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Corporate Tax Bulletin (January 2003)

IRS Grants 15-Day Grace Period
for 2002 Inversion Reporting




By Brian Wainwright a tax partner in the Palo Alto office of Pillsbury Winthrop Shaw Pittman LLP.

If you have or can obtain the Acrobat Reader, or have an Acrobat-enabled web browser, you may wish to download or view our January 2003 Corporate Tax Bulletin (a 511K pdf file), containing a printed version of this article and also available via ftp at ftp.pmstax.com/corp/bull0301.pdf.

See Material Available On-Line for links to the administrative material discussed herein.

This article is part of the Pillsbury Winthrop Shaw Pittman LLP Tax Page, a World Wide Web demonstration project. Comments are welcome on the design or content of this material. However, this material is not intended and cannot be regarded as legal or tax advice.


On November 18, 2002, the Internal Revenue Service ("IRS"), in Treasury Decision 9022, adopted temporary regulations requiring information reporting by corporations and brokers with respect to domestic corporations undergoing an "acquisition of control" or "substantial change in capital structure" after 2001. These reporting rules, which contain many exceptions and apply generally only to transactions involving $100 million or more, are aimed at large "inversion" transactions and require statements with respect to 2002 transactions (on IRS Form 1099-CAP) to be sent to affected shareholders by a reporting corporation by January 31, 2003. In addition, brokers are required to send Forms 1099-CAP for 2002 transactions to actual owners by February 28, 2003.

In Announcement 2003-7, the IRS stated that it will not impose penalties for failures to file Forms 1099-CAP by the due dates if a letter in the following form is provided to shareholders by February 15, 2003 (March 15, 2003 for brokers reporting to actual owners):

    On [date], you exchanged shares in [name of corporation] for new shares [and cash and other property] in a transaction that may be subject to United States federal income tax due to the application of section 367(a) of the Internal Revenue Code. Depending on your individual circumstances, you may be required to report any gain from the exchange on your federal income tax return. You had gain from the exchange if [the cash and] the fair market value on [the date of the exchange] of the new shares [and any other property] you received exceeded your basis in the shares of [name of corporation] that you gave up in the exchange. You are not permitted to claim a loss on your tax return with respect to the exchange.

In addition, the legend "Important Tax Document Enclosed" must appear in a bold and conspicuous manner on the outside of the envelope containing the letter. A reporting corporation must also file an interim statement with the IRS reporting the transaction in accordance with the temporary regulations and must, upon inquiry by a shareholder of record on the date of the transaction (including any clearing organization or broker), identify itself as a corporation described in section 3.01 of Announcement 2003-7.

Material Available On-Line

The following materials have been posted and are also available via ftp in the directory ftp.pmstax.com/corp with the indicated file name:


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