Pepper Hamilton LLP: IRS Temporarily Suspends Penalties for New Basis Reporting

Pepper Hamilton LLP: IRS Temporarily Suspends Penalties for New Basis Reporting

By Todd B. Reinstein

A key revenue-raiser contained in the Energy Improvement and Extension Act of 2008, was new Section 6045B that requires cost basis reporting in corporate transactions.1 Section 6045B is primarily aimed at securities brokers, but to the surprise of many, the basis reporting rules also apply to the issuers of securities (not just to brokers) for all outstanding issued stock issued on or after January 1, 2011. This seems to have caught many corporate tax departments by surprise this year, and they have been spending the last few weeks trying to prepare for implementation. The good news is that there is some time relief for complying with the rules.

Section 6045B

Under Section 6045B corporations that engage in an action that affects the basis of its outstanding stock have 45 days to file either with the Internal Revenue Service (IRS) or post on their corporate Web sites an information return describing the action and the action's "quantitative effect" on the basis of each share of their stock. This can apply to a number of transactions such as stock dividends, stock issued in mergers, stock splits, or spinoffs.2

Moreover, Treas. Reg. Section 1.6045B-1(a)(1)(v) requires the return to disclose the effect "as an adjustment per share or as a percentage of old basis, including a description of the calculation, the applicable Internal Revenue Code section and subsection upon which the tax treatment is based, the data supporting the calculation such as the market values of securities and valuation dates, any other information necessary to implement the adjustment including the reportable taxable year, and whether any resulting loss may be recognized."3

The IRS has the ability pursuant to Section 6721 to impose a penalty on any issuer of stock that does not timely file a correct issuer return with the IRS as required by Section 6045B(a). Although large corporations may have the ability to provide this analysis for large-scale transactions, the 45-day time frame is very concerning to taxpayers. Smaller corporations were beginning to raise doubts about their ability to fulfill the requirements under Section 6045B at all.

Notice 2011-18

On February 22, 2011, the IRS released Notice 2011-18 ( the Notice), which provides transitional relief for issuers of securities from Section 6045B information reporting.4 The IRS made it clear in the Notice that it expects issuers to make a good-faith effort to comply with the requirements of Section 6045B. Until, however, an alternative form is developed and made available, issuer compliance with Section 6045B may be currently satisfied through public reporting of information, as contemplated by Section 6045B. Accordingly, the IRS will not impose penalties under Section 6721 for a failure to file an issuer return with the IRS within 45 days of an organizational action taken in 2011, provided that the issuer files the issuer return with the IRS (or posts the return on its Web site as provided in the regulations) by January 17, 2012.

Pepper Perspective

Although the reporting requirement is still required for transactions after January 1, 2011 under Section 6045B, the lack of penalties until January 17, 2012 will likely deter most corporate issuers from conforming to the new rules until they are in effect next year. Corporate issuers should, however, use this reprieve to put systems in place to comply with these rules in the future.

Endnotes

1 See P.L. 110-343 (October 3, 2008). Unless otherwise stated, all references to Section are to the Internal Revenue Code of 1986, as amended (the Code), and all references to "Reg. Sec." are to the Treasury Regulations promulgated thereunder (the Regulations).

2 Its not clear to what extent the provision applies. For example, does a corporate issuer have a reporting obligation when there is no basis effect under certain reorganization provisions?

3 If all the holders of the corporate stock are considered exempt recipients, then no reporting is required.

4 2011-11 IRB 1 (February 22, 2011).

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

This article is republished with permission of Pepper Hamilton LLP. Further duplication without the permission of Pepper Hamilton LLP is prohibited. All rights reserved.

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