Mastering Form 8937 and Section 6045B:

Transcription

1 Presenting a live 110 minute teleconference with interactive Q&A Mastering Form 8937 and Section 6045B: An Ongoing Obligation Complying With Reporting Requirements Arising From Activities Affecting Tax Basis of Securities THURSDAY, JULY 12, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Dale Collinson, Director, Financial Institutions and Products, KPMG,, Washington, D.C. Bob Adams, Tax Services Partner, McGladrey LLP, Washington, D.C. Steve Tyler, Tax Partner, PricewaterhouseCoopers, New York Candace Ewell, Director, PricewaterhouseCoopers, Washington, D.C. For this program, attendees must listen to the audio over the telephone. Please refer to the instructions ed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at ext. 10.

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5 Mastering Form 8937 and Section 6045B: An Ongoing Obligation Seminar July 12, 2012 Dale Collinson, KPMG Bob Adams, McGladrey LLP Steve Tyler, PricewaterhouseCoopers Candace Ewell, PricewaterhouseCoopers

6 Today s Program Enactment And Implementation Of Sect. 6045B [Dale Collinson] Slide 7 Slide 14 Triggering Events And C-Suite Involvement [Bob Adams] Slide 15 Slide 21 Relevant Terms Of Sect. 6045B And Form 8937 [Steve Tyler and Candace Ewell] Slide 22 Slide 31 Early Experiences Filing Form 8937 [Steve Tyler and Dale Collinson] Slide 32 Slide 35

7 Dale Collinson, KPMG ENACTMENT AND IMPLEMENTATION OF SECT. 6045B

8 ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 8

9 Sect. 6045B Enactment Cost basis reporting statute was enacted in October Under Sect. 6045, brokers are required to report gross proceeds from sales of stock, securities and certain other financial i instruments. t New Sect. 6045(g) requires brokers to also report cost basis and whether gain or loss is long-term or short-term. Additional provisions assist brokers in tracking cost basis. Sect. 6045A requires persons transferring securities to provide cost basis and other information to receiving brokers. Sect. 6045B requires issuers to provide information with respect to corporate actions affecting basis. Implementation of Sect. 6045B includes Form KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 9

10 Implementation Timing Three statutory staggered effective dates: Stock acquired on or after Jan. 1, 2011 Mutual fund and dividend reinvestment plan (DRP) stock acquired on or after Jan. 1, 2012 Debt and options acquired on or after Jan. 1, 2013; postponed p to Jan. 1, 2014 by Notice (May 2, 2012) Plus, may add other designated securities (Jan. 1, 2013 or later) Final regulations for stock were released on Oct. 12, Transfer reporting was delayed until 2012, per Notice Issuer reporting for corporate actions during 2011 were effectively delayed to Jan. 17, 2012, per Notice Form 8937 and instructions were issued Jan. 5, 2012 and transition relief provided on Jan. 13, 2012, per Notice KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 10

11 Sect. 6045: Overview Of Rules Sect. 6045B(a) requires, according to prescribed forms or regulations, an issuer of a specified security to make a return setting forth: A description of any organizational action that affects the basis of such specified security of such issuer, The quantitative effect on the basis of such specified security resulting from such action, and Such additional information as may be prescribed. Sect. 6045B(c) requires the issuer to provide holders of specified securities or their nominees with both the information required to be included on the return, and contact information for the person required to file the return. Sect. 6045B(e) authorizes administrative action to permit issuers to make the required information publicly available, in lieu of filing the return and providing the holder/nominee statement. Treas. Reg B-1 implements the statute and provides some additional guidance. As implemented, 6045B reporting applies to public and private corporations, domestic and foreign KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 11

