On February 22, the IRS announced that it would not impose penalties on corporations for failing to file information returns reporting organizational actions that affected the tax basis of their outstanding shares.  Although
Notice 2011-18,  2011-11 I.R.B. (Mar. 14, 2011) technically addressed only the imposition of penalties, its practical effect is to delay implementation of Section 6045B of the Internal Revenue Code until the beginning of 2012.

Although it was enacted as part of  the Energy Improvement and Extension Act of 2008, Section 6045B did not legally become effective until January 1, 2011.  Under its terms, corporate issuers are required to file returns with the IRS describing (1) “any organizational action” (such as a stock split or a merger or acquisition) that affects the basis of their outstanding shares, (2) the “quantitative effect” on the basis of such action, and (3) any other information that the IRS might require.  The returns are required to be filed not later than the earlier of 45 days after the date of the organizational action and January 15 of the calendar year following the year in which the organizational action occurred.  Thus, in the unlikely event  a corporate action occurred on the January 1 holiday, the first information returns due under the new provision would technically have had to be filed by February 15.

Notwithstanding existence of this legal requirement, the IRS has not developed an information return form that would enable taxpayers to comply with its terms.  Although a somewhat unusual, technologically modern provision, Section 6045B(e), permits the IRS to waive the information return filing requirement for corporations that post the information return on their public Web sites, the IRS failure to develop an information return form has also frustrated corporate use of this alternative.

By waiving penalties for corporations that miss the 45-day deadline for organizational actions taken in 2011 but file information returns (or make information publicly available) by January 17, 2012, the IRS provides itself another year in which to develop an appropriate form.  Corporations have no incentive to make a “do-it-yourself” filing in the interim, and very few are likely to do so.

Section 6045B(c) imposes a parallel requirement on corporations to furnish information to their shareholders of record  (or their shareholders’ nominees) that is similar to that filed with the IRS.  Moreover, the information must be furnished not only to the shareholders of record as of the date the organizational action was taken but also to all subsequent holders of record up to the date the information is furnished.  Fortunately, the IRS has issued Treasury regulations that permit this requirement also to be satisfied through posting of the information on the corporation’s public Web site. Although Notice 2011-18 does not waive penalties for failure to furnish information to shareholders, the statute itself provides that the information need not be furnished until January 17, 2012.  The effect of the notice is therefore to conform the earliest due date for filing information returns with the IRS to the due date for furnishing shareholder information.

Because a corporation does not ordinarily know the tax basis of its shareholders, the information that it can supply under Section 6045B will be in the form of advice as to how the shareholders can calculate their basis rather than any actual basis determination.  Provision of this advice will usually require the corporation to reach a legal conclusion as to the nature of the organizational action, whether it is wholly or partially tax-free.  The extent of a corporation’s potential liability for providing incorrect information under Section 6045B is uncertain. Nevertheless, it is unlikely that a corporation’s penalty exposure for providing incorrect information to shareholders ($100 per return up to an aggregate of $1,500,000 per calendar year) may be reduced through the use of the Web site posting alternative. For these reasons, corporations may find it desirable to consult with the tax advisers before completing the returns or making the Web site postings required when Section 6045B is fully implemented.

The Tax Group of Ballard Spahr regularly advises clients on information return compliance issues.  Please contact Wayne R. Strasbaugh at 215.864.8328 or strasbaugh@ballardspahr.com for further information and assistance.

Copyright © 2011 by Ballard Spahr LLP.
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