IRS Creates New Corporate Divorce Paperwork, Shareholders Pay
Published Date: 1/16/2025
Proposed Rule
Summary
The IRS is proposing new rules that make corporations and their shareholders report details about corporate splits and related deals over several years. These changes help show that these transactions don’t trigger immediate taxes. If you’re involved, get ready to share more info starting soon, and don’t miss the March 17, 2025 deadline to comment!
Analyzed Economic Effects
5 provisions identified: 2 benefits, 3 costs, 0 mixed.
Five-Year Annual Form 7216 Reports
If you are a corporation, shareholder, or other covered filer involved in a corporate split under section 355, you must attach a Form 7216 each year for a five-year reporting period. The form must be filed with one of the specified Federal income tax returns (for example, Forms 1120, 1065, 1120-S, or 1040) and permanent books and records relevant to the transaction must be retained and made available for IRS inspection. These rules apply to section 355 transactions occurring after January 16, 2025.
Million-Dollar Securities Basis Reporting Trigger
A holder of securities who receives stock or securities in a section 355 transaction is a 'significant distributee' if they owned securities in the distributing corporation with a basis of at least $1,000,000 immediately before the first distribution. Such holders will be subject to the reporting and record retention rules tied to significant distributees.
Higher 'Significant Distributee' Ownership Cutoff
The rule raises the ownership threshold that defines a 'significant distributee' for non-publicly traded stock from 1% to 5% by vote or value. That change alters which shareholders of a distributing corporation meet the threshold for specific reporting obligations under Sec. 1.355-5.
Small Business Coverage Estimate
The IRS estimates about 110 small businesses with gross receipts under $25 million would be subject to the information collection in these proposed regulations each year. The IRS certified that the proposed regulations would not have a significant economic impact on a substantial number of small entities.
Certain Entities Explicitly Exempted
Taxpayers that are not required to file one of the specified Federal income tax returns (for example, an estate, a trust, or a regulated investment company as defined in section 851(a)) are not required to file Form 7216 under these proposed regulations. The Treasury and IRS may request comments on whether additional return types should be added.
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