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
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.
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.
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.
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
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).
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
article is republished with permission of Pepper Hamilton LLP. Further
duplication without the permission of Pepper Hamilton LLP is prohibited.
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