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1 TaxUpdate Vol. 2012, Issue 2 Berwyn Boston Detroit Harrisburg New York Orange County Philadelphia Pittsburgh Princeton Washington, D.C. Wilmington Follow Us on Twitter IRS Exam Issues for 2012 Join Pepper Hamilton for a tax seminar discussing the current focus of the IRS on significant tax issues that affect corporate taxpayers. Informal New York City Department Of Finance Advice Presents Expense Disallowance Risks for Investment Management Partnerships Lisa B. Petkun petkunl@pepperlaw.com Lance S. Jacobs jacobsls@pepperlaw.com Nicholas Metcalf* metcalfn@pepperlaw.com Wednesday March 7, :00-7:00 p.m. Pepper Hamilton LLP 400 Berwyn Park 899 Cassatt Road Berwyn, PA Beer, wine and hors d oeuvres will be served. From new rules relating to the reporting of expenses and categorization of independent contractors, to several matters related to the timing and characterization of income, deductions, and accounting methods, the IRS is targeting corporate taxpayers under exam for certain high dollar items. Our panelists will provide tips and strategies and relay personal experiences for addressing these issues on the tax return, and also once an IRS examination has commenced. 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. Internal Revenue Service rules require that we advise you that the tax advice, if any, contained in this publication was not intended or written to be used by you, and cannot be used by you, for the purposes of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please send address corrections to phinfo@pepperlaw.com Pepper Hamilton LLP. All Rights Reserved. New York City imposes an unincorporated business tax (UBT) on any unincorporated entity doing business in the city. Partnerships and limited liability companies are subject to the UBT and the current rate is 4 percent of taxable income. The UBT affects investment managers who operate hedge funds or other similar investment vehicles through a partnership or LLC based in New York City. A typical investment fund structure involves at least two legal entities: a management pass-through entity (management entity) which receives management fees and an incentive pass-through entity (incentive entity) which receives carried interest. The management entity generally employs the people, leases the space and incurs the costs of operations. By separating the income streams between two legal entities, the income streams are structurally bifurcated. This structure is important because the management entity is doing business in NYC and its income is subject to the UBT. Due to a statutory exemption, however, the incentive entity is not considered to be doing business and the carried interest is not subject * Nicholas Metcalf is a law clerk, resident in Pepper Hamilton s Washington, D.C. office. He is not admitted to practice law. This publication may contain attorney advertising. in this issue... 1 Informal New York City Department of Finance Advice Presents Expense Disallowance Risks for Investment Management Partnerships 3 Cut Unjustified Tax Loopholes Act Would Favor Foreign Fund Managers Over U.S. Managers 3 Speakers Corner and Published 6 Reporting of Organizational Actions Affecting Basis of Securities 11 Pepper Hamilton Hires Chief Executive Officer, Becoming One of Few Law Firms Nationwide to Appoint Non-Lawyer CEO 12 Pepper Hamilton s Tax Practice Group

2 IRS Exam Issues for 2012 continued Topics will include: factors that indicate independent contractor or employee status, the defenses that can be used against an IRS attempt to recharacterize independent contractors and the tax and other consequences of a recharacterization recent IRS audit and voluntary corrective initiatives and methods to enhance contractor status implications of Schedule UTP on corporate audits and how corporate tax payers should prepare for IRS audits of their uncertain positions disclosed on the Schedule UTP the rise in examination of tax accounting issues; the panel will address how to prepare for examinations involving these issues as well as how to address them if raised and recommendations for resolution withholding compliance on cross-border payments, which is identified as a tier 1 issue for financial institutions and other entities. Moderator Dan Hirst, vice president of Tax, AmerisourceBergen Speakers Joan C. Arnold, partner, Pepper Hamilton LLP Kevin M. Johnson, partner, Pepper Hamilton LLP Ellen McElroy, partner, Pepper Hamilton LLP Lisa B. Petkun, partner, Pepper Hamilton LLP to inclusion under the UBT. The carried interest is treated as income derived from trading property for the incentive entity s own account, which is excluded from UBT. In calculating its taxable income, the management entity can deduct expenses that are incurred directly in the operation of the business. These deductions offset income generated by the management entity and reduce the total amount of taxable income