New US Tax Reporting Requirements Relating to Corporate Actions

January 7, 2011

New U.S. tax reporting rules that came into effect on January 1, 2011 impose reporting requirements on both U.S. and foreign corporations (including entities that are treated as corporations for U.S. tax purposes) that engage in certain “organizational actions” that affect the U.S. tax basis of their shares. We have set forth below a brief overview of the new requirements, but it should be noted that the rules are complex and their application in the circumstances of a particular transaction will require careful analysis.

In 2008, Congress enacted rules imposing enhanced information reporting requirements relating to the tax basis of securities to facilitate U.S. taxpayers’ reporting of gains and losses on their securities holdings. The Internal Revenue Service recently released final regulations implementing portions of those new rules. Although the rules generally operate in a manner similar to Form 1099 reporting requirements, which impose reporting obligations mainly on financial intermediaries, they also impose reporting obligations on corporate issuers in certain circumstances.

The rules provide that if a corporation effects an “organizational action” (for example, a stock split, merger, acquisition or spinoff) that affects the U.S. tax basis of its outstanding shares, the corporation must provide specified information about the U.S. tax effect of the transaction to the Internal Revenue Service and its shareholders. The rules generally apply to transactions that would be tax-free from a U.S. tax perspective, but generally do not apply to fully taxable transactions, such as cash acquisitions or transactions that are taxable as dividends. A corporation can satisfy the reporting obligations by posting the required information on its website, provided the information remains accessible to the public for ten years.

The rules are broad in scope, and apply to both U.S. and foreign issuers. The rules apply not only to equity interests held in the form of common stock or ordinary shares, but also to securities held through ADR and GDR programs. The rules do not by their terms include any de minimis rule that would exempt corporations with only a limited U.S. market interest.

Issuers that fail to comply with these reporting requirements may be subject to penalties, which generally are $100 per failure (i.e., $100 for failing to file with the Internal Revenue Service and $100 for each holder for whom reporting is required).

Please feel free to contact any of your regular contacts at the firm or any of our partners and counsel listed under Tax if you have any questions.