12 Sect: 6045B: Specified Securities And Covered Securities For brokers, the CBR reporting requirements apply to covered securities, while Sect. 6045B applies to issuers of specified securities. These terms are components of effective date provision. Sect. 6045(g)(3)(A) defines a covered security as any specified security acquired after the applicable date, if one of two requirements is met; Sect. 6045(g)(3)(B) defines specified securities to include stock, debt and certain other financial instruments; and Sect. 6045(g)(3)(C) ) sets forth the applicable dates as summarized in the description of staggered effective dates in slide 3. Issuers are required to report organizational actions that affect the basis of specified securities under Sect. 6045B(a), but only if the action occurs after the applicable date under Sect. 6045B(d). Until 2014, 6045B reporting applies only to actions affecting the basis of stock, including mutual fund and DRP stock. Corporate issuers may have an interest in how the CBR rules will apply to debt and options beginning in KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 12

13 Time When Return Is Required Under Sect. 6045B(b) and the regulations, an issuer return is required to be filed by the earlier of 45 days after the organizational action affecting basis or Jan. 15 of the year following the calendar year in which the action occurred. Under Sect. 6045B(c), the holder/nominee statement must be provided by Jan. 15 of the following year. The regulations provide an alternative to the return/statement procedure. An issuer may post the return with the required information in a readily ascertainable format in an area of its primary public Web site dedicated to [the] purpose. The return must be kept accessible to the public for 10 years on its primary Web site. If the Web site posting procedure is followed, the time deadlines for the return (45 days or Jan.15 of the following calendar year) apply. The posting satisfies both the return and the holder/nominee statement requirements KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 13

14 Integration Of Issuer Returns With Broker Cost Basis Reporting Brokers are required to take into account information provided on an issuer statement under Sect. 6045B, unless the statement is incomplete or the broker has actual knowledge that it is incorrect. Treas. Reg (d)(2)(iv) The requirement to take into account information on an issuer statement (including a corrected statement) applies even if the statement is received after the broker has reported a sale of a covered security. This continuing requirement is cut off if the issuer statement is received more than three years after the broker has filed the gross proceeds return. Note that a broker may have to take into account a corrected issuer statement received many years after the corporate action, if the affected security has not been sold and is still held in the customer s account. Use by issuers of the Web site reporting option provides information more currently to brokers. The 45-day period is still not as immediate as brokers would like, but the posting of Forms 8937 may occur sooner KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 14

15 Bob Adams, McGladrey LLP TRIGGERING EVENTS AND C SUITE INVOLVEMENT

16 Triggering Events And C Suite Involvement I. Triggering events and the C-suite 16 A. Some major questions immediately arise when considering Form 8937/Sect. 6045B triggering events and filing requirements. 1. Who is first to know that such an event will occur or has occurred? 2. Who is responsible to ensure that Form 8937 filing requirements are met by someone inside or outside the company? 3. How is need to file Form 8937 communicated to responsible person? 4. If no in-house person is responsible to file Form 8937, who should be, and how does the filer learn that corporate action created requirement to file the form? 5. Will private companies and small public companies deal with the form-filing requirements differently than large public companies? 6. Are current models of engagement letters adequate to cover Form 8937 filing requirements, when outside service providers provide tax services?

17 Triggering Events And C Suite Involvement (Cont.) B. Corporate actions triggering requirements to file Form 8937 originate in the C-suite. 1. Board of Directors, CEO, CFO, treasurer, general counsel 2. Large public companies may have an office of investor relations, also. 3. Bottom line: Requirement to file Form 8937 is not precipitated by the normal income tax operations of an internal tax department or an external tax services provider. 4. Filing requirements are not generically included on the monthly or annual due date list of either. 5. C-suite executives and potential in-house personnel who are potentially responsible to fulfill Form 8937 filing requirements or have them fulfilled by a service provider must be educated. 6. Importance of timeliness and early warning must be stressed. 17

18 Triggering Events And C Suite Involvement (Cont.) C. Large public companies 1. Most have internal tax departments that are responsible for all IRS tax filings may also be responsible for Form Most have investor relations office to communicate with investors about securities matters; it may be responsible for Form 8937, also a. May need tax department help for calculations in certain situations; mergers with boot; where earnings and profits (E&P) are relevant b. Organizational actions announced to security holders by various means; impact on the basis of affected securities might also be communicated in same announcements, if written to meet reporting requirements c. Companies permitted to use public Web site to meet filing requirements d. Many large public companies already use Web site for such communications. 18