subject to the UBT. The NYC Department of Finance (the Department) reportedly has recently raised an issue upon audit related to the deductibility of expenses incurred by the management entity. On audit, the Department has reportedly contended that even though the carried interest is exempt from the UBT, a portion of the expenses incurred by the management entity are not deductible by the management company because they are attributable to the incentive entity s carried interest, which produces solely exempt income. While the expenses would be shifted to the incentive entity, there would be no tax benefit as the incentive entity is not subject to the UBT. The Department has not issued an explanation for this potential change in the audit position, nor has the audit position been published. It is unclear whether the UBT statute grants the Department sufficient authority to make such an adjustment (in clear contrast to the City s General Corporation Tax statute, which confers on the Department an ability to re-characterize items of income and expense). It can be argued that, in using federal taxable income as a starting point for the UBT calculation, the authority is implicit; however, it is not clear that the Department can rely on this authority to adjust items of federal taxable income unilaterally. In short, while arguments may be made, the disallowance of expenses attributable to carried interest is an issue that certainly bears watching in New York City. Register online at Contact Kim MacAlister at macalisterk@pepperlaw.com or with any questions. 2

3 TaxUpdate Speakers Corner On March 2, Todd Reinstein will be a panelist for Rehabilitating Troubled Corporations at the Federal Bar Association Tax Section 36th Annual Tax Law Conference in Washington, D.C. Todd Reinstein, Ellen McElroy and Howard Goldberg will present Life Cycle of a Business Transaction: From Cocktail Napkin to Financial Statement at the Tax Executives Institute s 62nd Mid Year Conference on March 26 in Washington, D.C. On April 30, Ellen McElroy and Todd Reinstein will present, Tax Accounting Issues: Methods, Periods, and Hot Topics at the Tax Executives Institute s Federal Tax Course - Level 1 in East Lansing, MI. On May 2, Todd Reinstein will present, Consolidated Net Unrealized Built-In Gain and Loss Rules at the Tax Executives Institute - Houston Chapter s 24th Annual Tax School in Houston, TX. On June 14, Annette Ahlers and Todd Reinstein will present, Making the Most of a Bad Situation: Buying and Selling Troubled or Loss Companies at the Tax Executives Institute s Federal Tax Seminar in Dallas, TX. Published Todd Reinstein and Nicholas Metcalf s article Application of Interest Netting Rules to Consolidated Groups, has been published by BNA Tax Management, Insights and Commentary. Cut Unjustified Tax Loopholes Act Would Favor Foreign Fund Managers Over U.S. Managers Steven D. Bortnick bortnicks@pepperlaw.com Timothy J. Leska leskat@pepperlaw.com In March 2009, Sen. Carl Levin (D-Mich.) introduced the Stop Tax Haven Abuse Act (S. 506) (the 2009 Act) to stop tax cheats and target off-shore tax abuses that rob the U.S. Treasury. 1 Although most of its provisions never were enacted, it did lead to the passage of sweeping withholding and informationgathering rules contained in the Foreign Account Tax Compliance Act (FATCA). Sen. Levin, through his Cut Unjustified Tax Loopholes Act (S. 2075) (the Act), is taking another shot at so called loopholes. The domestication provisions of the Act (substantially similar to those in the 2009 Act) would inappropriately tax foreign corporations where no abuse exists, and could discourage investment through U.S-based investment funds. Perhaps most ironic and disappointing is that these provisions may force investors to invest in the United States through foreign investment managers, which would only serve to reduce U.S. tax revenues. Domestication of Foreign Corporations The Act would amend the Internal Revenue Code s definition of a domestic corporation to include a foreign corporation if (1) the management and control of the corporation occurs, directly or indirectly, primarily within the United States and (2) either (A) the stock of such corporation is regularly traded on an established securities market or (B) the aggregate gross assets of such corporation, including assets under management for investors, whether held directly or indirectly, for the current year or any preceding year equals or exceeds $50 million. 2 Generally, management and control will be treated as occurring primarily in the United States if substantially all of the executive officers and senior management of the corporation who exercise day-to-day responsibility for making decisions involving strategic, financial, and operational policies of the corporation are located in the United States. For this purpose, individuals who are not executive officers and senior management, such as officers or employees in the same chain of corporations as the foreign corporation, will be treated as executive officers and senior management if they exercise the day-to-day responsibilities described in the 3

