Form 1099-CAP: Changes in Corporate Control and Capital Structure – 2015 Guide

What Form 1099-CAP Is For

Form 1099-CAP is a specialized tax document that corporations must file when they undergo major structural changes. Specifically, it reports when a company experiences either an "acquisition of control" (when another company takes over ownership) or a "substantial change in capital structure" (such as a merger, consolidation, or major reorganization).

Think of this form as the IRS's way of tracking what happens to your investment when a corporation you own stock in gets bought out, merges with another company, or undergoes a significant transformation. If you're a shareholder who receives cash, stock, or other property during one of these events, the corporation must send you Form 1099-CAP by January 31 of the year following the transaction. This form helps you understand the tax implications of what you received and ensures you report any taxable gains correctly.

The form is relatively straightforward, containing just four key information boxes: the date of the transaction, the aggregate amount you received (cash plus fair market value of any stock or property), the number of shares you exchanged, and the class of stock involved (common, preferred, etc.). Importantly, while you may need to report gains from these transactions, you cannot claim a loss based on the information in Box 2 of this form.

When You’d Use Form 1099-CAP (Late or Amended Returns)

Generally, corporations file Form 1099-CAP with the IRS by February 29, 2016 (for paper filing) or March 31, 2016 (for electronic filing) for transactions occurring during the 2015 calendar year. Shareholders receive their copies by February 1, 2016—though there's a special exception for clearing organizations like the Depository Trust Company (DTC), which must receive their copies by January 5, 2016.

If the corporation needs to correct errors on a previously filed Form 1099-CAP, they must file an amended return by checking the "CORRECTED" box at the top of the form. Common reasons for filing corrected returns include incorrect shareholder identification numbers, wrong dollar amounts in Box 2, inaccurate share counts, or incorrect transaction dates. The corporation should file corrected forms as soon as the error is discovered, following the same filing procedures as the original return.

Late filing can occur if the corporation misses the February or March deadline. While the IRS doesn't provide an automatic extension for Form 1099-CAP, corporations should file as soon as possible to minimize penalties. Under Section 6652(l), all Forms 1099-CAP related to a single acquisition or capital structure change are treated as one return, with penalties accruing at up to $500 per day the failure continues, capped at $100,000 per transaction.

Key Rules for 2015

The 2015 version of Form 1099-CAP operates under specific thresholds and requirements. First and foremost, the $100 million rule is central: corporations must file only when the fair market value of stock acquired (for control acquisitions) or the amount of cash/property provided to shareholders (for capital structure changes) equals or exceeds $100 million. This ensures the form captures only significant corporate events.

Exempt recipients don't receive Form 1099-CAP, even if they participated in a qualifying transaction. This exemption includes shareholders who received only stock (no cash or other property), those whose total consideration was $1,000 or less, and specific entity types like regular corporations (except S corporations), tax-exempt organizations, IRAs, government entities, foreign governments, REITs, regulated investment companies, securities dealers, registered investment companies, common trust funds, and financial institutions. Foreign persons with proper documentation (such as Form W-8BEN) are also exempt, though the corporation must still meet its withholding obligations under Section 1441.

The control definition for acquisition purposes means ownership of at least 50% of voting power or 50% of the total value of all stock classes. Additionally, either the corporation or its shareholders must be required to recognize gain under Section 367(a)—a provision dealing with certain international transactions—for the filing requirement to apply.

Corporations can avoid filing Form 1099-CAP under several circumstances: when the transaction involves control acquisition within an affiliated group or stock valued under $100 million, when they make a consent election on Form 8806 (particularly helpful for clearing organization situations), when they properly report under Section 6043(a), or when information returns are filed under other sections (Form 1099-DIV or Form 1099-B) and the corporation has no reason to believe those weren't filed.

Step-by-Step Filing Process (High Level)

Step 1: Determine if filing is required. The corporation must first evaluate whether the transaction qualifies as an acquisition of control or substantial change in capital structure and whether it meets the $100 million threshold. They should also verify that Section 367(a) gain recognition applies.

