Form 1099-CAP: Changes in Corporate Control and Capital Structure (2014)

When a corporation undergoes major structural changes—like a merger, acquisition, or significant reorganization—both the company and its shareholders need to understand their tax reporting obligations. Form 1099-CAP exists specifically for these situations, ensuring the IRS tracks the tax implications of corporate transformations. This guide breaks down everything you need to know about the 2014 version of this specialized form.

What the Form Is For

Form 1099-CAP, which stands for "Changes in Corporate Control and Capital Structure," is an information return that corporations must file when they experience significant structural changes. Think of it as the IRS's way of keeping tabs on major corporate events that might trigger tax consequences for shareholders.

The form comes into play in two main scenarios. First, when there's an "acquisition of control"—meaning one corporation acquires at least 50% of another corporation's voting power or total stock value, and the deal involves stock worth $100 million or more. Second, when there's a "substantial change in capital structure"—such as a merger, consolidation, bankruptcy reorganization, or major asset transfer involving $100 million or more in cash or property distributed to shareholders.

Importantly, shareholders receive this form when they get cash, stock, or other property as a result of these corporate changes. The corporation uses Form 1099-CAP to report what each shareholder received, helping both the shareholder and the IRS calculate any taxable gains or losses from the transaction. This is especially critical when shareholders exchange their old stock for a combination of cash and new stock, as the cash portion typically triggers immediate tax recognition.

When You’d Use It (Late/Amended)

Standard Filing Deadlines

Under normal circumstances, corporations must file Form 1099-CAP with the IRS by March 2, 2015 (for paper filing) or March 31, 2015 (for electronic filing) for transactions that occurred during 2014. Shareholders should receive their copies by February 2, 2015. However, things don't always go perfectly the first time.

Correction Types

If a corporation discovers an error after filing—perhaps they reported the wrong dollar amount, misspelled a shareholder's name, or used an incorrect taxpayer identification number—they need to file a corrected return as soon as possible. The IRS distinguishes between two types of errors. Type 1 errors involve incorrect money amounts, wrong checkboxes, incorrect payee names, or returns that shouldn't have been filed at all. For these, you prepare a new form, check the "CORRECTED" box, enter the correct information, and file it with a new Form 1096 transmittal.

Type 2 errors are more complex, involving missing or incorrect taxpayer identification numbers, wrong addresses, or using the completely wrong form type. These require a two-step process: first, file a corrected return with all zeros in the money fields showing the original erroneous information, then file a brand new original return (not marked "corrected") with the correct information. Both go to the IRS together with a new Form 1096.

Late Filing Penalties

Late filing isn't taken lightly. The IRS imposes escalating penalties: $30 per return if you correct within 30 days, $60 per return if you correct between 31 days and August 1, and $100 per return if you file after August 1 or never file at all. These penalties cap at amounts ranging from $250,000 to $1.5 million depending on timing and business size, but intentional disregard of filing requirements can result in at least $250 per return with no maximum penalty.

Key Rules for 2014

The 2014 version of Form 1099-CAP operates under several important thresholds and exemptions that determine who must file and for whom. Understanding these rules helps both corporations and shareholders know what to expect.

$100 Million Transaction Threshold

The $100 million threshold is fundamental. Corporations only need to file Form 1099-CAP when the fair market value of stock acquired (in a control acquisition) or the total cash and property distributed (in a capital structure change) reaches or exceeds $100 million. Below this amount, the reporting requirement generally doesn't apply.

Who Must Receive a Form

Not every shareholder receives a Form 1099-CAP, even when the corporation must file. The form is required only for shareholders who receive cash or property worth more than $1,000—shareholders receiving only stock, or those receiving less than $1,000 in total value, are exempt. Additionally, a lengthy list of institutional investors is automatically exempt, including corporations (except S corporations), tax-exempt organizations, IRAs, government entities, REITs, registered investment companies, securities dealers, banks, and foreign persons with proper documentation.

Electronic Filing and Truncated TINs

Electronic filing becomes mandatory when corporations must file 250 or more information returns of any single type. For 2014 filers, this meant obtaining approval through Form 4419 at least 30 days before the filing deadline. One 2014 update allowed corporations to truncate (partially hide) recipient social security numbers on the copies provided to shareholders, enhancing privacy protection.

Consent Election and Special Rules

Special rules apply when corporations make a "consent election" on Form 8806, which allows them to publish information through the IRS rather than filing separate Forms 1099-CAP for shares held by clearing organizations like the Depository Trust Company (DTC). This streamlines reporting for widely held public companies. The form also includes provisions for constructive ownership rules under Section 338 elections, treating certain asset purchases as stock acquisitions for reporting purposes.

Step-by-Step (High Level)

Step 1: Determine if filing is required.

