Us ma insights_organizational_actionreporting_161213Document Transcript
Merger & Acquisition Services
Reporting by Corporate
Issuers — Frequently
January 15, 2014, marks the third reporting cycle under IRC section 6045B and Form 8937, yet corporate issuers continue
to lag in their overall awareness of these disclosure obligations. There is also ongoing uncertainty regarding the situations
that require disclosure and the practical aspects of the reporting itself. This “FAQ” document highlights some common
issues encountered in determining whether reporting is required for events occurring in 2013, as well as common questions
concerning the preparation of the form. While a detailed discussion of IRC section 6045B and Form 8937 is beyond the scope
of this article, it is important to understand that for 2013 a corporation is generally required to report an “organizational
action” that affects the tax basis of its stock held by U.S. individuals and certain other tax entities.1 This reporting may be
accomplished by filing Form 8937 with the IRS within 45 days of an organizational action (or by January 15th of the following
year, if earlier), and also providing the same form (or a similar statement) to the affected shareholders by January 15th of the
following year.2 A corporation may also satisfy both obligations by timely posting Form 8937 on its public website, provided
certain conditions are met.3 Starting January 1, 2014, reporting is expanded to cover organizational actions that affect the tax
basis of certain debt instuments, non-compensatory options and certain other securities.
#1 — Is reporting required when an organizational action does not involve all shareholders? Despite language
that may be viewed as contrary in the statute and regulations, the instructions to Form 8937 specifically provide that reporting
with respect to an issuer's stock is required only if an organizational action affects the basis of all holders of the issuer’s stock
or all holders of a class of stock.4 The instructions illustrate this by stating that a nontaxable cash or stock distribution (such
as a stock split) requires reporting. Applying this rationale, a conversion, recapitalization or tender of shares that involves
only some of the issuer’s shareholders (or only some shareholders of a class of stock) does not appear to be reportable. The
instruction’s narrowing of the scope of reportable organizational actions is one of the most common reasons why reporting
may not be required.
#2 — Is a foreign corporation exempt from reporting? A foreign corporation is subject to the same rules as a domestic
corporation, provided it has at least one shareholder who is a U.S. individual or partnership. For this purpose, a corporation
includes any business entity that is treated as a corporation for U.S. federal tax purposes, including issuers whose equity is
listed as an American Depositary Receipt.5
1 There are various exceptions to reporting based on the nature of the issuer and its shareholders. Organization actions occurring in 2014 that may
require reporting include certain debt instruments, non-compensatory options and stock rights, and securities futures contracts. See Treas. Reg. secs.
1.6045B-1(j)(3), (5) and (6). These provisions are beyond the scope of this article.
2 See IRC secs. 6045B(a)-(c) and Treas. Reg. secs. 1.6045B-1(a) and 1.6045B-1(b).
3 See IRC sec. 6045B(e) and Treas. Reg. secs. 1.6045B-1(a)(3) and 1.6045B-1(b)(4).
4 Pursuant to IRC sec. 6045B(a) and Treas. Reg. sec. 1.6045B-1(a)(1), the instructions to Form 8937 are accorded the weight of law.
5 See IRC sec. 6045B(d), referencing IRC sec. 6045(g)(3)(B).
#3 — What are the most commonly reported organizational actions? Distributions that are a return of capital (to any
extent) under IRC section 301(c)(2) (i.e., a distribution in excess of earnings and profits), tax-free reorganizations under IRC section
368 (e.g., state law mergers and stock splits), tax-free stock distributions under IRC section 305, and tax-free spin-offs under IRC
section 355 are among the organizational actions frequently reported. These types of transactions generally affect the basis of all
shareholders (or at least all holders of a class of stock), and thus are readily recognized as giving rise to reporting.
#4 — What organizational actions are often overlooked? Even where there is a sound understanding of the reporting
rules, there are certain organizational actions that tend to be overlooked. These include tax-free exchanges of property for stock
of a controlled corporation (i.e., IRC section 351 transactions involving non-cash property), contributions to capital without the
issuance of additional shares, taxable liquidations under IRC section 331 that involve more than one distribution in liquidation, and
recapitalizations and conversions under IRC section 368(a)(1)(E) that involve all shareholders or all shareholders of a class of stock.
#5 — Which corporate entity in a tax-free reorganization is the proper issuer for reporting? In a typical tax-free
reorganization under IRC section 368, the acquiring corporation will issue its shares to shareholders of the target corporation. While
it may seem that the acquiring corporation is the proper reporting entity because its shares are being issued, it is actually the target
corporation that is treated as having redeemed all of its own shares using the newly issued shares of the acquiring corporation.
