As of January 1, 2011, U.S. and non-U.S. corporate issuers of certain securities were subject to new U.S. information reporting obligations. The deadline for filing this information return for 2011 was extended to January 17, 2012. On January 5, 2012, the IRS released a final Form 8937 (and related instructions) that must be used by taxpayers to comply with this reporting obligation. The release of Form 8937 so close to the filing deadline as well as the continuing uncertainty regarding the manner in which the form is to be completed will mean that taxpayers subject to this filing requirement will need to act quickly in order to meet the January 17, 2012 deadline. Canadian public and private corporations who have U.S. stockholders are subject to these reporting requirements for 2011 unless an applicable exception is established. Failure to comply with these reporting requirements may result in substantial penalties.
As part of the Energy Improvement and Extension Act of 2008, Congress enacted new Section 6045B of the U.S. Internal Code of 1986, as amended (the Code). These rules are intended to provide the IRS with more information regarding tax basis and to curb potential under-reporting of capital gains by U.S. taxpayers. Section 6045B generally requires domestic and foreign issuers of "specified securities" (which, for 2011, is generally limited to stock issued by a public or private corporation, including any entity treated as a corporation for U.S. federal income tax purposes1) to provide information about any organizational action occurring on or after January 1, 2011, that affects the U.S. tax basis of such security. Examples of an organizational action that may affect U.S. tax basis in a security include a variety of common transactions, including mergers, acquisitions, spin-offs, stock splits, stock redemptions, distributions in excess of U.S. earnings and profits and other similar corporate events.
For a more detailed explanation of the Section 6045B Reporting requirements, including a discussion of certain exemptions that may be applicable, please see our prior Osler Update.
In general, Section 6045B requires that an information return reporting an applicable organizational action must be filed with the IRS on or before the 45th day following the action or, if earlier, January 15 of the following calendar year. In addition, the filing corporation is also required to provide holders or their nominees with a copy of this return by January 15 of the year following the year in which the organizational action occurred. In lieu of direct reporting to the IRS and security holders, an issuer may elect to post the completed Form 8937 on the issuer's primary public website by the relevant deadline.
Failure to satisfy the reporting requirements (outlined below) may subject a corporate issuer to penalties, including penalties of $100 for each failure to report, up to a maximum annual penalty of $3 million.2
On February 22, 2011, the IRS released Notice 2011-18 which effectively extended the filing deadline for organizational actions occurring in 2011 until January 17, 2012. However, prior to the release of final IRS Form 8937 on January 5, 2012, there was no definitive form available to taxpayers for purposes of completing this filing.
IRS Form 8937 and Instructions
Form 8937 requires a corporation to provide a significant amount of information regarding each organizational action taken during 2011 if such action affects an entire class of stock of the corporation. In particular, the corporation is required to describe, in a narrative format, (i) the nature and date of the action, (ii) the quantitative effect of such action on the basis of the security, (iii) the relevant Internal Revenue Code sections related to the basis adjustment, (iv) whether any resulting loss may be recognized, and (v) a description of the data supporting the calculation of the change in basis. The instructions to Form 8937 do not provide clear guidance regarding the amount of detail required or the manner in which the quantitative effect of any given organizational action may be determined and conveyed in a written description. The instructions do, however, clarify certain circumstances in which reporting is not required, including a clarification that Form 8937 is not required to be filed for an initial public offering of stock or to a distribution of stock to someone exercising a previously granted stock option.
Canadian corporations that have engaged in an organizational action during 2011 and that are not eligible for an exception to Section 6045B reporting requirements will be required to quickly complete IRS Form 8937 and submit such form to the IRS and stockholders by January 17, 2012, in order to avoid exposure to potential U.S. tax penalties. Alternatively, these corporations may post the completed IRS Form 8937 on their website in compliance with relevant regulations by this deadline. Many public corporations will find the option of posting IRS Form 8937 to their website a more expedient manner for complying with these reporting requirements. Private companies may, however, not wish to make this information publically available.
Going forward, because of the wide range of corporate activities and transactions that could potentially trigger a Section 6045B reporting obligation and the fact that organizational actions that occur in 2012 are subject to the regular deadlines (i.e., a Form 8937 is generally required to be filed with the IRS within 45 days of such action), Canadian corporations should be vigilant about U.S. tax matters on a continuous basis if they may have U.S. shareholders. As indicated in our prior Update (see link above), Canadian corporations should consider taking steps to establish (i) internal safeguards to identify transactions that could affect the U.S. tax basis of their stock, (ii) procedures for obtaining certification of, or relying on the presumption rules regarding, their shareholders' status as "exempt recipients", and (iii) if necessary, procedures for preparing and relaying the required information to the IRS and shareholders on a timely basis.
The Section 6045B reporting rules are complex and subject to a number of exceptions. For further information, please contact a member of our New York Office Tax Department.
1. The reporting obligation under Section 6045B is extended to (i) certain stock in "regulated investment companies" (RICs) and dividend reinvestment plans beginning on January 1, 2012 and (ii) notes, bonds, debentures and other evidences of indebtedness beginning on January 1, 2013.
2. In cases where a corporate issuer is found to have intentionally disregarded the reporting requirements, the penalty may be increased to $250 for each failure, with no limitation on the maximum penalty.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.