Form 1099-CAP: Changes in Corporate Control and Capital Structure (2013)

If your corporation underwent a major change—like a merger, acquisition, or significant restructuring—you may need to understand Form 1099-CAP. This guide breaks down everything you need to know about this important tax form for the 2013 tax year in plain English.

What Form 1099-CAP Is For

Form 1099-CAP is an information return that corporations file with the IRS to report major corporate changes that affect shareholders. Think of it as a notification system that keeps both the IRS and shareholders informed when a company goes through significant transformations.

This form comes into play during two specific situations. First, when there's an acquisition of control—meaning another company buys enough stock (at least 50% of voting power or total value) to control your corporation, and the transaction involves at least $100 million worth of stock. Second, when there's a substantial change in capital structure—such as a merger, consolidation, major asset transfer worth $100 million or more, or a bankruptcy reorganization where shareholders receive cash, stock, or other property.

The corporation must provide this form to shareholders who receive cash, stock, or other property as a result of these changes. It reports critical information including the transaction date, the total amount received (cash plus fair market value of any stock or property), the number of shares exchanged, and the class of stock involved. Shareholders need this information to properly report any capital gains or losses on their individual tax returns. IRS.gov

When You’d Use Form 1099-CAP (Late/Amended Filing)

For 2013 transactions, corporations originally had to file Form 1099-CAP with the IRS and furnish copies to shareholders by specific deadlines. The corporation must file the form with the IRS by February 28, 2014 (or March 31, 2014, if filing electronically). Shareholder copies must be provided by January 31, 2014.

If you're a corporation that missed these deadlines, you should file as soon as possible to minimize penalties. Late filing penalties increase the longer you wait—ranging from $60 per form if filed within 30 days after the deadline, to $130 per form if filed between 31 days and August 1, and up to $340 per form for filing after August 1 or never filing at all. For intentional disregard, penalties jump to $680 per form with no maximum cap.

Amended returns are necessary if you discover errors after filing. To correct a Form 1099-CAP, you'll need to file a corrected version marking the "CORRECTED" box at the top of the form. Common reasons for amendments include incorrect shareholder information, wrong transaction amounts, or missing data. The sooner you file corrections, the lower your potential penalties. IRS.gov

Key Rules for 2013

Understanding who must file and who's exempt is crucial. Any domestic corporation required to file Form 8806 (Information Return for Acquisition of Control or Substantial Change in Capital Structure) must also file Form 1099-CAP for each affected shareholder. Additionally, brokers holding shares on behalf of customers must file Form 1099-B for their clients when they know (or should know based on readily available information) that a reportable transaction occurred.

However, not every shareholder receives a Form 1099-CAP. The corporation is exempt from filing for shareholders who only receive stock for stock (no cash or other property), shareholders whose total received (cash plus fair market value of stock and property) doesn't exceed $1,000, and shareholders with exemption certificates. Exempt recipients also include corporations (except S corporations), tax-exempt organizations, IRAs, government entities, foreign governments, REITs, regulated investment companies, securities dealers, financial institutions, and foreign persons with proper documentation like Form W-8BEN.

The $100 million threshold is critical. Transactions involving stock or assets worth less than $100 million don't trigger filing requirements. Also, if the transaction occurs within an affiliated group (related companies), Form 1099-CAP isn't required.

For Section 367(a) transactions, where the corporation or shareholders must recognize gain because assets are moving to a foreign corporation, additional reporting applies. There's also a unique penalty structure—Form 8806 and all related Forms 1099-CAP are treated as a single return for penalty purposes, capped at $100,000 total for any single transaction (with daily penalties up to $500 until compliance). IRS.gov

Step-by-Step (High Level)

Step 1: Determine if you must file

First, assess whether your transaction meets the criteria—acquisition of control or substantial capital structure change involving at least $100 million. Check if you need to file Form 8806 with the IRS (due within 45 days of the transaction). If yes, you'll also need to prepare Forms 1099-CAP for shareholders.

Step 2: Identify reportable shareholders

Create a list of all shareholders who received cash, stock, or other property in the transaction. Remove exempt recipients from your list—those who received only stock, those whose benefits don't exceed $1,000, and institutional/exempt entities. For brokers and clearing organizations like the Depository Trust Company (DTC), special rules apply; you may make a consent election on Form 8806 to avoid filing separate 1099-CAPs for shares they hold.

Step 3: Gather required information

For each reportable shareholder, you'll need their name, address, and taxpayer identification number (TIN); the transaction date; the aggregate amount received (total cash plus fair market value of stock and other property); the number of shares exchanged; and the class of stock exchanged (common, preferred, etc.).

Step 4: Complete the forms

Fill out a separate Form 1099-CAP for each shareholder. Be precise with dollar amounts and dates. Include your corporation's employer identification number (EIN) and contact information. Consider adding account numbers if you're filing multiple forms for the same shareholder.

Step 5: File with the IRS and furnish to shareholders

Submit Copy A to the IRS along with Form 1096 (if filing paper forms) by the deadline. Electronic filing is required if you're filing 250 or more forms. Provide Copy B to each shareholder by January 31, 2014. For clearing organizations, special earlier deadlines apply (January 6, 2014). IRS.gov

Common Mistakes and How to Avoid Them

Mistake #1: Missing the $1,000 threshold exemption

Many corporations unnecessarily file Forms 1099-CAP for small shareholders. If a shareholder's total consideration (cash plus FMV of stock and property) is $1,000 or less, you don't need to file. Always calculate each shareholder's total before preparing forms to avoid wasting time and resources.

Mistake #2: Incorrect or missing TINs

Using wrong Social Security numbers or employer identification numbers is a common error that triggers penalties. Verify TINs before filing using your existing W-9 forms. If you don't have a TIN or it doesn't match IRS records, you may need to implement backup withholding at 28%.

