The Isolated Offering, Vol 10, Issue 11

Cost Basis – What Does it Mean, and What Do I Have to Do?

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Cost Basis – What does it Mean, and What Do I Have to Do

Just in case you forgot, the new “Cost Basis” regulations go into effect on January 1, 2011.

Say What?

For those of you that are involved in buying and selling public company stock, be on notice that a new tax reporting law takes effect on January 1, 2011. The law is part of the Emergency Economic Stabilization Act of 2008 and affects issuers, broker-dealers, individual shareholders and transfer agents.

Background

Way back in October 2008, Congress passed the Emergency Economic Stabilization Act (the “Act”). Included in the Act is a provision that all equity securities and certain other securities purchased after January 1, 2010, will be required to “maintain, pass-through and report” all cost bases on all transactions. The intention of the Internal Revenue Service is to collect an estimated $6 billion in tax revenue over 10 years through more accurate reporting of cost basis and capital gains calculations.

As a result, firms that are responsible for producing Form 1099–B to individuals must include gross proceeds of the sale, the customer’s adjusted cost basis, and indicate whether the difference represents a long term or short term gain or loss. The Internal Revenue Service will match those reported numbers with customers’ tax returns.

What does this mean to you?

Issuers

If you are a public issuer, you will be responsible for collecting and then providing significantly more information regarding the issuance and transfer of your securities. Issuance and transfers of your shares after January 1, 2011 will be referred to by the Internal Revenue Service as “covered” securities. Securities transferred prior to that date will be referred to as “uncovered” securities. For the issuance or transfer of “covered” securities, you will be required to provide:

• The original cost basis for each additional issuance on a per individual basis
• The type of issuance (i.e., issued for services, employee compensation, officer/director fees, other grants and awards, private placement, etc.)
• The “Acquisition Date”
• The adjusted cost basis and tax consequences for any corporate actions (reverse splits, forward splits, buybacks, stock dividends, etc). In general, you will be required to provide shareholders with the quantitative effect of any corporate action that may effect their cost basis in your securities within 45 days of such action and file that same information with the IRS. However, as an alternative to providing the foregoing information to shareholders and the Internal Revenue Service, you may post the required information in a location on your website that is specifically dedicated and maintained for that purpose. Failure to comply with these rules could result in the Internal Revenue Service imposing financial penalties and fines.

If your securities are not listed, you will be required to provide your transfer agent with the Fair Market Value (“FMV”) for your securities. This information will be used by your transfer agent to determine the value of your securities that are being transferred between individuals and categorized as gifts. The Act requires transfer agents to record covered transfers between individuals as gifts unless specific information to the contrary is provided. If the transfer is considered a gift, your transfer agent will record the FMV of your securities on the date of the gift. Thus, unless the date of the gift is provided, the Act requires the date of the transfer to be recorded as the date of the gift.

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