4 UBTI Blockers These provisions likely would force funds to restructure in a manner that nevertheless would alienate tax-exempt and foreign investors, and establish an unnecessary impediment to investment in U.S. investment funds. preceding sentence. The Act directs Treasury to issue regulations addressing their posts. The Act imposes a lower threshold on foreign corporations connected to investment funds. If the assets of a foreign corporation consist primarily of assets being managed on behalf of investors, management and control of the foreign corporation will be treated as occurring primarily in the United States if decisions about how to invest the assets are made in the United States. This stems from Sen. Levin s belief that foreign corporations established in a foreign jurisdiction but that have little or no activities in that jurisdiction are created to enable owners to take advantage of all of the benefits provided by U.S. legal, educational, financial, and commercial systems, and at the same time avoid paying U.S. taxes. 3 Impact on Hedge and Private Equity Funds Blockers Generally Many hedge and private equity funds establish non-u.s. corporations as blockers on behalf of investors to invest in the fund, as a separate offshore component of a single fund, or by the fund to make certain investments in portfolio companies. These so-called blockers are formed to: (A) prevent U.S. tax-exempt investors from recognizing unrelated business taxable income (UBTI); and/or (B) prevent foreign investors from recognizing income that is effectively connected to a U.S. trade or business (ECI). 4 Some background about blockers is necessary to understand why the domestication provisions are inappropriate. Tax-exempt investors, such as pension funds, charities and educational organizations, generally do not pay tax on their investment income. They do, however, pay tax on UBTI, which includes income that is debt-financed or from an unrelated trade or business. Where a partnership, including an investment fund formed as a partnership, is engaged in a trade or business or incurs indebtedness, a tax-exempt investor in such partnership is required to pay tax on the UBTI flowing through from the partnership as though it derived the income directly. Because hedge funds and private equity funds typically employ leverage in their investment strategy, they often use blockers to avoid this flow-through of UBTI to tax-exempt investors. Additionally, funds that invest in operating companies formed as partnerships also often use blockers to avoid the flow-through of this business income, which would be UBTI, to tax-exempt investors. It should be noted that the pass-through of UBTI resulting from leverage was considered by many to be so inappropriate that the House passed proposed legislation as part of the carried interest legislation to avoid this result (see Pepper Hamilton s Tax Update regarding UBTI blockers. Does H.R Signal the End of UBTI Blockers? for a discussion of this proposed legislation, available at Additionally, a myth must be dispelled: Fully taxable U.S. corporations typically are used to block UBTI from U.S. businesses (as opposed to merely debtfinanced income), and any foreign blocker of such U.S. business income would be fully subject to tax in the United States and also subjected to a branch profits tax, as discussed below under ECI Blockers. ECI Blockers Foreign investors are subject to tax in the United States under one of two systems, depending upon the type of U.S. income earned. The investment income of foreign investors, such as dividends and interest (but not capital gains or portfolio interest ) is subject to U.S. tax only if it is sourced to the United States (e.g., dividends from U.S. companies). The tax on investment income is collected by means of withholding at the source of payment, at the flat rate of 30 percent (or lower treaty rate), with no deductions available to offset the gross income. 4

5 TaxUpdate Unlike the treatment of investment income, foreign persons are taxed like U.S. persons (i.e., at graduated rates up to 35 percent on a net basis) on ECI, and they must file a tax return if they are engaged in a trade or business in the United States, regardless of the extent of any income earned therefrom. In addition, foreign corporations also are subject to the branch profits tax on ECI. The branch profits tax is imposed upon deemed repatriations of ECI at a 30 percent rate (or lower treaty rate). The purpose of the branch profits tax is to replace the withholding tax that would be imposed on distributions from a U.S. subsidiary of the foreign corporation. If a foreign person invests in a partnership (including a fund) that is engaged in a trade or business in the United States, the foreign