From the perspective of the target corporation, this exchange affects the basis of all of its shareholders because the basis in their
old target shares is “shifted” to the newly received acquiring corporation shares and also likely adjusted. Similarly, a non-pro rata
spin-off under IRC section 355 should probably be analyzed from the perspective of the controlled corporation (whose shares come
to be held by the former shareholders of the distributing corporation); otherwise, one may incorrectly conclude that no reporting
is required by either the distributing or controlled corporation. In practice, the acquiring entity in a reorganization, and both the
distributing and controlled corporations in a spin-off, may ultimately file Form 8937 under a “successor”-type concept, which
appears to be contemplated by the regulations and the underlying policy of the statute.6
#6 — What if the facts necessary for reporting are not known? The regulations permit the issuer to make reasonable
assumptions about facts that cannot be determined before the disclosure is due.7 If the issuer later determines that the actual
facts are different from the assumptions used, it must file a corrected Form 8937 within 45 days of such determination (along with
the corresponding shareholder statement by the later of the 45-day period or January 15 of the year following the organizational
action).8 The only limitation on an issuer’s use of assumptions is that it must treat a distribution that may be a “dividend” under
IRC section 301(c)(1) as a dividend in its entirety unless the issuer is able to “determine” the portion that is not out of E&P.9 For
most distributions made prior to the close of a tax year, this presumptive dividend rule will often relieve an issuer of any reporting
obligation under IRC section 6045B because a dividend does not generally result in a stock basis adjustment for the holder.
#7 — Does the issuer need to know each shareholder’s stock basis to report an organizational action? The reporting
is intended to apprise shareholders of the change in their tax bases resulting from an organizational action, which is accomplished
by describing the nature of the change and how the change is calculated. Accordingly, a corporate issuer is not required to know,
and often will not know, what a shareholder’s existing basis is, but merely what mechanical adjustment to such basis is necessary.
Moreover, although the regulations speak of the “adjustment” to be reported, an organizational action may result even where there
is no change to the per share basis of stock. For example, a one-for-one stock exchange may be reportable where the old basis is
reflected in a new security. In this situation, the reporting entity ensures that the old basis is properly tracked to the new shares even
though the aggregate basis, as well as the per share basis in each security, is unchanged.
#8 — May a foreign issuer file or publicly post Form 8937 without an EIN? As with other information returns, the filer’s
identification is a critical aspect of the return. The absence of a valid employer identification number (EIN) may prevent the return
from being substantially in compliance, and therefore a valid return, especially if data on the form does not allow the reader to
identify the filer with accuracy.Typically, an EIN may be obtained online and with relative ease by filing Form SS-4.
6 See Treas. Reg. sec. 1.6045B-1(e).
7 See Treas. Reg. sec. 1.6045B-1(a)(2)(ii).
8 See id.; Treas. Reg. sec. 1.6045B-1(b)(2).
9 See Treas. Reg. secs. 1.6045B-1(a)(2)(ii) and 1.6042-3(c).
#9 — May public website posting be used to report an organizational action that is late? IRC section 6045B and
the regulations thereunder are designed to allow a corporate issuer to post Form 8937 on its primary, public website as an
alternative to paper filing with the IRS and with shareholders, provided the information is retained on the website (or that of a
successor) for 10 years. The ability to publicly post Form 8937 is a very convenient and cost-effective option for most issuers.
As currently written, however, the regulations allow this option only for a timely posted organizational action (i.e., a posting
within 45 days of the organizational action).10 Public companies may find the inability to use the public posting mechanism
for a late filing to be a burdensome and inefficient result (and arguably contrary to the goal of broad-based reporting of basis
consequences to shareholders and brokers who are required to gather such information).
#10 — What are the possible penalties for failure to report an organizational action? Two reporting obligations
arise from each organizational action. The first is the filing of Form 8937 with the IRS (or the effective posting online) within 45
days of the organizational action. The second is the shareholder statement (or copy of Form 8937) that is due by January 15
of the following calendar year to all affected shareholders. Each obligation is subject to a $100 failure-to-file penalty per form,
but is generally limited to a $1.5 million cap per year for each corporate issuer.11 In the case of intentional disregard, however,
the penalty is effectively equal to 20 percent of the amount that should have been reported to the IRS and shareholders
(with no cap).12 It is not clear how the penalty provisions are intended to work in this situation given that the “amount” to be
reported is not a fixed amount per share, but rather a description of how the change in or adjustment to the shareholder’s
existing basis is to be determined. The actual adjustment to the stock basis of the affected shareholders (individually and in the
aggregate) is information a corporate issuer does not generally possess.
10 See Treas. Reg. sec. 1.6045B-1(a)(3), referencing Treas. Reg. sec. 1.6045B-1(a)(2)(i).
11 See Treas. Reg. sec. 1.6045B-1(f); see also IRC secs. 6721(a) (information return) and 6722(a) (shareholder statement).
12 See IRC secs. 6721(e)(2)(A) and 6722(e)(2)(A).