Form 1099-CAP: Changes in Corporate Control and Capital Structure (2010)

What Form 1099-CAP Is For

Form 1099-CAP is an IRS tax document that corporations must use to report significant corporate changes to shareholders who may owe taxes as a result. Specifically, it covers two major types of corporate events: acquisition of control (when another company buys at least 50% of a corporation's voting stock or total value) and substantial changes in capital structure (such as mergers, consolidations, or major asset transfers). IRS.gov

Think of it this way: when a company undergoes a major transformation—like being bought by another company or merging with a competitor—and shareholders receive cash, new stock, or other property in exchange for their old shares, that exchange might trigger a taxable event. Form 1099-CAP alerts both the IRS and shareholders that this transaction occurred and provides the information needed to calculate any potential tax liability.

The form is required only for significant corporate changes involving transactions valued at $100 million or more. This threshold ensures that only major corporate restructuring events trigger the reporting requirement, not minor internal adjustments.

When You’d Use Form 1099-CAP (Including Late and Amended Filings)

For Corporations

Corporations must file Form 1099-CAP when they undergo an acquisition of control or substantial change in capital structure that meets specific criteria. The normal filing deadline is February 28, 2011 (or March 31, 2011 if filing electronically) for transactions that occurred in 2010. Shareholders must receive their copy by January 31, 2011.

There's a special earlier deadline for clearing organizations like the Depository Trust Company (DTC): they must receive the form by January 5, 2011. This earlier date gives brokers time to meet their own reporting obligations.

Late or Corrected Filings: If you need to file a corrected Form 1099-CAP, use the same form but mark the "CORRECTED" box at the top. Corrections follow the same filing procedures as original forms—send them to the IRS, the shareholder, and applicable state agencies. Late filings can result in significant penalties, so it's crucial to file on time or as soon as possible if you've missed the deadline.

For Shareholders

You don't file Form 1099-CAP yourself; you receive it from the corporation. If you receive this form, you'll use the information to report any taxable gain on Schedule D (Form 1040), Capital Gains and Losses, when you file your tax return. The form serves as documentation that you participated in a corporate restructuring event and received consideration that may be taxable.

Key Rules or Details for 2010

• The $100 Million Threshold: The transaction must involve stock with a fair market value of $100 million or more (for acquisition of control) or cash/property distributions of $100 million or more (for substantial capital structure changes). This significant threshold means most small and mid-sized corporate transactions don't require Form 1099-CAP reporting.
• The Control Definition: For acquisition purposes, "control" means owning at least 50% of the total voting power or at least 50% of the total value of all stock classes. This clear definition helps corporations determine whether they've crossed the reporting threshold.
• Section 367(a) Requirement: Either the corporation or its shareholders must be required to recognize gain under Section 367(a) of the tax code. This provision typically involves international transactions where U.S. persons transfer property to foreign corporations.
• Exempt Recipients: Corporations don't need to file for certain shareholders, including those who receive only stock for their stock (no cash or other property), those whose total consideration is $1,000 or less, C corporations, tax-exempt organizations, IRAs, government entities, REITs, RICs, financial institutions, and foreign persons with proper documentation (Form W-8BEN).
• Electronic Filing Requirement: While paper filing was acceptable for 2010, electronic filing extended the deadline to March 31, 2011, providing an extra month for compliance.
• Truncation Allowed: A 2010 rule change (Notice 2009-93) permitted corporations to truncate shareholders' Social Security numbers on paper statements, showing only the last four digits for privacy protection while still reporting the full number to the IRS. IRS.gov

Step-by-Step (High Level)

For Corporations Filing the Form

Step 1: Determine If You Must File

Verify that your transaction meets the reporting criteria—$100 million threshold, control acquisition or substantial capital structure change, and Section 367(a) gain recognition requirement.

Step 2: Identify Who Gets the Form

Create a list of all shareholders who received cash, stock, or other property, excluding exempt recipients. Remember that you must file for clearing organizations unless you make a consent election on Form 8806.