person will be deemed to be engaged in that trade or business, and will be required to file U.S. income tax returns and pay tax, as described above. It should be noted that investing/trading for one s own account (even through a partnership or a fund) has long been excluded by statute from the definition of a U.S. trade or business. Funds that invest in operating businesses through partnerships may employ the use of blockers to avoid the pass-through of ECI to foreign investors. Some foreign investors are so concerned about being in the U.S. tax system (a concern the proposed legislation certainly would not alleviate) that they insist on investing through blockers even if there is little likelihood of generating ECI. Again, a myth must be dispelled: Any blocker, U.S. or foreign, would be subject to tax in the United States on the ECI. In fact, because of the application of the income tax and branch profits tax, blockers used solely to block ECI typically are formed as U.S. corporations. Thus, no tax is avoided through the use of a blocker. Rather, the blockers prevent foreign persons from having to file U.S. tax returns. Impact on the Use of Blockers Under the Act s domestication provisions, foreign blocker corporations of the type discussed above would be treated as U.S. corporations if investment decisions are made within the United States. The blockers would be subject to corporate tax at rates up to 35 percent, regardless of the source (U.S. or foreign), character (ordinary or capital gain) or nature (related to a business or mere investment) of the income they generate. Moreover, dividends paid to foreign persons would be subject to withholding tax at 30 percent (or lower treaty rate). The consequences of this proposal would be catastrophic without further planning. Investment funds with foreign operations potentially could avoid these provisions by ensuring that investment decisions are made outside the United States. This could put U.S.-based investment managers at a competitive disadvantage to their foreign counterparts. Alternatively, funds could discontinue the use of blockers. Without UBTI blockers, hedge funds may look to leveraged exchange-traded funds to make leveraged investments. Additionally, tax-exempts may look to offshore managers or avoid funds that use leverage. Without ECI blockers, more foreign investors (who are willing to invest through U.S. managed funds) would be subject to obligations to file U.S. tax returns, but, as the blockers paid tax at the highest rates, it seems unlikely that the U.S. Treasury will receive more tax revenue. Private Equity Holding Vehicles The Act s domestication provisions could significantly impact private equity funds ability to structure acquisitions to efficiently manage worldwide tax obligations. For example, because certain foreign countries tax gains on the sale of companies resident in their jurisdictions, a holding company could be formed in a treaty country to avoid that tax (or just make it easier to prove the existence of a tax exception rather than obtaining residence certificates from all investors). An issue raised by the Act and left to the Treasury to resolve in future regulations is the extent to which investment decisions of a foreign holding company, with a board independent from the fund, will be considered to be made in the United States where the sole shareholder of the holding company is a U.S.-based fund. Moreover, the controlled foreign corporation and passive foreign investment company rules currently exist to prevent the deferral of income offshore by U.S. investors participating in these structures. However, by domesticating these foreign holding companies, the Act would inappropriately tax all of the income from wholly-foreign operations. Pepper Perspective Rather than increasing the tax paid to the U.S. Treasury, the domestication provisions of the Act, if enacted, could significantly reduce investment in U.S. hedge and private equity funds. The provision would tax income that simply should not be taxed in the United States (i.e., foreign source income) or tax it at inappropriate rates. This likely would force these funds to restructure in a manner that nevertheless would alienate tax-exempt and foreign investors. These provisions establish an unnecessary im- 5

