Tax Law Blog

Certain payments constituting income require the payor to prepare, furnish, and file certain information statements and returns, both to the payee and to IRS, even when the payor is not the taxpayer whose income is being reported. These returns typically aid the recipient payee in calculating and reporting income in the relevant year and help IRS to identify unreported or underreported income by creating two potential sources of information, which should generally be consistent.

Most of the time, determining the appropriate 1099 or similar form is straightforward. Reporting obligations are generally provided in the Internal Revenue Code or accompanying regulations. Cases and rulings interpret and apply these provisions. In addition, IRS provides guidance in the form of various instructions, FAQs, updates, notices, etc. In some cases a transaction or payment may not cleanly fit into available guidance for a certain form, new forms sometimes appear, and instructions or requirements change. Other times, it is not obvious which form is best because two forms may both seem appropriate. But for companies determining their reporting obligations, the exercise is not merely academic. Failure to furnish information statements to payees or file information returns with IRS can expose a taxpayer to significant penalties, especially where the failure results from intentional disregard.

Who is required to file Form 1099-B?

Brokers are required to file Form 1099-B for each sale of securities (redemptions, retirements, closing of options, exchanges, and certain corporate actions such as acquisition of control or capital structure changes) if the sale is effected in the ordinary course of the broker’s trade or business and if they are responsible for paying or crediting gross proceeds to a customer, such as clearing organizations, credit unions, mutual funds, and investors.

In most cases, a broker (including a stock transfer agent acting as a broker) handling redemptions must file Form 1099-B reporting gross proceeds. Section 6045 and Treas. Reg. section 1.6045-1(c)  require that every person doing business as a broker make a return of information with respect to each sale by a customer of the broker effected by the broker if the sale is effected in the ordinary course of the broker's trade or business.

These returns must show the name, address, and taxpayer identification number of the customer, the property sold, the Committee on Uniform Security Identification Procedures (CUSIP) number of the security sold (if available), gross proceeds, and such other information as may be required by the Form 1099. Treas. Reg. section 1.6045-1(d)(1). In a redemption of stock or retirement of securities, only the broker responsible for paying the holder redeemed or retired or crediting the gross proceeds on the sale to such holder's account, is required to report the sale. Temp. Treas. Reg. section 5f. 6045-1(c)(3)(iv). Transfer agents, escrow agents, custodians, or other involved third parties may be brokers in certain circumstances.

Are private companies brokers?

Corporations that are not doing business as brokers are generally not required to file Form 1099-B because they will not be brokers unless they stand ready to effect sales by others in the ordinary course of business, such as by regularly redeeming stock from their shareholders as part of a formal buy-back plan. A private issuer would be subject to broker reporting under I.R.C. § 6045 only if it “regularly” redeems its own stock. The term “regularly” is not defined in the regulations, but whether a corporation is a broker depends on the applicable facts and circumstances, particularly how often the company redeems its own shares. Irregular or one-time “odd-lot” redemptions should not create a broker reporting obligation.

Whose income is reported?

Brokers file Form 1099-B for sales of stocks, bonds, mutual funds, certain corporate reorganizations (where shareholders receive property, cash, or stock), and other reportable transactions for their customers. Information from Form 1099-B is used by individuals to report gains or losses on Form 8949 and Schedule D (1040).

When is Form 1099-B required?

Sales of securities, redemptions, exchanges, receipt of property or cash in corporate mergers/acquisitions, involving brokers and barter exchanges will generally require reporting. Covered securities trigger basis reporting. Noncovered securities do not require basis reporting by the broker.

What information is reported?

Gross proceeds, adjusted basis for covered securities, acquisition/sale date, and classification (short/long term capital asset, depending on holding period). For some actions (e.g., mergers, redemptions), report cash/property received and fair market value. For wash sales in the same account, report any disallowed losses.

Who reports on 1099-DIV?

Corporations, mutual funds, or other entities that pay at least $10 in dividends or at least $600 in liquidating distributions must file Form 1099-DIV to the shareholder and to the IRS.

When is 1099-DIV required?

Distributions, such as dividends, capital gain distributions, or nontaxable distributions, that were paid on stock and partial or complete liquidation distributions are reported on Form 1099-DIV. Nondividend distributions reduce basis; and recipients should only report on Schedule D once proceeds exceed basis. Backup withholding applies if TINs are not provided or there is underreporting. Nominees must file a new 1099 on behalf of the actual recipient. Form 8937 applies for organizational actions not reported as dividends.

A corporation must also file Form 1099-DIV with the IRS for each shareholder to whom it distributes $600 or more in redemption of its stock in a calendar year. The corporation must send Form 1099-DIV to the shareholder on or before January 31 of the year following the calendar year in which the distribution occurs, and must file the form with the IRS, accompanied by transmittal Form 1096, Annual Summary and Transmittal of U.S. Information Returns, on or before February 28 (March 31 if filed electronically) of the year following the calendar year of the distribution. Information reporting under §6043(c) is also required if there is an acquisition of control or a substantial change in the capital structure of a U.S. corporation and the corporation or any shareholder is required to recognize gain under §367(a).

A corporation's redemption (or deemed redemption) of its stock is not considered a change in its capital structure. See Reg. §1.6043-4(d)(2). Information reporting is not required under §6043(c) if reporting is otherwise required and properly undertaken under §6043(a). Reg. §1.6043-4(a)(4). In other words, a redemption would be reported on -DIV rather than -CAP. Company is not required to report on Form 1099-DIV taxable dividend distributions from employee stock ownership plans. See Instructions to 1099-DIV (2024), pg. 1.

Reporting Redemptions.

Information reporting is required under §6043(a) for any liquidation of “the whole or any part of” a corporation's capital stock. The corporation must file Form 1099-DIV, Dividends and Distributions, with respect to any shareholder to whom it distributes $600 or more in a calendar year in liquidation of all or any part of its stock. The corporation must send Form 1099-DIV to the shareholder on or before January 31 of the year following the calendar year in which the distribution occurs, and must file the form with the IRS, accompanied by transmittal Form 1096, Annual Summary and Transmittal of U.S. Information Returns, on or before February 28 (March 31 if filed electronically) of the year following the calendar year of the distribution. Reg. §1.6043-2(a). If reporting is required under Reg. §1.332-6(b), Reg. §1.368-3(a), or Reg. §1.1081-11, this requirement does not apply. See Reg. §1.6043-2(a).

Significant holders (i.e., holders of ≥5% vote or value for public companies, or ≥1% vote or value for private companies) must file a statement described in §1.302-2(b)(2) with their tax return detailing redemption, property received, and basis.

When must each form be filed?

Forms 1099-B and 1099-DIV statements are to be furnished to recipients by January 31 in the year following the transaction. IRS filings are normally due by February 28 (paper) or March 31 (electronic).

Exceptions.

Payments to certain recipients are exempt from reporting under I.R.C. §§
6041, 6043, and 6045. Certain recipients (e.g., corporations, charities, exempt entities) are not required to receive a 1099-B unless selling covered securities acquired after 2011 by an S corporation. Exemptions for small transactions, sales by certain institutions, certain money market funds, and others apply. Foreign persons are exempt.

Alternative reporting.

If the payor is not a broker, a corporation may need to report under 6041 (1099-MISC) for certain payments if those represent fixed/determinable income of $600 or more. Payments to corporations are generally exempt. Reporting is also not required if the payor cannot ascertain the payee’s basis. Stock redemptions are generally treated as sales or exchanges of capital assets that are not reportable payments under 6041, unless they are not reportable on a different 1099-series form and the payor can determine the payee’s income. See IRS Field Service Advice Memorandum (FSA 1993-1125).

Are there penalties for failing to file or furnish?

Penalties apply to a taxpayer’s failure to timely file information returns or furnish payee statements under I.R.C. §§ 6721 and 6722. Penalties may be waived where a taxpayer can show reasonable cause. Penalties are increased in cases of intentional disregard. These penalties do not apply to a failure that is due to reasonable cause and not to willful neglect. I.R.C. section 6724(a). Treas. Reg. section 301.6724-1 describes the circumstances under which a failure will be considered to be due to reasonable cause.