Step 2: Identify shareholders requiring forms. Compile a complete list of shareholders who received cash, stock, or other property, then remove exempt recipients from the list. This includes checking for corporations, tax-exempt entities, foreign persons with proper documentation, and those receiving only stock or amounts under $1,000.

Step 3: Gather necessary information. For each non-exempt shareholder, collect their taxpayer identification number (Social Security Number or Employer Identification Number), current mailing address, the exact date of the transaction, the number and class of shares they exchanged, and calculate the aggregate amount received (cash plus fair market value of any stock or other property).

Step 4: Complete the forms. Fill out Form 1099-CAP for each shareholder, ensuring accuracy in all four boxes. The corporation's name, address, and EIN go in the designated areas, along with an optional account number if maintaining multiple accounts for a recipient.

Step 5: File with the IRS and furnish to shareholders. Submit Copy A to the IRS by the deadline—February 29 for paper filing or March 31 for electronic filing (electronic filing is mandatory if filing 250 or more forms). Furnish Copy B to shareholders by February 1 (or January 5 for clearing organizations). The corporation should also file Form 8806 (Information Return for Acquisition of Control or Substantial Change in Capital Structure) with the IRS.

Step 6: Maintain records. Keep copies of all forms filed and documentation supporting the calculations for at least three years, in case of IRS inquiries or the need to file corrections.

Common Mistakes and How to Avoid Them

Mistake #1: Misidentifying exempt recipients. Corporations sometimes file Forms 1099-CAP for shareholders who shouldn't receive them, particularly foreign persons or entities. Solution: Develop a systematic checklist of all exempt categories and verify each shareholder against this list before preparing forms. Maintain current Form W-8BEN documentation for foreign shareholders.

Mistake #2: Miscalculating the aggregate amount in Box 2. This error occurs when corporations fail to include the fair market value of stock or other property received, or when they use incorrect valuation dates. Solution: Use the transaction date for fair market value determinations and include all consideration received—cash, stock, securities, and any other property. Document your valuation methodology.

Mistake #3: Confusing the filing with other 1099 forms. Corporations sometimes report these transactions on Form 1099-B (Broker Transactions) or Form 1099-DIV (Dividends) instead of Form 1099-CAP. Solution: Understand that Form 1099-CAP is specifically for corporate control changes and capital structure events meeting the $100 million threshold. Other forms may supplement but not replace Form 1099-CAP when it's required.

Mistake #4: Missing the electronic filing requirement. Corporations filing 250 or more information returns must file electronically, but some attempt paper filing. Solution: Count all Forms 1099-CAP for the transaction early in your preparation process. If you'll exceed 249 forms, arrange for electronic filing using software that meets Publication 1220 specifications well before the deadline.

Mistake #5: Failing to file for transferor corporations. When a corporation transfers substantially all its assets and then fails to file required Forms 1099-CAP, both the transferor and transferee can face joint and several liability. Solution: If your corporation is transferring assets as part of a qualifying transaction, ensure filing responsibilities are clearly assigned and completed. The transferor has primary responsibility, but the transferee must file if the transferor fails to do so.

Mistake #6: Incorrectly handling clearing organization reporting. Not understanding the special January 5 deadline or the consent election option leads to penalties or unnecessary filing burdens. Solution: If your transaction involves clearing organizations like the DTC, decide early whether to make the consent election on Form 8806, which eliminates the requirement to file Form 1099-CAP for clearing organization shares. If not making the election, calendar the January 5 deadline prominently.

What Happens After You File

Once the corporation files Form 1099-CAP with the IRS and furnishes copies to shareholders, several things occur. The IRS processes the forms to track corporate restructuring events and ensure shareholders properly report their transactions. For corporations that made the consent election on Form 8806, the IRS publishes necessary information on its website so brokers can meet their reporting obligations without the corporation having to file Forms 1099-CAP for clearing organization shares.