6 pediment to investment in U.S. investment funds. Whether this provision will be enacted is unclear. Endnotes 1 Statement of Sen. Carl Levin on Introducing the Stop Tax Haven Abuse Act, available at 2009 TNT This rule will not apply if the corporation is subject to the rules for controlled foreign corporations (which require certain U.S. shareholders to currently include in income certain income of the corporation) and is a member of a group of corporations connected through 80 percent stock ownership to a parent corporation that is organized under U.S. law and that has substantial assets (other than cash, cash equivalents, and stock of foreign subsidiaries) held for the use of the active conduct of a trade or business. 3 Statement of Sen. Carl Levin on Introducing the Stop Tax Haven Abuse Act, available at 2009 TNT See also Statement of Sen. Carl Levin on Introducing the CUT Loopholes Act, available at 2012 TNT For the reason described below, U.S. corporations typically are used as blockers where ECI is the sole concern. Reporting of Organizational Actions Affecting Basis of Securities Todd B. Reinstein reinsteint@pepperlaw.com Michelle Moersfelder moersfelderm@pepperlaw.com In general, any corporation, whether domestic or foreign and whether public or private, that (i) has one or more U.S. persons as a shareholder and (ii) engages in a corporate action that affects the tax basis of a specified security, 1 is now required to report certain information to the IRS on Form 8937, Report of Organizational Actions Affecting Basis of Securities. The purpose of the reporting of the basis is to permit brokers to report the taxable gain on sale transactions, not just the gross proceeds. This requirement was added by Section 6045B and is applicable to organizational actions occurring after December 31, General Due Date Form 8937 typically must be filed with the IRS on or before the earlier of (i) the 45th day following the organizational action or (ii) January 15 of the year following the calendar year of the organizational action Transactions As the IRS did not release Form 8937 until January 5, 2012, Notice provided transitional relief to waive penalties for corporate actions taken during 2011 if the Form 8937 is filed with the IRS (or posted on the issuer s Web site as described below) by January 17, In Notice , the IRS announced on January 13, 2012 that, due to its late release of the required form, it will not impose penalties on issuers of stock who report incorrect 2011 information as long as they make a good-faith effort to timely comply with the requirements. The IRS said in Notice that it recognizes that the release date provides a very limited timeframe remaining before the due date of the form. The IRS, therefore, will not impose penalties on issuers that reported incorrect information, provided they make good-faith efforts to timely post Form 8937 (or the required information) on their Web site or file accurate Forms 8937 and furnish corresponding issuer statements. Importantly, the IRS says this relief applies only to organizational actions occurring in

7 TaxUpdate Scope The instructions provide that only corporate issuers of stock or interests treated as stock, such as American Depository Receipts, are required to file Form The instructions to Form 8937 provide that reporting is required only when an organizational action affects the basis of all holders of a security or all holders of a class of securities. 3 This significantly narrows the statutory and regulatory definition of specified securities. The Code and regulations, however, require reporting of organizational actions affecting the basis of specified security holders on an information return. As the IRS has not provided an information return on which issuers may report organizational actions affecting the basis of securities other than stock, it seems that no reporting is currently required for these other securities. It is unclear whether the IRS will revise the instructions to require reporting of any of the other types of securities included in the definition of specified security in Section 6045(g)(3)(B). Both foreign and domestic corporations are covered by the reporting requirements. No reporting is required, however, by the issuer with respect to certain exempt security holders. No reporting is required with respect to a security held by C corporations, charitable organizations, IRAs, Archer MSAs, health savings accounts (HSAs), the United States, a state, or political subdivisions. The issuer also does not have to report as to a security holder if the issuer, prior to the transaction, associates such holder with documentation upon which the issuer may rely in order to treat payments to the holder as made to a foreign beneficial owner in accordance with the documentation for withholding exemptions or as made to a foreign payee. 4 It is unclear, however, whether a foreign issuer has a reporting obligation when the issuer is not required to receive any U.S. withholding certificates because there would have been no U.S. withholding obligations. Special rules exist for reporting to security holders that are S corporations and for certain regulated investment companies (RICs) and real estate investment trusts (REITs). Examples of Common Organizational Actions that Require Reporting The IRS has provided limited guidance as to what corporate actions are deemed to be organizational actions that affect basis. The Regulations provide three examples of some of the common organizational actions that affect a shareholders basis in a company s shares and require reporting on Form 8937: Although there is significant uncertainty regarding the types of transactions required to be reported, until additional guidance is released, companies should make good-faith efforts to comply with the reporting requirements. a stock split a payment of a stock dividend to shareholders, and a cash distribution treated as a return of capital (distribution exceeds current and accumulated earnings and profits (E&P)). 