19 Triggering Events And C Suite Involvement (Cont.) 3. So, in a large public company, it should be easy to establish totally in-house processes to meet Form 8937 filing requirements. 4. Examples of Forms 8937 posted to Web site: a) Reorganization/merger Exelon & Constellation i. s/stockinformation.aspx ii signed by VP Tax b) Reverse stock split Harbor Biosciences, Inc. i. ii. %20Forward%20Stock%20Split.pdf p -- signed by CFO c) Many others can be found. 19

20 Triggering Events And C Suite Involvement (Cont.) D. Private companies and small public companies 1. May not have internal tax function to file Form 8937 or public Web site to meet requirements in that way 2. Outside service providers might be hired to prepare and/or file Form Service provider should educate appropriate company personnel re: triggers and filing requirements for Form 8937; help company adopt plan of action for when triggering event is planned or has been executed 4. Plan should emphasize the need for sufficient time to meet deadlines, and some form of automatic notification to the service provider that a relevant organizational triggering event will take place or has taken place. 5. It must be remembered that some organizational actions could produce effects on the basis of securities that take considerable time to calculate (for example, in complex reorganizations or when E&P calculations are needed). 20

21 Triggering Events And C Suite Involvement (Cont.) E. Engagement letters, service providers 1. Companies anticipating organizational actions that would trigger Form 8937 filing requirements, and service providers that represent them, should carefully consider what is included in their engagement letters. 2. Form 8937 is relatively new. It may not have been included in previous engagement letters and is an information return generally not required on a regular and routine basis, but is required whenever certain things happen. 3. Some options for engagement letters: a. Specifically exclude service regarding Form 8937 filings b. Specifically include service with all pertinent terms; communication about the triggering event; timing of such communication; etc. 4. Opinion: Engagement letters should not be silent about this potential filing requirement; this opens the door for errors and misunderstandings; relationship issues 21

22 Steve Tyler, PricewaterhouseCoopers Candace Ewell, PricewaterhouseCoopers RELEVANT TERMS OF SECT. 6045B AND FORM 8937

23 IRC 6045B And Form 8937: Introduction IRC 6045B was enacted as part of the Energy Improvement and Extension Act of 2008 and became effective for transactions taking place on or after Jan. 1, On Jan. 5, the IRS released Form 8937, Report of Organizational Actions Affecting Basis of Securities. 6045B requires an "issuer" to disclose certain information if it engages in an "organizational action" that affects the basis of "specified securities" during the calendar year. PwC 23

24 IRC 6045B And Form 8937 Who is an issuer? An issuer is any domestic or foreign entity that is taxed as a corporation, for federal tax purposes. The list includes: - U.S. public corporations - U.S. private corporations - Non-U.S. public corporations - Non-U.S. private corporations Note: Partnerships, trusts, estates and individuals are not issuers and thus are not subject to the reporting requirements under Sect. 6045B. PwC 24

25 IRC 6045B And Form 8937 (Cont.) What is a specified security? A specified security is any share of stock in a U.S. or foreign corporation, including any interest treated as stock, such as an American depository receipt. After Jan. 1, 2014, the definition could be expanded to include notes, bonds, debentures and commodities or any other security identified by Treasury or the IRS. PwC 25

26 IRC 6045B And Form 8937 (Cont.) What is an organizational action? The term organizational action is not clearly defined in the statute or regulations, but the legislative l i history and Treasury commentary refer to the following: Organizational Actions NOT Organizational Actions Stock splits, mergers and/or acquisitions Stock distributions, cash distributions in excess of corporate earnings and profits Transactions that result in the sale or cancellation of shares and the elimination of basis Redemptions or distributions in complete liquidations All other transactions that affect the stock basis Transactions that create or establish of all security holders or all holders of a class of basis (such as the issuance of stock in a security. public stock offering) PwC 26

