Form 1099-CAP: Changes in Corporate Control and Capital Structure (2019)

Understanding Form 1099-CAP doesn't require a finance degree—just some basic knowledge about corporate changes and their tax implications. This guide breaks down everything you need to know about this specialized IRS form, designed to track major changes in how corporations are structured or controlled.

What Form 1099-CAP Is For

Form 1099-CAP is a tax information return used when a corporation undergoes a significant transformation—specifically, when control of a corporation changes hands or when it experiences a substantial shake-up in its capital structure. Think of it as the IRS's way of keeping tabs on major corporate restructuring events that might affect shareholders' tax obligations.

The form serves two primary purposes. First, it documents when shareholders receive cash, stock, or other property as a result of these corporate changes. Second, it helps the IRS ensure that shareholders properly report any taxable gains from these transactions on their personal tax returns. The transaction must meet specific thresholds: the fair market value of the acquisition or restructuring must be at least $100 million, and either the corporation or its shareholders must recognize gain under Section 367(a) of the tax code, which deals with international tax implications. IRS.gov

Domestic corporations issue Form 1099-CAP to shareholders who receive something of value—whether cash, new stock, or other assets—during these major corporate events. Brokers who hold shares on behalf of customers also have reporting obligations if they know or should reasonably know that such a transaction has occurred.

When You’d Use Form 1099-CAP

The timing for Form 1099-CAP follows strict IRS deadlines. Corporations must furnish Copy B to shareholders by January 31 of the year following the transaction. For filing with the IRS, paper filers face a deadline of February 28, while electronic filers have until March 31. IRS.gov

Late Filing

If you miss these deadlines, act quickly to minimize penalties. The IRS imposes tiered penalties based on how late you file. Filing within 30 days of the deadline results in lower penalties than filing months later. For Form 1099-CAP specifically, the penalty structure under Section 6652(l) treats Form 8806 (the related corporate information return) and all associated Forms 1099-CAP as a single return. This means penalties accumulate at up to $500 per day the failure continues, with a maximum cap of $100,000 for any single acquisition or capital structure change.

Amended/Corrected Returns

Mistakes happen—perhaps you reported the wrong share count, incorrect fair market value, or inaccurate shareholder information. To file a corrected Form 1099-CAP, mark the "CORRECTED" checkbox on the new form and complete all required fields with the accurate information. File the corrected form following the same procedures as the original, and furnish a corrected copy to the affected shareholder. While there's no strict deadline for corrections, the IRS recommends correcting errors within three years of the original filing date, as this aligns with the statute of limitations for most tax matters.

Key Rules or Details for 2019

The 2019 rules for Form 1099-CAP contained several important provisions that corporations and shareholders needed to understand:

Acquisition of Control Threshold: An acquisition of control occurs when a second corporation acquires enough stock to gain control (at least 50% of voting power or total stock value) of another corporation, the transaction involves stock valued at $100 million or more, shareholders receive stock or other property, and Section 367(a) gain recognition applies. IRS.gov

Substantial Capital Structure Changes: A substantial change in capital structure requires that at least $100 million in cash or property is provided to shareholders through mergers, consolidations, asset transfers, bankruptcy reorganizations, or changes in the corporation's identity, form, or place of organization—again with Section 367(a) gain recognition.

Exempt Recipients: Not every shareholder receives Form 1099-CAP. The form is not required for C corporations (except S corporations), tax-exempt organizations, IRAs, government entities, foreign governments, REITs, regulated investment companies, securities dealers, financial institutions, and common trust funds. Additionally, shareholders receiving less than $1,000 in total consideration or foreign persons with valid Form W-8BEN documentation are exempt from receiving Form 1099-CAP.

Electronic Filing: Beginning with the 2019 tax year, the IRS emphasized electronic filing. The form was converted to an online fillable format due to low paper filing volumes. However, small-volume filers could still submit black-and-white printed copies with Form 1096 if filing on paper.

Special Clearing Organization Rules: Corporations can make a consent election that relieves them from filing Form 1099-CAP with respect to shares held by clearing organizations like the Depository Trust Company (DTC). This election allows the IRS to publish necessary information directly, enabling brokers to meet their reporting obligations.

