Stock Redemption 1099 Reporting Requirements

A stock redemption occurs when a corporation repurchases its own shares from a shareholder. The tax reporting required by the Internal Revenue Service (IRS) depends on how the transaction is classified under federal tax law. This classification determines whether the payment is treated as a dividend or a sale, which dictates the entire reporting process.

Determining the Tax Treatment of the Redemption

The tax treatment of a stock redemption hinges on whether the payment is a distribution of corporate earnings or a sale of stock. If classified as a distribution, the amount may be taxed as a dividend. If it qualifies as a sale, the shareholder can recover their cost basis in the stock and recognizes a capital gain or loss on the difference. Capital gains are often taxed at lower rates than dividend income. The IRS provides specific tests under Internal Revenue Code Section 302 to make this determination.

A redemption is treated as a sale if it meets one of several tests. The first is a “complete termination” of the shareholder’s interest, where the corporation repurchases all shares owned by the shareholder. The analysis is complicated by family attribution rules under IRC Section 318, which can treat a person as owning stock held by family members. These attribution rules can sometimes be waived if specific requirements are met.

Another test is the “substantially disproportionate” redemption. To qualify, the shareholder must satisfy two conditions after the redemption. First, their ownership of the corporation’s outstanding voting stock must be less than 50%. Second, their post-redemption voting stock ownership percentage must be less than 80% of their pre-redemption ownership percentage.

If a redemption fails the other tests, it may still qualify as a sale under the “not essentially equivalent to a dividend” test. This standard relies on an analysis of the facts and circumstances of the transaction. The question is whether there has been a “meaningful reduction” in the shareholder’s proportionate interest in the corporation. When none of these tests are met, the redemption payment is treated as a dividend, to the extent of the corporation’s available earnings and profits.

Corporate Reporting Forms and Information

If the redemption is treated as a dividend, the corporation reports the payment on Form 1099-DIV, “Dividends and Distributions.” The total payment is reported in Box 1a as “Total ordinary dividends.” If a portion qualifies for lower tax rates, that amount is included in Box 1b, “Qualified dividends.”

When the redemption qualifies as a sale, reporting shifts to Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions.” A corporation that regularly redeems its stock is considered a “broker” for this purpose. The gross proceeds are reported in Box 1d. If the corporation must report the shareholder’s basis, such as for stock acquired after 2011, this is entered in Box 1e, “Cost or other basis,” with the acquisition date in Box 1b.

If a redemption affects the basis of a shareholder’s remaining stock or is a nontaxable return of capital, the corporation may need to file Form 8937, “Report of Organizational Actions Affecting Basis of Securities.” This form is filed with the IRS and made available to shareholders, either by mail or by posting it on the company’s public website.

Filing and Furnishing the Forms

After preparing the correct Form 1099-DIV or 1099-B, the corporation must adhere to deadlines for distributing the form to the shareholder and filing it with the IRS. The process is time-sensitive and requires careful management to avoid penalties.

The corporation must furnish a copy of the information return to the shareholder. For a redemption treated as a dividend, Form 1099-DIV must be furnished by January 31 of the year following the transaction. If the redemption is treated as a sale, the deadline for furnishing Form 1099-B is February 15.

The corporation must also file the forms with the IRS. If filing by mail, the forms and a Form 1096, “Annual Summary and Transmittal of U.S. Information Returns,” must be sent by February 28. For electronic filing, the deadline is March 31. Corporations that file 10 or more information returns in a calendar year are generally required to file electronically, and the IRS is transitioning filers to its Information Returns Intake System (IRIS) portal.

Shareholder Reporting Responsibilities

Upon receiving a Form 1099, the shareholder is responsible for reporting the transaction correctly on their personal income tax return. The form they receive dictates where and how the income is reported.

If the shareholder receives a Form 1099-DIV, the amount from Box 1a is reported as ordinary dividend income on Schedule B, “Interest and Ordinary Dividends,” which is attached to their Form 1040. The qualified dividend amount from Box 1b is used to calculate the tax at more favorable capital gains rates.

If the shareholder receives a Form 1099-B, the transaction is reported as a sale of a capital asset on Form 8949, “Sales and Other Dispositions of Capital Assets.” On this form, they report the sale proceeds and their cost basis in the shares to calculate the capital gain or loss. The totals from Form 8949 are then summarized on Schedule D, “Capital Gains and Losses.” The shareholder is responsible for substantiating their basis, even if it is not reported by the corporation.