Mistake #3: Reporting stock-for-stock exchanges

If shareholders receive only stock in exchange for their old stock—with no cash or other property—you generally don't need to report this on Form 1099-CAP (unless there's a Section 367(a) issue). Many corporations over-report these non-taxable exchanges unnecessarily.

Mistake #4: Miscalculating fair market value

Box 2 requires the "aggregate amount received," which includes both cash and the FMV of stock and other property received. Use the FMV as of the transaction date, not historical cost or some future value. Document your valuation method in case of IRS questions.

Mistake #5: Filing paper when electronic filing is required

If you're filing 250 or more information returns of any type (including all 1099 series), you must file electronically. The penalty for failing to e-file when required can be substantial—treat this as a mandatory threshold, not a suggestion.

Mistake #6: Ignoring the consent election option

For large corporations with shares held by clearing organizations, filing thousands of 1099-CAPs is burdensome. The consent election on Form 8806 allows the IRS to publish the information, shifting the reporting burden to brokers. This can save enormous time and expense—evaluate whether this option makes sense for your situation. IRS.gov

What Happens After You File

Once you've filed Form 1099-CAP, several things occur behind the scenes. The IRS receives and processes your submissions, matching the information against shareholders' tax returns. This helps the IRS verify that shareholders properly report any capital gains or losses resulting from the transaction. The IRS also checks for compliance with the related Form 8806 filing requirement.

Shareholders use the information on their Form 1099-CAP to complete their individual tax returns. Specifically, they'll report the transaction on Form 8949 (Sales and Other Dispositions of Capital Assets) and Schedule D (Capital Gains and Losses). If a shareholder would have a loss, they typically don't enter amounts on these forms for this particular transaction. If there's a gain, they calculate it using their cost basis in the original shares versus the amount received shown in Box 2.

Brokers and financial institutions that hold shares for customers use either your Form 1099-CAP or information published on the IRS website (if you made the consent election) to prepare Forms 1099-B for their customers. This creates a reporting chain ensuring everyone has the information needed for tax compliance.

If you filed late or incorrectly, the IRS may send you a notice. You might receive a CP2100 or CP2100A notice if there are TIN mismatches, requiring you to correct the information and potentially implement backup withholding. For late filing, the IRS assesses penalties automatically, though you can request penalty abatement if you have reasonable cause (such as natural disasters, serious illness, or unavoidable absence).

In cases where both the transferor and transferee corporations fail to file, both become jointly and severally liable for penalties. This means the IRS can collect the full penalty amount from either party, making it especially important for acquiring companies to ensure reporting compliance even if the acquired company no longer exists. IRS.gov

FAQs

Q1: What's the difference between Form 8806 and Form 1099-CAP?

Form 8806 is filed by the corporation to inform the IRS about the transaction itself—it's an information return about the corporate event. Form 1099-CAP is filed for each individual shareholder, reporting what they personally received. Think of Form 8806 as the announcement of the event, and Forms 1099-CAP as the individual receipts. Form 8806 is due within 45 days of the transaction, while Forms 1099-CAP follow the standard 1099 series deadlines.

Q2: Do I need to file Form 1099-CAP for foreign shareholders?

Not if you have proper documentation. Foreign persons with a valid Form W-8BEN (Certificate of Foreign Status) or other appropriate documentation are exempt recipients. However, you're still responsible for any withholding obligations under section 1441 for nonresident aliens. Don't confuse reporting exemptions with withholding requirements—they're separate obligations.

Q3: What if a shareholder's contact information is outdated or unknown?

You're still required to file Form 1099-CAP with the IRS even if you can't locate a shareholder. Use the last known address you have. For the IRS filing, accuracy is mandatory. For the shareholder copy, document your attempts to locate them (certified mail, address search services, etc.). The IRS may grant penalty relief if you made reasonable efforts but couldn't deliver the shareholder statement.

Q4: Can we file Form 1099-CAP on a composite basis for small shareholders?

No. Unlike some other reporting situations, Form 1099-CAP requires individual reporting for each shareholder who's not an exempt recipient and whose proceeds exceed $1,000. You cannot aggregate small shareholders onto a single form. However, you can exclude those under the $1,000 threshold entirely.

Q5: How do shareholders report a 1099-CAP transaction if they still own the stock?

If shareholders received only stock in the exchange (no cash) and it's a tax-free reorganization, they typically don't report a taxable transaction—though they need to track their basis in the new shares. If they received cash or other property creating a taxable event, they report it on Form 8949 and Schedule D in the year of the transaction, even if they still hold the stock portion. The 1099-CAP helps them calculate what's taxable now versus what's deferred.

Q6: What's the penalty for not filing when required?

For Form 1099-CAP, penalties depend on how late you file. Within 30 days: $60 per form. Between 31 days and August 1: $130 per form. After August 1 or never filed: $340 per form. Intentional disregard means $680 per form with no cap. However, there's a unique provision—Form 8806 and all related Forms 1099-CAP are treated as ONE return for penalty purposes, with a $100,000 cap ($500 per day until compliance) for the entire transaction.

Q7: Do I need to file Form 1099-CAP for a stock split or stock dividend?

No. Form 1099-CAP is specifically for acquisitions of control and substantial changes in capital structure as defined in the regulations. Regular stock splits, stock dividends, and routine capital changes don't qualify. These situations would be reported on Form 1099-DIV if applicable, not Form 1099-CAP. IRS.gov

For the latest forms, instructions, and updates, visit IRS.gov/Form1099CAP or call 1-800-TAX-FORM (1-800-829-3676). For complex transactions involving international elements or substantial assets, consult a qualified tax professional to ensure compliance with all reporting requirements.

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