I decided to addressing the issuer reporting provisions of the Section 305 proposed regulations before addressing the withholding agents’ reporting and withholding responsibilities. In this context, the withholding agent’s duties would be near impossible without appropriate issuer reporting requirements. Because this regime causes a “deemed” distribution, there is no cash payment moving through the system that’s contemporaneous with the adjustment. Therefore, the withholding agents would need to rely on other mechanisms to ensure that they capture the adjustment correctly.
Much of the broker reporting is keyed off the issuer reporting requirements under Section 6045B and 1.6045B-1. These provisions set forth rules that require issuers to file tax returns or issue statements or public notices when an organizational action would affect the basis of a security as well as ensuring that sufficient information is provided therein.
Specifically, under the current rules, the issuer must (1) file an issuer return (Form 8937, Report of Organizational Actions Affecting Basis of Securities) with the IRS by the earlier of 45 days after the organizational action or January 15 of the following calendar year, AND (2) must send a written statement to each holder of record of the security or the holder’s nominee by January 15 of the following calendar year.
Under current 1.6045B-1, however, in the case of (1), the issuer is not required to file a return if the issuer reasonably determines that all holders are exempt recipients, and (2) an issuer is not required to send a statement to exempt recipients. Exempt recipients are identified in 1.6045-1(c)(3)(i)(B) and include, among other things, corporations, tax-exempt organizations, foreign governments, financial institutions, and securities dealers. It also includes a foreign holder if the issuer has reliable documentation upon which the issuer can rely in order to treat the payments to the holder as made to a foreign beneficial owner.
In lieu of all of the foregoing, the issuer can, by the due date for filing the tax return, post the return with the required information in a readily accessible format in a readily accessible format in an area of its primary public Web site dedicated to this purpose and keep the return accessible for ten years to the public on this Web site or the primary public Web site of any successor.
These provisions were applicable at different times depending on the type of instrument, but, most convertible instruments that would be subject to Section 305(c) have been phased in:
- Convertible date: Applies to organizational actions after 12/31/15. 1.6045B-1(j)(4).
- Warrants: Applies to organizational actions after 12/31/13. 1.6045B-1(j)(5).
- Stock (e.g., convertible preferred): Applies to organizational actions after 12/31/10. 1.6045B-1(j)(1) (with an exception for RIC stock, which pushed the date to 12/31/11. 1.6045B–1(j)(2)).
The current rules (and the reliance on them) raise three questions with regard to disseminating information to brokers/beneficial owners relating to organizational actions in the context of Section 305(c): (1) assuming the issuer did not issue a public statement, the exempt recipients carve-out from providing written statements could obviously create problems for withholding agents since the issuer has an exemption for foreign holders, (2) assuming the information is in these written statements or public notices, how does a broker go about gathering and reporting this information, and (3) what information was a broker supposed to rely on before the phase-in of the reporting above?
The proposed regulations only directly address the first point. The proposed regulations specifically require issuers to send written statements to holders of record (or their nominees) regardless of their status as exempt recipients. PR 1.6045B-1(i)(2). In addition, the proposed regulations make it clear that the issuer must provide the date and the amount of the deemed distribution. PR 1.6045B-1(i)(3). This reporting requirement goes effective when the regulations are finalized.
Obviously, this goes beyond the original scope of the Section 6045B (basis reporting for organizational actions), but Treasury seems intent on piggybacking on these rules in order to get deemed dividend information to brokers for purposes other than holder basis adjustments. Somewhat kluge, but practically expedient I guess.
Of course, the above problem needed to be addressed, but I would have guessed that most issuers would not actually choose to issue written statements with their holders, but instead, would rather put a statement on a public web site. In that case, they wouldn’t have to worry about being precise about getting the information into the correct hands. It’s simply there for the world to see.
This would consequently push the onus on the brokers to retrieve that decentralized information or perhaps some third party service could actively aggregate and centralize this information. In any event, I’m already starting to creep into the reporting and withholding agent duties so I’ll stop here.