Step 3: Gather Required Information

Collect each shareholder's name, address, and taxpayer identification number (TIN), along with transaction details including the exchange date, aggregate amount received, number of shares exchanged, and classes of stock involved.

Step 4: Complete Each Box

Fill in the corporation's name, address, phone number, and EIN in the header. Then complete Box 1 (Date of sale or exchange), Box 2 (Aggregate amount received—the total cash plus fair market value of stock and other property), Box 3 (Number of shares exchanged), Box 4 (Classes of stock exchanged, such as common or preferred), and Box 5 (Account number, if applicable).

Step 5: File With the IRS

Submit Copy A to the IRS by February 28, 2011 (March 31 if filing electronically), along with Form 1096 (Annual Summary and Transmittal of U.S. Information Returns) as a cover sheet.

Step 6: Furnish to Shareholders

Send Copy B to each shareholder by January 31, 2011 (January 5 for clearing organizations).

For Shareholders Receiving the Form

Step 1: Review the Information

Check that your name, address, and the last four digits of your SSN are correct.

Step 2: Understand What It Means

The form indicates you may owe taxes on any gain from exchanging your old shares for cash, new stock, or other property.

Step 3: Calculate Your Gain

Subtract your cost basis in the old shares from the amount shown in Box 2 (if positive, you have a taxable gain).

Step 4: Report on Your Tax Return

Use the information to complete Form 8949 (Sales and Other Dispositions of Capital Assets) and Schedule D (Capital Gains and Losses) when filing your Form 1040. Important: You cannot claim a loss based on this transaction. IRS.gov

Common Mistakes and How to Avoid Them

Missing the Threshold Exemptions

Many corporations file unnecessary forms for shareholders whose consideration totals $1,000 or less, or who received only stock for stock. Carefully review the exempt recipient categories before filing to avoid unnecessary paperwork and expense.

Incorrect Valuation in Box 2

The aggregate amount must include both cash and the fair market value of any stock or other property received. Don't report only the cash portion. Use proper valuation methods to determine the FMV of stock or property on the exchange date.

Filing for Clearing Organizations Without Considering the Consent Election

If your corporation makes the consent election on Form 8806, you don't have to file Form 1099-CAP for clearing organizations like the DTC. This election allows the IRS to publish necessary information for brokers to meet their reporting obligations, relieving you of the burden while still ensuring proper reporting.

Wrong Filing Deadlines

Many filers confuse the different deadlines. Regular shareholders get their copies by January 31; clearing organizations by January 5; the IRS receives Copy A by February 28 (or March 31 if electronic). Mark these dates on your calendar and set reminders.

Not Filing Electronically When Required

If you're filing 250 or more information returns, electronic filing is mandatory. Even if you're under that threshold, electronic filing extends your IRS deadline by a month.

Forgetting to File Form 8806

Form 1099-CAP requires the corporation to also file Form 8806 (Information Return for Acquisition of Control or Substantial Change in Capital Structure). These forms work together, and penalties apply to both as a single return for penalty calculation purposes.

Failing to Report When Asset Transfer Occurs

If your corporation transfers substantially all assets to another entity and then dissolves, the transferor (original corporation) must file Form 1099-CAP. If it fails to do so, the transferee (receiving corporation) becomes responsible. Both can be held jointly and severally liable for penalties if neither files.

What Happens After You File

For Corporations

Once you file Form 1099-CAP, the IRS receives notification of the corporate control change or capital structure modification and can match this information with shareholder tax returns. The form also satisfies your information reporting obligation under Section 6043(c) of the tax code.

If you fail to file or file incorrectly, you may face penalties under Section 6652(l). For purposes of calculating penalties, Form 8806 and all related Forms 1099-CAP are treated as a single return. Penalties can reach $500 per day the failure continues, up to a maximum of $100,000 per acquisition or capital structure change. These penalties are substantial, reflecting the importance the IRS places on accurate reporting of major corporate events.