27 IRC 6045B And Form 8937 (Cont.) What are the reporting requirements? An issuer must file Form 8937 with the IRS within 45 days of the close of the transaction (or, if earlier, Jan. 15 of the following calendar year). In addition, the issuer must furnish corresponding statements to each nominee of the stockholder (or to each stockholder if there is no nominee) by Jan. 15 of the following calendar year. Alternative to filing - Issuers may post the Form 8937 to their primary public Web site, in lieu of filing the return with the IRS and furnishing statements t t to all non-exempt shareholders and nominees. - The information must be posted in a "readily accessible format" and must remain accessible to the public for 10 years. PwC 27

28 IRC 6045B And Form 8937 (Cont.) Are there any exceptions? Reporting is not required if the issuer's s shareholders are all exempt recipients. Exempt recipients include: - Corporations (excluding S corporations after Jan. 1, 2012) - Documented or presumed non-u.s. payees - Tax-exempt organizations - Governments - Individual Retirement Accounts (IRAs) - Foreign central banks of Issue - REITs and RICs - Securities and commodities dealers - Financial institutions PwC 28

29 IRC 6045B And Form 8937 (Cont.) Are there any exceptions? The organizational action must affect the basis of all holders of a security or all holders of a class of security. - Example: The exercise of an incentive stock option or the redemption of a single shareholder s stock is not the type of transaction that is reportable, because it does not affect the basis of all shareholders. S corporations: S corporations do not have to file Form 8937 if they report the required information on a Schedule K-1. PwC 29

30 IRC 6045B And Form 8937 (Cont.) What must be reported? 1. The classification and description of the security, as well as the relevant security identifiers (CUSIP number, serial number, ticker symbol, account number) 2. A description of the organizational action and, if applicable, the date of the action or the date against which h the shareholders h ownership is measured for the action 3. The quantitative effect of the organizational action on the basis of the security in the hands of a U.S. taxpayer, as an adjustment per share or as a percentage of old basis 4. A description of the calculation of the change in basis and the data that supports the calculation, such as the market value of securities and the valuation dates 5. A list of the applicable Internal Revenue Code section(s) and subsection(s) upon which the tax treatment is based 6. An admission of any resulting loss that can be recognized 7. Any other information necessary to implement the adjustment, such as the reportable tax year PwC 30

31 IRC 6045B And Form 8937 (Cont.) What are the potential penalties for non-compliance? $100 penalty per return (with a maximum penalty of $1.5 million) $100 penalty per shareholder statement ($1.5 million maximum per year) $250 penalty per return, if IRS determines that the failures were willful or due to intentional disregard of the rules (that is, a finding of gross negligence) 10% penalty for intentional disregard that would apply to the amount required to be shown, if it is greater than the $250-per-form penalty PwC 31

32 Steve Tyler, PricewaterhouseCoopers Dale Collinson, KPMG EARLY EXPERIENCES FILING FORM 8937

33 Practical Challenges Large number of public and private companies potentially affected Questions remain; for example: - IRS guidance is general with respect to what constitutes an organizational action. Difficulty obtaining proper data - Information may not be readily available. Significant unexpected work - Proper filing of Form 8937 will involve ve a host of requirements e e including: o Gathering data o Calculating and tracking adjustments to basis PwC 33

34 Practical Challenges (Cont.) Monthly/quarterly distributions may trigger multiple reporting requirements throughout the calendar year. Beware of Treas. Reg (c) requirement - Distributions that constitute return of capital must be reported within 45 days of the distribution date. - However, E&P is typically calculated on an annual basis after yearend. - Thus, companies may use reasonable estimates to determine what portion constitutes a dividend vs. return of capital. - Note that Treas. Reg (c) requires companies to treat the entire amount as a dividend, if they cannot reasonably estimate the portion that constitutes return of capital. PwC 34

35 Proactive Management Of This Issue Evaluate 2012 and future organizational actions to determine if they are subject to the new reporting requirements Calculate and track adjustments to basis resulting from corporate transactions Identify reportable transactions and determine the basis of specified securities through advanced cost basis analysis and data reconciliation PwC 35