Step-by-Step (High Level)

Step 1: Determine Filing Obligation – After a qualifying corporate transaction, the corporation must first determine whether the event meets the $100 million threshold and Section 367(a) gain recognition requirements. Consult with tax advisors to confirm the transaction qualifies for Form 1099-CAP reporting.

Step 2: File Form 8806 – Before issuing Forms 1099-CAP, the corporation must file Form 8806 (Information Return for Acquisition of Control or Substantial Change in Capital Structure) with the IRS. This companion form provides the IRS with transaction-level details about the corporate event.

Step 3: Identify Recipients – Compile a complete list of shareholders who received cash, stock, or other property in the transaction. Remove exempt recipients from this list based on the exemption categories outlined above.

Step 4: Calculate Amounts – For each shareholder, determine the aggregate amount received (cash plus fair market value of stock and other property), the number of shares exchanged, and the classes of stock involved.

Step 5: Complete Forms – Fill out Form 1099-CAP for each non-exempt shareholder, including the corporation's name, address, and EIN; shareholder's name, address, and TIN; date of sale or exchange (Box 1); aggregate amount received (Box 2); number of shares exchanged (Box 3); and classes of stock exchanged (Box 4).

Step 6: Furnish to Recipients – Send Copy B to each shareholder by January 31 of the year following the transaction. For clearing organizations like DTC, follow special procedures outlined in IRS Notice 2004-9.

Step 7: File with IRS – Submit Copy A to the IRS by February 28 (paper) or March 31 (electronic), accompanied by Form 1096 if filing on paper.

Step 8: Shareholder Reporting – Shareholders use the information from Form 1099-CAP to complete Form 8949 (Sales and Other Dispositions of Capital Assets) and Schedule D (Capital Gains and Losses) on their individual tax returns.

Common Mistakes and How to Avoid Them

Mistake 1: Missing the $1,000 De Minimis Exception – Many corporations unnecessarily file Forms 1099-CAP for shareholders who received less than $1,000 in total consideration. Avoid it: Create a spreadsheet tracking each shareholder's total consideration received and filter out those below the $1,000 threshold before preparing forms.

Mistake 2: Incorrect Fair Market Value Calculations – Determining the fair market value of stock or property received can be complex, especially if markets are volatile around the transaction date. Avoid it: Obtain professional appraisals for non-publicly traded stock and document the valuation methodology. For publicly traded stock, use the closing price on the transaction date.

Mistake 3: Using Incorrect Taxpayer Identification Numbers – TIN errors trigger IRS matching failures and potential backup withholding. Avoid it: Collect Form W-9 from shareholders before the transaction closes. Verify TINs using the IRS TIN Matching program if available to you.

Mistake 4: Failing to Identify Exempt Recipients – Filing unnecessary forms for banks, corporations, IRAs, and other exempt entities wastes resources and may confuse recipients. Avoid it: Cross-reference your shareholder list against the complete exemption list in the IRS instructions before preparing forms.

Mistake 5: Missing the Clearing Organization Election – Corporations sometimes file hundreds of Forms 1099-CAP for shares held by clearing organizations when they could have made a consent election. Avoid it: Consult with tax counsel before the transaction about making the consent election on Form 8806, which can significantly reduce filing burden.

Mistake 6: Incorrectly Reporting Stock Classes – Abbreviating stock classes inconsistently or ambiguously causes confusion. Avoid it: Establish a consistent abbreviation system (C for common, P for preferred) and document any subclasses clearly in your records.

Mistake 7: Missing Electronic Filing Requirements – Corporations sometimes attempt to paper-file when they exceed electronic filing thresholds. Avoid it: Review the General Instructions for Certain Information Returns to determine if you must file electronically based on your total information return volume.

What Happens After You File

IRS Processing: The IRS processes Forms 1099-CAP along with other information returns, matching the data against shareholder tax returns. This typically occurs several months after filing. The IRS uses sophisticated computer systems to identify discrepancies between what corporations report and what shareholders claim on their returns.

