What’s New: Deadline to File Another New Tax Form is Rapidly Approaching – Due January 17, 2012
Potential Impact: Moderate. Corporations (among other entities) are now required to file IRS Form 8937, Report of Organizational Actions Affecting Basis of Securities, upon taking an organizational action as of January 1, 2011 that affects the basis of a specified security (i.e., any share of stock or any interest treated as stock). The Form is an outgrowth of amendments to IRC § 6045B, under the Energy Improvement and Extension Act of 2008, that changed the reporting requirements for issuers of securities based on a Congressional belief that there may be substantial underreporting of capital gain due to misreporting of basis. The Form, via extensive questions surrounding security basis in relation to an organizational action, seeks to improve transparency related to such transactions and, correspondingly, increase revenue from capital gains.
In order for a Form 8937 filing to be required, an organizational action must affect the basis of all holders of a security or all holders of a class of a security. The filing requirement applies to both domestic and foreign issuers of securities if the security is owned by U.S. taxpayers, either directly or as a depository receipt. The definition of a reportable organizational action is fairly broad and may encompass several common corporate transactions, which we believe likely include the following:
- Tax-free acquisition or merger
- Tax-free spin-off
- A nontaxable cash or stock distribution to shareholders
- Corporate stock redemption
CD Thoughts: With tax increases a political non-starter in Washington, politicians are looking for creative ways to generate additional revenue to close record deficits (or at the very least not increase them further). Closing the “tax gap,” the difference between tax owed and the amount collected, is simply enforcement of existing tax law (i.e., not a tax increase) and therefore viewed as more palatable. We agree that taxpayers should pay what they are required to under the law. Unfortunately, this enforcement trend has led to a plethora of additional filing requirements forced upon already burdened taxpayers, of which Form 8937 is only the latest example.
Next Steps: We recommend contacting your tax service provider to determine whether a Form 8937 filing requirement exists for your company. If a filing requirement does exist, typically the Form must be filed with the IRS on or before the earlier of: (1) the 45th day following the organizational action, or (2) January 15 of the year following the calendar year of the organizational action. However, there is a brief relief period for 2011 organizational actions such that no penalties will apply to a company as long as the requisite filing is made by January 17, 2012 (IRS Notice 2011-18).
Review Form 8937: http://www.irs.gov/pub/irs-pdf/f8937.pdf
Review Form 8937 Instructions: http://www.irs.gov/pub/irs-pdf/i8937.pdf
Clifton Douglas LLP is a San Jose, California boutique firm that specializes in accounting for income taxes (ASC 740) and related tax compliance for public and pre-IPO corporations. We are committed to providing consistent, long-term results with an emphasis on the three “White Glove” service tenets: Personalized Care and Peace of Mind, Uncompromising Standards, and Unwavering Commitment to Perfection.