When your corporation undergoes a major transaction, first calculate whether it meets the $100 million threshold for either acquisition of control or substantial change in capital structure. Review the exempt transaction list—if your transaction involves only affiliated group members or if you're properly reporting under different sections (like 6043(a) or through Forms 1099-DIV or 1099-B), you may not need Form 1099-CAP at all.

Step 2: Identify which shareholders need forms.

Create a list of all shareholders who received cash, stock, or other property in the transaction. Remove those who received only stock (no cash or property), those who received less than $1,000 total value, and all exempt recipients (corporations, tax-exempt entities, IRAs, government entities, financial institutions, and foreign persons with proper documentation).

Step 3: Gather the required information.

For each non-exempt shareholder, you'll need their complete name, address, and taxpayer identification number (Social Security Number or Employer Identification Number). You'll also need the trade date of the exchange, the aggregate dollar amount they received (cash plus fair market value of any stock or property), the number of shares they exchanged, and the class of stock (common, preferred, etc.).

Step 4: Complete and file the forms.

Prepare Copy A of Form 1099-CAP for each shareholder and file these with the IRS along with Form 1096 (Annual Summary and Transmittal) by March 2, 2015 for paper filing, or March 31, 2015 for electronic filing. If you're filing 250 or more forms, electronic filing is mandatory. Clearing organizations like DTC have a special earlier deadline of January 5, 2015.

Step 5: Furnish copies to shareholders.

Send Copy B to each shareholder by February 2, 2015. This copy shows them what the corporation reported to the IRS about their transaction, giving them the information they need to prepare their own tax returns. Keep Copy C for your corporate records.

Common Mistakes and How to Avoid Them

Mistake #1: Failing to file because the transaction seems exempt.

Many corporations incorrectly assume they don't need to file Form 1099-CAP because they're also filing Forms 1099-DIV or 1099-B. However, the exemption only applies if you know or have reason to know those other returns were actually filed. Don't assume—verify that the reporting obligation is satisfied elsewhere before skipping Form 1099-CAP.

Mistake #2: Missing the clearing organization special deadline.

When shares are held by a clearing organization like the Depository Trust Company, the regular February 2 deadline doesn't apply—you must furnish their copy by January 5, a full month earlier. Missing this deadline can create problems for brokers who need the information to report on their customers' Forms 1099-B.

Mistake #3: Incorrectly calculating the $1,000 threshold.

Remember that the $1,000 exemption applies to the total value of cash plus fair market value of all stock and property received, not just the cash portion. Some preparers mistakenly think shareholders receiving $800 in cash and $300 in stock are exempt, but the $1,100 total requires filing.

Mistake #4: Using the wrong error correction procedure.

The IRS has specific protocols for Type 1 versus Type 2 errors. Many filers try to correct a missing or incorrect taxpayer identification number (a Type 2 error) by simply filing a corrected return, when they actually need the two-return procedure. Using the wrong method can lead to processing problems and continued penalty assessments.

Mistake #5: Not understanding the joint and several liability rule.

When one corporation transfers substantially all its assets to another, the transferor corporation is primarily responsible for filing Form 1099-CAP. If they fail to do so, the transferee becomes responsible. Many acquiring corporations don't realize they can be held liable for the predecessor's filing obligations, leaving both parties jointly and severally liable for penalties.

Mistake #6: Failing to report stock value when gain must be recognized.

The rules allow corporations to skip reporting the fair market value of stock provided to shareholders if they can reasonably determine that receiving the stock won't cause the shareholder to recognize gain. However, when gain recognition is required under Section 367(a) (often in international transactions), the stock value must be reported. Missing this requirement in cross-border deals is a frequent error.

What Happens After You File

For shareholders, the form provides critical information needed to prepare their individual tax returns. They'll use the data from Form 1099-CAP—particularly the aggregate amount received and number of shares exchanged—to calculate their realized gain or loss on the transaction. This typically goes on Schedule D (Capital Gains and Losses) of Form 1040, though the specific tax treatment depends on factors like holding period, the mix of cash versus stock received, and whether any reorganization provisions allow deferral of gain.

The IRS matches the information from Forms 1099-CAP against shareholder tax returns through its automated systems. If a shareholder fails to report a transaction that appears on a Form 1099-CAP, or if the amounts reported differ significantly from what the corporation reported, the IRS may send a CP2000 notice proposing additional tax, penalties, and interest. This matching process can occur months or even years after the transaction, so maintaining good records is essential.

For the filing corporation, the reporting obligation is satisfied once proper filing occurs, but the corporation should retain copies of all Forms 1099-CAP for at least three years (though four to seven years is advisable given IRS statute of limitations rules). If the IRS identifies errors or omissions during its review, it will issue penalty notices to the corporation. The corporation then has the opportunity to respond with reasonable cause explanations that might result in penalty abatement.

