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From time to time, we receive questions from readers about current topics on their minds. One of our readers wrote earlier this week to ask about an article from Monday’s Tax Notes – 2011 Brings New Return Obligation for Corporate Actions Affecting Basis, by Amy Elliott. The article discussed the newly effective Code section 6045B which generally requires corporations that engage in some act that affects the basis of their outstanding stock or other securities (e.g., a stock split or a distribution in excess of earnings and profits) to file a statement with the IRS and furnish a similar statement to their security holders describing the effect of the action on the basis of each share of their stock.
After reading this article, one of our readers expressed concern that the provision could apply to all corporate actions, including purely internal actions among domestic and foreign subsidiary corporations. For large, multinational companies, a requirement to report to both the stockholders and the IRS every action that affected the basis of a subsidiary’s stock could create an obvious burden. Read literally, the text of the statute would seem to suggest this is exactly what is required, given that the statute applies to “any issuer of a specified security.” Code section 6045B(a)(1). (A “specified security” generally refers to any security in which basis reporting is required – e.g., stocks, bonds, derivative contracts.)
Thankfully, the regulations issued under section 6045B clarify that no such reporting is required for actions involving corporate subsidiaries if the security holders are “exempt recipients.” First, an issuer is not required to furnish a statement to the holder of a specified security if the holder (e.g., its corporate parent) is an “exempt recipient.” Treas. Reg. § 1.6045B-1(b)(5). The definition of “exempt recipient” refers to § 1.6045-1(c)(3)(i)(B), which defines the term to include “a corporation as defined in section 7701(a)(3), whether domestic or foreign...”
Second, the regulations also conform the rules for reporting to the IRS so that no such reporting is required if the issuer reasonably determines that all of the holders of the security are exempt recipients. § 1.6045B-1(a)(4). Therefore, in the context of a corporate subsidiary with multiple shareholders where all of the shareholders are themselves corporations, no reporting to the IRS under section 6045B appears to be required.
To be sure, this analysis does not minimize the concerns addressed in the Tax Notes article, and taxpayers will likely spend considerable effort trying to comply with the new requirement. Nevertheless, the regulations interpreting section 6045B put at least this articulated concern to rest.
This post involves enough technical analysis to warrant the disclaimer: 31 CFR Part 10, § 10.35, requires us to notify you that any tax advice in this memorandum was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties.