Form 1099-CAP: Changes in Corporate Control and Capital Structure (2016) – A Plain-English Guide

When a corporation undergoes major changes—like a merger, acquisition, or major restructuring—the IRS wants to know about it, and so do the shareholders who might owe taxes on what they received. That's where Form 1099-CAP comes in. This guide breaks down everything you need to know about this specialized tax form for the 2016 tax year.

What Form 1099-CAP Is For

Form 1099-CAP is a specialized information return that corporations must file when they experience significant changes in ownership or structure. Think of it as the IRS's way of tracking major corporate shake-ups that could have tax consequences for shareholders.

The Two Corporate Events That Trigger Filing

Acquisition of Control

This occurs when one corporation acquires at least 50% voting power or total value of another corporation's stock, and the value of the acquired stock totals $100 million or more. For example, if Company A buys controlling interest in Company B, and Company B's shareholders receive cash, new stock, or other property worth millions, Form 1099-CAP must be filed. IRS.gov

Substantial Change in Capital Structure

This happens when a corporation merges, consolidates, transfers substantially all its assets, or reorganizes in a way that provides $100 million or more in cash or property to shareholders. This includes bankruptcy reorganizations where stockholders receive distributions, or when a company changes its form or identity in major ways.

The key purpose is to help shareholders calculate their taxable gain or loss from these corporate transactions. When you receive Form 1099-CAP, you'll use it to complete Form 8949 (Sales and Other Dispositions of Capital Assets) and ultimately Schedule D on your personal tax return.

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

For 2016 transactions, corporations had specific deadlines to meet. The form was generally due to shareholders by January 31, 2017, and to the IRS according to the normal information return filing schedule (February 28 for paper filers, March 31 for electronic filers).

Late Filing

If a corporation missed these deadlines, they should file as soon as possible. The IRS imposes penalties for late filing under Section 6652(l). Importantly, Form 8806 (the master information return) and all related Forms 1099-CAP are treated as a single return for penalty purposes. This means the penalty can reach up to $500 per day the failure continues, with a maximum of $100,000 per corporate event. IRS.gov

Amended or Corrected Returns

If a corporation discovers errors after filing—such as incorrect amounts, wrong shareholder information, or missing recipients—they must file corrected Forms 1099-CAP. The 2016 General Instructions for Certain Information Returns provide detailed procedures for voiding incorrect forms and submitting corrections.

Special Case – Clearing Organizations

If you're filing for a clearing organization like the Depository Trust Company (DTC), there's a special earlier deadline of January 5, 2017. This earlier date ensures brokers have time to meet their own reporting obligations.

Key Rules or Details for 2016

Understanding who must file and when exemptions apply is crucial:

Thresholds and Exemptions

The $100 Million Threshold: Both types of reportable events require that the transaction involve at least $100 million in stock value (for acquisitions) or cash/property provided to shareholders (for capital structure changes). Below this amount, Form 1099-CAP generally isn't required. IRS.gov
The $1,000 Individual Exemption: A corporation doesn't need to file Form 1099-CAP for any shareholder whose total receipt of cash plus fair market value of stock and other property is $1,000 or less. This saves paperwork for small shareholders.

Exempt Recipients

You don't file for shareholders who are:

Corporations (including tax-exempt organizations)
Individual retirement accounts (IRAs)
Government entities (federal, state, or foreign)
Real estate investment trusts (REITs) and regulated investment companies (RICs)
Financial institutions like banks and credit unions
Foreign persons with proper Form W-8BEN documentation
Shareholders who received only stock (no cash or other property) in the exchange

Additional Filing Requirements and Notes

Form 8806 Requirement: Before filing any Forms 1099-CAP, the corporation must first file Form 8806 (Information Return for Acquisition of Control or Substantial Change in Capital Structure) with the IRS. This master form provides overall transaction details. Without filing Form 8806 first, the 1099-CAP filings are incomplete. IRS.gov
Section 367(a) Trigger: The reporting requirement only applies when the corporation or any shareholder must recognize gain under Internal Revenue Code Section 367(a). This section typically applies to international transfers where U.S. shareholders transfer stock to foreign corporations.
Electronic Filing: If you're filing 250 or more Forms 1099-CAP, electronic filing is mandatory. For 2016, the IRS introduced a special exception allowing low-volume filers to print and mail black-and-white Copy A from the IRS website, since the paper form was converted to an online fillable format.

Step-by-Step (High Level)

Step 1: Determine If Filing Is Required

First, confirm your corporate event qualifies. Ask: Did we have an acquisition of control or substantial capital structure change? Does it meet the $100 million threshold? Is gain recognized under Section 367(a)? If yes to all three, proceed. IRS.gov

Step 2: File Form 8806

Complete and file Form 8806 with the IRS first. This master information return describes the overall transaction, including the date, type of change, and total value involved. This is the foundation for all subsequent 1099-CAP forms.

Step 3: Identify Shareholders to Report

Create a list of all shareholders who received cash, stock, or other property, excluding exempt recipients. Remove anyone whose total receipt was $1,000 or less. Gather each shareholder's taxpayer identification number (TIN), full legal name, and address.

Step 4: Calculate Amounts for Each Shareholder

For each non-exempt shareholder, determine:

The trade date of the exchange (Box 1)
The aggregate amount of cash plus fair market value of stock and other property received (Box 2)
The number of shares they exchanged (Box 3)
The class of stock exchanged—common, preferred, or other (Box 4)

Step 5: Complete Forms 1099-CAP

For 2016, use the online fillable form at IRS.gov/form1099cap. Enter the reporting corporation's name, address, and employer identification number (EIN) in the payer section. Complete the four boxes for each shareholder. You may truncate the shareholder's identification number on their copy for privacy, but never on the IRS copy.

Step 6: File with IRS and Furnish to Shareholders

If filing 250 or more forms, submit electronically by March 31, 2017. If fewer than 250, you may print black-and-white copies and mail with Form 1096 by February 28, 2017. Furnish Copy B to each shareholder by January 31, 2017 (or January 5, 2017 for clearing organizations).

Step 7: Maintain Records

Keep copies of all filed forms and supporting documentation for at least three years in case of IRS questions or audit.

Common Mistakes and How to Avoid Them

Mistake #1: Missing the Form 8806 Prerequisite

Many corporations file Forms 1099-CAP without first filing Form 8806. Remember: Form 8806 must be filed first. It's the master return that establishes the overall transaction. Filing 1099-CAPs without it creates incomplete reporting. Always check that Form 8806 was submitted before sending out shareholder forms.

Mistake #2: Including Exempt Recipients

Corporations sometimes file unnecessarily for banks, corporations, IRAs, and other exempt entities. This wastes resources and creates confusion. Carefully review the exempt recipient list in the instructions and cross-reference your shareholder list. Request exemption certificates from shareholders when unsure of their status.

Mistake #3: Incorrect Fair Market Value Calculations

Box 2 requires the fair market value (FMV) of stock and property received. Some filers use book value or arbitrary estimates instead of true market value. Always use professionally determined fair market values as of the transaction date. If stock isn't publicly traded, obtain a qualified appraisal. IRS.gov

Mistake #4: Missing the Special Clearing Organization Deadline

For shares held by clearing organizations like DTC, the deadline is January 5—nearly a month earlier than the regular January 31 deadline. Missing this special date can trigger penalties. Mark your calendar distinctly for clearing organization deadlines if your corporation has shares held in street name.

Mistake #5: Wrong Trade Date

Box 1 asks for the "date of sale or exchange." Some filers use the settlement date or the date shareholders received their copy of the form. Use the actual trade date when ownership legally transferred—this is what the shareholder needs for tax purposes.

Mistake #6: Truncating TINs on IRS Copy

While you may truncate taxpayer identification numbers on the shareholder's copy (showing only the last four digits), you must never truncate on Copy A filed with the IRS. The IRS needs complete TINs for matching and verification. Accidental truncation causes processing delays and potential penalties.

Mistake #7: Failing to Report Stock-Only Exchanges When Gain Is Recognized

There's an exception: if the corporation reasonably determines that receiving stock would not cause the shareholder to recognize gain, reporting the stock's FMV is optional. However, if Section 367(a) causes gain recognition, you must report even stock-only exchanges. Don't automatically skip shareholders who received only stock—analyze whether gain must be recognized first.

What Happens After You File

IRS Processing

The IRS receives your forms and enters the information into their systems. They match the amounts reported on Forms 1099-CAP against what shareholders report on their individual tax returns (Forms 8949 and Schedule D). Significant mismatches trigger automated notices.