Shareholders use the information on Copy B to prepare their tax returns. They report any gain from the exchange on Form 8949 (Sales and Other Dispositions of Capital Assets), which flows to Schedule D. The gain calculation typically involves subtracting their basis in the original stock from the amount shown in Box 2. Importantly, shareholders cannot claim a loss based on the Box 2 amount—this limitation prevents inappropriate loss claims from corporate restructurings.

The corporation maintains its copies and supporting documentation for at least three years. During this retention period, the IRS may request additional information or identify discrepancies requiring corrected returns. If the corporation discovers errors, it should promptly file corrected forms with the "CORRECTED" box checked and furnish corrected statements to affected shareholders.

Penalties for non-compliance can be significant. Under Section 6652(l), Form 8806 and all related Forms 1099-CAP are treated as a single return for penalty purposes. The penalty accrues at up to $500 per day the failure continues, with a maximum of $100,000 per acquisition or capital structure change. Additional penalties apply for failure to file electronically when required (250+ forms), for providing false or incomplete information, and for failure to furnish correct statements to shareholders.

FAQs

Q1: Our company merged with another company in 2015, and shareholders received a mix of cash and stock. Do we need to file Form 1099-CAP?
It depends on whether the transaction meets the $100 million threshold and other requirements. If the aggregate cash and property provided to shareholders totals $100 million or more, and either the corporation or shareholders must recognize gain under Section 367(a), then yes, you must file Form 1099-CAP for non-exempt shareholders. However, shareholders who received only stock (no cash or other property) are exempt and don't receive forms.

Q2: A shareholder received $800 in cash and $400 worth of stock. Do we need to file Form 1099-CAP for them?
Yes, if the transaction otherwise qualifies for reporting. The $1,000 exemption threshold means shareholders receiving exactly $1,000 or less total consideration don't receive forms. Your shareholder received $1,200 total ($800 + $400), so they exceed the exemption threshold and should receive Form 1099-CAP.

Q3: Can we file Form 1099-CAP on paper, or must we file electronically?
If you're filing 250 or more Forms 1099-CAP (or 250 or more information returns in total when combined with other 1099 forms), you must file electronically. If you're filing fewer than 250, you may file on paper by the February 29, 2016 deadline. Electronic filers get until March 31, 2016. Electronic filing requires software meeting Publication 1220 specifications.

Q4: We filed Form 1099-CAP but later discovered we reported the wrong dollar amount in Box 2. What should we do?
File a corrected Form 1099-CAP as soon as possible. Check the "CORRECTED" box at the top of the form, ensure all information is accurate, and file it with the IRS using the same procedures as the original form. You must also furnish a corrected statement to the affected shareholder. Don't file a "VOID" form to the IRS for the incorrect version—just file the correction.

Q5: What if a shareholder who should have received Form 1099-CAP claims they never got it?
The corporation should verify the mailing address used and, if correct, provide a duplicate Copy B to the shareholder promptly. The corporation's records should show when and how the original was sent. If the address was incorrect, send the form to the correct address and consider whether a corrected return should be filed with the IRS if the address change affects other reporting elements.

Q6: Do foreign shareholders receive Form 1099-CAP?
Generally, no. Foreign persons for whom the corporation has valid Form W-8BEN or other documentation establishing foreign beneficial owner status are exempt recipients. However, the corporation must still meet its withholding obligations under Section 1441 for payments to nonresident aliens. The exemption from Form 1099-CAP doesn't eliminate withholding requirements.

Q7: Our corporation acquired control of another company through multiple purchases over several months in 2015. Which date do we put in Box 1?
For a series of related transactions constituting an acquisition of control, use the trade date when each specific shareholder's stock was actually or constructively received. Different shareholders may have different dates in Box 1 if their stock was acquired at different times during the series of transactions. Each Form 1099-CAP should reflect the specific date applicable to that shareholder's transaction.

Sources: This guide is based entirely on authoritative IRS publications: 2015 Instructions for Form 1099-CAP, Form 1099-CAP (2015), and About Form 1099-CAP from IRS.gov.