For any failure to file an information statement or furnish a payee statement which is due to international disregard of the requirements set forth in section 6045, the penalty is increased to the greater of $100 or 5 percent of the aggregate amount of items required to be reported correctly. I.R.C. sections 6721(e) and 6722(c). The $100,000 limitations set forth in subsections 6721(a) and 6722(a) do not apply to penalties imposed under the intentional disregard provisions, nor are penalties imposed under these provisions taken into account in determining whether the $100,000 limitation has been reached.

Does form of consideration (payment) matter?

Yes. In a redemption, for example, all-cash proceeds must be reported. Noncash redemptions or pro rata exchanges involving stock or similar property depend on the facts and circumstances. Reporting requirements are arguable if other property (e.g., stock) is also distributed in addition to cash.

Can more than one Form 1099 apply to the same transaction?

Yes, more than one 1099-type form may be required for certain transactions, such as complex reorganizations or redemptions involving multiple payors, classes of stock, payments, or intermediaries.

Redemptions that are reportable on Form 1099-DIV or Form 8939 by the issuer also may require 1099-B if the company is treated as a broker because it regularly redeems its own stock (e.g., as part of a formal buy-back program), or a third-party broker is involved and responsible for payment. When applicable, brokers must take into account all information provided by issuer returns (Form 8937) or transfer statements when preparing Form 1099-B. Form 8937 must be filed for organizational actions affecting basis unless the action is already reportable as a dividend on 1099-DIV or otherwise on Forms 1099.

Both Forms 1099-B and 1099-DIV may be required when there is a redemption or similar exchange of property for securities or rights to acquire securities through a broker (or person treated as a broker, as noted above). Certain corporate actions may also trigger reporting under different sections (e.g., 6045, 6045A, 6045B), but redemptions are not changes in capital structure for 6043(c) reporting. If a liquidating distribution is reported on Form 1099-DIV under 6043(a), no additional reporting is required under 6043(c).

Where options, warrants, or similar equity rights are vested, redeemed or exchanged by the issuer in connection with an employee compensation plan or other incentive program, they may be treated as compensation requiring reporting on W-2 or Form 1099-NEC. Substitute payments in lieu of dividends should be reported on Form 1099-MISC. Nondividend distributions may sometimes require Form 5452.

When is Form 8937 Required?

Issuers of specified securities must file Form 8937 if they take an organizational action affecting the basis of the security for holders. Options and warrants are specified securities within the meaning of IRC Reg. Section 1.6045-1(m)(2). An issuer of a specified security is generally required to file an information return describing any organization action that affects the basis of the security on Form 8937. Typical actions affecting the basis of a security include a nontaxable cash or stock distribution to holders of a class, stock split, merger, or acquisition. This requirement is generally waived through publishing a conforming information return and information statement on the company’s website. §6045B(e); Reg. §1.6045B-1(a)(3).

Do not file Form 8937 for a distribution that is reportable as a dividend on Form 1099-DIV or if a transaction properly reportable on Form 1099-DIV reports the basis-affecting event. RICs and REITs reporting undistributed capital gains can use Form 2439 instead. S corporations can use Schedule K-1s in lieu of Form 8937.

Form 8937 is due on the 45th day following the organizational action or by January 15 of the following year, whichever is earlier. No Form 8937 is required if all holders are exempt recipients or for certain money market funds. "Exempt recipients" include corporations, IRAs, tax-exempt orgs, and government entities.

When is Form 8937 used instead of Forms 1099-B or 1099-DIV?

Form 8937 is used by issuers when an organizational action affects the basis of securities and is not otherwise reportable as a dividend (1099-DIV). If the basis change is reported via 1099-DIV (e.g., taxable distribution), Form 8937 is not needed. There is no similar relief provision where forms 1099-B and 8937 would both apply, so use of one will not rule out the other.

Need help interpreting complex 1099 rules? Contact one of our tax attorneys to help walk you through your obligations step by step.