The information you provide helps brokers meet their own reporting obligations. When brokers receive notice of a qualifying transaction through clearing organizations or IRS publications, they must file Form 1099-B for customers who held shares through brokerage accounts, unless those customers are exempt recipients.

For Shareholders

After receiving your Form 1099-CAP, you have the information needed to properly report the transaction on your tax return. Keep this form with your tax records for at least three years (the general statute of limitations), or longer if advised by your tax professional.

If you determine you owe capital gains tax based on the information, you'll pay this as part of your regular income tax liability when you file Form 1040. The gain is generally treated as a capital gain, with the holding period of your old shares carrying over to determine whether it's short-term or long-term.

Remember that you cannot claim a loss based on Form 1099-CAP information. If your basis in the old shares exceeds the amount in Box 2, you don't get to deduct that loss on your tax return. This restriction reflects the tax code's treatment of corporate reorganizations, which often have special rules preventing loss recognition in certain circumstances.

FAQs

1. What's the difference between an acquisition of control and a substantial change in capital structure?

An acquisition of control occurs when one corporation acquires at least 50% ownership of another corporation's voting power or total stock value, with the transaction valued at $100 million or more. A substantial change in capital structure involves mergers, consolidations, asset transfers, or bankruptcy reorganizations where shareholders receive $100 million or more in cash or property. Both trigger Form 1099-CAP requirements when Section 367(a) gain recognition applies.

2. Do I need to file Form 1099-CAP if my company undergoes a tax-free reorganization?

Not necessarily. If the transaction qualifies as a tax-free reorganization and shareholders receive only stock in exchange for their old stock, you don't need to file for those shareholders. You only file for shareholders who receive cash, property, or a combination that may trigger taxable gain recognition. Additionally, if the corporation can reasonably determine that stock received wouldn't cause gain recognition, reporting the stock's fair market value isn't required.

3. What happens if I discover an error after filing Form 1099-CAP?

File a corrected Form 1099-CAP as soon as you discover the error. Use the same form, mark the "CORRECTED" box, and follow the same filing procedures as the original—send it to the IRS, the affected shareholder, and any applicable state agencies. Don't wait; timely corrections help shareholders file accurate tax returns and may reduce potential penalties.

4. I'm a shareholder who received Form 1099-CAP. Does this mean I definitely owe taxes?

Not necessarily. The form indicates that the corporation has reasonably determined you may need to recognize gain. Whether you actually owe taxes depends on your cost basis in the original shares. If your basis equals or exceeds the amount in Box 2, you don't have a taxable gain. However, you should consult with a tax professional to calculate your actual tax liability, especially if the transaction was complex.

5. Can a Section 338 election affect Form 1099-CAP filing requirements?

Yes. If a Section 338 election is made, the transaction is treated as an acquisition of stock, not an asset acquisition. This means the acquiring corporation must evaluate the transaction under the acquisition of control rules to determine if Form 1099-CAP filing is required. The election changes how the IRS views the transaction for tax purposes.

6. What if I'm a foreign shareholder who received Form 1099-CAP?

If you properly provided Form W-8BEN or other documentation establishing your foreign status, the corporation should not have filed Form 1099-CAP for you—foreign persons with proper documentation are exempt recipients. However, if you did receive the form, you should consult with a tax advisor familiar with international tax law, as special rules may apply to your situation.

7. Are brokers required to file anything when corporations undergo these transactions?

Yes. Brokers who hold shares on behalf of customers in corporations that undergo qualifying transactions must file Form 1099-B (Proceeds from Broker and Barter Exchange Transactions) unless the customer is an exempt recipient. Brokers learn about qualifying transactions through clearing organizations like the DTC or through information published on the IRS website. This ensures comprehensive reporting even when investors hold shares through brokerage accounts rather than directly.

Note: This guide provides general information about Form 1099-CAP for tax year 2010. Tax laws and regulations change over time. For current requirements or specific situations, consult the latest IRS instructions or a qualified tax professional. All information is based on official IRS sources available at IRS.gov.

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