Form 1099-CAP: Changes in Corporate Control and Capital Structure (2011)
When corporations undergo major changes—like mergers, acquisitions, or structural reorganizations—the IRS requires detailed reporting to track the tax implications for shareholders. Form 1099-CAP serves as the official notification document that shareholders receive when they exchange their stock for cash, new stock, or other property during these corporate transformations. This guide breaks down everything you need to know about this important tax form for the 2011 tax year.
What Form 1099-CAP Is For
Form 1099-CAP ("Changes in Corporate Control and Capital Structure") is an information return that corporations must file with the IRS and provide to shareholders when the company experiences specific types of major corporate events. Think of it as the IRS's way of keeping track of wealth transfers that occur during corporate restructuring.
The form specifically applies when a corporation undergoes one of two qualifying events:
Acquisition of Control occurs when one corporation acquires at least 50% of another corporation's voting power or total stock value in transactions worth $100 million or more. The key is that before the transaction, the acquiring corporation didn't have control, but afterward it does.
Substantial Change in Capital Structure happens when a corporation merges, consolidates, combines with another company, or transfers substantially all its assets—and the transaction involves $100 million or more in cash or property distributed to shareholders. This also includes major reorganizations during bankruptcy proceedings or situations where the corporation changes its identity, form, or place of organization with specific tax recognition requirements under Section 367(a).
As a shareholder, you'll receive Form 1099-CAP if you exchanged your shares for cash, stock, or other property during one of these qualifying corporate events. The corporation sends you this form because you may need to recognize gain (but not loss) on your tax return from the exchange. IRS.gov
When You’d Use Form 1099-CAP (Late/Amended)
Deadlines
Standard Deadlines
- Shareholders must receive Copy B by January 31, 2012
- Corporations must file Copy A with the IRS by February 28, 2012 (paper filing)
- Electronic filers had until April 2, 2012
Special Deadline for Clearing Organizations
If the shareholder is a clearing organization (like the Depository Trust Company), the corporation must furnish Form 1099-CAP by January 5, 2012—significantly earlier than the regular deadline.
Late Filing Situations
If you're a corporation that missed the original deadlines, you should file as soon as possible. The penalty structure under Section 6652(l) treats Form 8806 (the corporate filing) and all related Forms 1099-CAP as a single return, with penalties not exceeding $500 per day up to a maximum of $100,000 for each acquisition or structural change event.
Amended Returns
If you need to correct information on a previously filed Form 1099-CAP, mark the "CORRECTED" box at the top of the form. Common reasons for amendments include incorrect shareholder identification numbers, wrong transaction dates, or inaccurate aggregate amounts. File corrected forms as soon as you discover the error, providing the corrected copy to both the IRS and the affected shareholder. IRS.gov
Key Rules or Details for 2011
The $100 Million Threshold
Both types of qualifying events required fair market value thresholds of at least $100 million. Transactions below this amount didn't trigger Form 1099-CAP filing requirements.
The $1,000 Exemption
Corporations didn't need to file Form 1099-CAP for shareholders whose total receipt (cash plus fair market value of stock and other property) didn't exceed $1,000. This helped reduce paperwork for small shareholders.
Stock-for-Stock Exchanges
If a shareholder received only stock in exchange for their original stock—with no cash or other property—no Form 1099-CAP was required for that shareholder.
Identifying Number Disclosure
A significant change in 2011 was the end of the pilot program for truncating identification numbers. Corporations had to show each shareholder's complete Social Security Number or Taxpayer Identification Number on all copies of the form.
Exempt Recipients
Corporations didn't file Form 1099-CAP for certain categories of shareholders, including corporations (except S-corporations), tax-exempt organizations, IRAs, government entities, foreign governments, REITs, regulated investment companies, securities dealers, financial institutions, and properly documented foreign persons with valid Form W-8BEN.
The Consent Election Option
Corporations could make a consent election on Form 8806, which eliminated the requirement to file Form 1099-CAP for shares held by clearing organizations. Instead, the IRS published the necessary information for brokers to meet their reporting obligations.
