New IRS Reporting Requirement for Corporate Distributions, Stock Splits & Acquisitions
Stan Rose, Director, Tax Practice
Has your corporation recently paid distributions, issued a stock split or acquired or merged with another company? If so, and if those actions altered a shareholder’s stock basis, you may be required to report those actions to the IRS by filing Form 8937 – a requirement that did not exist in the past.
In an effort to enhance accuracy and compliance, the IRS has for many years required the use of informational reporting. For example, brokers have long been required to report the amount of sale proceeds of securities that were sold on behalf of their clients. They do so by completing Form 1099-B and providing copies to both the taxpayer and the IRS. By doing so, the taxpayer can more accurately report the gain or loss and the IRS has record of what they should expect to see on the taxpayer’s tax return. Historically such reporting requirements have addressed only the proceeds, but in recent years, attention has been turned to the other component of security gain or loss: The taxpayer’s cost basis in the investment. In a previous article we pointed out that beginning with recent purchases, brokers must now track and report cost basis on Form 1099-B. Another step in that direction is a new requirement under Internal Revenue Code Section 6045B, and explaining that provision is the purpose of this article.
Who must file
Section 6045B requires foreign and domestic corporations that engage, on or after January 1, 2011, in “organizational actions” that affect the basis of securities, to file Form 8937 with the IRS. Examples of organizational actions that may require disclosure include stock splits, stock distributions, mergers, or acquisitions. Many cash distributions are derived from “earnings and profits” and do not need to be disclosed because basis remains unchanged. However, a cash distribution that exceeds available earnings and profits may reduce basis and therefore require disclosure. Obviously, to determine whether filing is required, the corporation must be familiar with which actions alter shareholder basis in the company stock and which actions do not. It may require a working knowledge and accurate historical tracking of earnings and profits.
Some exceptions to the Form 8937 filing requirements exist. An S corporation does not need file Form 8937. Instead, it can provide similar information on its routine and timely filed Schedules K-1. In addition (although less likely to apply), a corporation whose shareholders consist entirely of tax exempt recipients does not need to report organizational actions.
How and when to file/penalties
If the rules apply, Form 8937, Report of Organizational Actions Affecting Basis of Securities, must be filed with the IRS and provided to every affected shareholder, but under certain circumstances, companies instead may comply with these requirements by posting the form or similar information on their publicly accessible websites. The form must present a description of the organizational action, the quantitative effect on the basis of the security and how it was computed, the applicable Internal Revenue Code sections, and whether a loss is recognized. This filing must take place within 45 days of the transaction, or by January 15 of the following year if that day occurs earlier than day 45. For transactions occurring in 2011, the latest due date was January 17, 2012 as a result of the holidays. While penalties may be assessed for returns omitted or filed late, there is some relief. The IRS was slow to publish the finalized form, and recognizes these new requirements have generated many questions. In Notice 2012-11 (issued less than a week from their own deadline!), the IRS points out that penalties may not be imposed for incorrect filings if corporations make a good faith effort to timely post corrected Forms 8937. Precise details on the application of this specific relief are somewhat vague, and it is unclear whether the IRS intends to extend this relief to parties who did not file at all when required. In the absence of this relief, penalties are significantly reduced for such filings if failure to file was not willful, or if accurate filings are made within 30 days of the original deadline.
The new Section 6045B requirements introduce a number of potential instances that could trigger a corporation’s need to file the new Form 8937 or present similar information on Schedules K-1. Penalties may be imposed for corporations who fail to meet their filing requirements, although the IRS appears willing to forgo some penalties for taxpayers who attempt to comply. Corporations are encouraged to become familiar with these rules and monitor their activity to determine which years, if any, produce the need to file. If reportable activity occurred during 2011 and correct filings were not made on behalf of a C-corporation by January 17, 2012, action should be undertaken immediately.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.