Tight timeframe adds to Form 8937 compliance burden

January 9, 2012
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The new year has arrived and we are all attempting to catch up on what we postponed dealing with until after the holidays. Most businesses will begin to gather the information needed to file W-2 forms for employees and 1099 for independent contractors.

Many corporations will be surprised that they have a matter of days to comply with a new reporting provision for certain actions occurring in 2011. The new tax reporting deals with certain corporate transactions, and many have no idea it is required.

Let me provide some background. In 2008, a provision was inserted into the Energy Improvement and Extension Act of 2008 and required corporate issuers of “specified securities” (such as shares in the corporation) to report certain information to the Internal Revenue Service and shareholders following corporate organizational actions that affect the basis of a corporate security.

The changes under Internal Revenue Code section 6045B now require all corporations (public or private) to report organizational actions such as return of capital distributions, spin-offs, corporation formation and reorganization transactions to shareholders if the transaction impacts the shareholders’ basis in shares they own. Organizational changes are required to be reported to shareholders within 45 days (or Jan. 15 of the year following the calendar year, if earlier) of the transaction or action on the newly created Form 8937.

In lieu of providing written information to shareholders, the affected corporation can post the corporate action information on its primary public website. Information on the corporate action posted on the website must be accessible for 10 years. In addition, the company must furnish a written statement to shareholders by Jan. 15 or post Form 8937 on its website by Jan. 15.

Form 8937 has not been finalized and still appears in its draft format on the IRS website (as of Dec. 30). As a result of the development of the actual reporting form, the IRS issued Notice 2011-118, which postponed the due date for calendar year 2011 corporate action filings to Jan. 17, 2012, rather than within 45 days of the actual corporate action.

The rules are broad and apply to any share of stock of an entity organized as or treated for federal tax purposes as a corporation. Thus, the rules apply to both C and S corporations. Fortunately, S corporations can satisfy the reporting requirement for any organizational action affecting the basis of its shares if the S corporation reports the effect of any organizational actions on a timely filed Schedule K-1 for each shareholder and gives a copy to all proper parties.

Currently, the regulations give three examples of corporate actions that must be reported: stock distributions, cash distributions and stock splits. There is an exception for the reporting if the corporate issuer reasonably determines that all of its shareholders are “exempt recipients.” An exempt recipient includes a corporation, a foreign holder and a tax exempt organization. Corporate issuers will need to have properly completed exemption certificates to rely on a presumption that its holders are exempt recipients.

Form 8937 has specific sections that require significant detail to be disclosed regarding corporate organizational actions. This includes a description of the organizational action, the date of the action, the quantitative affect of the action on basis of shares of the security held by a U.S. taxpayer, and a description of the calculation of the basis change and any data that supports the calculation. The form also requires information regarding the applicable Internal Revenue Code sections for the federal tax treatment of the transaction, and information regarding whether a loss can be recognized, and any other information necessary to implement the basis adjustment and the applicable reportable tax year.

Cash dividends paid by a C corporation may not be reportable, unless a portion of the dividend is a return of capital and then the reporting requirements will be triggered. Since earnings and profits of a C corporation (the basis of how the taxability of dividends is determined) are often not fully determined until a year ends, the determination of whether a cash dividend is subject to reporting may not be possible until after the required reporting notification requirements have long passed.

The reporting also impacts foreign corporations that have organization actions that affect the basis of shares. If the corporation has non-exempt recipients, it will be technically required to comply with the U.S. reporting requirements. Foreign corporations may need to demonstrate they have no U.S. shareholders subject to the reporting.

I saw slides from a recent presentation in Canada on the new reporting requirements. The slides make the comment that the IRS has the authority to invoke a provision in the U.S.-Canada Tax Treaty to request the Canada Revenue Agency to assist in collection of any penalties assessed for noncompliance with the new reporting requirements. The burden for foreign corporations to determine what U.S. investors they may have and to comply with the U.S. reporting requirements may come as a surprise to many of them. The foreign corporations are also dealing with the FACTA provisions enacted in 2010 that require foreign entities to identify U.S. owners.

Many public companies are making use of the ability to post corporate organizational actions on their corporate websites in lieu of some of the direct reporting to shareholders within 45 days of corporate actions that otherwise may be required.

There are penalties for failure to comply with the new rules. They can be significant if there are a large number of shareholders. The Form 8937 compliance burden will be added to a long list of reporting and filings that businesses are currently dealing with. Given the timing of the release of the form and the tight timeframe, perhaps the IRS will take this into account before assessing any penalties.

Just wait: Many of the health care and FCATA related provisions will become effective in coming years and will add to the compliance burden.

Bill Roth is a tax partner with the local office of BDO.

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