Joint and Several Liability
In asset transfer situations, if the transferor corporation failed to file required Forms 1099-CAP, the transferee corporation became responsible. If neither filed, both faced joint and several liability for penalties. IRS.gov
Step-by-Step (High Level)
For Corporations Filing Form 1099-CAP
Step 1: Determine if Filing is Required
Assess whether your corporate transaction meets the control acquisition or capital structure change criteria with the $100 million threshold. Also file Form 8806 (Information Return for Acquisition of Control or Substantial Change in Capital Structure) with the IRS to report the overall transaction.
Step 2: Identify Reportable Shareholders
Create a list of shareholders who received cash, stock, or other property, excluding exempt recipients and those receiving only stock or amounts under $1,000.
Step 3: Gather Required Information
Collect complete identification numbers (no truncation allowed in 2011), addresses, and transaction details for each shareholder. Calculate the aggregate amount (cash plus fair market value of stock and other property) each shareholder received.
Step 4: Complete the Form
Fill in Box 1 (date of exchange), Box 2 (aggregate amount received), Box 3 (number of shares exchanged), and Box 4 (classes of stock). Include your corporation's name, address, EIN, and contact information.
Step 5: Distribute and File
Send Copy B to shareholders by January 31, 2012 (or January 5, 2012 for clearing organizations). File Copy A with the IRS by February 28, 2012 (paper) or April 2, 2012 (electronic).
For Shareholders Receiving Form 1099-CAP
Step 1: Receive and Review
You should receive Form 1099-CAP by January 31, 2012. Review all information for accuracy, including your identification number and the transaction details.
Step 2: Calculate Your Gain
Determine if you have taxable gain by comparing the amount in Box 2 (what you received) to your original cost basis in the exchanged shares.
Step 3: Report on Your Tax Return
Report any gain on Schedule D (Form 1040), Capital Gains and Losses. Important: You cannot claim a loss from this exchange, even if Box 2 shows a lower value than your original investment.
Step 4: Retain Records
Keep Form 1099-CAP with your tax records for at least three years after filing your return. IRS.gov
Common Mistakes and How to Avoid Them
Mistake #1: Filing for Exempt Recipients
Many corporations waste resources filing Forms 1099-CAP for shareholders who are exempt. Before filing, carefully review the exempt recipient list, which includes corporations, financial institutions, tax-exempt organizations, and properly documented foreign persons. Solution: Create a checklist of exempt categories and screen your shareholder list accordingly.
Mistake #2: Missing the Clearing Organization Early Deadline
The January 5 deadline for clearing organizations is easy to overlook when you're planning for the standard January 31 deadline. Solution: When preparing your shareholder list, flag clearing organizations (like DTC) immediately and process their forms first.
Mistake #3: Reporting Stock-Only Exchanges
If shareholders received only stock (no cash or other property), Form 1099-CAP isn't required. Solution: Segment your shareholders by what they received before preparing forms.
Mistake #4: Applying the $1,000 Threshold Incorrectly
The $1,000 exemption applies to the total value received (cash plus fair market value of all stock and property), not to each component separately. Solution: Calculate the complete aggregate amount before determining if filing is required.
Mistake #5: Truncating Identification Numbers
The 2011 rules ended the truncation pilot program, requiring complete Social Security Numbers or TINs on all copies. Solution: Ensure your reporting software doesn't have truncation settings enabled from previous years.
Mistake #6: Shareholders Claiming Losses
A critical mistake shareholders make is attempting to claim a loss based on the amount in Box 2. The form explicitly states that losses cannot be claimed from these exchanges. Solution: Consult Publication 550 or a tax professional if you believe you've experienced a loss.
Mistake #7: Ignoring Joint Liability in Asset Transfers
When substantially all assets are transferred, both the transferor and transferee can be held jointly liable if Forms 1099-CAP aren't filed. Solution: Include Form 1099-CAP filing obligations in asset transfer agreements with clear assignments of responsibility. IRS.gov
What Happens After You File
For Corporations
After filing Form 1099-CAP, the IRS processes the information and matches it with shareholders' tax returns. The information becomes part of the permanent record for that tax year. If you filed electronically, you'll receive acknowledgment of receipt within a few business days. Paper filers won't receive confirmation unless there's an issue.
The IRS may contact you if discrepancies appear between your filed Forms 1099-CAP and shareholders' reported information, or if you failed to file when required. The penalty structure means failure to file can result in daily penalties up to $100,000 per corporate event.