5 One issue practitioners are dealing with is that Form 8937 instructions require that the issuer file a Form 8937 for a distribution of property to all shareholders if it knows that the distribution is not taxable. The instructions then state that taxpayers do not need to report a distribution on Form 8937 if the distribution is reportable as a dividend on Form 1099-DIV. What happens if a distribution is a partial dividend because E&P is less than the distribution amount with the remainder being a return of basis? There would be a 1009-DIV filed in that case, but it wouldn t report all of the distribution as a dividend. Taxpayers may want to use caution at this point and file the Form even if redundant information is reported to the IRS as brokers may still need the information for their reporting requirements. Although the definition of organizational action is vague at this point, the reporting requirement may apply to other types of transactions, such as: tax-free spin-offs non-pro rata split-offs involving a distribution to all holders of a class of securities 6 taxable recapitalizations treated as a return of capital 7

8 pro rata redemptions of a class to the extent treated as a return of capital, and non-arm s length asset transfers among affiliates in which a distribution and contribution is deemed to occur under the principles of Section The application of the filing requirements to several types of transactions remains unclear at this time. For example, certain tax-free reorganizations where stock is merely exchanged for new stock and basis is carried over to the new shares, as this has no real effect on basis and there is a split among practitioners as to whether these rules apply. It is also unclear whether the adjustments to basis required by the controlled foreign corporation (CFC) and passive foreign investment corporation (PFIC) regimes must be reported on Form There are also many transactions that do not involve an actual exchange or change in investment under standard business law. These transactions, however, may be considered a deemed recognition event for U.S. federal income tax purposes, such as a non-arm s length transfer among affiliates under Section 482. For these transactions, it is unclear as to whether the deemed transfer triggers a filing. Until the IRS issues further guidance, taxpayers are advised to use prudence in applying these rules to corporate transactions. The instructions and regulations provide that initial public offerings are exempt from the reporting rules. It is unclear, however, whether similar transactions are also exempt, such as private placements for a new class of stock and all issuances of stock in which only cash is contributed or secondary offerings. Successor/Acquirer Issues Treas. Reg. Section B-1(e) requires that an acquiring or successor entity of an issuer must satisfy these reporting obligations if applicable. Importantly, if neither the issuer nor the acquiring or successor entity satisfies these reporting obligations, both parties are jointly and severally liable for any applicable penalties. Neither the Treasury Regulation nor the instructions define or refer to the definition of acquirer. Thus, the broad definition may catch more transactions than expected. For example, a partnership that acquires shares of a public company may have a reporting requirement responsibility if the corporation files to comply as they may be considered an acquirer under the literal reading of the regulation. Interplay with the Relatively New Broker Cost Basis Reporting Regime Section 6045(g) was enacted as part of the new basis reporting regime to create a system for brokers to provide customers with cost basis information that customers could use to report more accurately capital gains and losses from sales of securities. Brokers that are required to file a gross proceeds information return with the IRS for the sale of stock (1099-B) must now include in the information return the customer s adjusted basis in the stock. 