Shareholder Reporting

Shareholders use Form 1099-CAP to calculate their taxable gain or loss from the corporate transaction. They report this information on Form 8949, which flows to Schedule D (Capital Gains and Losses). If the shareholder's calculations show a loss due to the change, IRS instructions indicate not to enter amounts on Forms 8949 or Schedule D for that transaction.

Broker Reporting

When shares are held in brokerage accounts, brokers may also have reporting obligations under Form 1099-B. The corporation's filing of Form 8806 (and making the consent election) can relieve brokers of certain reporting duties. The IRS publishes Form 8806 information on their website so brokers know which transactions to report.

Penalty Assessment

If you filed late or inaccurately, the IRS may assess penalties. For Form 1099-CAP failures, penalties accrue daily up to $100,000 per corporate event. You'll receive a penalty notice with options to pay or contest the assessment.

Transferor-Transferee Liability

In asset transfer situations, if the transferor corporation fails to file, the transferee corporation becomes responsible. Both entities are jointly and severally liable for penalties, meaning the IRS can collect from either party. This ensures reporting happens even when the original corporation no longer exists. IRS.gov

Record Retention

Keep all Forms 1099-CAP and supporting documentation for at least three years from the filing date. The IRS can request these records during audits of either the corporation or individual shareholders.

FAQs

Q1: Our company had a merger in 2016, but the total value was only $80 million. Do we still need to file Form 1099-CAP?

No. The $100 million threshold is absolute. If your acquisition involved less than $100 million in stock value, or your capital structure change provided less than $100 million to shareholders, Form 1099-CAP isn't required under Section 6043(c). However, you may still have reporting obligations under other sections like 6043(a) for certain reorganizations.

Q2: Can we file Form 1099-CAP if our corporation is an S corporation?

No. S corporations are specifically excluded from Form 1099-CAP filing requirements. Only C corporations, plus certain other entities in specific circumstances, must file. S corporations have different reporting rules under other tax code sections. IRS.gov

Q3: We have shareholders in foreign countries. Do we file Form 1099-CAP for them?

Generally no, if you have proper documentation. Foreign persons who have provided a valid Form W-8BEN (Certificate of Foreign Status) or other appropriate documentation are exempt recipients. However, this exemption doesn't relieve you of withholding obligations under Section 1441 for nonresident aliens. You may need to withhold tax even though you don't file Form 1099-CAP. IRS.gov

Q4: What is the "consent election" mentioned in the instructions, and should we make it?

The consent election on Form 8806 allows the corporation to avoid filing Forms 1099-CAP for shares held by clearing organizations (like DTC). Instead, the IRS publishes the transaction information on their website for brokers to access. This election significantly reduces paperwork if you have many shares held in street name. Consider making this election if your stock is widely held through brokers. Consult IRS Notice 2004-9 for detailed procedures.

Q5: A shareholder lost money in our transaction. Do they still get a Form 1099-CAP?

Yes, if they're not exempt and received more than $1,000. Form 1099-CAP reports the transaction details, not whether the shareholder had a gain or loss. The shareholder uses the form's information plus their original cost basis to calculate their actual gain or loss. The form itself just documents what they received in the exchange.

Q6: We filed all our Forms 1099-CAP on time, but now we discovered errors in the amounts. What should we do?

File corrected Forms 1099-CAP as soon as possible. Follow the procedures in the 2016 General Instructions for Certain Information Returns for filing corrected returns. Mark the forms as "CORRECTED" and include accurate information. You must send corrected copies to both the IRS and the affected shareholders. Prompt correction minimizes penalty risk. IRS.gov

Q7: Our transaction occurred in December 2016, but the stock wasn't actually distributed until January 2017. Which tax year do we report?

Report based on the trade date—the date of the sale or exchange when ownership legally transferred. If the exchange legally occurred in December 2016, even if physical delivery happened in January 2017, you report it on 2016 Forms 1099-CAP. The trade date (Box 1) determines the tax year, not the settlement or delivery date.

Sources & More Information

For More Information: Visit IRS.gov/form1099cap for current forms, instructions, and updates. The 2016-specific instructions are available at IRS.gov/pub/irs-prior/i1099cap--2016.pdf.

You have not enough Humanizer words left. Upgrade your Surfer plan.

‍