Shareholder Responsibility: Shareholders who receive Form 1099-CAP must use this information to report their capital gains or losses. They transfer the data to Form 8949, calculating their gain or loss based on their cost basis in the original shares. If the transaction would result in a loss, specific IRS rules may limit or disallow reporting that loss.

Potential IRS Inquiries: If the IRS detects discrepancies between Form 1099-CAP data and shareholder-reported information, both the corporation and shareholder may receive notices. Corporations should retain detailed transaction records, valuation documentation, and shareholder correspondence for at least four years after filing.

Amended Returns Impact: If you file a corrected Form 1099-CAP, shareholders who already filed their tax returns may need to file amended returns (Form 1040-X). Promptly notify affected shareholders of corrections, explaining the changes and their potential tax impact.

Penalty Assessments: If you filed late or incorrectly, the IRS may assess penalties months after the original deadline. You'll receive a notice explaining the penalty and your right to request abatement. Reasonable cause exceptions exist for unavoidable circumstances like natural disasters or serious illness.

Transfer of Liability: In situations where a corporation transfers substantially all assets to another entity, both the transferor and transferee can be held jointly and severally liable for Form 1099-CAP penalties if neither entity satisfies the filing requirement. This makes coordination between merging entities crucial.

FAQs

Q1: Do I need to file Form 1099-CAP if our corporate merger was between related companies in the same affiliated group?
No. Transactions involving acquisition of control within an affiliated group are exempt from Form 1099-CAP reporting requirements, even if they meet the $100 million threshold. However, you may still need to file Form 8806 to claim this exemption. IRS.gov

Q2: What if I discover an error on a Form 1099-CAP after shareholders have already filed their tax returns?
File a corrected Form 1099-CAP immediately, marking the "CORRECTED" checkbox. Furnish the corrected form to affected shareholders with a clear explanation of what changed. Advise shareholders to consult their tax advisors about whether they need to file amended returns (Form 1040-X).

Q3: Can I truncate social security numbers on the copies I furnish to shareholders?
Yes. IRS Regulations section 301.6109-4 permits corporations to truncate recipients' taxpayer identification numbers on payee statements (the copies furnished to shareholders). However, you must never truncate TINs on forms filed with the IRS. Show the full TIN on Copy A.

Q4: Our company completed a qualifying transaction in December 2019. Which tax year's forms do I use?
Use the 2019 version of Form 1099-CAP. However, you'll furnish it to shareholders by January 31, 2020, and file it with the IRS by February 28 or March 31, 2020. The form year corresponds to the transaction year, not the filing year.

Q5: We filed Form 8806 making the consent election. Do we still need to file any Forms 1099-CAP?
Yes, but fewer of them. The consent election only relieves you from filing Forms 1099-CAP for shares held by clearing organizations (like DTC). You must still file Forms 1099-CAP for all other non-exempt shareholders who received consideration in the transaction.

Q6: What if a shareholder refuses to provide their taxpayer identification number?
You still must file Form 1099-CAP, but you may be subject to backup withholding requirements. Report what information you have and note the missing TIN situation. The IRS may impose penalties for missing TINs, though reasonable cause exceptions exist if you made proper efforts to obtain the TIN through Form W-9 requests.

Q7: Our foreign subsidiary acquired control of a U.S. corporation. Are we exempt from Form 1099-CAP filing?
Not automatically. The key question is whether shareholders must recognize gain under Section 367(a). Foreign corporations acquiring U.S. corporations often trigger Section 367(a), which means Form 1099-CAP filing is required. Consult international tax specialists, as these transactions involve complex rules about outbound transfers and gain recognition agreements.

Important Note: Tax rules change frequently, and Form 1099-CAP reporting involves complex corporate and international tax provisions. This guide provides general information about the 2019 requirements but should not substitute for professional tax advice. Always consult qualified tax advisors when dealing with corporate control changes and capital structure transactions.

Official Resources:

• Form 1099-CAP and Instructions - IRS.gov
• General Instructions for Certain Information Returns - IRS.gov
• 2019 Form 1099-CAP Instructions (PDF) - IRS.gov

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