8 The new regime thus includes rules governing both the transfer of cost basis information when securities are transferred and certain cost basis adjustments brokers must make. 9 In enacting the cost basis reporting requirements for brokers, Congress recognized that brokers might not have cost basis information for previously acquired securities. So the new rules also provide that sales of securities that a broker has held in a customer s account prior to the effective date of the new cost basis reporting rules are not subject to those rules. Mechanically, the rules only apply with respect to sales of covered securities. Pursuant to Section 6045(g)(3)(A), covered securities are specified securities that were acquired in accounts held by the customer for cash or transferred into the account on or after January 1, How to File Form 8937 typically is filed with the IRS in Ogden, Utah. Taxpayers that are required to file Form 8937 also are required to provide a copy of the form (or a written statement containing the same information) to each security holder of record as of the date of the organizational action and to all subsequent holders of record up to the date that the copy of the Form 8937 is provided. A taxpayer alternatively may post required information, rather than Form 8937 itself, on its Web site for 2011 transactions. 11 Such issuer statements generally are required to be provided on or before January 15 of the year following the calendar year of the organizational action. The reporting requirement also extends to an acquiring or successor entity of the issuer who is considered jointly and severally liable. 12 Public Reporting Taxpayers are not required to file the physical Form 8937 with the IRS or furnish issuer statements to security holders if, by the due date for filing Form 8937, the company posts a completed Form 8937 in a readily accessible format in an area of its primary 8

9 TaxUpdate public Web site that is dedicated to this purpose, and the information is made accessible to the public on this Web site (or the Web site of any successor organization) for ten years. Penalties An issuer may make reasonable assumptions in order to report the effect on basis of a corporate action. However, if an issuer fails to file the return, significant penalties may apply under Section The potential penalties for failing to meet the reporting obligations of section 6045B include: $100 for each failure to file a return with the IRS, with a maximum of $1.5 million per year, and $100 for each failure to furnish a statement to a shareholder, with a maximum of $1.5 million per year. Additional (and more substantial) uncapped penalties may apply for intentional disregard of the reporting requirements. A corporation may use an agent to satisfy its obligations but remains liable for penalties for failure to comply and Future Compliance Although the filing deadline was January 17, there are likely many corporations with reportable 2011 organizational actions that have not yet filed Form Moreover, going forward companies must file within 45 days (or January 15 of the next year, if earlier) of a reportable organizational action. Although there is significant uncertainty regarding the types of transactions required to be reported on Form 8937, until additional guidance is released, companies should make good-faith efforts to comply with the reporting requirements. The IRS has indicated flexibility with respect to efforts to comply by the January 17, 2012 deadline and may show leniency for non-compliant companies making a good-faith effort to comply with the reporting requirements in a timely manner. Accordingly, companies should make a good-faith effort to comply with the requirements of Section 6045B as soon as possible if they have not already done so for 2011 filings. Endnotes 1 For purposes of Code Sec. 6045B, the term specified security has the meaning given the term by Section 6045(g) (3)(B). Section 6045(g)(3)(B) defines a specified security as any stock in a corporation; any note, bond, debenture, or other evidence of indebtedness; any commodity, or contract or derivative with respect to a commodity (if the IRS chooses); and any other financial instrument (as specified by the IRS). The instructions to Form 8937, however, narrowly define specified securities as stock in a corporation or an interest treated as stock. Unless otherwise stated, all references to Section are to the Internal Revenue Code of 1986, as amended, and all references to the Regulations or to Treas. Reg. are to the Treasury Regulations promulgated thereunder. 2 Enacted as part of The Emergency Economic Stabilization Act of Of note, the Form 8937 instructions establish an all shareholder or all holders of a class standard that is not evident in the statute. 4 For withholding agent reliance for payments to foreign beneficial owners see Treas. Reg. Section (e) and determination of foreign payee rules see Treas. Reg. Section (d). 5 Treas. Reg. Section B-1(g). Of note, E&P typically will not be known until sometime after year end when the books are closed and necessary information is available. This makes it difficult to meet the January 17, 2012 deadline, and will be an issue on an ongoing basis with the 45 day compliance rule. 6 It s unclear if a non-pro rata distribution to some shareholders requires reporting as it does not appear to affect the basis of all holders of stock or all holders of a class of securities of the distributing corporation. 7 It is unclear as to whether the reporting requirements apply to taxable acquisitions as the acquisition itself does not have an effect on basis although the brokers have a reporting requirement to the individual shareholders. 8 Currently, gross proceeds information is reported on Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. 9