If shareholders report information inconsistent with your Forms 1099-CAP, the IRS may initiate correspondence with either party to resolve the discrepancy. Maintaining detailed records of the transaction, including fair market value calculations and shareholder distributions, is crucial for responding to any inquiries.
For Shareholders
After receiving Form 1099-CAP, you must report any recognized gain on Schedule D of your Form 1040. The IRS will have a copy of your Form 1099-CAP and will check that you've reported the transaction. Failure to report can trigger notices, penalties, and interest charges.
If you disagree with the amounts shown on your Form 1099-CAP, contact the corporation immediately to request a corrected form. Don't simply ignore the form or file contrary information without documentation. If you can't resolve the issue with the corporation, report the transaction as shown on the form and attach a statement explaining the discrepancy to your tax return.
Remember that Form 1099-CAP documents potential gain recognition events—you still need to calculate your actual gain or loss based on your original cost basis. The amount in Box 2 represents what you received, not your taxable gain. IRS.gov
FAQs
Q1: I received Form 1099-CAP, but I don't think I have a taxable gain. Do I still need to report it?
Yes, you must report the transaction on Schedule D even if you don't have a taxable gain. Calculate your gain by subtracting your original cost basis from the amount shown in Box 2. If the result is zero or negative, you report no gain, but you still document the exchange. Remember, you cannot claim a loss from transactions reported on Form 1099-CAP.
Q2: Our corporation had a qualifying transaction but also filed Forms 1099-DIV or 1099-B. Do we still need Form 1099-CAP?
Generally no, if you properly reported under Section 6042 (Form 1099-DIV) or Section 6045 (Form 1099-B), and those returns were actually filed, Form 1099-CAP isn't required. However, if the corporation knows or has reason to know those returns weren't filed, Form 1099-CAP becomes mandatory.
Q3: What if a shareholder's address is unknown or outdated?
You're still required to file Form 1099-CAP with the IRS even if you can't deliver the shareholder's copy. Make reasonable efforts to obtain current addresses, including checking with the corporation's transfer agent or conducting address searches. Document your attempts in case the IRS questions the missing shareholder copy.
Q4: Can we file Form 1099-CAP electronically, and is it required?
Electronic filing is permitted and encouraged. For 2011, if you filed 250 or more information returns of any type, electronic filing was required. Electronic filers receive an extended deadline (April 2, 2012 versus February 28, 2012), and electronic filing reduces errors through validation checks.
Q5: A broker holds shares for our corporation's shareholders. Who files Form 1099-CAP?
Generally, the corporation files Form 1099-CAP unless the broker is required to file Form 1099-B based on readily available information about the transaction. The corporation must file for shares held by clearing organizations unless it makes the consent election on Form 8806. If a broker has actual knowledge of a qualifying transaction, the broker may need to file Form 1099-B instead—but cannot rely solely on Form 1099-CAP filing by the corporation to meet this obligation.
Q6: What's the difference between Form 1099-CAP and Form 8806?
Form 8806 is the Information Return for Acquisition of Control or Substantial Change in Capital Structure that the corporation files with the IRS to report the overall corporate transaction. Form 1099-CAP is furnished to individual shareholders to report their personal portion of the exchange. Think of Form 8806 as the master document describing the corporate event, while Forms 1099-CAP are the individual notices to affected shareholders.
Q7: We discovered an error after the deadline. How serious is filing a corrected Form 1099-CAP late?
File corrected forms as soon as you discover errors, even if past the deadline. While late filing can incur penalties, correcting errors demonstrates good faith and helps shareholders file accurate tax returns. The penalties for incorrect information can be as significant as penalties for not filing at all, so correction is important. If the error affects shareholder tax reporting, notify affected shareholders immediately so they can file amended returns if necessary.
Sources and More Information
Visit IRS.gov and search for Form 1099-CAP to access current forms and instructions, or call the IRS Information Reporting Customer Service at 1-866-455-7438 (toll-free) or 304-263-8700. Consult Publication 550 (Investment Income and Expenses) for additional guidance on reporting capital gains from corporate restructuring events.
This summary is based on official IRS instructions and forms for the 2011 tax year. Tax laws and filing requirements change over time, so always verify current requirements at IRS.gov or consult a tax professional for your specific situation.