Brokers and financial institutions holding shares on behalf of customers use the information from Forms 1099-CAP (particularly when corporations make the consent election and publish data via Form 8806) to prepare Forms 1099-B for their customers. This creates a reporting chain ensuring that all levels of ownership are properly documented.

If shareholders discover that information on their Form 1099-CAP doesn't match their records—perhaps the number of shares is wrong or the amount received is different—they should contact the corporation immediately. The corporation will need to file a corrected return with the IRS and furnish a corrected statement to the shareholder. Shareholders shouldn't just ignore discrepancies, as the IRS will eventually notice the mismatch between the corporate filing and the shareholder's return.

FAQs

Q1: I received both Form 1099-CAP and Form 1099-B for the same transaction. Do I report it twice on my tax return?

No, you don't double-report. When a broker is involved, you'll often receive Form 1099-B from your broker and Form 1099-CAP from the corporation. The Form 1099-B typically shows your basis and proceeds from the broker's perspective, while Form 1099-CAP provides the corporate perspective on the transaction. Use the information from both forms together to accurately calculate your gain or loss, but report the transaction only once on Schedule D. If there's a conflict between the forms, contact both the broker and the corporation for clarification.

Q2: Our corporation had a $150 million merger, but some shareholders only received stock. Do they still get Form 1099-CAP?

No. Shareholders who receive only stock in exchange for their shares are exempt recipients and should not receive Form 1099-CAP. The form is only required for shareholders who receive cash or property (or a combination of stock and cash/property). This makes sense because receiving only stock typically doesn't trigger immediate tax recognition in qualifying reorganizations.

Q3: We missed the March 2 filing deadline. What should we do?

File immediately. The longer you wait, the higher the penalty. If you file within 30 days of the March 2 deadline, the penalty is $30 per return. Wait longer than 30 days but file by August 1, and it jumps to $60 per return. File after August 1, and you're looking at $100 per return. If you have reasonable cause for the delay (serious illness, natural disaster, etc.), document it carefully and submit an explanation with your late filing—the IRS may abate penalties if the reason is compelling.

Q4: Can we email Form 1099-CAP to shareholders instead of mailing it?

Yes, but only with proper consent. The IRS allows electronic delivery of recipient statements if the recipient has affirmatively consented to receive the statement electronically and hasn't withdrawn that consent. The consent must be made electronically in a way that demonstrates the recipient can access the statement in the required format. You must also provide clear instructions on how to obtain a paper copy upon request. Simply emailing forms without proper consent procedures doesn't satisfy the furnishing requirement.

Q5: We filed Forms 1099-B for all the transactions. Do we still need Form 1099-CAP?

Possibly. The Form 1099-CAP filing requirement is waived only if Forms 1099-B or 1099-DIV are filed and you know or have reason to know those returns were actually filed. If you filed Forms 1099-B through your transfer agent or broker network and can verify they covered all shareholders, you may be exempt from Form 1099-CAP. However, if you don't have verification, or if certain shareholders weren't covered by the Form 1099-B filings, you still need Form 1099-CAP. Document your reasonable belief that other forms satisfied the reporting requirement.

Q6: What's this "consent election" mentioned in the instructions, and should we make it?

The consent election on Form 8806 allows corporations to avoid filing individual Forms 1099-CAP for shares held by clearing organizations like the Depository Trust Company by instead having the IRS publish necessary information that brokers can use. This significantly reduces the filing burden for publicly traded companies where a large percentage of shares are held in "street name" through brokers. If your stock is widely held through brokerage accounts, making the consent election can save enormous time and expense. However, you'll need to file Form 8806 and provide certain information to the IRS for publication on their website.

Q7: A shareholder claims they never received their copy of Form 1099-CAP. What's our liability?

You're responsible for furnishing statements to shareholders by the required deadline (February 2, 2015 for most situations). If a shareholder didn't receive their copy due to an incorrect address, postal service issues, or other problems, you could face penalties for failure to furnish. Maintain proof of mailing (certified mail receipts are best) and keep updated shareholder addresses. If a shareholder contacts you saying they didn't receive it, furnish a copy immediately. The IRS generally considers the furnishing requirement satisfied if you mailed to the shareholder's last known address, but having proof protects you from penalty assertions.

Additional Resources

All information in this guide comes from official IRS sources for the 2014 tax year:

• 2014 Form 1099-CAP
• 2014 Instructions for Form 1099-CAP
• About Form 1099-CAP
• 2014 General Instructions for Certain Information Returns

For questions about your specific situation, consult a tax professional or contact the IRS directly at 1-800-TAX-FORM (1-800-829-3676).

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