Has your bank ever bought back stock from your shareholders, or have you ever implemented a treasury buy-back program? If the answer is yes, there are information reporting requirements that must be satisfied in order to avoid penalties with the Internal Revenue Service. These information reporting rules apply to both S corporations and C corporations.
I’ve had several questions come up recently regarding a bank’s reporting requirements when buying shares from its shareholders. The entity subject to these reporting requirements is the entity buying the treasury shares. If the bank is a wholly owned subsidiary of a holding company, it is the holding company that is buying shares from its shareholders and has the reporting requirements discussed below.
Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, may be required to be filed if the company is a “broker.” According to the 1099-B instructions, “a broker is any person who, in the ordinary course of a trade or business, stands ready to effect sales to be made by others” or is a corporation that regularly stands ready to redeem its own stock or retire its own debt.
If a company purchases shares of stock from its shareholders on an irregular basis and does not actively pursue or stand ready to make redemptions, the company would not meet the definition of a broker and therefore would not be required to file Form 1099-B. If a company promotes a buy-back program of its shareholders’ shares, the company is a broker and is required to file Form 1099-B. There is no dollar threshold for filing Form 1099-B. In fact, separate transactions and/or different types of securities are required to be reported on separate 1099-B forms or substitute statements must be used. Form 1099-B is required to be furnished to recipients by February 15 of the year after the year in which the transaction occurred.
If a company does not meet the definition of a broker, it may still have a reporting obligation. Form 1099-DIV, Dividends and Distributions, is required to be filed when a company pays a shareholder $600 or more during a calendar year to liquidate all or part of their stock. The amount paid to acquire the shares would be reported on the 2019 Form 1099-DIV in Box 9, Cash Liquidation Distributions, if cash was paid, and/or Box 10, Noncash Liquidation Distributions, at fair market value of the property distributed or paid other than cash. Form 1099-DIV is required to be furnished to recipients by January 31 of the year after the year in which the transaction occurred.
Let’s be sure to differentiate between the company buying back shares versus facilitating the sale or transfer of shares from one shareholder to another. Facilitating a sale or transfer does not result in information reporting obligations for the company.
1099 forms must be filed in a timely manner with the IRS by February 28, or March 31 if filed electronically, of the year following the calendar year in which the distributions were made. Even if a company doesn’t meet the information reporting requirements outlined above, the shareholder is still obligated under the Internal Revenue Code to report the sale of the shares on their tax return, especially if the shareholder recognized a gain on sale.
If you have questions regarding these reporting requirements, please contact your Wipfli representative.