045(g) was enacted as part of the new basis reporting regime to create a system for brokers to provide customers with cost basis information that customers could use to report more accurately capital gains and losses from sales of securities. Brokers that are required to file a gross proceeds information return with the IRS for the sale of stock (1099-B) must now include in the information return the customer’s adjusted basis in the stock.8 The new regime thus includes rules governing both the transfer of cost basis information when securities are transferred and certain cost basis adjustments brokers must make.9
In enacting the cost basis reporting requirements for brokers, Congress recognized that brokers might not have cost basis information for previously acquired securities. So the new rules also provide that sales of securities that a broker has held in a customer’s account prior to the effective date of the new cost basis reporting rules are not subject to those rules. Mechanically, the rules only apply with respect to sales of “covered securities.” Pursuant to Section 6045(g)(3)(A), covered securities are specified securities that were acquired in accounts held by the customer for cash or transferred into the account on or after January 1, 2011.10
How to File
Form 8937 typically is filed with the IRS in Ogden, Utah. Taxpayers that are required to file Form 8937 also are required to provide a copy of the form (or a written statement containing the same information) to each security holder of record as of the date of the organizational action and to all subsequent holders of record up to the date that the copy of the Form 8937 is provided. A taxpayer alternatively may post “required information,” rather than Form 8937 itself, on its Web site for 2011 transactions.11 Such issuer statements generally are required to be provided on or before January 15 of the year following the calendar year of the organizational action. The reporting requirement also extends to an acquiring or successor entity of the issuer who is considered jointly and severally liable.12
Taxpayers are not required to file the physical Form 8937 with the IRS or furnish issuer statements to security holders if, by the due date for filing Form 8937, the company posts a completed Form 8937 in a readily accessible format in an area of its primary public Web site that is dedicated to this purpose, and the information is made accessible to the public on this Web site (or the Web site of any successor organization) for ten years.
An issuer may make reasonable assumptions in order to report the effect on basis of a corporate action. However, if an issuer fails to file the return, significant penalties may apply under Section 6721.
The potential penalties for failing to meet the reporting obligations of section 6045B include:
- $100 for each failure to file a return with the IRS, with a maximum of $1.5 million per year, and
- $100 for each failure to furnish a statement to a shareholder, with a maximum of $1.5 million per year.
Additional (and more substantial) uncapped penalties may apply for intentional disregard of the reporting requirements.
A corporation may use an agent to satisfy its obligations but remains liable for penalties for failure to comply.
2011 and Future Compliance
Although the filing deadline was January 17, there are likely many corporations with reportable 2011 organizational actions that have not yet filed Form 8937. Moreover, going forward companies must file within 45 days (or January 15 of the next year, if earlier) of a reportable organizational action. Although there is significant uncertainty regarding the types of transactions required to be reported on Form 8937, until additional guidance is released, companies should make good-faith efforts to comply with the reporting requirements. The IRS has indicated flexibility with respect to efforts to comply by the January 17, 2012 deadline and may show leniency for non-compliant companies making a good-faith effort to comply with the reporting requirements in a timely manner. Accordingly, companies should make a good-faith effort to comply with the requirements of Section 6045B as soon as possible if they have not already done so for 2011 filings.