10 9 Section 6045A requires persons transferring securities to provide the transferee with cost basis and holding period information. 10 For transferred securities, the broker must receive a transfer statement pursuant to Section 6045A from an applicable person which is a person that acts as a custodian of securities in the ordinary course of a trade or business, an issuer of securities, a trustee or custodian of an individual retirement plan, or any agent of these persons. 11 See Notice It is unclear as to what information will be required in future years on a company s Web site. 12 It s unclear if the scope of joint and several liability excludes organizational actions and reporting due dates occurring before the acquisition date. RSS on Subscribe to the latest Pepper articles via RSS feeds. Visit today and click on the RSS button on the publications page to subscribe to our latest articles in your news reader. 10

11 TaxUpdate Pepper Hamilton Hires Chief Executive Officer, Becoming One of Few Law Firms Nationwide to Appoint Non-Lawyer CEO Pepper Hamilton has hired Scott Green as Chief Executive Officer of the law firm. This is the first time that the firm has appointed a non-lawyer as CEO to lead the entire firm. Green joins Pepper Hamilton from the law firm WilmerHale, where he has served as Executive Director since In the newly created position at Pepper, he will assume responsibility for business strategy and operations of the firm. The Chair of Pepper Hamilton s Executive Committee, Nina M. Gussack, explained that creating the role of Chief Executive Officer and hiring a non-lawyer executive to fill it resulted from a yearlong process during which the Executive Committee analyzed succession planning, alternative management structures, and best practices in organizational governance. We began with our clients desire for value, creativity, quality and efficiency, said Gussack. We concluded that a management model that more closely resembles those of our clients would enable the lawyers at Pepper Hamilton to focus on providing legal services in the most effective way for our clients. In his new role, Green will be responsible for both business strategy and operations at the firm. He will serve on the firm s Executive Committee and will work with Gussack, the Executive Partner, and other Executive Committee members to shape and execute Pepper s strategic plan. The legal functions of the firm department heads, practice group leaders and office managing partners will report to Green. All management functions of the firm, including finance, IT, marketing, human resources, recruiting and development, and practice management, will also report to Green. Green, 49, brings a diverse background to his new position. He holds an MBA from Harvard University and is a Certified Public Accountant. Early in his career, he joined Deloitte & Touche as part of their accelerated career program, and then served in various management roles for Goldman Sachs, ING Barings, and the law firm of Weil, Gotshal & Manges. In 2007, he joined the law firm of WilmerHale. As Executive Director of the firm, he oversaw the business operation that includes 1,400 employees at 10 offices in five countries. 11

12 Pepper Hamilton s Tax Practice Group Federal and International Tax Issues Annette M. Ahlers ahlersa@pepperlaw.com Timothy B. Anderson andersontb@pepperlaw.com Joan C. Arnold arnoldj@pepperlaw.com Anthony J. Balden baldena@pepperlaw.com James W. Barson barsonj@pepperlaw.com Steven D. Bortnick bortnicks@pepperlaw.com Gordon R. Downing downingg@pepperlaw.com W. Roderick Gagné gagner@pepperlaw.com Howard S. Goldberg goldbergh@pepperlaw.com Kevin M. Johnson johnsonkm@pepperlaw.com Timothy J. Leska leskat@pepperlaw.com Ellen McElroy mcelroye@pepperlaw.com Michelle Moersfelder moersfelderm@pepperlaw.com Paul D. Pellegrini pellegrinip@pepperlaw.com Lisa B. Petkun petkunl@pepperlaw.com Todd B. Reinstein reinsteint@pepperlaw.com Joan M. Roll rollj@pepperlaw.com State and Local Tax Issues Lance S. Jacobs jacobsls@pepperlaw.com Employee Benefits Issues Jonathan A. Clark clarkja@pepperlaw.com David M. Kaplan kapland@pepperlaw.com Andrew J. Rudolph rudolpha@pepperlaw.com Sign-Up to Receive Your Tax Update Sooner We are encouraging our readers to switch to delivery. delivery means faster delivery of updates to you, reduced printing and postage costs for us, and reduced environmental impact for everyone. Please subscribe online at or send your request, name, company and address to phinfo@pepperlaw.com. Please be assured that we will respect your privacy please see our privacy policy at